<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
2001 Third Ave. South, 35233
Birmingham, AL (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(205) 325-4200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $1.00 Par 891027104 New York Stock Exchange
Value The International Stock
Exchange, London,
England
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CUSIP NUMBER:
CLASS:
8 5/8% Sinking Fund 891027 AB 0
Debentures due 2017
9 5/8% Senior Notes 891027 AD 6
due 1998
8 1/4% Senior 891027 AE 4
Debentures due 2009
7 7/8% Notes due 891027 AF 1
2023
7 3/8% Notes due 891027 AG 9
2013
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT: $4,181,248,001
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 1997: 69,832,952
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997,
PART III
INDEX OF EXHIBITS (PAGES 67 THROUGH 69)
TOTAL NUMBER OF PAGES INCLUDED ARE 76
<PAGE>
PART 1
ITEM 1. BUSINESS
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company, was incorporated in Delaware on November 19, 1979,
as Liberty National Insurance Holding Company. Through a plan of
reorganization effective December 30, 1980, it became the parent company for
the businesses operated by Liberty National Life Insurance Company ("Liberty")
and Globe Life And Accident Insurance Company ("Globe"). United American
Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United
Investors Life Insurance Company ("UILIC") along with their respective
subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted
on July 1, 1982. Family Service Life Insurance Company ("Famlico") was
purchased in July, 1990, and American Income Life Insurance Company ("American
Income") was purchased in November, 1994.
The following table presents Torchmark's business by primary distribution
method:
<TABLE>
<CAPTION>
PRIMARY
DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television,
ACCIDENT surance including special senior magazine; nationwide.
INSURANCE COMPANY life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- -----------------------------------------------------------------------------------------------------------------
LIBERTY NATIONAL LIBERTY NATIONAL LIFE Individual life and 1,750 full-time sales repre-
EXCLUSIVE AGENCY INSURANCE COMPANY health insurance. sentatives; 111 district offices
Birmingham, Alabama in the Southeastern U.S.
- -----------------------------------------------------------------------------------------------------------------
AMERICAN INCOME AMERICAN INCOME LIFE Individual life and health in- 1,450 agents.
EXCLUSIVE AGENCY INSURANCE COMPANY surance to union and credit
Waco, Texas union members and other
associations.
- -----------------------------------------------------------------------------------------------------------------
UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,170 Waddell & Reed
EXCLUSIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen-
Kansas institutional investment dent agents; 172 offices
UNITED INVESTORS LIFE management services includ- nationwide.
INSURANCE COMPANY ing assets of Torchmark.
Birmingham, Alabama Individual life insurance
and annuities.
- -----------------------------------------------------------------------------------------------------------------
MILITARY LIBERTY NATIONAL LIFE Individual life insurance Independent Agency through
INSURANCE COMPANY career agents nationwide.
Birmingham, Alabama
GLOBE LIFE AND ACCIDENT
INSURANCE COMPANY
Oklahoma City, Oklahoma
- -----------------------------------------------------------------------------------------------------------------
UNITED AMERICAN UNITED AMERICAN Senior life and health 46,000 independent agents
INDEPENDENT AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and
AND EXCLUSIVE INDEPEN- McKinney, Texas Medicare Supplement Canada; 1,100 exclusive
DENT AGENCY coverage and long-term care. agents in 73 branch offices.
</TABLE>
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 17--Industry Segments in the
Notes to Consolidated Financial Statements.
INSURANCE
LIFE INSURANCE
Torchmark writes a variety of nonparticipating ordinary life insurance
products. These include traditional and interest sensitive whole-life
insurance, term life insurance, and other life insurance. The following table
presents selected information about Torchmark's life products:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Whole life:
Traditional.............. $112,817 $107,288 $ 63,108 $521,015 $469,581 $445,025
Interest-sensitive....... 16,638 29,287 34,633 167,912 174,675 171,264
Term...................... 82,331 79,849 48,392 243,210 212,213 167,973
Other..................... 2,955 1,564 3,700 14,388 12,897 12,693
-------- -------- -------- -------- -------- --------
$214,741 $217,988 $149,833 $946,525 $869,366 $796,955
======== ======== ======== ======== ======== ========
</TABLE>
1
<PAGE>
The distribution methods for life insurance products include sales efforts
conducted by direct response, exclusive agents and independent agents. These
methods are discussed in more depth under the heading "Marketing." The
following table presents life annualized premium issued by marketing method:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- ---------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct response......... $ 62,029 $ 63,900 $ 48,267 $202,370 $180,530 $154,130
Exclusive Agents:
Liberty National....... 45,394 48,549 51,461 297,581 297,418 291,813
American Income........ 54,382 51,190 7,393 188,039 169,599 147,008
United Investors....... 10,715 10,609 8,674 84,495 78,666 73,148
United American........ 15,874 19,080 18,175 59,760 60,470 59,459
Independent Agents:
Military............... 8,165 8,268 7,292 74,150* 48,402 42,595
United American........ 18,182 16,392 8,571 40,130 34,281 28,802
-------- -------- -------- -------- -------- --------
$214,741 $217,988 $149,833 $946,525 $869,366 $796,955
======== ======== ======== ======== ======== ========
</TABLE>
- --------
* Annualized premium in force for 1996 includes $21 million acquired from
another carrier originally produced by this agency.
Permanent insurance products sold by Torchmark build cash values which are
available to policyholders. Policyholders may borrow such funds using the
policies as collateral. The aggregate value of policy loans outstanding at
December 31, 1996 was $207 million and the average interest rate earned on
these loans was 6.58% in 1996. Interest income earned on policy loans was
$13.2 million in 1996, $12.1 million in 1995, and $10.0 million in 1994.
Torchmark had 188 thousand and 182 thousand policy loans outstanding at year-
end 1996 and 1995, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Torchmark's life insurance products may
be terminated or surrendered at the election of the insured at any time,
generally for the full cash value specified in the policy. Specific surrender
procedures vary with the type of policy. For certain policies this cash value
is based upon a fund less a surrender charge which decreases with the length
of time the policy has been in force. This surrender charge is either based
upon a percentage of the fund or a charge per $1,000 of face amount of
insurance. The schedule of charges may vary by plan of insurance and, for some
plans, by age of the insured at issue. Torchmark's ratio of aggregate face
amount voluntary terminations to the mean amount of life insurance in force
was 17.1% in 1996, 17.2% in 1995 and 14.7% in 1994.
The following table presents an analysis of changes to Torchmark's life
insurance business in force:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
1996 1995 1994
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
In force at January 1,.. 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933
New issues.............. 1,320 18,718,479 1,413 19,359,923 1,147 14,958,141
Business acquired....... 38 2,573,996 -0- -0- 595 8,983,055
Other increases......... 1 104,490 1 64,128 1 10,961
Death benefits.......... (111) (289,687) (110) (271,451) (105) (228,354)
Lapses.................. (880) (13,008,065) (856) (12,185,540) (688) (8,940,980)
Surrenders.............. (140) (1,296,744) (135) (1,187,581) (106) (1,048,117)
Other decreases......... (32) (245,694) (30) (246,317) (41) (243,425)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 9,392 $86,948,151 9,196 $80,391,376 8,913 $74,858,214
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,776 $ 6,854 $ 6,933
Other.................. 10,246 9,491 9,039
</TABLE>
2
<PAGE>
HEALTH INSURANCE
Torchmark offers an assortment of supplemental health insurance products.
These are generally classified as (1) Medicare Supplement, (2) cancer and (3)
other health policies.
Medicare Supplement policies are offered on both an individual and group
basis through exclusive and independent agents, and direct response. These
guaranteed renewable policies provide reimbursement for certain expenses not
covered by the federal Medicare program. One popular feature available under
Torchmark's Medicare Supplements is an automatic claim filing system for
Medicare Part B benefits whereby policyholders do not have to file most claims
because they are paid directly by Torchmark from Medicare records.
Cancer policies are offered on an individual basis through exclusive and
independent agents as well as direct response. These guaranteed renewable
policies are designed to fill gaps in existing medical coverage. Benefits are
triggered by a diagnosis of cancer or health related events or medical
expenses related to the treatment of cancer. Benefits may be in the form of a
lump sum payment, stated amounts per diem, per medical procedure, or
reimbursement for certain medical expenses.
Other health policies include accident, long term care and limited benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They are designed to supplement
existing medical coverages. Benefits are triggered by certain health related
events or incurred expenses. Benefit amounts are per diem, per health related
event or defined expenses incurred up to a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 1996 by marketing method:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct response........... 4,990 171 674 5,141 929 1,162
Exclusive agents:
Liberty National......... 11,258 16,701 24,904 122,305 122,147 127,962
American Income.......... 10,645 9,585 1,232 42,140 39,693 36,215
United American.......... 31,565 32,596 33,765 131,250 127,599 130,738
Independent agents:
United American.......... 42,523 44,438 62,088 447,317 468,691 516,294
-------- -------- -------- -------- -------- --------
$100,981 $103,491 $122,663 $748,153 $759,059 $812,371
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1996 by product category:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Medicare Supplement...... $ 65,767 $ 64,638 $ 87,547 $523,902 $529,616 $572,221
Cancer................... 10,676 11,338 8,101 119,428 114,972 114,495
Other health related pol-
icies................... 24,538 27,515 27,015 104,823 114,471 125,655
-------- -------- -------- -------- -------- --------
$100,981 $103,491 $122,663 $748,153 $759,059 $812,371
======== ======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
ANNUITIES
Annuity products offered by Torchmark include single-premium deferred
annuities, flexible-premium deferred annuities, and variable annuities.
Single-premium and flexible-premium products are fixed annuities where a
portion of the interest credited is guaranteed. Additional interest may be
credited on certain contracts. Variable annuity policyholders may select from
a variety of mutual funds managed by W&R which offer different degrees of risk
and return. The ultimate benefit on a variable annuity results from the
account performance. The following table presents Torchmark subsidiaries'
annuity collections and deposit balances by product type:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS)
COLLECTIONS DEPOSIT BALANCE
FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------------- --------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed annuities......... $ 87,133 $ 133,461 $ 43,339 $ 974.6 $ 927.9 $ 801.2
Variable annuities...... 247,461 189,188 196,105 1,375.5 1,052.2 692.8
---------- ---------- ---------- -------- -------- --------
$ 334,594 $322,649 $239,444 $2,350.1 $1,980.1 $1,494.0
========== ========== ========== ======== ======== ========
</TABLE>
INVESTMENTS
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. Torchmark's investments
consist predominantly of high-quality, investment-grade securities. Fixed
maturities represented 90% of total investments at December 31, 1996.
Approximately 25% of fixed maturity investments were securities guaranteed by
the United States Government or its agencies or investments that were
collateralized by U.S. government securities. More than 70% of these
investments were in GNMA securities that are backed by the full faith and
credit of the United States government. The remainder of these government
investments were U.S. Treasuries, agency securities or collateralized mortgage
obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment
Operations in the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis.)
The following table presents an analysis of Torchmark's fixed maturity
investments at December 31, 1996. All of the securities are classified as
available for sale and are, therefore, reported at fair market value.
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS) %
-------------- -----
<S> <C> <C>
Securities of U.S. Government...................... $ 179,178 3.4%
GNMA and MBS backed by GNMA collateral............. 1,083,860 20.3
Other U.S. Government guaranteed................... 58,035 1.1
Other investment grade............................. 3,763,846 70.6
Non-investment grade corporates.................... 243,357 4.6
---------- -----
$5,328,276 100.0%
========== =====
</TABLE>
The following table presents Torchmark's fixed maturity investments at
December 31, 1996 on the basis of ratings as determined primarily by Standard
& Poor's Corporation. Moody's Investors Services' bond ratings are used when
Standard & Poor's ratings are not available. Ratings of BBB and higher (or
their equivalent) are considered investment grade by the rating services.
<TABLE>
<CAPTION>
AMOUNT
RATING (IN THOUSANDS) %
------ -------------- -----
<S> <C> <C>
AAA................................................ $2,098,390 39.4%
AA................................................. 787,542 14.8
A.................................................. 1,910,726 35.9
BBB................................................ 277,915 5.2
BB................................................. 170,522 3.2
B.................................................. 6,991 0.1
Less than B........................................ 88 0.0
Not rated.......................................... 76,102 1.4
---------- -----
$5,328,276 100.0%
========== =====
</TABLE>
4
<PAGE>
The following table presents the fixed maturity investments of Torchmark's
insurance subsidiaries at December 31, 1996 on the basis of ratings as
determined by the National Association of Insurance Commissioners ("NAIC").
Categories one and two are considered investment grade by the NAIC.
<TABLE>
<CAPTION>
AMOUNT
RATING (IN THOUSANDS) %
-------------------- -------------- -----
<S> <C> <C>
1. Highest quality.. $4,788,405 90.2%
2. High quality..... 277,087 5.2
3. Medium quality... 211,316 4.0
4. Low quality...... 31,372 0.6
5. Lower quality.... 669 0.0
6. In or near de-
fault.............. 0 0.0
---------- -----
$5,308,849 100.0%
========== =====
</TABLE>
Securities are assigned ratings when acquired. All ratings are reviewed and
updated at least annually. Specific security ratings are updated as
information becomes available during the year.
PRICING
Premium rates for life and health insurance products are established using
assumptions as to future mortality, morbidity, persistency, and expenses, all
of which are generally based on Torchmark's experience, and on projected
investment earnings. Revenues for individual life and health insurance
products are primarily derived from premium income, and, to a lesser extent,
through policy charges to the policyholder account values on certain
individual life products. Profitability is affected to the extent actual
experience deviates from that which has been assumed in premium pricing and to
the extent investment income exceeds that which is required for policy
reserves.
Collections for annuity products and certain life products are not
recognized as revenues but are added to policyholder account values. Revenues
from these products are derived from charges to the account balances for
insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment
income on the deposits invested in excess of the amounts credited to policy
accounts.
UNDERWRITING
The underwriting standards of Torchmark are established by management.
Torchmark uses information from the application and, in some cases, inspection
reports, doctors' statements and/or medical examinations to determine whether
a policy should be issued in accordance with the application, with a different
rating, with a rider, with reduced coverage or rejected.
Torchmark requires medical information or examinations of applicants for
life insurance in excess of certain prescribed amounts. These are graduated
according to the age of the applicant and may vary with the kind of insurance.
The maximum amount of insurance issued without medical information is $100,000
through age 40. Torchmark requests medical information of all applicants,
regardless of age or amount, if information obtained from the application or
other sources indicates that such information is warranted.
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
Torchmark has implemented certain underwriting tests to detect the presence of
the HIV virus and continues to assess the utility of other appropriate
underwriting tests to detect AIDS in light of medical developments in this
field. To date, AIDS claims have not had a material impact on claims
experience.
5
<PAGE>
REINSURANCE
As is customary among insurance companies, Torchmark cedes insurance to
other unaffiliated insurance companies on policies they issue in excess of
retention limits. Reinsurance is an effective method for keeping insurance
risk within acceptable limits. In the event insurance business is ceded,
Torchmark remains contingently liable with respect to ceded insurance should
any reinsurer be unable to meet the obligations it assumes (See Note 16--
Commitments and Contingencies in the Notes to Consolidated Financial
Statements and Schedule IV--Reinsurance [Consolidated]).
RESERVES
The life insurance policy reserves reflected in Torchmark's financial
statements as future policy benefits are calculated based on generally
accepted accounting principles. These reserves, with the addition of premiums
to be received and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature.
Generally, the mortality and persistency assumptions used in the calculations
of reserves are based on company experience. Similar reserves are held on most
of the health policies written by Torchmark's insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A list of
the assumptions used in the calculation of Torchmark's reserves are reported
in the financial statements (See Note 8--Future Policy Benefit Reserves in the
Notes to Consolidated Financial Statements). Reserves for annuity products
consist of the policyholders' account values and are increased by policyholder
deposits and interest credits and are decreased by policy charges and benefit
payments.
MARKETING
Torchmark is licensed to sell insurance in all 50 states, the District of
Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada.
Distribution is through direct response, independent and exclusive agents.
Direct Response. Torchmark offers life insurance products directly to
consumers through direct mail, co-op mailings, national cable and local spot
television, national newspaper supplements and national magazines. Torchmark
operates a full service letterpress which enables the direct response
operation to maintain high quality standards while producing materials much
more efficiently than they could be purchased from outside vendors.
Exclusive Agents. Torchmark sells and services life and health insurance
through 1,750 Liberty National agents primarily in the seven state area of
Alabama, Florida, Georgia, Tennessee, Mississippi, South Carolina, and North
Carolina. These agents are employees of Liberty and are primarily compensated
by commissions based on sales. During the past several years this operation
has emphasized bank draft and direct bill collection of premium rather than
agent collection, because of the resulting lower cost and improved
persistency. Agent collected sales were discontinued in 1996.
Through the American Income Agency, Torchmark sells individual life and
fixed-benefit accident and health insurance through approximately 1,450
exclusive agents who target moderate income wage earners through the
cooperation of labor unions, credit unions, and other associations. These
agents are authorized to use the "union label" because this sales force is
represented by organized labor.
Torchmark sells life insurance as well as fixed and variable annuity
products through the 2,170 W&R financial planners. (See Asset Management--
Mutual Funds for additional marketing information about the W&R sales force.)
Torchmark offers life and health insurance targeted to various special
markets through approximately 1,100 United American exclusive independent
agents in 73 branch offices throughout the United States.
Independent Agents. Torchmark offers a variety of life and health insurance
policies through approximately 46 thousand independent agents, brokers, and
licensed sales representatives. Torchmark is not committed or obligated in any
way to accept a fixed portion of the business submitted by any independent
agent. All policy applications, both new and renewal, are subject to approval
and acceptance by Torchmark. Torchmark is not dependent on any single agent or
any small group of independent agents, the loss of which would have a
materially adverse effect on insurance sales.
6
<PAGE>
Torchmark distributes life insurance through a nationwide independent agency
whose sales force is comprised of former commissioned and non-commissioned
military officers who sell exclusively to commissioned and non-commissioned
military officers and their families.
RATINGS
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
<TABLE>
<CAPTION>
A.M. BEST
COMPANY
---------------
<S> <C> <C>
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
</TABLE>
A.M. Best states that it assigns A+ (Superior) ratings to those companies
which, in its opinion, have demonstrated superior overall performance when
compared to the norms of the life/health insurance industry. A+ (Superior)
companies have a very strong ability to meet their obligations to
policyholders over a long period of time. A.M. Best states that it assigns A
(Excellent) ratings to those companies which, in its opinion, have
demonstrated excellent overall performance when compared to the norms of the
life/health insurance industry. A (Excellent) companies have an excellent
ability to meet their obligations to policyholders over a long period of time.
United Investors Life Insurance Company also has a rating of AA by Standard &
Poor's Corporation. This AA rating is assigned by Standard & Poor's
Corporation to those companies who offer excellent financial security on an
absolute and relative basis and whose capacity to meet policyholders
obligations is overwhelming under a variety of economic and underwriting
conditions.
7
<PAGE>
ASSET MANAGEMENT
Torchmark conducts its asset management and financial services businesses
through Waddell & Reed Financial Services, Inc. and its subsidiaries. This
segment's activity is mutual fund distribution, management, and servicing.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by a subsidiary of United
Management, W&R, which markets and manages the seventeen mutual funds in the
United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund,
Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc.
("TMK/United Funds") which are used exclusively as the investment funds for
variable annuities sold by UILIC. These funds were valued as follows at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(AMOUNTS IN
MILLIONS)
1996 1995
------- -------
<S> <C> <C>
United Funds $15,130 $13,569
W&R Funds 643 419
TMK/United Funds 1,434 1,099
------- -------
Total mutual fund assets under management 17,207 15,087
Institutional and private accounts 1,651 3,201
------- -------
Total assets under management $18,858 $18,288
======= =======
</TABLE>
W&R's revenues consist of the following: (1) fees for managing the assets,
which are based on the value of the assets managed, (2) commissions for the
sale of products, and (3) fees for accounting and administration, which are
based primarily on an annual charge per account. In addition to its mutual
fund management and distribution activities, W&R manages accounts for
individual and institutional investors for which asset management fees are
received.
Asset management activities are conducted by an experienced and qualified
staff. As of December 31, 1996, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 13 years.
The following table indicates W&R revenues by component for the three years
ending December 31, 1996:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Asset management fees........................ $103,127 $ 85,999 $ 70,651
Investment product commissions*.............. 71,991 56,927 59,450
Insurance product commissions*............... 13,897 13,531 12,773
Service fees................................. 28,419 23,528 22,297
-------- -------- --------
$217,434 $179,985 $165,171
======== ======== ========
</TABLE>
*Commissions received from affiliates for variable annuities and insurance
product sales are eliminated in consolidation.
W&R markets its mutual funds and other financial products, including life
insurance, through a sales force of approximately 2,170 registered
representatives in 50 states and the District of Columbia. These
representatives concentrate on product sales of W&R and other Torchmark
affiliates. W&R maintained 172 sales offices at December 31, 1996.
W&R conducts money management seminars on a national scale to reach numerous
potential clients every year. Individual financial plans are developed for
clients through one-on-one consultations with the W&R sales representatives.
Emphasis is placed on a long-term relationship with a client rather than a
one-time sale.
8
<PAGE>
COMPETITION
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales effort. In addition to competition with other insurance companies,
Torchmark also faces increasing competition from other financial services
organizations. While there are a number of larger insurance companies
competing with Torchmark that have greater resources and have considerable
marketing forces, there is no individual company dominating any of Torchmark's
life or health markets.
Torchmark's health insurance products compete with, in addition to the
products of other health insurance carriers, health maintenance organizations,
preferred provider organizations, and other health care related institutions
which provide medical benefits based on contractual agreements.
Generally, Torchmark companies operate at lower administrative expense
levels than its peer companies, allowing Torchmark to have competitive rates
while maintaining margins, or, in the case of Medicare Supplement business, to
remain in the business while some companies have ceased new writings.
Torchmark's years of experience in direct response business are a valuable
asset in designing direct response products. On the other hand, Torchmark's
insurance subsidiaries do not have the same degree of national name
recognition as some other companies with which they compete.
W&R competes with hundreds of other registered institutional investment
advisers and mutual fund management and distribution companies which
distribute their fund shares through a variety of methods including affiliated
and unaffiliated sales forces, broker-dealers, and direct sales to the public.
Although no one company or group of companies dominates the mutual fund
industry, some are larger than W&R and have greater resources. Competition is
based on the methods of distribution of fund shares, tailoring investment
products to meet certain segments of the market, the changing needs of
investors, the ability to achieve superior investment management performance,
the type and quality of shareholder services, and the success of sales
promotion efforts.
REGULATION
INSURANCE. Insurance companies are subject to regulation and supervision in
the states in which they do business. The laws of the various states establish
agencies with broad administrative and supervisory powers which include, among
other things, granting and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, approving certain
premium rates, setting minimum reserve and loss ratio requirements,
determining the form and content of required financial statements, and
prescribing the type and amount of investments permitted. Insurance companies
can also be required under the solvency or guaranty laws of most states in
which they do business to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies. They are
also required to file detailed annual reports with supervisory agencies, and
records of their business are subject to examination at any time. Under the
rules of the NAIC, insurance companies are examined periodically by one or
more of the supervisory agencies. The most recent examinations of Torchmark's
insurance subsidiaries were: Famlico, as of December 31, 1995; American Income
as of December 31, 1990; Globe, as of December 31, 1994; Liberty, as of
December 31, 1991; United American, as of December 31, 1993; and UILIC, as of
December 31, 1993.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies. IRIS identifies twelve
insurance industry ratios from the statutory financial statements of insurance
companies, which are based on regulatory accounting principles and are not
based on generally accepted accounting principles ("GAAP"). IRIS specifies a
standard or "usual value" range for each ratio, and a company's variation from
this range may be either favorable or unfavorable. The following table
9
<PAGE>
presents the IRIS ratios as determined by the NAIC for Torchmark's five
largest insurance subsidiaries, which varied unfavorably from the "usual
value" range for the years 1995 and 1994.
<TABLE>
<CAPTION>
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- --------- --------
<S> <C> <C> <C>
1995:
- -----
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 238
Globe Change in Capital and Surplus 50 to -10 -18
United American Change in Capital and Surplus 50 to -10 -11
Liberty Change in Reserving Ratio 20 to -20 24
American Income Non-admitted to Admitted Assets 10 11
1994:
- -----
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202
Liberty Change in Capital and Surplus 50 to -10 -29
Globe Change in Capital and Surplus 50 to -10 -12
</TABLE>
Explanation of Ratios:
Investment in Affiliate to Capital and Surplus--This ratio is determined by
measuring total investment in affiliates against the capital and surplus of
the company. The NAIC considers a ratio of more than 100% to be high, and to
possibly impact a company's liquidity, yield, and overall investment risk. The
large ratio in Liberty in 1995 and 1994 is brought about by its ownership of
other large Torchmark insurance companies and the ownership of 81% of the
stock of United Management. Profitability and growth in these subsidiaries
have caused this ratio to gradually rise. All intercompany investment is
eliminated in consolidation, and the internal organizational structure has no
bearing on consolidated results.
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in the company's
financial position during the year. The NAIC considers ratios less than minus
10% and greater than 50% to be unusual. Liberty's ratio of minus 29% in 1994
was due to the payment of a large dividend by United Management, an 81% owned
subsidiary, directly to Torchmark. Because Liberty waived its interest in this
dividend, it reduced Liberty's capital and surplus. United American's ratio of
minus 11% in 1995 and Globe's ratios of minus 18% in 1995 and minus 12% in
1994 were caused by the payment of dividends to Torchmark in excess of their
statutory net income. These transactions did not affect the consolidated
equity of Torchmark at December 31, 1995 and 1994.
Change in Reserving Ratio--The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. Liberty's ratio was slightly over the usual range
because it assumed a block of business in late 1995. The assumption of this
business caused an increase in year-end reserves. No allowance is made for
special transactions such as this in the calculation.
Non-admitted Assets to Admitted Assets--This ratio measures the degree to
which a company has acquired assets which cannot be carried on its statutory
balance sheet. American Income's ratio of 11% in 1995 was due to a large
amount of agent balances that arose from comissions that are advanced to
agents when a policy is submitted. Due to the growth of American Income's
business, these advances have grown and caused a variance in this particular
ratio.
Risk Based Capital. In December 1992, the NAIC adopted a model act that
requires a risk based capital formula be applied to all life and health
insurers. The requirement began in 1994 for information based on the 1993
annual statements. The risk based capital formula is a threshold formula
rather than a target capital formula. It is designed only to identify
companies that require regulatory attention and is not to be used to rate or
rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
10
<PAGE>
Guaranty Assessments. State solvency or guaranty laws provide for
assessments from insurance companies into a fund which is used, in the event
of failure or insolvency of an insurance company, to fulfill the obligations
of that company to its policyholders. The amount which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
HOLDING COMPANY. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
Insurance holding company system statutes and regulations impose various
limitations on investments in subsidiaries, and may require prior regulatory
approval for the payment of certain dividends and other distributions in
excess of statutory net gain from operations on an annual noncumulative basis
by the registered insurer to the holding company or its affiliates.
MUTUAL FUNDS. Torchmark's mutual fund management and distribution
activities, as well as its investment advisory services, are subject to state
and federal regulation and oversight by the National Association of Securities
Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R
Funds, and the TMK/United Funds is or was a registered investment company
under the Investment Company Act of 1940. W&R and Waddell & Reed Asset
Management Company ("WRAM") are registered pursuant to the Investment Advisers
Act of 1940. Additionally, W&R is regulated as a broker-dealer under the
Securities Exchange Act of 1934.
PERSONNEL
At the end of 1996, Torchmark had 2,312 employees and 2,516 licensed
employees under sales contracts. Additionally, approximately 54,000
independent and exclusive agents and brokers, who were not employees of
Torchmark, were associated with Torchmark's marketing efforts.
ITEM 2. REAL ESTATE
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 square foot building
at 2001 Third Avenue South, Birmingham, Alabama which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately
160,000 square feet of this building to unrelated tenants. Liberty also
operates from 61 company-owned district office buildings used for agency sales
personnel.
Globe owns a 300,000 square foot office building at 204 North Robinson,
Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home
office and the balance is available for lease. Globe also owns a 330,000
square foot office building complex at 14000 Quail Springs Parkway Plaza
Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building
at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to
other tenants.
In 1996, United American relocated to a new home office building. United
American owns and is the sole occupant of this 140,000 square foot facility,
located in the Stonebridge Ranch development in McKinney, Texas (a North
Dallas suburb). The former home office building on Buckner Boulevard in
Dallas, Texas is under contract to be sold.
American Income owns and is the sole occupant of an office building located
at 1200 Wooded Acres Drive, Waco, Texas. The building is a two story structure
containing approximately 72,000 square feet of usable floor space. In
addition, American Income leases office space in various cities throughout the
United States.
W&R owns and occupies a 116,000 square foot office building utilized as its
corporate headquarters located in United Investors Park, a commercial
development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R
owns three other office buildings in this development, each containing
approximately 48,000 square feet, which are leased or are available for lease.
11
<PAGE>
Liberty, Globe and W&R also lease district office space for their agency
sales personnel. All of the other Torchmark companies lease their office space
in various cities in the U.S.
A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has
completed three buildings consisting of 185,000 square feet, 90,000 square
feet and 25,000 square feet of office space within a 100 acre commercial
development known as Liberty Park along Interstate 459 in Birmingham, Alabama.
Approximately 275,000 square feet of this total office area is currently
leased. A 110,000 square foot office building is currently under construction
in this development and is scheduled for completion in the Spring of 1997. TDC
also owns and manages a 70,000 square foot office and retail complex adjacent
to Liberty Park of which approximately 60% is leased by an affiliated party.
As a part of a joint venture with unaffiliated entities, TDC is also
developing 2,800 contiguous acres as a planned community development.
DATA PROCESSING EQUIPMENT
Torchmark and its primary subsidiaries have significant automated
information processing capabilities, supported by centralized computer
systems. Torchmark also uses personal computers to support the user-specific
information processing needs of its professional and administrative staffs.
All centralized computer software support, information processing schedules
and computer-readable data management requirements are supported by company-
specific policies and procedures which ensure that required information
processing results are produced and distributed in a timely manner. These
policies and procedures provide for the copying, off-site physical storage and
retention of significant company computer programs and business data files for
backup purposes.
ITEM 3. LEGAL PROCEEDINGS
Torchmark and its subsidiaries continue to be named as parties to pending or
threatened legal proceedings. These lawsuits involve tax matters, alleged
breaches of contract, torts, including bad faith and fraud claims based on
alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries,
employment discrimination, and miscellaneous other causes of action. Many of
these lawsuits involve claims for punitive damages in state courts of Alabama,
a jurisdiction particularly recognized for its large punitive damage verdicts.
A number of such actions involving Liberty also name Torchmark as a defendant.
As a practical matter, a jury's discretion regarding the amount of a punitive
damage award is not limited by any clear, objective criteria under Alabama
law. Accordingly, the likelihood or extent of a punitive damage award in any
given case is virtually impossible to predict. As of December 31, 1996,
Liberty was a party to approximately 282 active lawsuits (including 25
employment related cases and excluding interpleaders and stayed cases), more
than 250 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. In July 1994, certain intervenors in the Robertson litigation
filed a notice of appeal of the Order and Final Judgment with the Supreme
Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously
affirmed the Robertson class action settlement and on February 16, 1996,
issued a notice overruling the petition for a rehearing in Robertson filed by
certain intervenors. A petition for writ of certiorari to the Supreme Court of
the United States was then filed by intervenors. The U.S. Supreme Court
granted certiorari in Robertson on October 1, 1996. Oral arguments on the
intervenors' petition, which alleged that class members had not received due
process in the class certification procedure and should be allowed to opt out
of the class action settlement to pursue separate litigation, were heard by
the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari previously
granted in Robertson. The ruling effectively ends direct appeals from the
Robertson class action settlement and Liberty will proceed with administration
of benefits under the class settlement.
As previously reported, Liberty is subject to 76 individual cancer policy
lawsuits pending in Alabama and Mississippi, which were stayed or otherwise
held in abeyance pending final resolution of the Robertson case. Liberty will
file motions to dismiss these lawsuits based upon the U.S. Supreme Court
opinion in Robertson. If these cases are dismissed, no collateral attacks on
the cancer class action settlement will remain at this time.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 and is presently pending in
the U.S. District Court for the Northern District of
12
<PAGE>
Alabama, is the only remaining purported class action litigation brought by
Torchmark shareholders alleging untimely and inadequate disclosure of material
contingent liabilities arising out of insurance policy litigation involving
Liberty. The U.S. District Court entered an order granting partial summary
judgment on behalf of the defendants on April 16, 1996. Claims for damages
based on Section 10b-5 of the Securities Exchange Act, on state securities
laws and for common law fraud remain pending in the case.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
litigation filed April 22, 1994, as a purported class action in the District
Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No.
CJ-94-2784-65). The suit claims damages on behalf of individual health
policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. The
complaint seeks actual and punitive damages for each class member in excess of
$10,000. Subsequent to the filing of this case, one of the plaintiffs was
dismissed and the named plaintiff died. The complaint was amended to include
new plaintiffs purporting to represent the class and restyled Tabor v.
Torchmark Corporation. No class has been certified. A motion to dismiss filed
by the defendants was denied and limited discovery as permitted by the
Oklahoma Supreme Court is proceeding.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleged actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. Liberty removed this case to
federal court, but the case was subsequently remanded to the state court. The
Bryant case was settled on an individual basis by the parties on December 23,
1996. No class was ever certified.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage alleged to be in conflict with provisions of the Omnibus Budget
Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance
Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance
Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance
Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance
Company, Case No. CV-95-347H). The Stewart case has been dismissed with
prejudice and the other cases remain pending.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims during an
approximately two month period in 1993 (Adkins v. Liberty National Life
Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in
reliance on federal law concerning the amount health care providers could
collect from Medicare eligible individuals, Liberty limited the payment of
benefits to such individuals to the amounts collectible by the providers under
federal law. In November, 1993 Liberty discontinued this practice and
recalculated and repaid all claims in full as it had prior to September 1993
together with interest. Nearly two years after this refund, the Adkins case
was filed. The claims made in Adkins are identical to the individual claims in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an
individual case reversed and remanded by the Alabama Supreme Court on March 7,
1997 after an appeal regarding the remitted verdict of $2.7 million. A class
certification order, which does not address the merits of the litigation, was
entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for
writ of mandamus or prohibition with the Alabama Supreme Court in August 1996
asserting abuse of discretion by the trial court in certifying the Adkins
class. The Alabama Supreme Court has stayed further proceedings as to the
class issues in Adkins pending its ruling on the propriety of class
certification.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification does not go to
13
<PAGE>
the merit of the allegations in the complaint. On December 31, 1996, the
plaintiffs filed an amended complaint in Smith to allege violations of various
provisions of the Employment Retirement Income Security Act of 1974. Discovery
is presently proceeding in this case.
It has been previously reported that Liberty is a party to individual
lawsuits and a purported class action (Carlton v. Liberty National Life
Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County,
Alabama, in which allegations are made that an interest sensitive life
insurance policy would become paid-up or self-sustaining after a specified
number of years. Currently, Liberty is a party to more than 100 individual
interest sensitive cases, 53 of which were filed by a single lawyer in
Chambers County, Alabama. Additionally, Torchmark has previously reported the
case of Lawson v. Liberty National Life Insurance Company, filed in the
Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119),
where the plaintiffs were seeking class certification on behalf of such
policyholders including those who were allegedly induced to exchange life
insurance policies or the existing policy's cash value was allegedly depleted.
On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an
order conditionally certifying a plaintiffs claim in Lawson in order to
preserve the Court's jurisdiction over the class action question, subject to a
full evidentiary hearing on class certification at a future date yet to be
determined.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently
subject to subsequent collateral attack by absent class members, the Battle
decree remains in effect to date. A motion filed in February 1990 to challenge
the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by
both the District Court in 1991 and the Eleventh Circuit Court of Appeals in
1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. Liberty is actively opposing this
petition.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain
Torch Energy subsidiaries and affiliated limited partnerships in the Circuit
Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No.
CV-95-140). Plaintiff alleges improper payment of royalties and overriding
royalties on coalbed methane gas produced and sold from wells in Robinson's
Bend Coal Degasification Field, seeks certification of a class and claims
unspecified compensatory and punitive damages on behalf of such class. On
April 11, 1996, Torchmark's motion to change venue was granted and the case
has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The
Company's motion to dismiss remains pending while discovery is proceeding.
It has been previously reported that the Company, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed April 5, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud,
breach of contract, conspiracy, violations of the Oklahoma Consumer Protection
Act and breach of the duty of good faith and fair dealing on behalf of all
persons who purchased, at any time between 1987 and the present, certain
hospitalization and surgical insurance policies issued by Globe and United
American. The plaintiffs asserted that they purchased these policies and
subsequently incurred improper claim denials, wrongful recision and "rate-ups"
and post-claim underwriting. On December 4, 1996, the U.S. District Court
dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract
counts as to certain defendants and ordered plaintiffs to file an amended
complaint. On December 23, 1996, the plaintiffs filed
14
<PAGE>
the amended complaint as ordered, alleging breach of contract, fraud,
conspiracy and breach of the duty of good faith and fair dealing on behalf of
a purported class of persons who purchased Globe, but not United American,
policies from 1987 to the present. Defendants have filed motions to dismiss
and for partial summary judgment.
On April 19, 1996, a $5 million punitive judgment was entered against
LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life
Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was
in his sixties, cancelled several small life insurance policies and purchased
a substantial amount of new coverage. The plaintiff contended that certain
supplemental benefits which were present in the smaller policies were not
included in the new coverage (i.e. accidental death and premium waiver). The
trial judge held that Strickland was not entitled to recover compensatory
damages. Nevertheless the jury awarded $100 in nominal damages in addition to
the punitive award. Liberty has filed various motions for the post-trial
relief with the Circuit Court, which held a post-trial hearing on the
propriety of the punitive damage award on February 12, 1997. On March 11,
1997, the Circuit Court judge reduced the Strickland judgment to $37,500.
A jury in Chambers County, Alabama Circuit Court returned a verdict of
$333,000 compensatory damages and $17.2 million in punitive damages against
Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance
Company (CV-94-234). The case arose out of a claim which had been denied due
to an alleged misrepresentation in the application. There was a recorded
telephone interview with the applicant in which a statement was given which
Liberty alleges was a misrepresentation of the health of the proposed insured.
After the litigation was filed, it was learned that one signature on the
application was not that of the insured. Upon notice of this fact, Liberty
paid the $20,000 claim proceeds into court. Liberty has filed motions for
post-trial relief with the Court, subject to completion of post trial
discovery. A post-trial hearing on the propriety of the punitive damage award
is scheduled for March 28, 1997.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that the
frequency of large punitive damage awards bearing little or no relation to
actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly in Alabama, continues to increase
universally, creating the potential for unpredictable material adverse
judgments in any given punitive damage suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1996.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The principal market in which Torchmark's common stock is traded is the New
York Stock Exchange. There were 7,262 shareholders of record on December 31,
1996, excluding shareholder accounts held in nominee form. Information
concerning restrictions on the ability of Torchmark's subsidiaries to transfer
funds to Torchmark in the form of cash dividends is set forth in Note 14--
Shareholders' Equity in the Notes to the Consolidated Financial Statements.
The market price and cash dividends paid by calendar quarter for the past two
years are as follows:
<TABLE>
<CAPTION>
1996
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
<S> <C> <C> <C>
1 $49.875 $42.500 $ .29
2 45.250 41.000 .29
3 46.250 40.250 .29
4 52.125 45.500 .29
</TABLE>
Year-end closing
price..................$50.500
<TABLE>
<CAPTION>
1995
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
<S> <C> <C> <C>
1 $42.875 $34.250 $ .28
2 42.000 37.375 .28
3 42.250 36.750 .28
4 45.250 40.875 .29
</TABLE>
Year-end closing
price..................$45.250
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Torchmark's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K:
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Premium Revenue:
Life................... $ 854,897 $ 772,257 $ 601,633 $ 555,859 $ 544,745
Health................. 732,618 754,983 773,375 804,605 802,536
Other ................. 22,404 19,043 13,866 132,446 106,681
Total................. 1,609,919 1,546,283 1,388,874 1,492,910 1,453,962
Net investment income... 404,608 381,865 347,637 368,494 370,617
Financial services
revenue................ 184,295 152,482 139,276 137,422 133,462
Realized investment
gains (losses)......... 5,829 (14,323) (2,551) 8,009 (948)
Total revenue........... 2,205,810 2,067,482 1,875,337 2,066,846 1,959,668
Net income from
continuing operations.. 318,509 271,945 263,814 242,298 247,647
Net income.............. 311,372 143,235 268,946 297,979 265,477
Net income available to
common
shareholders........... 311,372 143,235 268,142 294,690 262,024
Annualized premium
issued:
Life................... 214,741 217,988 149,833 128,433 131,726
Health................. 100,981 103,491 122,663 177,701 227,134
Total................. 315,722 321,479 272,496 306,134 358,860
Mutual fund collections. 1,497,259 1,182,594 1,180,477 1,237,747 1,141,928
Per common share:
Net income............. 4.37 2.00 3.72 4.01 3.58
Net operating
income(1)............. 4.43 3.93 3.74 3.50 3.34
Net income from
continuing operations. 4.47 3.80 3.65 3.25 3.33
Cash dividends paid.... 1.16 1.13 1.12 1.08 1.07
Return on average common
equity excluding
effect of SFAS 115 and
discontinued
operations............. 20.5% 18.5% 19.7% 21.3% 24.6%
Average shares
outstanding............ 71,230 71,594 72,096 73,502 73,237
- -------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
AS OF DECEMBER 31, ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash and invested assets
(2).................... $6,049,629 $5,874,037 $5,036,211 $5,200,588 $ 4,675,577
Total assets............ 9,800,800 9,364,104 8,165,244 7,441,185 6,544,617
Short-term debt......... 40,910 189,372 250,116 107,108 195,102
Long-term debt.......... 791,880 791,988 791,518 791,090 496,622
Shareholders' equity.... 1,629,343 1,588,952 1,242,603 1,417,255 1,115,660
Per common share (3)... 23.38 22.17 17.37 18.80 14.54
Per common share
excluding effect of
SFAS 115.............. 22.84 20.33 19.31 17.29 14.54
Annualized premium in
force:
Life.................. 946,525 869,366 796,955(4) 612,656 588,084
Health................ 748,153 759,059 812,371(4) 828,332 837,628
Total................. 1,694,678 1,628,425 1,609,326 1,440,988 1,425,712
Assets under management
at W&R................. 18,858,000 18,288,000 14,502,000 14,470,000 12,144,000
</TABLE>
- -------------------------------------------------------------------------------
(1) Excludes realized investment gains (losses) and the related adjustment to
deferred acquisition costs.
(2) Includes accrued investment income.
(3) Computed after deduction of preferred shareholders' equity.
(4) Annualized life premium in force includes $144 million, and annualized
health premium in force includes $37 million, representing the business
acquired in the acquisition of American Income Life Insurance Company in
1994.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial Data
and Torchmark's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Torchmark's net operating income from continuing operations excludes
realized investment gains and losses and the related adjustment to deferred
acquisition costs. Net operating income was $4.43 per share in 1996, rising
13% over $3.93 per share in 1995. This increase in net operating income for
1995 was 5% from 1994 per share net operating income of $3.74. Realized
investment losses for 1995 included a $15 million after-tax, or $.21 per
share, writedown of an investment in Southwestern Life Corporation, which
filed for Chapter 11 bankruptcy protection in the third quarter of 1995.
Torchmark's net income, including discontinued operations, was $311 million
in 1996 compared with $143 million in 1995 and $269 million in 1994. On a per-
share basis, net income was $4.37, $2.00, and $3.72 in 1996, 1995, and 1994,
respectively. Net income in 1995 was negatively affected by Torchmark's
decision to dispose of its energy segment and to exit the energy industry.
Accordingly, in 1995, Torchmark modified the presentation in its financial
statements to set forth separately the net assets and results attributable to
the discontinued energy segment as discontinued operations. Also in the fourth
quarter of 1995, as a part of the decision to dispose of the energy segment,
Torchmark wrote down its investment in a coalbed methane gas development in
the Black Warrior Basin of Alabama to the investment's estimated realizable
value. Torchmark had experienced disappointments in methane gas production
through increased difficulties in obtaining significant gas production from
lower coal seams, resulting in downward revisions to engineering estimates of
reserves. In view of these production difficulties, Torchmark's desire to sell
its energy segment, and the adoption of FASB Statement 121, an accounting rule
regarding impairments, it was determined that a writedown of the investment
was appropriate. The writedown amounted to an after-tax charge of $130
million, or $1.82 per share in 1995. The disposition of the energy segment was
completed on September 30, 1996 and resulted in an after-tax loss of $7
million or $.10 per share. For more details on this transaction, see "Disposal
of Energy Segment" on page 30 of this report.
In a comparison of 1996 and 1995 results with those of 1994, attention
should be given to the acquisition of American Income on November 3, 1994 for
total consideration of $552 million. American Income's results were
consolidated with Torchmark's after the acquisition date, being included for a
full year in 1995 for the first time. American Income added approximately $17
million and $22 million to Torchmark's 1995 and 1996 net income, respectively,
after taking into account goodwill amortization and financing costs.
Torchmark's 1996 revenues gained 7% over the prior year to $2.21 billion.
Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an
increase of $192 million. The American Income acquisition accounted for the
1995 increase after adjusting for lost investment income from the purchase.
American Income added $225 million to total revenues in 1995, compared with
$31 million in 1994. Premium income increased 4% in 1996 over the prior year
to $1.61 billion. Premium in 1995 rose 11% to $1.55 billion from $1.39
billion. The $157 million gain in premium in 1995 was caused by the inclusion
of American Income premium for a full year, which increased $168 million over
1994. The components of Torchmark's revenues and operations are described in
more detail in the discussion of segments and investment operations found on
pages 19 through 27 of this report.
Operating expenses, as a percentage of total revenues, were stable at 7% in
both 1996 and 1995. This expense ratio increased from 6.3% in 1994. The higher
expense ratios in 1995 and 1996 are related to increased legal and litigation
costs at Liberty. In 1995, the increases in goodwill amortization, interest
expense, and the MIPS dividend were the result of financing the American
Income acquisition in late 1994. Please refer to the following sections of
this report for a more complete discussion of this purchase
18
<PAGE>
and the related financing costs: "Acquisition of American Income" on page 30,
and "Capital Resources" on page 28. Interest expense declined 9% in 1996 due
to debt paydowns. For a more complete discussion of Torchmark's debt, please
see the "Capital Resources" discussion.
The following is a discussion of Torchmark's operations by segment.
INSURANCE
Life insurance. Life insurance premium increased 11% in 1996 to $855
million. Life premium grew 28% to $772 million for the year 1995. The 1995
versus 1994 comparison is distorted somewhat because of the American Income
acquisition in late 1994. American Income life premium was $154 million in
1995, compared with $21 million in 1994, accounting for $133 million of the
$171 million increase in life premium for 1995. Sales of life insurance in
terms of annualized premium were $215 million in 1996 and $218 million in
1995. This represents a 1% decline in 1996 when compared with 1995, a record
year for Torchmark, but the 1995 increase was 45% over 1994 sales of $150
million. American Income accounted for $51 million of 1995 sales, or 64% of
the 1995 increase.
Life insurance premium is Torchmark's largest component of revenue,
representing 39% of total revenue and 53% of total premium. In 1995,
Torchmark's life annualized premium in force at year end exceeded its health
premium for the first time since 1982. In 1996, the gap between life and
health premium increased, as annualized life premium in force grew to 56% of
total as opposed to health premium's 44%. Torchmark has emphasized increases
in sales of life insurance product lines relative to health and other
insurance products because profit margins for life insurance are superior.
Additionally, assets backing the higher reserves required for life products
provide the potential for Torchmark to increase investment income. Profit
margins for life insurance operations, as measured by insurance operating
income as a percentage of premium, have approximated 29% in each of the three
years presented. By contrast, health margins have not exceeded 16% during the
same three years.
Annualized life premium in force climbed 9% in 1996 to $947 million at
December 31. Annualized life premium in force also grew 9% during 1995, rising
to $869 million. Annualized premium in force data includes amounts collected
on certain interest-sensitive life products which are not recorded as premium
income but exclude single premium income and policy account charges.
Torchmark markets its life insurance products through a variety of different
distribution channels. The following table presents life insurance premium
income during each of the three years ended December 31, 1996 by distribution
method.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent
Agency........................ $ 33,404 3.9% $ 28,305 3.7% $ 25,971 4.3%
United American Exclusive
Agency........................ 15,767 1.8 10,713 1.4 7,988 1.3
Direct Response................ 171,983 20.1 149,141 19.3 127,661 21.2
Liberty National Exclusive
Agency........................ 279,637 32.7 275,089 35.6 268,460 44.6
American Income Exclusive
Agency........................ 173,700 20.3 153,914 19.9 21,055 3.5
Military....................... 71,223 8.3 45,512 5.9 39,802 6.6
United Investors Exclusive
Agency........................ 73,836 8.6 69,498 9.0 64,940 10.8
Other.......................... 35,347 4.3 40,085 5.2 45,756 7.7
-------- ----- -------- ----- -------- -----
$854,897 100.0% $772,257 100.0% $601,633 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The direct response operation has experienced premium growth, with premium
revenue rising 15% in 1996 to $172 million, after having risen 17% in 1995.
Annualized life premium in force was $202 million at December 31, 1996. Direct
response marketing is conducted through direct mail, co-op mailings,
19
<PAGE>
television and consumer magazine advertising, as well as direct mail
solicitations endorsed by groups, unions and associations. The direct response
operation accounted for 20% of Torchmark's life insurance premium in 1996.
The Liberty National Agency distribution system accounted for the most life
insurance premium income in each of the three years presented, with 1996
premium representing 33% of Torchmark's total life premium. Annualized life
premium in force grew from $297 million at year-end 1995 to $299 million at
the end of 1996. Life premium sales, in terms of annualized premium issued,
declined 6% during 1996 to $45 million. During the past two years, this agency
has completed the transition from a debit-style renewal premium collection
system to a direct bill or bank-draft collection system. At the beginning of
1996, debit or home collection sales were discontinued. Under the new system,
agents spend more time developing new customers. As expected, a number of
agents did not make the transition. During the two year period, the agency
force declined 31% to 1,750 agents. However, life insurance production only
declined 12%, which is evidence of the strength of the existing sales force.
In the fourth quarter of 1996, emphasis was placed on hiring and training new
agents under the new system. The agency expects a growth in the number of
productive agents, and in turn, growth in sales and in force.
Another Torchmark distribution system which experienced growth in life
insurance operations was the American Income Agency. This agency targets
members of labor unions, credit unions, and other associations for its life
insurance sales. Life premium rose 13% in 1996 to $174 million. Annualized
premium in force grew 11% to $188 million at December 31, 1996. Annualized
premium in force was $170 million at year-end 1995, rising 15% over year-end
1994. Sales of annualized premium increased 6% to $54 million in 1996.
American Income was acquired by Torchmark in late 1994.
Torchmark distributes life insurance through a nationwide independent agency
whose sales force is comprised of former commissioned and non-commissioned
military officers who sell exclusively to commissioned and non-commissioned
military officers and their families. The quality of the business, which is
comprised of whole life products with term insurance riders, produced by this
agency is outstanding. Life premium income from this distribution system was
$71 million in 1996, up $26 million from 1995. This increase resulted
primarily from the acquisition from another carrier of a block of business
with $21 million of annualized premium in force produced by the military
agency. In the past, this agency has produced business through Liberty
National, but beginning late in the first quarter of 1997, additional sales
will be produced through Globe Life.
Torchmark's other three distribution channels each experienced premium
growth in 1996. The United Investors Exclusive Agency, made up of W&R sales
representatives, recorded premium income of $74 million, increasing 6% over
1995. Premium for the United American Exclusive Agency rose 47% to $16
million. Annualized premium sold was $11 million in 1996, gaining 17%. The
United American Independent Agency had life premium income growth of 19% to
$33 million, and sales growth of 11% to $18 million. The United Investors
Agency represents 9% of Torchmark's life premium, while the two United
American Agencies represent 6%.
20
<PAGE>
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium and policy
charges................. $854,897 100.0% $772,257 100.0% $601,633 100.0%
Policy obligations....... 558,436 65.3 507,444 65.7 412,799 68.6
Required reserve
interest................ (209,126) (24.4) (194,733) (25.2) (163,637) (27.2)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 349,310 40.9 312,711 40.5 249,162 41.4
Amortization of
acquisition costs....... 146,164 17.1 126,695 16.4 90,573 15.1
Commissions and premium
taxes................... 54,182 6.3 50,994 6.6 39,845 6.6
Other expenses........... 61,865 7.2 60,767 7.9 46,814 7.8
-------- ----- -------- ----- -------- -----
Total expense........... 611,521 71.5 551,167 71.4 426,394 70.9
-------- ----- -------- ----- -------- -----
Insurance operating
income.................. $243,376 28.5% $221,090 28.6% $175,239 29.1%
======== ===== ======== ===== ======== =====
</TABLE>
Torchmark's life insurance margins have remained stable, with insurance
operating income at approximately 29%, throughout the three-year period
presented. As a percentage of premium, operating expenses resumed their
decline in 1996, dropping to 7.2%. This expense ratio was 8.6% five years ago
and 11% ten years ago.
One major factor in maintaining stable operating income margins in the life
insurance business is improved persistency. Persistency is beneficial to
margins because it lowers the rate of amortization of acquisition costs, and
increases profits because the premium life is extended. Persistency
improvements have resulted, at least in part, from previously-mentioned
changes in the Liberty National Agency marketing system, including revisions
in agents' compensation formulas to encourage lower lapses and changing the
premium collection method from agent-collected to bank draft and direct bill
methods which are characterized by higher persistency. Another contributing
factor to improved persistency in life business is a higher proportion of
premium from the military distribution system, which has an extremely low
lapse rate.
Even though improvements in persistency have occurred in Torchmark's major
life insurance lines, acquisition cost ratios rose in each of the years
reported. In a comparison of 1996 and 1995 ratios with 1994, the American
income purchase must be taken into account. While American Income's life
business is very profitable and has a total insurance operating income margin
similar to other Torchmark products, it is characterized by lower policy
obligations and higher amortization of acquisition costs. The higher
acquisition cost ratio is a result of the higher amortization of the value of
insurance purchased relative to deferred acquisition costs. Torchmark's
discontinuance of active marketing of pre-need funeral insurance has caused
the amortization of acquisition cost on this business to increase relative to
premium, although the impact on total margins are more than offset by a
reduction in policy benefits ratios.
The above presentation of life insurance results excludes a $22.8 million
benefit in 1994 from the review of reserving assumptions on a block of burial
reserves. An evaluation of assumptions regarding mortality, interest, and
inflation pressures on burial costs indicated that sufficient experience
existed to support a change in the level of reserves held on this block.
Torchmark will continue to monitor its reserving assumptions for this block on
an annual basis to ensure that reserves are adequate to meet contractual
liabilities. Had this item been included, the 1994 ratio of policy obligations
to premium would have been reduced and overall margin would have been
increased 3.8%.
Health insurance. Health products sold by Torchmark include Medicare
Supplement insurance, cancer insurance, long-term care, and other under-age 65
limited benefit supplemental medical and hospitalization products. As a
percentage of annualized health premium in force at December 31, 1996,
Medicare Supplement accounted for 70%, cancer 16%, and other products 14%.
These products are marketed by exclusive and independent agents, by direct
response, and through associations. The table below presents health insurance
premium income during each of the three years ended December 31, 1996 by
distribution method.
21
<PAGE>
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent
Agency........................ $440,862 60.2% $466,751 61.8% $509,972 65.9%
United American Exclusive
Agency........................ 124,037 16.9 123,264 16.3 128,538 16.6
Direct Response................ 3,519 0.5 956 0.1 1,106 0.2
Liberty National Exclusive
Agency........................ 120,028 16.4 122,722 16.3 127,672 16.5
American Income Exclusive
Agency........................ 44,172 6.0 41,290 5.5 6,087 0.8
-------- ----- -------- ----- -------- -----
$732,618 100.0% $754,983 100.0% $773,375 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following chart contains health insurance premium data from 1994 through
1996:
<TABLE>
<CAPTION>
($ MILLIONS)
% % %
HEALTH PREMIUM 1996 CHANGE 1995 CHANGE 1994 CHANGE
- -------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................................... $733 (3)% $755 (2)% $773 (4)%
Annualized Premium Sales.................... $101 (2)% $103 (16)% $123 (31)%
</TABLE>
A major factor leading to the smaller decline in health sales over the three
year period was the smaller decline in Medicare Supplement sales over the same
period. In 1996, sales of Medicare Supplement insurance, the major component
of Torchmark's health insurance, increased over the prior year sales for the
first time since 1992.
The following chart demonstrates the smaller declines over the past three
years for Medicare Supplement annualized premium sales and in force:
<TABLE>
<CAPTION>
($ MILLIONS)
% % %
MEDICARE SUPPLEMENT 1996 CHANGE 1995 CHANGE 1994 CHANGE
- ------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales....................................... $ 66 2% $ 65 (26)% $ 88 (36)%
In Force.................................... $524 (1)% $530 (7)% $572 (5)%
</TABLE>
The leveling of Medicare Supplement sales as compared to the prior year is
due in part to $4 million annualized premium sold through Direct response, a
distribution system not previously marketing this product. In addition to
higher sales than the previous year, 1996 Medicare Supplement in force
benefited from premium rate increases implemented during the year, the first
increase in three years.
In recent years, declines in Medicare Supplement premium issued and premium
in force were the result of 1990 regulatory requirements that reduced
allowable agents commissions on new sales, as well as uncertainties regarding
health care reform by the Clinton Administration and Congress. Further,
regulatory standardization of policy benefits to 10 standardized plans
increased competition because consumers now see these products as a
"commodity", differentiated only by price. Increased competition by Health
Maintenance Organizations that substitute for traditional Medicare also have
dampened sales.
Torchmark is using several strategies to maintain sales of new policies and
the persistency of existing in force Medicare Supplement policies. Torchmark's
premium rate increases year to year have been less than certain competitors,
making Torchmark's rates more price competitive. In addition, new markets such
as employer and association groups, and distribution methods such as Direct
response are being tested.
Sales of cancer products declined 6% to $10.7 million in 1996 after rising
40% in 1995 to $11.3 million. In spite of the lower sales, annualized premium
in force for cancer increased to $119 million at year-end 1996 from $115
million at December 31, 1995, due primarily to the implementation of rate
increases for the first time in two years. Annualized premium in force for
other health products experienced an 8% drop in 1996, from $114 million to
$105 million at December 31, 1996. Sales also
22
<PAGE>
declined 11% in 1996 to $25 million. Torchmark introduced a new series of
long-term care products in late 1996, and intends to aggressively market this
product line.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium.................. $732,618 100.0% $754,983 100.0% $773,375 100.0%
Other income............. 2,994 0.4 3,001 0.4 3,349 0.4
-------- ----- -------- ----- -------- -----
Total revenues.......... 735,612 100.4 757,984 100.4 776,724 100.4
Policy obligations....... 448,346 61.2 454,107 60.2 459,163 59.4
Required reserve
interest................ (26,137) (3.6) (26,139) (3.5) (25,710) (3.4)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 422,209 57.6 427,968 56.7 433,453 56.0
Amortization of
acquisition costs....... 63,150 8.6 69,698 9.2 76,170 9.8
Commissions and premium
taxes................... 87,688 12.0 94,624 12.5 102,603 13.3
Other expense............ 45,812 6.3 47,510 6.3 43,007 5.6
-------- ----- -------- ----- -------- -----
Total expense........... 618,859 84.5 639,800 84.7 655,233 84.7
-------- ----- -------- ----- -------- -----
Insurance operating
income.................. $116,753 15.9% $118,184 15.7% $121,491 15.7%
======== ===== ======== ===== ======== =====
</TABLE>
As a percentage of premium, insurance operating income for Torchmark's
health insurance was stable, approximating 16% in each of the three years
considered. While policy obligations as a percentage of premium have risen
each year, these increases have been more than offset by the declines in
amortization of acquisition costs and commissions. The decline in the
amortization of acquisition costs ratio has been caused by improvements in
persistency in Torchmark's health business. Excluded from the above
presentation of health results in 1994 is a $30 million charge for cancer
policy benefits resulting from a reclassification of non-operating expense to
health benefits, since actual payments will be made in the form of health
benefits.
Annuities. Torchmark's annuity products serve a wide range of markets, such
as providing retirement income, funding prearranged funerals, and offering
long-term tax-deferred growth opportunities. Annuities are sold on both a
fixed and variable basis. Fixed annuity deposits are held and invested by
Torchmark and are obligations of the company. Variable annuity deposits are
invested at the policyholder's direction into his choice among ten W&R managed
mutual funds which vary in degree of investment risk and return. A fixed
annuity investment account is also available as a variable annuity investment
option. These investments pertaining to variable annuity deposits are reported
as "Separate Account Assets" and the corresponding deposit balances for
variable annuities are reported as "Separate Account Liabilities."
Annuity premium is accounted for as a deposit and is not reflected in
income. Revenues on both fixed and variable annuities are derived from charges
to the annuity account balances for insurance risk, administration, and
surrender, depending on the structure of the contract. Variable accounts are
also charged an investment fee and a sales charge. Torchmark benefits to the
extent these policy charges exceed actual costs and to the extent actual
investment income exceeds the investment income which is credited to
policyholders on fixed annuities.
23
<PAGE>
The following table presents the annuity account balance at each year end
and the annuity collections for each year for both fixed and variable
annuities.
<TABLE>
<CAPTION>
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS
-------------------------- --------------------------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
MILLIONS) THOUSANDS)
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed..................... $ 974.6 $ 927.9 $ 801.2 $ 87,133 $133,461 $ 43,339
Variable.................. 1,375.5 1,052.2 692.8 247,461 189,188 196,105
-------- -------- -------- -------- -------- --------
Total.................... $2,350.1 $1,980.1 $1,494.0 $334,594 $322,649 $239,444
======== ======== ======== ======== ======== ========
</TABLE>
Annuity premium collections increased 4% in 1996 to $335 million over the
prior year. Annuity collections rose 35% to $323 million in 1995. Fixed
annuity premium collections declined 35% in 1996 to $87 million from $133
million in 1995, after having risen over three times 1994 collections of $43
million. The 1995 increase was caused by the entry of a United American
general agency in the fourth quarter of 1994 that markets to bank customers.
These sales generated $76 million in 1995 collections. In 1996, however, these
sales declined to $55 million. Additionally, Torchmark's preneed annuity
collections declined $19 million in 1996, contributing to the decline in 1996
fixed annuity collections.
More than offsetting the decline in 1996 of fixed collections was an
increase in 1996 of variable annuity collections of 31%. These collections
were $247 million in 1996 as compared with $189 million in 1995. Strong
financial markets in 1996 have contributed greatly to the growth in variable
collections. Torchmark's variable annuities are issued by UILIC and sold by
W&R sales representatives.
The variable annuity account balance also gained 31% over the 1995 period,
standing at $1.4 billion at December 31, 1996. The deposit account balance is
positively affected by additional deposits resulting from heightened investor
interest and by the accounts being valued based on the higher market values of
the underlying investments.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
% OF % OF % OF
MEAN MEAN MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Policy charges.............. $22,404 1.0% $19,049 1.1% $13,888 1.0%
Allocated investment
income..................... 12,957 0.6 10,206 0.6 8,576 0.6
------- ---- ------- ---- ------- ----
Total revenue.............. 35,361 1.6 29,255 1.7 22,464 1.6
Policy obligations.......... 51,320 2.3 48,012 2.8 42,275 3.0
Required reserve interest... (50,188) (2.3) (48,541) (2.8) (42,765) (3.0)
------- ---- ------- ---- ------- ----
Net policy obligations..... 1,132 0.0 (529) 0.0 (490) 0.0
Amortization of acquisition
costs...................... 10,606 0.5 9,125 0.5 5,772 0.4
Commissions and premium
taxes...................... 610 0.0 699 0.0 605 0.0
Other expense............... 2,352 0.1 2,573 0.2 2,345 0.2
------- ---- ------- ---- ------- ----
Total expense.............. 14,700 0.6 11,868 0.7 8,232 0.6
------- ---- ------- ---- ------- ----
Insurance operating income.. $20,661 1.0% $17,387 1.0% $14,232 1.0%
======= ==== ======= ==== ======= ====
</TABLE>
Insurance operating margins for annuities as measured by the mean reserve
have remained fairly stable throughout the three years examined. Annuity
policy charges have increased in each period. Policy charges increased 18% to
$22 million in 1996. These charges were $19 million in 1995, gaining 37% over
1994 charges of $14 million. Growth in these policy charges resulted from the
increase in size of the annuity account balance over each of the prior years,
the increase in the number of annuity contracts in force, and the cumulative
effect of growth in sales over the past few years on which the sales charge is
based. The allocated investment income, or the investment income earned in
excess of policy
24
<PAGE>
requirements, also grew in each of the periods 1994 through 1996. These
increases resulted from the growth in the fixed annuity deposit balances.
ASSET MANAGEMENT
Financial Services. Torchmark's financial services operations consist of the
marketing of 23 mutual funds, including the United Group and the W & R Group
of funds through exclusive financial planners. These representatives also
market a variety of insurance products of Torchmark subsidiaries. Financial
services operations also involve the management of mutual fund portfolios, the
management of institutional portfolios, and the servicing of customer
accounts. Revenues are derived from commissions from the sale of investment
and insurance products, fees for management of investment asset portfolios,
and fees for servicing the accounts.
Financial services revenues rose 21% to $221 million in 1996 compared with
1995 revenues of $183 million. These revenues grew 9% in 1995 from 1994
revenues of $167 million. Financial services revenues presented in Torchmark's
consolidated financial statements will not correspond to total revenues for
the financial services segment presented below in the Summary of Results table
because certain revenues are eliminated in consolidation.
Asset management fees of $103 million in 1996 were the largest component of
financial services revenues, representing 47% of 1996 segment revenues. Asset
management fees grew 20% in 1996, after having gained 22% to $86 million in
1995. Increases in these fees have occurred due to the daily growth in mutual
fund assets and institutional assets under management, on which asset
management fees are based. Average assets under management rose 17% in 1996
and 14% in 1995. Growth in average assets under management in 1995 and 1996
resulted from two factors. First, strength in the financial markets caused
increases in the values of fund securities. Secondly, new net investment
product sales and reinvested dividends in each period contributed to asset
growth. Total assets under management were $18.9 billion at December 31, 1996,
an increase over the prior year end of 3%. Total assets under management were
$18.3 billion at December 31, 1995 and $14.5 billion at December 31, 1994,
rising 26% in 1995. Mutual fund assets under management rose 14% in 1996 to
$17.2 billion at year-end 1996. Asset management fees grew at a higher rate
than assets under management in 1996 primarily because of a change in the type
of assets under management. The total increase in assets under management for
the period of $.6 billion was the result of a $2.1 billion increase in mutual
fund assets partially offset by a $1.5 billion decrease in institutional
assets. The mutual fund assets that were added have a higher management fee
rate than the institutional assets that were lost.
Commission revenues are derived from the sales of both investment and
insurance products, with investment product commissions representing 84% of
total commission revenues in 1996. The commissions from insurance products and
variable annuities are primarily received from Torchmark insurance
subsidiaries, and are eliminated in consolidation. Investment product
commissions rose 26% to $72 million in 1996, after having declined 4% to $57
million in 1995. Investment product sales climbed 27% in 1996 to $1.5 billion.
Investment product sales in 1995 were level with the 1994 sales of $1.2
billion. In 1996, sales of the United Funds, a front-load product, increased
22% or $187 million while sales of the W&R Funds, a deferred-load product,
grew 44% or $70 million. Insurance product commissions have grown steadily,
with 1996 commissions of $13.9 million, as compared with $13.5 million in 1995
and $12.8 million in 1994.
Services fees grew 21% in 1996, after rising 6% in 1995. Service fees are
charged based on the number of accounts serviced. The number of accounts
serviced was 1.31 million at December 31, 1996, an increase of 7%. Accounts
serviced were 1.22 million at year-end 1995 and 1.15 million at year-end 1994.
The 1996 fees grew at a rate greater than the number of accounts because of an
increase in fees.
25
<PAGE>
FINANCIAL SERVICES
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Commission revenue........... $ 85,888 38.9% $ 70,458 38.5% $72,223 43.1%
Asset management fees........ 103,127 46.6 85,999 47.0 70,651 42.2
Service fees................. 28,419 12.9 23,528 12.9 22,297 13.3
-------- ----- -------- ----- ------- -----
Financial services
revenue*................... 217,434 98.4 179,985 98.4 165,171 98.6
Investment and other income.. 3,642 1.6 2,947 1.6 2,264 1.4
-------- ----- -------- ----- ------- -----
Total revenue............... 221,076 100.0 182,932 100.0 167,435 100.0
Commissions and selling
expenses.................... 78,797 35.6 63,882 34.9 62,285 37.2
Other expenses............... 28,959 13.1 24,708 13.5 21,252 12.7
-------- ----- -------- ----- ------- -----
Total expenses.............. 107,756 48.7 88,590 48.4 83,537 49.9
-------- ----- -------- ----- ------- -----
Pretax income................ $113,320 51.3% $ 94,342 51.6% $83,898 50.1%
======== ===== ======== ===== ======= =====
</TABLE>
- --------
* Financial services revenue includes $33.1 million in 1996, $27.5 million in
1995 and $25.9 million in 1994 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Pretax income for Torchmark's financial services operations has grown very
rapidly, rising 20% to $113 million in 1996. This growth follows a 12%
increase in 1995 to $94 million and a 15% increase in 1994 to $84 million. As
a percentage of total financial services revenues, pretax income rose above
51% in 1995 and remained comparable in 1996. The 1995 margin improvement
resulted from a greater percentage of financial services revenues coming from
asset management fees. Asset management fees have a significantly greater
profit margin than commissions and service fees. The proportion of asset
management fees to total revenues remained constant in 1996, contributing to
the flat margin ratios. While other expenses as a percentage of revenues
declined, asset management fees were up about 17% over 1995.
Commissions and selling expenses are the direct expenses associated with
producing commission revenue. They consist of the commissions, bonuses, and
other compensation paid to the sales force as well as other marketing and
promotional costs. Because of the 1996 increase in sales volume, which causes
an increase in sales incentive compensation, direct expenses as a percentage
of commission revenue rose slightly, from 91% in 1995 to 92%. W&R also
increased promotional efforts in 1995 and to an even greater extent in 1996.
The 1996 increase in commission revenues resulted, at least in part, from
these measures.
INVESTMENTS
Torchmark's net investment income increased 6% to $405 million during the
year, following an increase of 10% in 1995 and a decrease of 6% in 1994. When
adjusted for the American Income acquisition in late 1994, however, the 1995
increase was 3%. The 1996 increase in investment income is principally due to
the continued accumulation of invested assets, which rose to $5.9 billion by
year end. When adjusted for disposition of Torchmark's energy operations, mean
invested assets rose 6% in 1996, as compared with a similar 6% increase in
1995.
The overall level of interest rates rose sharply during the first half of
1996, then retracted approximately one-half of the advance by year end. In
this environment, Torchmark's investment program continued to emphasize
investment grade, call-protected corporate securities. New investment
acquisitions of fixed income securities totaled $1.08 billion, compared with
1995 acquisitions of $1.87 billion. Acquisitions in 1995, however, were
inflated by several sales programs implemented to reduce exposure to
prepayments on mortgage-backed securities. During 1996, acquisitions were made
at an average yield of 7.12% and an average life of 7.8 years compared with
7.28% and 13.4 years, respectively, for 1995. While there were no significant
sales of GNMA holdings as in the past several
26
<PAGE>
years, mortgage-backed securities declined because of repayments and the
increase in other types of invested assets. Mortgage-backed securities were
25% of fixed income securities and 23% of invested assets at December 31,
1996. They were 27% of invested assets at year-end 1995 and 43% of invested
assets at year-end 1994.
Torchmark's fixed maturity portfolio is subject to market risk caused by
changes in interest rates in financial markets. Because this portfolio is
classified as available for sale, it is valued at market. While the portfolio
is sensitive to market fluctuations, these temporary changes in market value
have no bearing on the ultimate proceeds at maturity. Torchmark limits its
market risk by maintaining a high quality portfolio with a relatively short
average life.
The moderate increase in rates in 1996 caused the unrealized gain of the
fixed income portfolio to decline. At December 31, 1996, the market value of
fixed income investments exceeded book value by $63 million, compared with an
unrealized gain of $226 million at the end of 1995 and an unrealized loss of
$242 million at year-end 1994. Despite the fluctuation in market values, the
portfolio yield remained relatively stable at 7.55%, compared with 7.66% at
year-end 1995 and 7.73% at year-end 1994. With shorter maturity acquisitions,
the average life of the bond portfolio decreased from 8.8 years at year-end
1995 to 7.8 years currently. At year end, an estimated 38% of the fixed income
portfolio will maturity within five years, and 80% will mature within 10
years. This compares with estimates of 38% and 76%, respectively, at year-end
1995.
Presented below is a schedule of Torchmark's fixed-income portfolio by
maturity.
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Short terms and under 1 year...................................... 8.7% 8.6%
2-5 years......................................................... 29.0 28.9
6-10 years........................................................ 42.0 38.3
11-15 years....................................................... 10.0 10.8
16-20 years....................................................... 3.1 2.5
Over 20 years..................................................... 7.2 10.9
----- -----
100.0% 100.0%
===== =====
</TABLE>
Torchmark's emphasis on fixed maturity bonds, which represented 90% of
invested assets at 1996 year end, caused percentage holdings of other type
investments to vary widely with latest industry averages prepared by the
American Council of Life Insurance.
<TABLE>
<CAPTION>
TORCHMARK
---------------- INDUSTRY %
AMOUNT % (1)
---------- ----- ----------
<S> <C> <C> <C>
Investment grade and short-term bonds.......... $5,162,841 86.9% 68.3%
Noninvestment grade bonds...................... 243,357 4.1 3.7
Preferred and common stocks.................... 16,035 0.3 5.4
Mortgage loans................................. 64,353 1.1 12.8
Real estate.................................... 150,490 2.5 2.5
Policy loans................................... 206,959 3.5 5.8
Other invested assets.......................... 95,485 1.6 1.5
---------- ----- -----
$5,939,520 100.0% 100.0%
========== ===== =====
</TABLE>
- --------
(1) Latest data available from the American Council of Life Insurance.
The quality of fixed income holdings remains very high, with 95% rated
investment grade by Standard & Poor's and the NAIC.
27
<PAGE>
FINANCIAL CONDITION
Liquidity. Liquidity pertains to Torchmark's ability to meet on demand the
cash commitments required by its business operations and financial
obligations. Torchmark's liquidity is obtained from three sources: its
positive cash flow from operations, its portfolio of short-term investments,
and its line of credit facility.
Torchmark's insurance and asset management operations generate positive cash
flows in excess of its immediate needs. Cash flows provided from operations,
including deposit-product operations, were $517 million in 1996, compared with
$478 million in 1995, an increase of 8%. Operating cash flows grew 42% in 1995
over 1994 cash flows of $337 million. The 1995 increase was primarily caused
by increased deposit-product sales in 1995 and a one-time $48 million tax
settlement paid in 1994 related to prior periods. In addition to operating
cash flows, Torchmark received $347 million of investment maturities and
repayments in 1996, further enhancing total positive cash flow. Such
repayments were $351 million in 1995 and $796 million in 1994. Cash flows in
excess of immediate requirements are used to build an investment base to fund
future requirements.
Torchmark's cash and short-term investments were $103 million at December
31, 1996, compared with $86 million at year-end 1995. These liquid assets
represented approximately 1% of total assets at December 31, 1996, the same as
at the end of the previous year. In addition to Torchmark's liquid assets,
Torchmark has a portfolio of marketable fixed and equity securities which are
available for sale should the need arise. These securities had a value of $5.3
billion at December 31, 1996.
Torchmark has in place a line of credit facility with a group of lenders
which allows unsecured borrowings up to a specified maximum amount. The
maximum amount was increased during 1996 to $600 million at December 31, 1996.
Interest is charged at variable rates for borrowings. This line of credit is
further designated as a backup credit line for a commercial paper program not
to exceed $600 million, whereby Torchmark may borrow from either the credit
line or issue commercial paper at any time but may not borrow in excess of a
total of $600 million on the combined facilities. At December 31, 1996,
$41 million in commercial paper was outstanding and there were no borrowings
on the line of credit. A facility fee is charged on the entire $600 million
balance. In accordance with the agreements, Torchmark is subject to certain
covenants regarding capitalization and earnings. At December 31, 1996,
Torchmark was in full compliance with these covenants.
Liquidity of the parent company is affected by the ability of the
subsidiaries to pay dividends. Dividends are paid by subsidiaries to the
parent in order to meet its dividend payments on common and preferred stock,
interest and principal repayment requirements on parent company debt, and
operating expenses of the parent company. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations on an annual noncumulative basis or 10% of surplus, in the
absence of special approval, and distributions are not permitted in excess of
statutory net worth. Subsidiaries are also subject to certain minimum capital
requirements. Although these restrictions exist, dividend availability from
subsidiaries has been and is expected to be more than adequate for parent
company operations. During 1997, a maximum amount of $275 million will be
available to Torchmark from insurance subsidiaries without regulatory
approval.
Capital Resources. The carrying amount of Torchmark's long-term debt was
$792 million at both year-ends 1996 and 1995. Major debt issues outstanding at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
INSTRUMENT DUE RATE ($ THOUSANDS)
---------- ---- ----- -------------
<S> <C> <C> <C>
Sinking Fund Debentures............................... 2017 8 5/8% $200,000
Senior Notes.......................................... 1998 9 5/8 200,000
Senior Debentures..................................... 2009 8 1/4 99,450
Notes................................................. 2023 7 7/8 200,000
Notes................................................. 2013 7 3/8 100,000
--------
$799,450
========
</TABLE>
28
<PAGE>
Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996
under the terms of a put provision.
In connection with the American Income purchase in November, 1994, Torchmark
issued eight million shares or $200 million face amount Cumulative Monthly
Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were
issued at an annual dividend rate of 9.18%. They are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are redeemable at Torchmark's option at any time after September 30,
1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%,
Torchmark subsequently entered into a ten-year interest-rate swap agreement
with an unaffiliated party to reduce financing costs. The swap agreement calls
for Torchmark to pay a variable rate on the $200 million face amount in
exchange for payment of the fixed dividend. Torchmark is at risk on this
instrument for higher financing costs to the extent interest rates rise during
the remaining term. This risk is limited, however, by a five-year interest-
rate cap which Torchmark acquired in conjunction with the swap agreement that
insures the variable rate cannot exceed 10.39%. At December 31, 1996, the
variable rate was 6.95%. During 1996, Torchmark's after-tax dividend cost for
the MIPS was $9.7 million, compared with $11.9 million that would have been
incurred without the swap and cap transactions. Torchmark's after-tax cost in
1995 was $10.3 million, saving $1.6 million.
Short-term debt was $41 million at year-end 1996, compared with $189 million
at the end of the previous year. Torchmark repaid $148 million principal
amount on this debt in 1996, with funds from internal cash flow. Torchmark
paid down a net of $61 million on the credit facility during 1995.
During 1996, the Torchmark Board of Directors and its financial advisor,
Morgan Stanley, reviewed a number of restructuring options to possibly enhance
shareholder value, including splitting the operations into separate publicly
traded entities and selling all or portions thereof. However, none of the
reasonably achievable restructuring options provided sufficient likelihood of
creating more long term shareholder value than the current structure.
Accordingly, the following actions were agreed to and accomplished to the
extent described in the following sections.
(1) Beginning in August 1996, Torchmark renewed its share repurchase
program, and acquired 2.3 million shares of its common stock at a
cost of $107 million by year end 1996. Torchmark also intends to use
excess cash flow to make additional open market purchases, as market
conditions warrant, provided that its debt-to-capital ratio does not
exceed 40% and that no opportunities for acquisition offering
superior returns are available.
(2) Monetization of Vesta stock (see discussion below under Other
items).
(3) Complete the sale of the energy related discontinued operations (see
discussion below under Other Items).
Shareholders' equity rose to $1.63 billion at December 31, 1996, an increase
of 3% from December 31, 1995 shareholders' equity of $1.59 billion. Book value
per share was $23.38 at 1996 year end, compared with $22.17 and $17.37 at
year-ends 1995 and 1994, respectively. After adjusting for the impact of
interest-rate fluctuations on shareholders' equity required by accounting
rules, book value per share was $22.84 at year-end 1996, an increase of 12%
over $20.33 at year-end 1995. Comparative book value per share was $19.31 at
year-end 1994. Return from continuing operations on common shareholders'
equity was 20.5% in 1996, compared with 18.5% in 1995, even though average
shareholders' equity increased. The return on equity ratios excludes the mark
up or down of shareholders' equity for changes in market interest rates
required by accounting rules. Total debt as a percentage of total
capitalization continues to decline, and was 32% at December 31, 1996. In the
computation of this ratio, the MIPS are counted as equity and the effect of
the above-mentioned accounting rule is excluded. This debt-to-capitalization
ratio was 37% at year-end 1995 and 40% at year-end 1994. Torchmark's ratio of
earnings before interest, taxes and discontinued operations to interest
requirements was 7.7 for 1996, compared with 6.3 in 1995 and 6.2 in 1994.
29
<PAGE>
OTHER ITEMS
Acquisition of American Income. On November 3, 1994, Torchmark acquired
American Income for a total cash purchase price of approximately $552 million.
American Income sells life insurance to union, credit union, and other
association members through exclusive agents. The results of operations of
American Income were consolidated with those of Torchmark after the purchase
date. Funds for the purchase were provided through a $200 million preferred
security offering which is discussed in more detail in the capital resources
section above, a $175 million bridge loan from a group of banks, the sale of
investments available for sale, and internal cash flow.
Disposal of Energy Segment. On September 30, 1996, Torchmark completed the
sale of its energy business segment including its energy asset management
subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior
coalbed methane investment. These operations, which were reclassified as
discontinued operations in Torchmark's financial statements at December 31,
1995, were sold to a TEAI management group. After the sale, Torchmark had no
controlling ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totalling $32.5 million along
with $15.5 million in cash. After closing costs and retained liabilities,
Torchmark recorded a pre-tax loss of $23 million and an after-tax loss of $7
million from the sale, or $.10 per share.
Monetization of Vesta Stock. Torchmark filed a registration statement with
the Securities and Exchange Commission during the third quarter of 1996. The
purpose of this statement was to monetize a substantial portion of Torchmark's
holdings of Vesta Insurance Group, Inc. ("Vesta") common stock, by issuing a
security mandatorily exchangeable for Vesta stock at the option of Torchmark.
Torchmark currently holds approximately five million shares of Vesta stock. On
November 7, 1996, Torchmark withdrew this registration statement because
market conditions were not favorable for the monetization of Vesta stock at
that time. Depending upon future market conditions, Torchmark may refile the
registration statement or otherwise provide for the monetization of a portion
of all of the Vesta stock, but currently has no plans to monetize this stock.
Litigation. Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involve punitive damage
claims based upon allegations of agent misconduct at Liberty in Alabama. Such
punitive damage claims are tried in Alabama state courts where any punitive
damage litigation has the potential for significant adverse results. It is
impossible to predict the extent of punitive damages that may be awarded if
liability is found in any given case, since the amount of punitive damages in
Alabama is left largely to the discretion of the jury in each case. It is thus
difficult to predict with certainty the liability of Torchmark or its
subsidiaries in any given case because of the unpredictable nature of this
type of litigation.
Also, the cancer policy class action litigation in Alabama continued in
1996. In February 1996, the Alabama Supreme Court issued a notice overruling a
petition for rehearing of its decision affirming the trial court's final
approval of the May 1994 settlement of this litigation. Certain intervenors
then filed a petition for writ of certiorari to the U.S. Supreme Court, which
granted certiorari in October 1996. Oral arguments were heard on the
intervenors' petition in January 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari it had
previously granted, effectively ending direct appeals of the cancer policy
class action settlement.
NEW ACCOUNTING RULES
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FASB Statement No. 125) is effective for
transactions occurring after December 31, 1996, applied prospectively. Earlier
or retrospective application is not permitted. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities, based on the concept of control.
The adoption of this standard will have no material impact on Torchmark's
financial condition or results.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 32
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996 and 1995................. 33
Consolidated Statement of Operations for each of the years in the three-
year period
ended December 31, 1996................................................. 34
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year
period ended December 31, 1996.......................................... 35
Consolidated Statement of Cash Flow for each of the years in the three-
year period
ended December 31, 1996................................................. 36
Notes to Consolidated Financial Statements............................... 37
</TABLE>
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Torchmark Corporation
Birmingham, Alabama
We have audited the consolidated financial statements of Torchmark
Corporation and subsidiaries as listed in Item 8 and the supporting schedules
as listed in Item 14(a). These financial statements and financial statement
schedules are the responsibility of Torchmark's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial statement schedules 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 Torchmark
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, 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.
As discussed in Note 1 to the consolidated financial statements, Torchmark
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 31, 1997, except for
Note 16, which is as
of March 11, 1997
32
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1996--$5,265,499; 1995--$4,984,223).......... $5,328,276 $5,210,224
Equity securities, at fair value (cost: 1996--$3,799;
1995--$4,758)....................................... 8,858 10,551
Mortgage loans on real estate, at cost (estimated
fair value: 1996--$61,970; 1995--$50,686)........... 64,353 52,274
Investment real estate, at cost (less allowance for
depreciation: 1996--$40,370; 1995--$32,463)......... 150,490 143,356
Policy loans......................................... 206,959 193,877
Other long-term investments.......................... 95,485 95,744
Short-term investments............................... 85,099 72,847
---------- ----------
Total investments................................... 5,939,520 5,778,873
Cash (includes restricted cash: 1996--$15,028; 1995--
$11,838)............................................. 18,272 13,158
Investment in unconsolidated subsidiaries............. 88,051 76,101
Accrued investment income............................. 91,837 82,006
Other receivables..................................... 112,291 122,108
Deferred acquisition costs............................ 1,253,727 1,121,325
Value of insurance purchased.......................... 244,368 277,297
Property and equipment................................ 50,323 47,185
Goodwill.............................................. 540,540 555,517
Other assets.......................................... 41,846 30,304
Discontinued operations assets........................ -0- 174,386
Separate account assets............................... 1,420,025 1,085,844
---------- ----------
Total assets........................................ $9,800,800 $9,364,104
========== ==========
Liabilities:
Future policy benefits................................ $4,797,738 $4,566,850
Unearned and advance premiums......................... 83,670 83,473
Policy claims and other benefits payable.............. 220,121 209,773
Other policyholders' funds............................ 80,812 77,039
---------- ----------
Total policy liabilities............................ 5,182,341 4,937,135
Accrued income taxes.................................. 340,287 362,005
Other liabilities..................................... 202,869 215,712
Short-term debt....................................... 40,910 189,372
Long-term debt (estimated fair value: 1996--$814,082;
1995--$860,258)...................................... 791,880 791,988
Separate account liabilities.......................... 1,420,025 1,085,844
---------- ----------
Total liabilities................................... 7,978,312 7,582,056
Commitments and contingencies
Monthly income preferred securities
(estimated fair value: 1996--$210,000; 1995--
$217,040)............................................. 193,145 193,096
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
-0- in 1996 and in 1995.............................. -0- -0-
Common stock, par value $1 per share--Authorized
160,000,000 shares; outstanding: 73,784,228 issued in
1996 and in 1995, less 4,088,253 and 2,117,091 shares
held in treasury in 1996 and 1995, respectively...... 73,784 73,784
Additional paid-in capital............................ 141,701 139,754
Unrealized gains, net of applicable taxes............. 46,581 140,338
Retained earnings..................................... 1,549,391 1,325,534
Treasury stock........................................ (182,114) (90,458)
---------- ----------
Total shareholders' equity.......................... 1,629,343 1,588,952
---------- ----------
Total liabilities and shareholders' equity.......... $9,800,800 $9,364,104
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Life premium............................... $ 854,897 $ 772,257 $ 601,633
Health premium............................. 732,618 754,983 773,375
Other premium.............................. 22,404 19,043 13,866
--------- ---------- ----------
Total premium............................ 1,609,919 1,546,283 1,388,874
Net investment income...................... 404,608 381,865 347,637
Financial services revenue................. 184,295 152,482 139,276
Realized investment gains (losses)......... 5,829 (14,323) (2,551)
Other income............................... 1,159 1,175 2,101
--------- ---------- ----------
Total revenue............................ 2,205,810 2,067,482 1,875,337
Benefits and expenses:
Life policyholder benefits................. 558,436 507,444 389,976
Health policyholder benefits............... 448,346 454,107 489,163
Other policyholder benefits................ 51,302 47,785 42,138
--------- ---------- ----------
Total policyholder benefits.............. 1,058,084 1,009,336 921,277
Amortization of deferred acquisition costs. 218,826 204,067 178,107
Commissions and premium taxes.............. 140,515 144,333 141,158
Financial services selling expense......... 50,515 40,080 39,962
Other operating expense.................... 154,150 145,520 118,353
Amortization of goodwill................... 14,977 14,977 6,584
Interest expense........................... 73,611 80,994 75,922
--------- ---------- ----------
Total benefits and expenses.............. 1,710,678 1,639,307 1,481,363
Income from continuing operations before
income taxes and equity in earnings of
unconsolidated subsidiaries................ 495,132 428,175 393,974
Income taxes................................ (180,622) (157,539) (135,994)
Equity in earnings of unconsolidated
subsidiaries............................... 13,654 11,626 7,971
Monthly income preferred securities
dividend................................... (9,655) (10,317) (2,137)
--------- ---------- ----------
Net income from continuing operations.... 318,509 271,945 263,814
Discontinued operations of energy segment:
Income (loss) from operations (less
applicable income taxes of: 1995--$86,050,
1994--$11,677)............................ -0- (128,710) 5,132
Loss on disposal
(less applicable income tax benefit of:
1996--$15,813)............................ (7,137) -0- -0-
--------- ---------- ----------
Net income............................... 311,372 143,235 268,946
Dividends to preferred shareholders......... -0- -0- (804)
--------- ---------- ----------
Net income available to common
shareholders............................ $ 311,372 $ 143,235 $ 268,142
========= ========== ==========
Net income per share:
Continuing operations...................... $ 4.47 $ 3.80 $ 3.65
Discontinued operations of energy segment:
Income (loss) from operations............. 0.00 (1.80) 0.07
Loss on disposal.......................... (0.10) 0.00 0.00
--------- ---------- ----------
Net income per share..................... $ 4.37 $ 2.00 $ 3.72
========= ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY
--------- ------- ---------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1994
- -----------------------
Balance at January 1,
1994................... $1,000 $73,784 $232,432 $120,138 $1,082,031 $ (92,130) $1,417,255
Net income.............. 268,946 268,946
Common dividends
declared ($1.12 a
share)................. (80,602) (80,602)
Preferred dividends
declared and accrued... (804) (804)
Acquisition of treasury
stock--preferred....... (46,982) (46,982)
Acquisition of treasury
stock--common.......... (59,072) (59,072)
Retirement of treasury
stock--preferred....... (1,000) (93,736) 94,736 -0-
Exercise of stock
options................ 349 (2,026) 6,433 4,756
Net change in unrealized
gains (losses)......... (260,894) (260,894)
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1994.................. -0- 73,784 139,045 (140,756) 1,267,545 (97,015) 1,242,603
Year Ended December 31,
1995
- -----------------------
Net income.............. 143,235 143,235
Common dividends
declared ($1.14 a
share)................. (81,643) (81,643)
Exercise of stock
options................ 709 (3,603) 6,557 3,663
Net change in unrealized
gains (losses)......... 281,094 281,094
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1995.................. -0- 73,784 139,754 140,338 1,325,534 (90,458) 1,588,952
Year Ended December 31,
1996
- -----------------------
Net income.............. 311,372 311,372
Common dividends
declared ($1.16 a
share)................. (82,320) (82,320)
Acquisition of treasury
stock--
common................. (106,996) (106,996)
Exercise of stock
options................ 1,947 (5,195) 15,340 12,092
Net change in unrealized
gains (losses)......... (93,757) (93,757)
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1996.................. $ -0- $73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343
====== ======= ======== ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net income................................ $ 311,372 $ 143,235 $ 268,946
Adjustments to reconcile net income to
cash provided from operations:
Increase in future policy benefits...... 136,375 178,850 81,062
Increase in other policy benefits....... 14,319 4,877 23,990
Deferral of policy acquisition costs.... (300,461) (362,837) (225,409)
Amortization of deferred policy
acquisition costs...................... 218,826 204,067 178,107
Change in accrued income taxes.......... 61,519 42,337 (39,942)
Depreciation............................ 9,056 9,603 11,271
Realized (gains) losses on sale of
investments,
subsidiaries, and properties........... (5,829) 14,323 2,551
Change in accounts payable and other
liabilities............................ 9,091 (6,623) (45,093)
Change in receivables................... (15,501) (31,670) (2,237)
Change in payables and receivables of
unconsolidated affiliates.............. (3,350) (2,348) (1,251)
Other accruals and adjustments.......... (20,158) (2,951) 2,483
Discontinued operations of energy
segment................................ 7,137 128,710 (5,132)
---------- ---------- ----------
Cash provided from operations............. 422,396 319,573 249,346
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................... 487,070 1,177,874 582,611
Fixed maturities available for sale--
matured, called, and repaid............ 347,116 351,246 796,064
Equity securities....................... 2,872 16,587 23,179
Mortgage loans.......................... 7,113 1,856 1,128
Real estate............................. 5,780 2,566 1,292
Other long-term investments............. 21,099 21,666 16,552
---------- ---------- ----------
Total investments sold or matured...... 871,050 1,571,795 1,420,826
Acquisition of investments:
Fixed maturities--available for sale.... (1,080,793) (1,870,445) (1,264,056)
Equity securities....................... -0- (394) (23,739)
Mortgage loans.......................... (18,360) -0- -0-
Real estate............................. (9,690) (17,708) (20,587)
Net increase in policy loans............ (13,082) (11,889) (8,305)
Other long-term investments............. (15,891) (67,241) (15,333)
---------- ---------- ----------
Total investments acquired............. (1,137,816) (1,967,677) (1,332,020)
Net (increase) decrease in short-term
investments............................. (12,252) 35,514 76,457
Purchase of American Income.............. -0- -0- (551,501)
Proceeds from sale of discontinued
operations.............................. 15,500 -0- -0-
Proceeds from sale of Nuevo Energy
Company stock........................... 93,160 -0- -0-
Loans made to unconsolidated affiliates.. -0- -0- (20,186)
Loans repaid by unconsolidated
affiliates.............................. -0- 28,000 -0-
Dispositions of properties............... 2,093 1,198 1,332
Additions to properties.................. (15,412) (6,510) (5,632)
Dividends from unconsolidated affiliates. 770 684 513
---------- ---------- ----------
Cash used for investment activities....... (182,907) (336,996) (410,211)
Cash provided from (used for) financing
activities:
Issuance of common stock................. 10,145 2,953 4,408
Issuance of monthly income preferred
securities.............................. -0- -0- 193,046
Additions to debt........................ -0- -0- 143,000
Cash dividends paid to shareholders...... (82,893) (80,887) (82,336)
Repayments on debt....................... (149,144) (60,867) (70,108)
Acquisition of treasury stock............ (106,996) -0- (106,054)
Net receipts from deposit product
operations.............................. 94,513 158,084 87,701
---------- ---------- ----------
Cash provided from (used for) financing
activities............................... (234,375) 19,283 169,657
---------- ---------- ----------
Increase in cash......................... 5,114 1,860 8,792
Cash at beginning of year................ 13,158 11,298 2,506
---------- ---------- ----------
Cash at end of year...................... $ 18,272 $ 13,158 $ 11,298
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation: The financial statements include the results of
Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries.
Subsidiaries which are not majority-owned are reported on the equity method.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments. Torchmark classifies all of its fixed maturity investments,
which include bonds and redeemable preferred stocks, as available for sale.
Investments classified as available for sale are carried at fair value with
unrealized gains and losses, net of deferred taxes, reflected directly in
shareholders' equity. Investments in equity securities, which include common
and nonredeemable preferred stocks, are reported at fair value with unrealized
gains and losses, net of deferred taxes, reflected directly in shareholders'
equity. Policy loans are carried at unpaid principal balances. Mortgage loans
are carried at amortized cost. Investments in real estate are reported at cost
less allowances for depreciation, which are calculated on the straight line
method. Short-term investments include investments in certificates of deposit
and other interest-bearing time deposits with original maturities within three
months. Other long-term investments consist of investments in mutual funds
managed by a Torchmark subsidiary. They are carried at fair value. Other long-
term investments also include passive energy limited-partnership investments
which are valued at partnership equity. If an investment becomes permanently
impaired, such impairment is treated as a realized loss and the investment is
adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
Torchmark's net income. Investment income attributable to other policyholders
is included in Torchmark's net investment income. Net investment income for
the years ended December 31, 1996, 1995 and 1994 included $298.4 million,
$279.6 million, and $240.7 million, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are
not allocable to policyholders.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, short-term debt, receivables and payables approximates
carrying value. Fair values for investment securities are based on quoted
market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Mortgages are valued using discounted
cash flows. Substantially all of Torchmark's long-term debt, including the
monthly income preferred securities, is valued based on quoted market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to SFAS 97
are recognized as revenue over the premium-paying period of the policy.
Profits for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and
annuity contracts are added to the policy account value, and revenues for such
products are recognized as charges to the policy account value for mortality,
administration, and surrenders (retrospective deposit method). Variable
annuity products are also assessed an investment management fee and a sales
charge. Life premium includes policy charges of $72.8 million, $72.7 million,
and $74.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Other premium includes annuity policy charges for the
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended December 31, 1996, 1995, and 1994 of $22.4 million, $19.0 million,
and $13.9 million, respectively. Profits are also earned to the extent that
investment income exceeds policy requirements. The related benefits and
expenses are matched with revenues by means of the provision of future policy
benefits and the amortization of deferred acquisition costs in a manner which
recognizes profits as they are earned over the same period.
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. The liability for future policy benefits for all other life and
health products is provided on the net level premium method based on estimated
investment yields, mortality, morbidity, persistency and other assumptions
which were appropriate at the time the policies were issued. Assumptions used
are based on Torchmark's experience as adjusted to provide for possible
adverse deviation. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of
acquiring new insurance business are deferred. Such costs consist of sales
commissions, underwriting expenses, and certain other selling expenses. The
costs of acquiring new business through the purchase of other companies and
blocks of insurance business are also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies according to SFAS 97 are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For universal life-type policies, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with unrealized investment gains and losses pertaining to universal
life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. 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.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the
straight line method over the estimated useful lives of these assets which
range from two to twenty years for equipment and two to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, effective at the issuance of the standard in March, 1995. This standard
requires that certain long-lived assets used in Torchmark's business as well
as certain intangible assets be reviewed for impairment when circumstances
indicate that these assets may not be recoverable, and further provides how
such impairment shall be determined and measured. It also requires that long-
lived assets and intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. Except for the writedown of
the energy investment described in Note 7, the adoption of this statement had
no material impact on Torchmark's operations or financial position for the
years ended December 31, 1996 and 1995.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill: The excess cost of businesses acquired over the fair value of
their net assets is reported as goodwill and is amortized on a straight-line
basis over a period not exceeding 40 years. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill is written down to the recoverable amount and is
amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to legal proceedings. Because much of Torchmark's litigation is brought in
Alabama, a jurisdiction known for excessive punitive damage verdicts bearing
little or no relationship to actual damages, the ultimate outcome of any
particular action cannot be predicted. It is reasonably possible that changes
in the expected outcome of these matters could occur in the near term, but
such changes should not be material to Torchmark's reported results or
financial condition.
Earnings Per Share: Earnings available to holders of common stock are
computed after deducting dividends on the Preferred Stock in 1994. Primary
earnings per share are then calculated by dividing the earnings available to
holders of common stock by the weighted average number of common shares
outstanding during the period. The weighted average numbers of common shares
outstanding for each period are as follows: 1996--71,229,892, 1995--
71,593,774, 1994--72,095,657.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 2--STATUTORY ACCOUNTING
Insurance subsidiaries of Torchmark are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------- ---------------------
1996 1995 1994 1996 1995
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance subsidiar-
ies...................... $283,881 $245,552 $228,754 $622,326 $ 618,557
</TABLE>
The excess, if any, of shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to Torchmark without regulatory approval.
A reconciliation of Torchmark's insurance subsidiaries' statutory net income
to Torchmark's consolidated GAAP net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Statutory net income................... $ 283,881 $ 245,552 $228,754
Deferral of acquisition costs.......... 300,461 328,598 225,409
Amortization of acquisition costs...... (218,826) (204,067) (178,107)
Differences in insurance policy liabil-
ities................................. 48,396 1,407 30,271
Deferred income taxes.................. (20,496) (40,380) (2,052)
Inter-affiliate dividends.............. (137,200) (684) -0-
Income of noninsurance affiliates...... 28,943 (207,164) 11,372
Other.................................. 26,213 19,973 (18,229)
Pre-acquisition adjustments............ -0- -0- (28,472)
---------- ---------- --------
GAAP net income........................ $ 311,372 $ 143,235 $268,946
========== ========== ========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Statutory shareholders' equity......... $ 622,326 $ 618,557
Differences in insurance policy liabil-
ities................................. 440,204 371,599
Deferred acquisition costs............. 1,253,727 1,121,325
Value of insurance purchased........... 244,368 277,297
Deferred income taxes.................. (329,609) (407,267)
Debt of parent company................. (832,367) (980,814)
Monthly income preferred securities.... (193,145) (193,096)
Asset valuation reserves............... 133,118 161,573
Nonadmitted assets..................... 137,270 85,240
Net assets of noninsurance affiliates . 69,776 351,355
Other.................................. 83,675 183,183
---------- ----------
GAAP shareholders' equity.............. $1,629,343 $1,588,952
========== ==========
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Investment income is summarized as fol-
lows:
Fixed maturities..................... $ 373,110 $ 350,931 $ 329,626
Equity securities.................... 373 818 1,323
Mortgage loans on real estate........ 6,525 4,343 631
Investment real estate............... 14,629 8,277 7,778
Policy loans......................... 13,192 12,137 10,003
Other long-term investments.......... 5,319 10,410 4,958
Short-term investments............... 6,397 8,890 7,046
--------- --------- ---------
419,545 395,806 361,365
Less investment expense.............. (14,937) (13,941) (13,728)
--------- --------- ---------
Net investment income................ $ 404,608 $ 381,865 $ 347,637
========= ========= =========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities.................... $ 3,760 $ 1,285 $ (5,049)
Equity securities................... 1,913 (15,033) 1,610
Other............................... 156 (575) 888
--------- --------- ---------
$ 5,829 $ (14,323) $ (2,551)
========= ========= =========
An analysis of the net change in
unrealized investment gains (losses)
is as follows:
Equity securities before tax......... $ (734) $ 10,125 $ (15,064)
Fixed maturities available for sale
before tax.......................... (163,224) 468,336 (434,340)
Other long-term investments and
foreign exchange translation
adjustments......................... 1,907 5,514 (4,088)
Adjustment to deferred acquisition
costs............................... 17,837 (51,739) 52,334
Applicable tax....................... 50,457 (151,142) 140,264
--------- --------- ---------
Net change in unrealized gains
(losses)............................ $ (93,757) $ 281,094 $(260,894)
========= ========= =========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated market value at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
COST GAINS LOSSES VALUE SHEET
---------- ---------- ---------- ---------- -----------
1996:
- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 231,151 $ 2,260 $ (3,628) $ 229,783 $ 229,783
GNMAs................. 882,036 49,647 (5,170) 926,513 926,513
Mortgage-backed
securities, GNMA
collateral........... 154,816 2,665 (134) 157,347 157,347
Other mortgage-backed
securities........... 266,776 6,931 (1,667) 272,040 272,040
State, municipalities
and political
subdivisions......... 709,980 14,721 (4,211) 720,490 720,490
Foreign governments... 76,298 3,789 (94) 79,993 79,993
Public utilities...... 265,248 5,036 (3,888) 266,396 266,396
Industrial and
miscellaneous........ 2,672,613 35,720 (39,796) 2,668,537 2,668,537
Redeemable preferred
stocks................ 6,581 596 0 7,177 7,177
---------- -------- -------- ---------- ----------
Total fixed maturities 5,265,499 121,365 (58,588) 5,328,276 5,328,276
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,014 4,658 (3) 6,669 6,669
Industrial and all
others............... 287 62 (23) 326 326
Non-redeemable
preferred stocks...... 1,498 365 0 1,863 1,863
---------- -------- -------- ---------- ----------
Total equity
securities........... 3,799 5,085 (26) 8,858 8,858
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,269,298 $126,450 $(58,614) $5,337,134 $5,337,134
========== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1995:
- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available
for sale:
Bonds:
U.S. Government direct
obligations and
agencies................ $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833
GNMAs.................... 1,050,034 68,053 (1,221) 1,116,866 1,116,866
Mortgage-backed
securities, GNMA
collateral.............. 214,186 8,136 (62) 222,260 222,260
Other mortgage-backed
securities.............. 230,981 11,527 (2,960) 239,548 239,548
State, municipalities and
political subdivisions.. 762,943 21,383 (3,677) 780,649 780,649
Foreign governments...... 71,489 5,303 (3) 76,789 76,789
Public utilities......... 258,840 13,276 (308) 271,808 271,808
Industrial and
miscellaneous........... 2,235,811 103,443 (2,400) 2,336,854 2,336,854
Redeemable preferred
stocks................... 7,729 888 0 8,617 8,617
---------- -------- -------- ---------- ----------
Total fixed maturities... 4,984,223 236,654 (10,653) 5,210,224 5,210,224
Equity securities:
Common stocks:
Banks and insurance
companies............... 2,945 5,304 (10) 8,239 8,239
Industrial and all
others.................. 264 151 (7) 408 408
Non-redeemable preferred
stocks................... 1,549 355 0 1,904 1,904
---------- -------- -------- ---------- ----------
Total equity securities.. 4,758 5,810 (17) 10,551 10,551
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity securities... $4,988,981 $242,464 $(10,670) $5,220,775 $5,220,775
========== ======== ======== ========== ==========
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A schedule of fixed maturities by contractual maturity at December 31, 1996
is shown below on an amortized cost basis and on a market value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Fixed maturities available
for sale:
Due in one year or less... $ 98,491 $ 99,442
Due from one to five
years.................... 913,734 929,238
Due from five to ten
years.................... 1,878,153 1,881,091
Due after ten years....... 1,010,817 1,001,220
---------- ----------
3,901,195 3,910,991
Redeemable preferred
stocks................... 6,581 7,177
Mortgage-backed and asset-
backed securities........ 1,357,723 1,410,108
---------- ----------
$5,265,499 $5,328,276
========== ==========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $487 million
in 1996, $1.18 billion in 1995, and $583 million in 1994. Gross gains realized
on those sales were $8.7 million in 1996, $13.4 million in 1995, and $14.6
million in 1994. Gross losses were $5.3 million in 1996, $13.5 million in
1995, and $20.8 million in 1994.
Torchmark had $39.2 million and $25.7 million in investment real estate at
December 31, 1996 and 1995, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Fixed maturity investments, mortgage loans, and other
long-term investments which were nonincome producing during the previous
twelve months were $0.3 million at December 31, 1995. There were no such
investments at December 31, 1996.
Derivative investments were immaterial to Torchmark at December 31, 1996.
These investments consist of interest-only and principal-only collateralized
mortgage obligations and a foreign currency trading account. Torchmark's total
carrying value of these investments was $26.3 million and $23.9 million at
December 31, 1996 and 1995, respectively. Torchmark has no off-balance sheet
exposure in connection with these investments.
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Company occupied real estate........ $ 68,925 $27,960 $ 67,528 $31,040
Data processing equipment........... 23,179 20,942 24,507 22,198
Transportation equipment............ 11,396 7,492 12,802 8,005
Furniture and office equipment...... 38,047 34,830 36,979 33,388
-------- ------- -------- -------
$141,547 $91,224 $141,816 $94,631
======== ======= ======== =======
</TABLE>
Depreciation expense on property used in the business was $5.4 million, $5.7
million, and $7.6 million in each of the years 1996, 1995, and 1994,
respectively.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 5--DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE PURCHASED
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF
ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE
COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year................... $1,121,325 $277,297 $1,017,467 $274,124 $ 901,565 $131,602
Additions:
Deferred during peri-
od:
Commissions........... 185,197 -0- 192,427 -0- 134,032 -0-
Other expenses........ 115,264 -0- 136,170 -0- 91,377 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 300,461 -0- 328,597 -0- 225,409 -0-
Value of Insurance
purchased -0- -0- -0- 34,240 -0- 158,788
Adjustment
attributable to
unrealized investment
losses(1)............ 17,838 -0- -0- -0- 52,334 -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 318,299 -0- 328,597 34,240 277,743 158,788
---------- -------- ---------- -------- ---------- --------
Deductions:
Amortized during peri-
od................... (185,148) (32,929) (172,764) (31,067) (154,697) (16,266)
Adjustment
attributable to
unrealized investment
gains(1)............. -0- -0- (51,739) -0- -0- -0-
Adjustment attribut-
able to realized in-
vestment gains(1).... (749) -0- (236) -0- (7,144) -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (185,897) (32,929) (224,739) (31,067) (161,841) (16,266)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,253,727 $244,368 $1,121,325 $277,297 $1,017,467 $274,124
========== ======== ========== ======== ========== ========
</TABLE>
- --------
(1)Represents amounts pertaining to investments relating to universal life-
type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was $18.9 million, $20.0 million, and $11.7 million, for
the years ended December 31, 1996, 1995 and 1994, respectively. The average
interest accrual rates used for the years ended December 31, 1996, 1995 and
1994 were 7.26%, 7.26% and 7.72%, respectively. The estimated amount of the
unamortized balance at December 31, 1996 to be amortized during each of the
next five years is: 1997, $27.8 million; 1998, $24.5 million; 1999, $21.6
million; 2000, $18.9 million; and 2001, $16.7 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 6--ACQUISITIONS
On November 3, 1994, Torchmark acquired all of the outstanding common stock
of American Income Holding, Inc., whose primary operating subsidiary is
American Income Life Insurance Company ("American Income") for $35 per share
or a total purchase price of $552 million, including expenses. American Income
is a life insurance company which sells individual supplemental life and
fixed-benefit accident and health insurance through labor union locals, credit
unions, and other employment related associations. The purchase was financed
with a combination of internal funds, sales of securities, bank borrowings,
and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income
Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill
of approximately $403 million which will be amortized on a straight line basis
over 40 years. The acquisition was accounted for as a purchase, and the
results of operations since the acquisition date have been consolidated.
A summary of the net assets acquired is as follows:
<TABLE>
<S> <C>
Assets acquired:
Investments.................................................. $ 434,677
Cash......................................................... 0
Value of insurance purchased................................. 158,788
Goodwill..................................................... 402,791
Other assets................................................. 62,808
---------
Total....................................................... 1,059,064
Liabilities assumed:
Policy liabilities........................................... 397,184
Other liabilities............................................ 110,379
---------
Total....................................................... 507,563
---------
Total purchase price.......................................... $ 551,501
=========
</TABLE>
The table below presents supplemental pro forma information for 1994 as if
the American Income acquisition were made at January 1, 1993 at the same
purchase price, based on estimates and assumptions considered appropriate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenues................................................. $2,086,987
Net income before extraordinary items.................... 278,533
Net income............................................... 277,014
Net income per common share before extraordinary items... 3.86
Net income per common share.............................. 3.84
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 7--DISPOSAL OF ENERGY SEGMENT
On September 30, 1996, Torchmark completed the sale of its energy business
segment including its energy asset management subsidiary, Torch Energy
Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane
investment. These operations, which were reclassified as discontinued
operations in Torchmark's financial statements at December 31, 1995, were sold
to a TEAI management group. After the sale, Torchmark had no controlling
ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totaling $32.5 million along
with $15.5 million in cash. After closing costs and retained liabilities,
Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7
million from the sale, or $.10 per share.
In the first quarter of 1996, TEAI sold 1.5 million of its shares in Nuevo
Energy Company ("Nuevo") common stock for proceeds of $35.6 million. These
proceeds were transferred to Torchmark in the form of a dividend prior to the
sale of TEAI. Additionally, included in the above mentioned transferred
marketable securities were 1.3 million shares of Nuevo common stock which were
sold in the fourth quarter of 1996 for proceeds of $57.6 million.
At December 31, 1995, discontinued operations assets consisted of:
<TABLE>
<S> <C>
Trade and other receivables.................................. $118,266
Energy properties and investments............................ 158,238
Other assets................................................. 74,639
--------
Total assets................................................ 351,143
Trade and other payables..................................... (157,827)
Other liabilities............................................ (18,930)
--------
Total liabilities........................................... (176,757)
--------
Net discontinued assets................................... $174,386
========
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1996 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1917-1996 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1995 4.00% 13
1962-1969 4.50% graded to 4.00% 3
1970-1980 5.50% graded to 4.00% 5
1970-1996 5.50% 1
1929-1996 6.00% 9
1986-1994 7.00% graded to 6.00% 11
1954-1996 8.00% graded to 6.00% 10
1951-1985 8.50% graded to 6.00% 10
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 6
1984-1996 Interest Sensitive 25
---
100%
===
</TABLE>
MORTALITY ASSUMPTIONS:
For individual life, the mortality tables used are various statutory
mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-58 Industrial Experience Table
1955-60 Ordinary Experience Table
1965-70 Select and Ultimate Table
1955-60 Inter-Company Table
1970 United States Life Table
1979-81 United States Life Table
1975-80 Select and Ultimate Table
X-18 Ultimate Table
WITHDRAWAL ASSUMPTIONS:
Withdrawal assumptions are based on Torchmark's experience.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
INDIVIDUAL HEALTH INSURANCE
INTEREST ASSUMPTIONS:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1962-1996 3.00% 2%
1969-1980 5.50% graded to 4.00% 4
1982-1996 4.50% 1
1993-1996 6.00% 16
1986-1992 7.00% graded to 6.00% 54
1955-1996 8.00% graded to 6.00% 9
1951-1986 8.50% graded to 6.00% 14
---
100%
===
</TABLE>
MORBIDITY ASSUMPTIONS:
For individual health, the morbidity assumptions are based on either
Torchmark's experience or the assumptions used in calculating statutory
reserves.
TERMINATION ASSUMPTIONS:
Termination assumptions are based on Torchmark's experience.
OVERALL INTEREST ASSUMPTIONS
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1996 was 6.3%.
NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS
Activity in the liability for unpaid health claims is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year: $170,566 $166,731 $131,161
Addition due to acquisition of American
Income...................................... -0- -0- 9,185
Incurred related to:
Current year................................ 495,642 502,018 514,814
Prior year.................................. 179 (8,295) (14,985)
-------- -------- --------
Total incurred............................... 495,821 493,723 499,829
-------- -------- --------
Paid related to:
Current year................................ 340,310 342,905 332,273
Prior year.................................. 151,859 146,983 141,171
-------- -------- --------
Total paid................................... 492,169 489,888 473,444
-------- -------- --------
Balance at end of year....................... $174,218 $170,566 $166,731
======== ======== ========
</TABLE>
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
Health benefits for 1994 include a $30 million charge resulting from a
reclassification of nonoperating expense to health benefits, since actual
payments will be made in the form of health benefits.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES
Torchmark and most of its subsidiaries file a life-nonlife consolidated
federal income tax return. Sentinel files its own federal income tax return
and will not be eligible to join Torchmark's consolidated return group until
1997. American Income files its own consolidated federal income tax return and
will not be eligible to join Torchmark's consolidated return group until 2000.
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income from continuing operations............. $180,622 $157,539 $135,994
Discontinued operations....................... (15,813) (86,050) (11,677)
Monthly income preferred securities dividend.. (5,199) (5,555) (1,148)
Shareholders' equity:
Unrealized gains (losses).................... (50,457) 157,200 (147,520)
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes.................................... (1,947) (709) (349)
Other......................................... (898) (6,169) 9,424
-------- -------- --------
$106,308 $216,256 $(15,276)
======== ======== ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current income tax expense....................... $130,624 $110,652 $113,215
Deferred income tax expense...................... 49,998 46,887 22,779
-------- -------- --------
$180,622 $157,539 $135,994
======== ======== ========
</TABLE>
In 1996, 1995, and 1994, deferred income tax expense was incurred because of
the difference between net operating income before income taxes as reported on
the consolidated statement of operations and taxable income as reported on
Torchmark's income tax returns. As explained in Note 1, this difference caused
the financial statement book values of some assets and liabilities to be
different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes............ $173,296 35% $149,861 35% $137,891 35%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income.... (7,014) (1) (7,965) (2) (10,625) (2)
Other........................... 14,340 3 15,643 4 8,728 2
-------- --- -------- --- -------- ---
Income taxes..................... $180,622 37% $157,539 37% $135,994 35%
======== === ======== === ======== ===
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Investments, principally due to (in the acquisition of a
subsidiary) the use of market value in recording the cost
of fixed maturities for financial reporting purposes but
not for tax purposes..................................... $ 2,996 $ 6,897
Future policy benefits, unearned and advance premiums, and
policy claims............................................ 9,264 27,432
Present value of future policy surrender charges.......... 9,636 4,083
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................. 30,025 18,344
-------- --------
Total gross deferred tax assets........................... 51,921 56,756
Less valuation allowance.................................. (2,111) (2,111)
-------- --------
Net deferred tax assets................................... 49,810 54,645
-------- --------
Deferred tax liabilities:
Unconsolidated affiliates, principally due to the use of
equity method accounting for financial reporting purposes
but not for tax purposes................................. 24,368 11,305
Deferred acquisition costs................................ 333,640 322,900
Unrealized investment gains............................... 23,952 74,408
Other..................................................... 12,625 12,404
-------- --------
Total gross deferred tax liabilities...................... 394,585 421,017
-------- --------
Net deferred tax liability................................. $344,775 $366,372
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million
relating to the December 31, 1996 valuation allowance will be allocated to
goodwill.
Torchmark has not recognized a deferred tax liability for the undistributed
earnings of its wholly-owned subsidiaries because such earnings are remitted
to Torchmark on a tax-free basis. A deferred tax liability will be recognized
in the future if the remittance of such earnings becomes taxable to Torchmark.
In addition, Torchmark has not recognized a deferred tax liability of
approximately $60 million that arose prior to 1984 on temporary differences
related to the policyholders' surplus accounts in the life insurance
subsidiaries. A current tax expense will be recognized in the future if and
when these amounts are distributed.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS
Pension Plans: Torchmark has retirement benefit plans and savings plans
which cover substantially all employees. There is also a nonqualified excess
benefit plan which covers certain employees. The total cost of these
retirement plans charged to operations was as follows:
<TABLE>
<CAPTION>
DEFINED EXCESS
DEFINED BENEFIT BENEFIT
YEAR ENDED CONTRIBUTION PENSION PENSION
DECEMBER 31, PLANS PLANS PLAN
------------ ------------ ------- -------
<S> <C> <C> <C>
1996.................... $2,595 $4,804 $ 467
1995.................... 3,208 6,820 524
1994.................... 3,201 6,922 1,800
</TABLE>
Cost for the defined benefit pension plans has been calculated on the
projected unit credit actuarial cost method. Contributions are made to the
pension plans subject to minimums required by regulation and maximums allowed
for tax purposes. Accrued pension expense in excess of amounts contributed has
been recorded as a liability in the financial statements and was $6.2 million
and $9.5 million at December 31, 1996 and 1995, respectively. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $4.8
million and $5.5 million as of December 31, 1996 and 1995, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the
period.................................. $ 6,581 $ 7,190 $ 8,323
Interest cost on projected benefit obli-
gation.................................. 9,097 8,867 8,242
Actual return on assets.................. (17,798) (17,927) (2,302)
Net amortization and deferral............ 7,391 9,214 (5,541)
-------- --------- --------
Net periodic pension cost................ $ 5,271 $ 7,344 $ 8,722
======== ========= ========
</TABLE>
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Fair market value of assets available for benefits. $123,288 $113,193
Projected benefit obligation:
Vested............................................ 90,189 89,170
Nonvested......................................... 3,453 5,441
-------- --------
Accumulated benefit obligation................... 93,642 94,611
Effect of projected future salary increases 25,710 27,003
-------- --------
Total projected benefit obligation............... 119,352 121,614
-------- --------
Funded status...................................... 3,936 (8,421)
Unamortized prior service costs.................... 1,433 147
Unamortized transition asset....................... (725) (1,220)
Unrecognized (gain) or loss........................ (15,669) (5,462)
-------- --------
Accrued pension costs included in liabilities.... $(11,025) $(14,956)
======== ========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1996 and 7.25% in 1995. The rate of
assumed compensation increase was 4.5% in 1996 and 4.25% in 1995 and the
expected long-term rate of return on plan assets was 9.25% in 1996 and 8.0% in
1995.
Torchmark accrues expense for the defined contribution plans based on a
percentage of the employees' contributions. The plans are funded by the
employee contributions and a Torchmark contribution equal to the amount of
accrued expense.
Postretirement Benefit Plans Other Than Pensions: Torchmark provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
For retired employees over age sixty-five, Torchmark does not provide
postretirement benefits other than pensions. Torchmark does provide a portion
of the cost for health insurance benefits for employees who retired before
February 1, 1993 and before age sixty-five, covering them until they reach age
sixty-five. Eligibility for this benefit was generally achieved at age fifty-
five with at least fifteen years of service. This subsidy is minimal to
employees who did not retire before February 1, 1993. This plan is unfunded.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
---- ----- ------
<S> <C> <C> <C>
Service cost....................................... $297 $ 284 $ 444
Interest cost on accumulated postretirement benefit
obligation........................................ 617 678 831
Actual return on plan assets....................... -0- -0- -0-
Net amortization and deferral...................... (252) (559) (237)
---- ----- ------
Net periodic postretirement benefit cost........... $662 $ 403 $1,038
==== ===== ======
</TABLE>
The following table sets forth the plans' combined benefit obligation with
the amount shown in Torchmark's balance sheet:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 3,622 $ 4,880
Fully eligible active plan participants................ 1,613 1,231
Other active plan participants......................... 2,395 3,145
------- -------
Total accumulated postretirement benefit obligation... 7,630 9,256
Plan assets at fair value............................... -0- -0-
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets......................................... 7,630 9,256
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions...... 1,717 1,423
Prior service cost not yet recognized in net periodic
post retirement benefit cost........................... 993 262
------- -------
Accrued postretirement benefit cost included in
liabilities.......................................... $10,340 $10,941
======= =======
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
For measurement purposes, a 7.5% to 10.0% annual rate of increase in a per
capita cost of covered healthcare benefits was assumed for 1996. These rates
were assumed to decrease gradually to ranges of 4.5% to 6.5% by the year 2005.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the health care cost trend by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $1.3 million and would increase
the net periodic postretirement cost for the year ended December 31, 1996 by
approximately $425 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1996 and 7.0% to 8.0% in 1995.
NOTE 12--NOTES PAYABLE
An analysis of notes payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Sinking Fund Debentures........... $198,134 $198,033
Senior Notes, due 1998............ 199,607 199,343
Senior Debentures, due 2009....... 99,450 99,881
Notes, due 2023................... 195,921 195,877
Notes, due 2013................... 98,477 98,432
Commercial paper.................. $40,778 $189,248
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ..... 132 291 124 422
------- -------- -------- --------
$40,910 $791,880 $189,372 $791,988
======= ======== ======== ========
</TABLE>
The amount of debt that becomes due during each of the next five years is:
1997, $40.9 million; 1998, $200.1 million; 1999, $150 thousand; 2000, $-0-;
and 2001, $-0-.
The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million
principal amount less unamortized issue expenses and bear interest at 8 5/8%,
payable on March 1 and September 1. A sinking fund provides for mandatory
repayment at par of not less than $8 million principal amount per year from
March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12
million principal amount per year may be redeemed at par according to the same
schedule. The option to make such additional repayments is not cumulative and
if not availed of in any year will terminate. Furthermore, Torchmark may, at
its option, redeem the entire issue at prices ranging from 104.59% to 100.0%
of par, subject to certain restrictions. The Sinking Fund Debentures have
equal priority with other Torchmark unsecured indebtedness.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity.
They were issued in the principal amount of $200 million. Interest is payable
on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have
equal priority with other Torchmark unsecured indebtedness.
The Senior Debentures, principal amount of $100 million, are due August 15,
2009. They bear interest at a rate of 8 1/4%, with interest payable on
February 15 and August 15 of each year. The Senior Debentures, which are not
redeemable at the option of Torchmark prior to maturity, provided the holder
with an option to require Torchmark to repurchase the debentures on August 15,
1996 at principal amount plus accrued interest. Pursuant to this option, $550
thousand debentures were repurchased in 1996. The Senior Debentures have equal
priority with other Torchmark unsecured indebtedness.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--NOTES PAYABLE (CONTINUED)
The Notes, due May 15, 2023, were issued in May, 1993 in the principal
amount of $200 million. Proceeds of the issue, net of issue costs, were $196
million. Interest is payable on May 15 and November 15 of each year at a rate
of 7 7/8%. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
The Notes, due August 1, 2013, were issued in July, 1993 in the principal
amount of $100 million for net proceeds of $98 million. Interest is payable on
February 1 and August 1 of each year at a rate of 7 3/8%. These notes are not
redeemable prior to maturity and have equal priority with other Torchmark
unsecured indebtedness.
Torchmark has entered into revolving credit agreements with a group of
lenders under which it may borrow on an unsecured basis up to $600 million.
One-third of the commitment matures October 23, 1997 and the balance matures
October 24, 2001. Borrowings, pro rata under each facility, are at interest
rates selected by Torchmark based on either the corporate base rate or the
Eurodollar rate at the time of borrowings. At December 31, 1996 and December
31, 1995 there were no borrowings under the revolving credit agreements. The
revolving credit agreements are designed to back up a commercial paper program
which began in 1995. The short-term borrowings under the revolving credit
agreements and in the commercial paper market averaged $103 million during
1996, and were made at an average yield of 5.42%. At December 31, 1996,
commercial paper was outstanding in the face amount of $41.0 million.
Torchmark is subject to certain covenants for the revolving credit agreements
regarding capitalization and earnings, for which it was in compliance at
December 31, 1996, and pays a facility fee based on size of the lines.
Interest in the amount of $1.4 million, $1.6 million and $1.8 million was
capitalized during 1996, 1995, 1994, respectively.
NOTE 13--MONTHLY INCOME PREFERRED SECURITIES
In October, 1994, Torchmark, through its wholly-owned finance subsidiary,
Torchmark Capital L.L.C., completed a public offering of eight million shares
of 9.18% MIPS at a face amount of $200 million. The securities are subject to
a mandatory redemption in full at September 30, 2024, although Torchmark may
elect to extend the MIPS for up to an additional 20 years if certain
conditions are met. They are redeemable at Torchmark's option after September
30, 1999. Torchmark subsequently entered into a ten-year swap agreement with
an unaffiliated party whereby Torchmark agreed to pay a variable rate on the
$200 million face amount in exchange for payment of the fixed dividend. In a
related transaction, Torchmark purchased a five-year cap on the swap agreement
that insures that the variable rate cannot exceed 10.39% through September 30,
1999. The interest rate was 6.95% at December 31, 1996 and 7.25% at December
31, 1995. Torchmark pays a yearly fee of $860 thousand for the cap agreement.
The market value of the swap agreement was a benefit of $14.7 million at
December 31, 1996 and a benefit of $26.5 million at December 31, 1995. The
market value of the cap agreement, net of the present value of future annual
payments, was an obligation of $1.3 million at December 31, 1996 and an
obligation of $2.1 million at December 31, 1995. Except as otherwise described
in "Note 3--Investments" on page 43 of this report, Torchmark is a party to no
other derivative instruments as defined by SFAS 119.
Net proceeds from the MIPS offering of approximately $193 million were
loaned from Torchmark Capital to Torchmark to provide part of the financing of
the acquisition of American Income Holding, Inc. The carrying value of the
MIPS at December 31, 1996 and 1995 was $193 million.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY
Share Data: A summary of preferred and common share activity is as follows:
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
TREASURY TREASURY
ISSUED STOCK ISSUED STOCK
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1994:
Balance at January 1, 1994....... 1,000,000 (530,180) 73,784,228 (889,134)
Issuance of common stock due to
exercise of stock options...... 130,641
Other treasury stock acquired... (469,820) (1,491,700)
Retirement of preferred treasury
stock.......................... (1,000,000) 1,000,000
---------- --------- ---------- ----------
Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193)
1995:
Issuance of common stock due to
exercise of stock options...... 133,102
---------- --------- ---------- ----------
Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091)
1996:
Issuance of common stock due to
exercise of stock options...... 338,188
Other treasury stock acquired... (2,309,350)
---------- --------- ---------- ----------
Balance at December 31, 1996.... -0- -0- 73,784,228 (4,088,253)
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------- ---------------------
PREFERRED COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Par value per share................ $1.00 $1.00 $1.00 $1.00
Authorized shares.................. 5,000,000 160,000,000 5,000,000 160,000,000
</TABLE>
Preferred Stock: One million shares of adjustable rate preferred stock were
issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark
acquired 530 thousand shares which were reported as treasury stock and had a
total cost basis of $47.8 million and a total redemption value of $52.9
million. During 1994, Torchmark acquired the remaining 470 thousand shares at
a cost of $100 per share plus accrued dividends. The acquisition was completed
at an aggregate price of $47 million. The preferred treasury stock was
immediately retired.
Acquisition of Common Shares: Torchmark shares are acquired from time to
time for the following reasons: (1) open market purchases under the Torchmark
stock repurchase program, in which share purchases in the amount of $107
million for 2.3 million shares, and $59 million for 1.5 million shares were
made in 1996 and 1994, respectively, (2) for future employee stock option
exercises, and (3) for payment of the option price and taxes upon exercise of
stock options by employees.
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 6,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $34.92 per share on the
grant date.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain on an annual noncumulative basis in the
absence of special approval. Additionally, insurance companies are not
permitted to distribute the excess of shareholders' equity as determined on a
GAAP basis over that determined on a statutory basis. In 1997, $275 million
will be available to Torchmark for dividends from insurance subsidiaries in
compliance with statutory regulations without prior regulatory approval.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS
Certain employees and directors have been granted options to buy shares of
Torchmark stock generally at the market value of the stock on the date of
grant under the provisions of the Torchmark Corporation 1987 Stock Incentive
Plan ("1987 Option Plan"). The options are exercisable during the period
commencing from three months to three years after grant until expiring ten
years or ten years and two days after grant. Employee stock options granted
under the 1987 Option Plan generally vest one-half in two years and one-half
in three years. Director grants generally vest in six months. At December 31,
1996, approximately 11.4 million shares were authorized for grants of options
under this plan. In October, 1993, Torchmark implemented a policy to issue
shares for the exercise of stock options out of treasury stock.
In October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
effective for Torchmark beginning January 1, 1996. SFAS 123 defines a "fair
value method" of accounting for employee stock options. It also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations. If a company elects to
use the intrinsic value method, then pro forma disclosures of earnings and
earnings per share are required as if the fair value method of accounting was
applied. The effects of applying SFAS 123 in the pro forma disclosures are not
necessarily indicative of future amounts because the pro forma disclosures do
not take into account the amortization of the fair value of awards prior to
1995. Additionally, Torchmark is expected to grant additional awards in future
years.
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires use of the
Black-Scholes option valuation model to value employee stock options, upon
which a compensation expense is based. The Black-Scholes option valuation
model was not developed for use in valuing employee stock options. Instead,
this model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because Torchmark's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing models do not provide a reliable measure of the fair value of its
employee stock options. Under the intrinsic value method, compensation expense
is only recognized if the exercise price of the employee stock option is less
than the market price of the underlying stock on the date of grant.
In accordance with SFAS 123, the fair value for Torchmark's employee stock
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Risk-free interest rate.................................... 6.4% 5.4%
Dividend yield............................................. 3.7% 3.7%
Volatility factor.......................................... 22.8 22.8
Weighted average expected life (in years).................. 4.17 4.17
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Torchmark's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Pro forma net income...................................... $309,657 $143,148
Pro forma net income per share............................ 4.35 2.00
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
A summary of Torchmark's stock option activity, and related information for
the years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- ---------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS
--------- ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 4,435,850 34.61 3,820,707 $32.50 3,660,391
Granted................. 724,100 49.09 761,100 43.14 316,600
Exercised............... (338,188) 30.00 (133,102) 22.18 (130,641)
Expired................. (146,751) 39.26 (12,855) 40.24 (25,643)
--------- --------- ---------
Outstanding-end of year. 4,675,011 37.04 4,435,850 34.61 3,820,707
========= ========= =========
Exercisable at end of
year................... 3,094,311 32.93 3,243,647 32.66 2,936,867
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1995 were $49.61 and $43.14, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
CONTRACT
EXERCISE NUMBER NUMBER TERMINATION
PRICE GRANT DATE OUTSTANDING EXERCISABLE DATE
-------- ----------------- ----------- ----------- -----------------
<C> <S> <C> <C> <C>
11.300 October 1, 1993 13,906 13,906 October 3, 2003
13.110 October 1, 1993 13,828 13,828 October 3, 2003
16.000 December 16, 1987 7,500 7,500 December 18, 1997
19.875 February 25, 1988 5,217 5,217 February 27, 1998
20.375 January 3, 1989 30,003 30,003 January 5, 1999
22.600 October 1, 1993 31,041 31,041 October 3, 2003
24.410 October 1, 1993 2,766 2,766 October 3, 2003
25.625 October 11, 1990 692,155 692,155 October 13, 2000
28.480 October 1, 1993 42,670 42,670 October 3, 2003
31.125 January 15, 1991 445,930 445,930 January 17, 2001
32.500 January 2, 1991 63,000 63,000 January 4, 2001
33.125 January 25, 1990 63,000 63,000 January 27, 2000
34.000 December 16, 1994 265,600 146,300 December 18, 2004
34.000 December 7, 1992 123,863 96,863 December 9, 2002
34.000 December 14, 1993 258,522 258,522 December 16, 2003
34.000 October 1, 1993 47,497 47,497 October 3, 2003
34.350 October 1, 1993 26,539 26,539 October 3, 2003
34.375 December 12, 1991 606,757 606,757 December 14, 2001
34.875 January 3, 1995 21,000 21,000 January 5, 2005
36.610 October 1, 1993 27,997 27,997 October 3, 2003
37.220* December 18, 1996 30,000 0 December 20, 2006
38.375 January 2, 1992 63,000 63,000 January 4, 2002
43.375 December 20, 1995 731,300 0 December 22, 2005
43.500 December 14, 1993 189,824 189,824 December 16, 2003
45.000 January 3, 1994 24,000 24,000 January 5, 2004
45.000 January 2, 1996 21,000 21,000 January 4, 2006
46.560 October 1, 1993 12,745 12,745 October 3, 2003
49.750 December 16, 1996 673,100 0 December 18, 2006
52.000 December 7, 1992 117,251 117,251 December 9, 2002
57.750 January 3, 1993 24,000 24,000 January 5, 2003
--------- ---------
4,675,011 3,094,311
========= =========
</TABLE>
- --------
* Issued when the market price was $49.625.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES
Reinsurance: Insurance affiliates of Torchmark reinsure that portion of
insurance risk which is in excess of their retention limits. Retention limits
for ordinary life insurance range up to $2.5 million per life. Life insurance
ceded represents less than 1.0% of total life insurance in force at December
31, 1996. Insurance ceded on life and accident and health products represents
1.0% of premium income for 1996. Torchmark would be liable for the reinsured
risks ceded to other companies to the extent that such reinsuring companies
are unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life
reinsurance assumed represents 3.1% of life insurance in force at December 31,
1996 and reinsurance assumed on life and accident and health products
represents 1.8% of premium income for 1996.
Leases: Torchmark leases office space and office equipment under a variety
of operating lease arrangements. These leases contain various renewal options,
purchase options, and escalation clauses. Rental expense for operating leases
was $7.0 million, $6.3 million, and $7.9 million for 1996, 1995, and 1994,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1996 are as follows: 1997, $3.9 million; 1998, $2.4 million;
1999, $1.5 million; 2000, $726 thousand; 2001, $157 thousand; and in the
aggregate, $8.7 million.
Restrictions on cash: A portion of the cash held in financial service
subsidiaries that function as broker-dealers has been segregated for the
benefit of customers in compliance with security regulations. This amount was
$15.0 million at December 31, 1996 and $11.8 million at December 31, 1995.
Concentrations of Credit Risk: Torchmark maintains a highly-diversified
investment portfolio with limited concentration in any given region, industry,
or economic characteristic. At December 31, 1996, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (22%); non government-guaranteed mortgage-backed securities (5%);
short-term investments, which generally mature within one month (1%);
securities of state and municipal governments (12%); securities of foreign
governments (1%); and investment-grade corporate bonds (46%). The remainder of
the portfolio was in oil and gas investments (1%) and real estate (3%), which
are not considered financial instruments according to GAAP; policy loans (4%),
which are secured by the underlying insurance policy values; and equity
securities, mortgages, noninvestment grade corporate securities and other
long-term investments (5%). Investments in municipal governments and
corporations are made throughout the U.S. with no concentration in any given
state. Most of the investments in foreign government securities are in
Canadian government obligations. Corporate equity and debt investments are
made in a wide range of industries. At December 31, 1996, 1% or more of the
portfolio was invested in the following industries: Financial services (18%);
regulated utilities (5%); chemicals and allied products (5%); food and kindred
products (4%); transportation (4%); technology (3%); media (2%); paper and
allied products (2%); petroleum (2%); and retailing (1%). Otherwise, no
individual industry represented 1% or more of Torchmark's investments. At
year-end 1996, 5% of the carrying value of fixed maturities was rated below
investment grade (Ba or lower as rated by Moody's service or the equivalent
NAIC designation). Par value of these investments was $237.7 million,
amortized cost was $239.8 million, and market value was $243.4 million. While
these investments could be subject to additional credit risk, such risk should
generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments
are in government, government-secured, or corporate securities, the
requirement for collateral is rare. Torchmark's mortgages are secured by
collateral.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened legal proceedings. These lawsuits involve tax
matters, alleged breaches of contract, torts, including bad faith and fraud
claims based on alleged wrongful or fraudulent acts of agents of Torchmark's
subsidiaries, employment discrimination, and miscellaneous other causes of
action. Many of these lawsuits involve claims for punitive damages in state
courts of Alabama, a jurisdiction particularly recognized for its large
punitive damage verdicts. A number of such actions involving Liberty also name
Torchmark as a
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
defendant. As a practical matter, a jury's discretion regarding the amount of
a punitive damage award is not limited by any clear, objective criteria under
Alabama law. Accordingly, the likelihood or extent of a punitive damage award
in any given case is virtually impossible to predict. As of December 31, 1996,
Liberty was a party to approximately 282 active lawsuits (including 25
employment related cases and excluding interpleaders and stayed cases), more
than 250 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. In July 1994, certain intervenors in the Robertson litigation
filed a notice of appeal of the Order and Final Judgment with the Supreme
Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously
affirmed the Robertson class action settlement and on February 16, 1996,
issued a notice overruling the petition for a rehearing in Robertson filed by
certain intervenors. A petition for writ of certiorari to the Supreme Court of
the United States was then filed by intervenors. The U.S. Supreme Court
granted certiorari in Robertson on October 1, 1996. Oral arguments on the
intervenors' petition, which alleged that class members had not received due
process in the class certification procedure and should be allowed to opt out
of the class action settlement to pursue separate litigation, were heard by
the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari previously
granted in Robertson. The ruling effectively ends direct appeals from the
Robertson class action settlement and Liberty will proceed with administration
of benefits under the class settlement.
As previously reported, Liberty is subject to 76 individual cancer policy
lawsuits pending in Alabama and Mississippi, which were stayed or otherwise
held in abeyance pending final resolution of the Robertson case. Liberty will
file motions to dismiss these lawsuits based upon the U.S. Supreme Court
opinion in Robertson. If these cases are dismissed, no collateral attacks on
the cancer class action settlement will remain at this time.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 and is presently pending in
the U.S. District Court for the Northern District of
Alabama, is the only remaining purported class action litigation brought by
Torchmark shareholders alleging untimely and inadequate disclosure of material
contingent liabilities arising out of insurance policy litigation involving
Liberty. The U.S. District Court entered an order granting partial summary
judgment on behalf of the defendants on April 16, 1996. Claims for damages
based on Section 10b-5 of the Securities Exchange Act, on state securities
laws and for common law fraud remain pending in the case.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
litigation filed April 22, 1994, as a purported class action in the District
Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No.
CJ-94-2784-65). The suit claims damages on behalf of individual health
policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. The
complaint seeks actual and punitive damages for each class member in excess of
$10,000. Subsequent to the filing of this case, one of the plaintiffs was
dismissed and the named plaintiff died. The complaint was amended to include
new plaintiffs purporting to represent the class and restyled Tabor v.
Torchmark Corporation. No class has been certified. A motion to dismiss filed
by the defendants was denied and limited discovery as permitted by the
Oklahoma Supreme Court is proceeding.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleged actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. Liberty removed this
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
case to federal court, but the case was subsequently remanded to the state
court. The Bryant case was settled on an individual basis by the parties on
December 23, 1996. No class was ever certified.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage alleged to be in conflict with provisions of the Omnibus Budget
Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance
Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance
Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance
Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance
Company, Case No. CV-95-347H). The Stewart case has been dismissed with
prejudice and the other cases remain pending.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims during an
approximately two month period in 1993 (Adkins v. Liberty National Life
Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in
reliance on federal law concerning the amount health care providers could
collect from Medicare eligible individuals, Liberty limited the payment of
benefits to such individuals to the amounts collectible by the providers under
federal law. In November, 1993 Liberty discontinued this practice and
recalculated and repaid all claims in full as it had prior to September 1993
together with interest. Nearly two years after this refund, the Adkins case
was filed. The claims made in Adkins are identical to the individual claims in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an
individual case reversed and remanded by the Alabama Supreme Court on March 7,
1997 after an appeal regarding the remitted verdict of $2.7 million. A class
certification order, which does not address the merits of the litigation, was
entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for
writ of mandamus or prohibition with the Alabama Supreme Court in August 1996
asserting abuse of discretion by the trial court in certifying the Adkins
class. The Alabama Supreme Court has stayed further proceedings as to the
class issues in Adkins pending its ruling on the propriety of class
certification.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification does not go to
the merit of the allegations in the complaint. On December 31, 1996, the
plaintiffs filed an amended complaint in Smith to allege violations of various
provisions of the Employment Retirement Income Security Act of 1974. Discovery
is presently proceeding in this case.
It has been previously reported that Liberty is a party to individual
lawsuits and a purported class action (Carlton v. Liberty National Life
Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County,
Alabama, in which allegations are made that an interest sensitive life
insurance policy would become paid-up or self-sustaining after a specified
number of years. Currently, Liberty is a party to more than 100 individual
interest sensitive cases, 53 of which were filed by a single lawyer in
Chambers County, Alabama. Additionally, Torchmark has previously reported the
case of Lawson v. Liberty National Life Insurance Company, filed in the
Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119),
where the plaintiffs were seeking class certification on behalf of such
policyholders including those who were allegedly induced to exchange life
insurance policies or the existing policy's cash value was allegedly depleted.
On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an
order conditionally certifying a plaintiffs claim in Lawson in order to
preserve the Court's jurisdiction over the class action question, subject to a
full evidentiary hearing on class certification at a future date yet to be
determined.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently
subject to subsequent collateral attack by absent class members, the Battle
decree remains in effect to date. A motion filed in February 1990 to challenge
the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by
both the District Court in 1991 and the Eleventh Circuit Court of Appeals in
1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. Liberty is actively opposing this
petition.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain
Torch Energy subsidiaries and affiliated limited partnerships in the Circuit
Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No.
CV-95-140). Plaintiff alleges improper payment of royalties and overriding
royalties on coalbed methane gas produced and sold from wells in Robinson's
Bend Coal Degasification Field, seeks certification of a class and claims
unspecified compensatory and punitive damages on behalf of such class. On
April 11, 1996, Torchmark's motion to change venue was granted and the case
has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The
Company's motion to dismiss remains pending while discovery is proceeding.
It has been previously reported that the Company, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed April 5, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud,
breach of contract, conspiracy, violations of the Oklahoma Consumer Protection
Act and breach of the duty of good faith and fair dealing on behalf of all
persons who purchased, at any time between 1987 and the present, certain
hospitalization and surgical insurance policies issued by Globe and United
American. The plaintiffs asserted that they purchased these policies and
subsequently incurred improper claim denials, wrongful recision and "rate-ups"
and post-claim underwriting. On December 4, 1996, the U.S. District Court
dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract
counts as to certain defendants and ordered plaintiffs to file an amended
complaint. On December 23, 1996, the plaintiffs filed
the amended complaint as ordered, alleging breach of contract, fraud,
conspiracy and breach of the duty of good faith and fair dealing on behalf of
a purported class of persons who purchased Globe, but not United American,
policies from 1987 to the present. Defendants have filed motions to dismiss
and for partial summary judgment.
On April 19, 1996, a $5 million punitive judgment was entered against
LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life
Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was
in his sixties, cancelled several small life insurance policies and purchased
a substantial amount of new coverage. The plaintiff contended that certain
supplemental benefits which were present in the smaller policies were not
included in the new coverage (i.e. accidental death and premium waiver). The
trial judge held that Strickland was not entitled to recover compensatory
damages. Nevertheless the jury awarded $100 in nominal damages in addition to
the punitive award. Liberty has filed various motions for the post-trial
relief with the Circuit Court, which held a post trial hearing on the
propriety of the punitive damage award on February 12, 1997. On March 11,
1997, the Circuit Court judge reduced the Strickland judgment to $37,500.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
A jury in Chambers County, Alabama Circuit Court returned a verdict of
$333,000 compensatory damages and $17.2 million in punitive damages against
Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance
Company (CV-94-234). The case arose out of a claim which had been denied due
to an alleged misrepresentation in the application. There was a recorded
telephone interview with the applicant in which a statement was given which
Liberty alleges was a misrepresentation of the health of the proposed insured.
After the litigation was filed, it was learned that one signature on the
application was not that of the insured. Upon notice of this fact, Liberty
paid the $20,000 claim proceeds into court. Liberty has filed motions for
post-trial relief with the Court, subject to completion of post-trial
discovery. A post-trial hearing on the propriety of the punitive damage award
is scheduled for March 28, 1997.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that the
frequency of large punitive damage awards bearing little or no relation to
actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly in Alabama, continues to increase
universally, creating the potential for unpredictable material adverse
judgments in any given punitive damage suit.
NOTE 17--INDUSTRY SEGMENTS
Torchmark operates primarily in two industry segments, insurance and asset
management. Operations in the insurance industry involve the sale and
administration of life insurance, health insurance and annuities. It also
includes investment operations related to insurance segment investments.
Operations in the asset management industry include the management,
distribution, and servicing of various mutual funds. Torchmark markets its
products in all fifty states.
Certain insurance company investments are managed by the asset management
segment. Additionally, the asset management segment markets certain insurance
products for the insurance segment and manages the mutual funds for the
insurance segment's variable products.
Total revenues by segment include revenues from other segments in addition
to unaffiliated parties. Intersegment revenues include commission revenue and
investment income which eliminate in consolidation. Pre-tax income for
operating segments is total revenue less operating costs and expenses for the
segment. Corporate pre-tax income includes transactions which are nonoperating
in nature and are not related to the activities of a segment. Such items
include parent company interest expense, goodwill amortization, and similar
items.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 17--INDUSTRY SEGMENTS (CONTINUED)
A summary of segment data is as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
ASSET AND CONSOLIDATED
INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL
---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1996:
Revenues--unaffiliated.. $2,008,594 $192,414 $ 4,802 $ -0- $2,205,810
Intersegment revenues... 7,561 33,139 (2,310) (38,390) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $2,016,155 $225,553 $ 2,492 $(38,390) $2,205,810
========== ======== ========= ======== ==========
Pretax income........... $ 485,646 $118,082 $(101,521) $ (7,075) $ 495,132
Depreciation............ 5,468 3,451 137 9,056
Capital expenditures.... 15,236 9,671 62 24,969
Identifiable assets at
year end............... 9,649,488 396,061 357,792 (602,541) 9,800,800
1995:
Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482
Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482
========== ======== ========= ======== ==========
Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175
Depreciation............ 6,135 3,327 141 9,603
Capital expenditures.... 7,094 15,227 193 22,514
Identifiable assets at
year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104
1994:
Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337
Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337
========== ======== ========= ======== ==========
Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974
Depreciation............ 8,260 2,869 142 11,271
Capital expenditures.... 5,117 20,952 160 26,229
Identifiable assets at
year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244
</TABLE>
NOTE 18--RELATED PARTY TRANSACTIONS
Investment in Related Parties: Other long-term investments include
investment by Torchmark subsidiaries in the United Group of Mutual Funds and
certain other funds for which Waddell & Reed, Inc. is sole advisor. These
investments were $30.3 million and $26.2 million at December 31, 1996 and
1995, respectively. Investment income derived from these investments is
included in net investment income.
Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc.
("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was
$508 thousand, $494 thousand, and $461 thousand, for the years ended December
31, 1996, 1995 and 1994, respectively.
NOTE 19--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow as required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 1994
------- ---- ----
<S> <C> <C> <C>
Paid-in capital from tax benefit for stock option
exercises.............................................. $ 1,947 $709 $349
Non-cash assets received from sale of energy operations. 79,289 -0- -0-
Non-cash liabilities assumed from sale of energy
operations............................................. 48,942 -0- -0-
</TABLE>
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Interest paid..................................... $ 74,433 $82,642 $ 77,114
Income taxes paid................................. $108,496 $99,298 $182,052
</TABLE>
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results for the two years ended
December 31, 1996. The information is unaudited but includes all adjustments
(consisting of normal accruals) which management considers necessary for a
fair presentation of the results of operations for these periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1996:
- -----
Premium and policy charges....... $402,188 $403,534 $402,585 $401,612
Financial services revenue....... 44,337 47,157 45,529 47,272
Net investment income............ 99,417 100,700 101,576 102,915
Realized investment gains........ 4,713 379 498 239
Total revenues................... 550,823 551,983 550,597 552,407
Policy benefits.................. 264,302 265,971 263,612 264,199
Amortization of acquisition
expenses........................ 55,457 54,277 54,788 54,304
Pretax income from continuing
operations...................... 119,296 123,200 125,094 127,542
Loss from discontinued
operations...................... -0- -0- (7,137) -0-
Net income....................... 76,274 79,039 73,693 82,366
Net income per common share from
continuing operations........... 1.06 1.10 1.13 1.17
Net income per common share from
discontinued operations:
Loss on disposal............... 0.00 0.00 (0.10) 0.00
Net income per common share...... 1.06 1.10 1.03 1.17
Net income per common share
excluding realized gains, the
related DPAC adjustment, and
discontinued operations......... 1.03 1.10 1.13 1.17
1995:
- -----
Premium and policy charges....... $390,834 $384,759 $383,962 $386,728
Financial services revenue....... 34,774 37,223 39,108 41,377
Net investment income............ 92,808 92,883 93,762 102,412
Realized investment gains
(losses)........................ (920) 304 (15,700) 1,993
Total revenues................... 517,688 515,597 501,383 532,814
Policy benefits.................. 253,369 252,640 252,547 250,780
Amortization of acquisition
expenses........................ 50,185 49,936 51,150 52,796
Pretax income from continuing
operations...................... 107,362 108,530 94,457 117,826
Income (loss) from discontinued
operations...................... 288 569 2,017 (131,584)
Net income (loss)................ 68,621 70,023 60,974 (56,383)
Net income per common share from
continuing operations........... 0.96 0.97 0.82 1.05
Net income per common share from
discontinued operations:
Income (loss) from operations.. 0.00 0.01 0.03 (1.84)
Net income (loss) per common
share........................... 0.96 0.98 0.85 (0.79)
Net income per common share
excluding realized gains, the
related DPAC adjustment, and
discontinued operations......... 0.96 0.97 0.97 1.03
</TABLE>
64
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and Section 16(a) "Beneficial Ownership
Reporting Compliance" of the Securities Exchange Act in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 24, 1997 (the "Proxy
Statement"), which is to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Compensation and Other Transactions with Executive Officers
and Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT
(a)Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the
section entitled "Principal Stockholders" in the Proxy Statement.
(b)Security ownership of management:
Information required by this item is incorporated by reference from the
section entitled "Stock Ownership" in the Proxy Statement.
(c)Changes in control:
Torchmark knows of no arrangements, including any pledges by any person
of its securities, the operation of which may at a subsequent date result
in a change of control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Compensation and Other Transactions with Executive Officers
and Directors" in the Proxy Statement.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)Index of documents filed as a part of this report:
<TABLE>
<CAPTION>
PAGE OF
THIS REPORT
-----------
<S> <C>
Financial Statements:
Torchmark Corporation and Subsidiaries:
Independent Auditors' Report.................................... 32
Consolidated Balance Sheet at December 31, 1996 and 1995........ 33
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1996.................. 34
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996......... 35
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1996...................... 36
Notes to Consolidated Financial Statements...................... 37
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1996................
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 71
III.Supplementary Insurance Information (Consolidated).......... 74
IV.Reinsurance (Consolidated)................................... 75
</TABLE>
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
66
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended (incorporated by reference from Exhibit
3(i) to Form 10-K for the fiscal year ended December 31,
1995)
(ii) By-Laws of Torchmark Corporation, as amended (incorporated
by reference from Exhibit 3(b) to Form 10-K for the fiscal
year ended December 31, 1989)
(4)(a) Specimen Common Stock Certificate (incorporated by reference
from Exhibit 4(a) to Form 10-K for the fiscal year ended De-
cember 31, 1989)
(b) Trust Indenture dated as of February 1, 1987 between
Torchmark Corporation and Morgan Guaranty Trust Company of
New York, as Trustee (incorporated by reference from Exhibit
4(b) to Form S-3 for $300,000,000 of Torchmark Corporation
Debt Securities and Warrants (Registration No. 33-11816))
(10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve
Agreement, as amended, and Trust (incorporated by reference
from Exhibit 10(b) to Form 10-K for the fiscal year ended
December 31, 1991)
(b) Capital Accumulation and Bonus Plan of Torchmark Corpora-
tion, as amended, (incorporated by reference from Exhibit
10(c) to Form 10-K for the fiscal year ended December 31,
1988)
(c) Torchmark Corporation Supplementary Retirement Plan (incor-
porated by reference from Exhibit 10(c) to Form 10-K for the
fiscal year ended December 31, 1992)
(d) Certified Copies of Resolutions Establishing Retirement Pol-
icy for Officers and Directors of Torchmark Corporation,
Providing for Advisory Directors, and Providing Retirement
Benefits for Directors (incorporated by reference from Ex-
hibit 10(e) to Form 10-K for the fiscal year ended December
31, 1989)
(e) Torchmark Corporation Restated Deferred Compensation Plan
for Directors, Advisory Directors, Directors Emeritus and
Officers, as amended (incorporated by reference from Exhibit
10(e) to Form 10-K for the fiscal year ended December 31,
1992)
(f) The Torchmark Corporation 1987 Stock Incentive Plan
(g) The 1984 Torchmark Corporation Stock Option Plan (incorpo-
rated by reference from Form S-8 for The 1984 Torchmark Cor-
poration Stock Option Plan (Registration No. 2-93760))
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and to Retire Prior to December 31, 1986 (incorporated by
reference from Exhibit 10(k) to Form 10-K for the fiscal
year ended December 31, 1991)
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(k) Form of Deferred Compensation Agreement between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and Not Eligible to Retire Prior to December 31, 1986 (in-
corporated by reference from Exhibit 10(l) to Form 10-K for
the fiscal year ended December 31, 1991)
(l) Torchmark Corporation Supplemental Savings and Investment
Plan (incorporated by reference from Exhibit 10(m) to Form
10-K for the fiscal year ended December 31, 1992)
(m) Service Agreement, dated as of January 1, 1991, between
Torchmark Corporation and Liberty National Life Insurance
Company (prototype for agreements between Torchmark Corpora-
tion and other principal operating subsidiaries) (incorpo-
rated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1992)
(n) The Torchmark Corporation Pension Plan (incorporated by ref-
erence from Exhibit 10(o) to Form 10-K for the fiscal year
ended December 31, 1992)
(o) United Investors Management Company Retirement Income Plan
(incorporated by reference from Exhibit 10(p) to Form 10-K
for the fiscal year ended December 31, 1992)
(p) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo-
rated by reference from Exhibit 10(q) to Form 10-K for the
fiscal year ended December 31, 1992)
(q) United Investors Management Company 1986 Employee Stock In-
centive Plan (incorporated by reference from Exhibit 10(r)
to Form 10-K for the fiscal year ended December 31, 1993)
(r) The Torchmark Corporation Savings and Investment Plan (in-
corporated by reference from Exhibit 10(s) to Form 10-K for
the fiscal year ended December 31, 1992)
(s) United Investors Management Company Savings and Investment
Plan (incorporated by reference from Exhibit 10(t) to Form
10-K for the fiscal year ended December 31, 1992)
(t) Credit Agreements dated as of October 24, 1996 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent (364 Day and Five Year)
(u) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995 (incorporated by
reference from Exhibit 10(u) to Form 10-K for the fiscal
year ended December 31, 1995)
(v) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Not Eligible to Participate in Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K
for the fiscal year ended December 31, 1991)
(w) Torchmark Corporation 1996 Non-Employee Directors Stock Op-
tion Plan
(x) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan
(11) Statement re computation of per share earnings 70
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 24, 1997
(21) Subsidiaries of the registrant 70
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except
for Note 16, which is as of March 11, 1997, into Form S-8 of
The Torchmark Corporation Savings and Investment Plan (Reg-
istration No. 2-76378)
(b) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except
for Note 16, which is as of March 11, 1997, into Form S-8 of
The United Investors Management Company Savings and Invest-
ment Plan (Registration No. 2-76912)
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 and the
accompanying Form S-3 Prospectus of The 1984 Torchmark Corpo-
ration Stock Option Plan (Registration No. 2-93760)
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1987 Stock Incentive Plan (Registration No. 33-23580)
(e) Consent of KPMG Peat Marwick LLP to incorporation by
reference of their audit report dated January 31, 1997,
except for Note 16, which is as of March 11, 1997, into Form
S-8 and the accompanying Form S-3 Prospectus of The Capital
Accumulation and Bonus Plan of Torchmark Corporation
(Registration No. 33-1032)
(f) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 of the
Liberty National Life Insurance Company 401(k) Plan (Regis-
tration No. 33-65507)
(24) Powers of attorney
(27) Financial Data Schedule
</TABLE>
69
<PAGE>
(b) Reports on Form 8-K.
A Form 8-K dated October 2, 1996 was filed to report the United States
Supreme Court's grant of intervenors' petition for writ of certiorari in
Robertson v. Liberty National Life Insurance Company. No exhibits were
required to be filed.
(c) Exhibits
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Net income from continuing opera-
tions.............................. $318,508,976 $ 271,945,720 $263,814,601
Discontinued operations of energy
segment:
Income (loss) from operations...... -0- (128,710,390) 5,131,667
Loss on disposal................... (7,137,124) -0- -0-
------------ ------------- ------------
Net income.......................... 311,371,852 143,235,330 268,946,268
Preferred dividends................. -0- 0 (804,130)
------------ ------------- ------------
Adjusted net income................. $311,371,852 $ 143,235,330 $268,142,138
============ ============= ============
Weighted average shares outstanding. 71,229,892 71,593,774 72,095,657
============ ============= ============
Primary earnings per share:
From continuing operations......... $ 4.47 $ 3.80 $ 3.65
From discontinued operations of en-
ergy segment:
Income (loss) from operations..... -0- (1.80) 0.07
Loss on disposal.................. (0.10) -0- -0-
------------ ------------- ------------
Net income........................ $ 4.37 $ 2.00 $ 3.72
============ ============= ============
</TABLE>
There were no common stock equivalents included in weighted average shares
outstanding.
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
<TABLE>
<CAPTION>
STATE OF NAME UNDER WHICH
COMPANY INCORPORATION COMPANY DOES BUSINESS
----------------------- ------------- ---------------------
<S> <C> <C>
American Income Life American Income Life
Insurance Company Indiana Insurance Company
Family Service Life Family Service Life
Insurance Company Texas Insurance Company
Globe Life And Accident Globe Life And Accident
Insurance Company Delaware Insurance Company
Liberty National Life Liberty National Life
Insurance Company Alabama Insurance Company
United American United American
Insurance Company Delaware Insurance Company
United Investors Life United Investors Life
Insurance Company Missouri Insurance Company
Waddell & Reed Waddell & Reed
Investors Management Investors Management
Company, Inc. Delaware Company, Inc.
Waddell & Reed Waddell & Reed
Services Company, Inc. Delaware Services Company, Inc.
</TABLE>
All other exhibits required by Regulation S-K are listed as to location in the
"Index of documents filed as a part of this report" on pages 67 through 69 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
70
<PAGE>
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets:
Investments:
Long-term investments--available for sale........ $ 11,182 $ 9,655
Short-term investments........................... 5,940 994
---------- ----------
Total investments................................. 17,122 10,649
Cash.............................................. 156 -0-
Investment in affiliates.......................... 2,949,625 2,820,323
Due from affiliates............................... 104,146 105,887
Accrued investment income......................... 84 94
Other assets...................................... 5,154 3,636
Discontinued operations assets.................... -0- 61,109
---------- ----------
Total assets..................................... $3,076,287 $3,001,698
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt.................................. $ 40,778 $ 189,248
Long-term debt................................... 791,589 791,566
Due to affiliates................................ 330,527 195,193
Other liabilities................................ 90,904 43,643
---------- ----------
Total liabilities................................ 1,253,798 1,219,650
Monthly income preferred securities............... 193,146 193,096
Shareholders' equity:
Preferred stock.................................. -0- -0-
Common stock..................................... 73,784 73,784
Additional paid-in capital....................... 141,701 139,754
Unrealized investment gains ..................... 46,581 140,338
Retained earnings................................ 1,549,391 1,325,534
Treasury stock................................... (182,114) (90,458)
---------- ----------
Total shareholders' equity....................... 1,629,343 1,588,952
---------- ----------
Total liabilities and shareholders' equity....... $3,076,287 $3,001,698
========== ==========
</TABLE>
See accompanying Independent Auditors' Report
71
<PAGE>
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net investment income............................ $ 931 $ 1,261 $ 5,183
Realized investment losses....................... (5,738) (23,516) (4,422)
Other income..................................... 1 11 11
-------- -------- --------
Total revenue.................................. (4,806) (22,244) 772
General operating expenses....................... 13,958 7,823 14,442
Non-operating expenses--related to affiliates.... -0- -0- (71,417)
Reimbursements from affiliates................... (13,332) (13,260) (15,218)
Interest expense................................. 88,916 91,825 79,762
-------- -------- --------
Total expenses................................. 89,542 86,388 7,569
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (94,348) (108,632) (6,797)
Income taxes .................................... 23,102 37,363 2,022
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (71,246) (71,269) (4,775)
Equity in earnings of affiliates................. 420,900 326,822 271,992
Monthly income preferred securities dividend..... (9,655) (10,317) (2,137)
-------- -------- --------
Net income from continuing operations.......... 339,999 245,236 265,080
Discontinued operations of energy segment:
Income (loss) from operations................... -0- (102,001) 3,866
Loss on disposal................................ (28,627) -0- -0-
-------- -------- --------
Net income..................................... $311,372 $143,235 $268,946
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
72
<PAGE>
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Cash provided from operations before dividends
from subsidiaries............................. $(77,291) $ (86,764) $ (48,378)
Cash dividends from subsidiaries.............. 265,688 185,500 270,500
-------- --------- ---------
Cash provided from operations.................. 188,397 98,736 222,122
Cash provided from (used for) investing activi-
ties:
Disposition of investments.................... -0- 116 225,573
Acquisition of investments.................... (1,667) (1,556) (202,579)
Investment in subsidiaries.................... -0- (83,211) (70,000)
Purchase of American Income................... -0- -0- (476,501)
Loans to subsidiaries......................... (12,508) (49,043) (28,916)
Net decrease (increase) in temporary invest-
ments........................................ (4,946) (188) 1,529
Additions to properties....................... (49) (146) (113)
-------- --------- ---------
Cash used for investing activities............. (19,170) (134,028) (551,007)
Cash provided from (used for) financing activi-
ties:
Issuance of debt.............................. -0- -0- 143,000
Issuance of monthly income preferred securi-
ties......................................... -0- -0- 193,046
Repayments of debt............................ (149,020) (60,752) -0-
Issuance of stock to subsidiaries............. -0- 77,766 -0-
Issuance of stock............................. 10,145 2,808 4,408
Acquisitions of treasury stock................ (106,996) -0- (106,054)
Borrowed from subsidiaries.................... 153,959 101,857 176,821*
Repayment on borrowings from subsidiaries..... 8,500 (5,500) -0-
Payment of dividends.......................... (85,659) (80,887) (82,336)
-------- --------- ---------
Cash provided from (used for) financing activi-
ties.......................................... (169,071) 35,292 328,885
Net increase in cash........................... 156 -0- -0-
Cash balance at beginning of period............ -0- -0- -0-
-------- --------- ---------
Cash balance at end of period.................. $ 156 $ -0- $ -0-
======== ========= =========
</TABLE>
* Includes an $80.3 million note payable to subsidiary which was forgiven in
1994 in the form of a dividend from the subsidiary.
TORCHMARK CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
NOTE A--DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Torchmark from the consolidated subsidiaries were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Consolidated subsidiaries..................... $265,688 $185,500 $270,500
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
73
<PAGE>
TORCHMARK CORPORATION
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AMORTIZATION
OF DEFERRED
PREMIUM NET POLICY OTHER
AND POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING
CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES
---------- ---------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Insurance.............. $1,609,919 $403,300 $ 2,936 $1,058,084 $219,917 $252,508
Asset management....... 8,077 217,476 107,471
Corporate.............. (3,550) 6,042 104,013
Eliminations and ad-
justments............. (3,219) (35,171) (1,091) (30,224)
---------- -------- -------- ---------- -------- --------
Total................. $1,609,919 $404,608 $191,283 $1,058,084 $218,826 $433,768
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167
Asset management....... 4,021 180,001 87,651
Corporate.............. (3,418) (14,309) 106,653
Eliminations and ad-
justments............. (3,357) (29,469) (1,442) (25,567)
---------- -------- -------- ---------- -------- --------
Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Insurance.............. $1,388,874 $331,679 $ 3,821 $ 921,277 $172,493 $228,042
Asset management....... 2,443 165,259 82,727
Corporate.............. 8,103 (2,525) 95,160
Eliminations and ad-
justments............. 5,412 (27,729) 5,614 (23,950)
---------- -------- -------- ---------- -------- --------
Total................. $1,388,874 $347,637 $138,826 $ 921,277 $178,107 $381,979
========== ======== ======== ========== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
74
<PAGE>
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Life insurance in force. $84,360,821 $655,574 $2,587,330 $86,292,577 3.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... 759,321 3,472 26,511 782,360 3.4%
Health insurance....... 742,319 9,835 135 732,619 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,501,640 $ 13,307 $ 26,646 $ 1,514,979 1.8%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Life insurance in force. $80,377,021 $636,961 $ 14,355 $79,754,415 0.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6%
Health insurance....... 761,573 10,985 -0- 750,588 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Life insurance in force. $74,834,644 $633,485 $ 23,570 $74,224,729 0.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2%
Health insurance....... 781,207 12,493 -0- 768,714 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1%
=========== ======== ========== =========== ====
</TABLE>
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
By: ________________________________
R.K. RICHEY, CHAIRMAN, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
By: ________________________________
KEITH A. TUCKER, VICE CHAIRMAN
AND DIRECTOR (PRINCIPAL FINANCIAL
OFFICER)
By: ________________________________
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: ________________________________ By: ________________________________
DAVID L. BOREN DIRECTOR HAROLD T. MCCORMICK DIRECTOR
By: ________________________________ By: ________________________________
JOSEPH M. FARLEY DIRECTOR GEORGE J. RECORDS DIRECTOR
By: ________________________________ By: ________________________________
LOUIS T. HAGOPIAN DIRECTOR YETTA G. SAMFORD, JR. DIRECTOR
By: ________________________________
C.B. HUDSON DIRECTOR
By: ________________________________
JOSEPH L. LANIER, JR. DIRECTOR
Date: March 20, 1997
*By: _______________________________
GARY L. COLEMAN ATTORNEY-IN-FACT
76
<PAGE>
EXHIBIT 1
RESTATED TORCHMARK CORPORATION
1987 STOCK INCENTIVE PLAN
(AMENDED AND RESTATED AS OF MARCH 4, 1997)
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Torchmark Corporation 1987 Stock Incentive Plan
(the "Plan"). The purpose of the Plan is to enable Torchmark Corporation (the
"Company") and its Subsidiaries to attract and retain employees and directors
who contribute to the Company's success by their ability, ingenuity and
industry, and to enable such employees and directors to participate in the
long-term success and growth of the Company through an equity interest in the
Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
a. "Affiliate" means any corporation (other than a Subsidiary), partnership,
joint venture or any other entity in which the Company owns, directly or
indirectly, at least a 10 percent beneficial ownership interest.
b. "Board" means the Board of Directors of the Company.
c. "Cause" means a participant's willful misconduct or dishonesty, any of
which is directly and materially harmful to the business or reputation of the
Company or any Subsidiary or Affiliate.
d. "Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto.
e. "Committee" means the Compensation Committee of the Board. If at any time
no Committee shall be in office, then the functions of the Committee specified
in the Plan shall be exercised by the Board.
f. "Commission" means the Securities and Exchange Commission.
g. "Company" means Torchmark Corporation, a corporation organized under the
laws of the State of Delaware (or any successor corporation).
h. "Deferred Stock" means an award made pursuant to Section 9 below of the
right to receive Stock at the end of a specified deferral period.
i. "Director Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 6.
j. "Disability" means total and permanent disability as determined under the
Company's long term disability program. With respect to Director Stock
Options, "Disability" shall be determined as if the Director was covered under
the Company's long term disability program.
k. "Early Retirement" means retirement from active employment with the
Company, any Subsidiary, and any Affiliate pursuant to the early retirement
provisions of the applicable company pension plan.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any successor thereto.
A-1
<PAGE>
m. "Fair Market Value" means, as of any given date, the closing price of the
Stock on such date on the New York Stock Exchange Composite Tape.
n. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
o. "Immediate Family" means the children, grandchildren or spouse of any
optionee.
p. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Normal Retirement" means retirement from active employment with the
Company, any Subsidiary, and any Affiliate on or after the normal retirement
date specified in the applicable company pension plan.
r. "Plan" means this 1987 Stock Incentive Plan.
s. "Restricted Stock" means an award of shares of Stock that are subject to
restrictions under Section 8.
t. "Retirement" means Normal or Early Retirement.
u. "Stock" means the Common Stock of the Company.
v. "Stock Appreciation Right" means a right granted under Section 7 below to
surrender to the Company all or a portion of a Stock Option in exchange for an
amount equal to the difference between (i) the Fair Market Value, as of the
date such Stock Option or such portion thereof is surrendered, of the shares
of Stock covered by such Stock Option or such portion thereof, and (ii) the
aggregate exercise price of such Stock Option or such portion thereof.
w. "Stock Option" means any option to purchase shares of Stock granted to
employees pursuant to Section 5.
x. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Committee which shall at all times
comply with the requirements of Rule 16b-3 of the Exchange Act. Commencing on
the date of the 1995 annual meeting of stockholders of the Company, all
members of the Committee shall also be "outside directors" within the meaning
of Section 162(m) of the Code.
The Committee shall have the power and authority to grant to eligible
employees, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock
Appreciation Rights; (iii) Restricted Stock or (iv) Deferred Stock.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company, its
Subsidiaries, and its Affiliates to whom Stock Options, Stock Appreciation
Rights, Restricted Stock or Deferred Stock awards or a combination of the
foregoing from time to time will be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or
Deferred Stock, or a combination of the foregoing, are to be granted
hereunder;
(iii) to determine the number of shares of Stock to be covered by each
such award granted hereunder;
A-2
<PAGE>
(iv) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (other than Director
Stock Options), including, but not limited to, any restriction on any Stock
Option or other award and/or the shares of Stock relating thereto based on
performance and/or such other factors as the Committee may determine, in
its sole discretion, and any vesting acceleration features based on
performance and/or such other factors as the Committee may determine, in
its sole discretion;
(v) to determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under this Plan
shall be deferred either automatically or at the election of a participant,
including providing for and determining the amount (if any) of deemed
earnings on any deferred amount during any deferral period.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of
the Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan
shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for distribution
under the Plan shall be 12,300,000 comprised of: (i) 9,300,000 shares (plus
such number of shares subject to options granted under the 1984 Torchmark
Corporation Stock Option Plan which expire unexercised), which may consist, in
whole or in part, of authorized and unissued shares or treasury shares, and
(ii) 3,000,000 additional shares, which may consist, in whole or in part, of
authorized and unissued shares or treasury shares.
If any shares of Stock that have been optioned cease to be subject to
option, or if any shares subject to any Restricted Stock or Deferred Stock
award granted hereunder are forfeited or such award otherwise terminates, such
shares shall again be available for distribution in connection with future
awards under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization,
Stock dividend, or other change in corporate structure affecting the Stock, a
substitution or adjustment shall be made in (i) the aggregate number of shares
reserved for issuance under the Plan, (ii) the number and option price of
shares subject to outstanding Stock Options and Director Stock Options granted
under the Plan, (iii) the number of shares subject to Restricted Stock or
Deferred Stock awards granted under the Plan, (iv) the aggregate number of
shares available for issuance to any employee pursuant to Section 4(a), and
(v) the number of Director Stock Options to be granted each year pursuant to
Section 6, as may be determined to be appropriate by the Committee, in its
sole discretion, provided that the number of shares subject to any award shall
always be a whole number, and further provided that no such adjustment shall
increase the aggregate value of any outstanding award. Such adjusted option
price shall also be used to determine the amount payable by the Company upon
the exercise of any Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
(a) Officers and other key employees of the Company, its Subsidiaries or its
Affiliates (but excluding members of the Committee and any person who serves
only as a director) who are responsible for or contribute to the management,
growth and/or profitability of the business of the Company, its Subsidiaries,
or its Affiliates are eligible to be granted Stock Options, Stock Appreciation
Rights, Restricted Stock or Deferred Stock awards.
Except as provided in Section 6, the optionees and participants under the
Plan shall be selected from time to time by the Committee, in its sole
discretion, from among those eligible, and the Committee shall determine, in
its sole discretion, the number of shares covered by each award or grant;
provided, however, that no employee shall be granted Stock Options on more
than 200,000 shares in any calendar year.
A-3
<PAGE>
(b) Directors of the Company (other than directors who are also officers or
employees of the Company, its Subsidiaries or its Affiliates) are eligible to
receive Director Stock Options pursuant to Section 6 of the Plan.
SECTION 5. STOCK OPTIONS FOR EMPLOYEES.
Stock Options may be granted either alone or in addition to other awards
granted under the Plan. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve, and the provisions
of Stock Option awards need not be the same with respect to each optionee.
The Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Stock Options, or both types of Stock Options (in each
case with or without Stock Appreciation Rights) except that Incentive Stock
Options shall not be granted to employees of an Affiliate. To the extent that
any Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Except as provided in Section 5(1), no term of this Plan relating to
Incentive Stock Options shall be interpreted, amended or altered, nor shall
any discretion or authority granted under the Plan be so exercised, so as to
disqualify either the Plan or any Incentive Stock Option under Section 422 of
the Code. Notwithstanding the foregoing, in the event an optionee voluntarily
disqualifies an option as an Incentive Stock Option within the meaning of
Section 422 of the Code, the Committee may, but shall not be obligated to,
make such additional grants, awards or bonuses as the Committee shall deem
appropriate, to reflect the tax savings to the Company which results from such
disqualification.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
desirable:
(a) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be determined by the Committee at the time of grant but
shall be not less than 100% of the Fair Market Value of the Stock on the date
of the grant of the Stock Option.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date such Incentive Stock Option is granted.
(c) Exercisability. Subject to paragraph (l) of this Section 5 with respect
to Incentive Stock Options, Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee, provided, however, that, except as provided in Section 5(f), 5(g),
5(h) or 13, no Stock Option shall be exercisable prior to six months from the
date of the granting of the option. Notwithstanding the limitations set forth
in the preceding sentence, the Committee may accelerate the exercisability of
any Stock Option, at any time in whole or in part, based on performance and/or
such other factors as the Committee may determine in its sole discretion.
(d) Method of Exercise. Stock Options may be exercised in whole or in part
at any time during the option period, by giving written notice of exercise to
the Company specifying the number of shares to be purchased, accompanied by
payment in full of the purchase price, in cash, by check or such other
instrument as may be acceptable to the Committee (including instruments
providing for "cashless exercise"). As determined by the Committee, in its
sole discretion, at or after grant, payment in full or in part may also be
made in the form of unrestricted Stock already owned by the optionee or, in
the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or
Deferred Stock subject to an award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the option is exercised, as determined
by the Committee). If payment of the option exercise price of a Non-Qualified
Stock Option is made in whole or in part in the form of Restricted Stock or
Deferred Stock, the shares received upon the exercise of such Stock Option
shall be restricted or deferred, as the case may be, in accordance with the
original term of the Restricted Stock award or Deferred Stock award in
A-4
<PAGE>
question, except that the Committee may direct that such restrictions or
deferral provisions shall apply to only the number of such shares equal to the
number of shares of Restricted Stock or Deferred Stock surrendered upon the
exercise of such option. No shares of unrestricted Stock shall be issued until
full payment therefor has been made. An optionee shall have the rights to
dividends or other rights of a stockholder with respect to shares subject to
the option when the optionee has given written notice of exercise and has paid
in full for such shares.
(e) Transferability of Options. A Stock Option agreement may permit an
optionee to transfer the Stock Option to members of his or her Immediate
Family, to one or more trusts for the benefit of such Immediate Family
members, or to one or more partnerships where such Immediate Family members
are the only partners if (i) the agreement setting forth such Stock Option
expressly provides that the Stock Option may be transferred only with the
express written consent of the Committee, and (ii) the optionee does not
receive any consideration in any form whatsoever for said transfer. Any Stock
Option so transferred shall continue to be subject to the same terms and
conditions in the hands of the transferee as were applicable to said Stock
Option immediately prior to the transfer thereof. Stock Options granted prior
to December 1, 1993 may be amended to provide for their transferability,
subject to the foregoing conditions.
Any Stock Option not (i) granted pursuant to any agreement expressly
allowing the transfer of said Stock Option or (ii) amended expressly to permit
its transfer shall not be transferable by the optionee otherwise than by will
or by the laws of descent and distribution and such Stock Option thus shall be
exercisable during the optionee's lifetime only by the optionee.
(f) Termination by Death. Unless otherwise determined by the Committee, if
an optionee's employment with the Company, any Subsidiary, and any Affiliate
terminates by reason of death (or if an optionee dies following termination of
employment by reason of disability or Normal Retirement), any Stock Option
shall become immediately exercisable and may thereafter be exercised by the
legal representative of the estate or by the legatee of the optionee under the
will of the optionee, during the period ending on the expiration of the stated
term of such Stock Option or the first anniversary of the optionee's death,
whichever is later.
(g) Termination by Reason of Disability. Unless otherwise determined by the
Committee, if an optionee's employment with the Company, any Subsidiary and
any Affiliate terminates by reason of Disability, any Stock Option held by
such optionee shall be immediately exercisable and may thereafter be exercised
during the period ending on the expiration of the stated term of such Stock
Option. In the event of termination of employment by reason of Disability, if
an Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. Unless otherwise determined by the
Committee, if an optionee's employment with the Company, any Subsidiary and
any Affiliate terminates by reason of Normal Retirement, any Stock Option held
by such optionee shall become immediately exercisable. A Stock Option held by
an optionee whose employment has terminated by reason of Normal Retirement
shall expire at the end of the stated term of such Stock Option, unless
otherwise determined by the Committee.
If an optionee's employment with the Company, any Subsidiary and any
Affiliate terminates by reason of Early Retirement, any Stock Option shall
terminate three years from the date of such Early Retirement or upon the
expiration of the stated term of the Stock Option, whichever is shorter,
unless otherwise determined by the Committee. In the event of Early
Retirement, there shall be no acceleration of vesting of the Stock Option
unless otherwise determined by the Committee at or after grant, and said Stock
Option may only be exercised to the extent it is or has become exercisable
prior to termination of the Stock Option.
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In the event of termination of employment by reason of Retirement, if an
Incentive Stock Option is exercised after the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(i) Termination for Cause. If the optionee's employment with the Company,
any Subsidiary and any Affiliate is terminated for Cause, the Stock Option
shall immediately be forfeited to the Company upon the giving of notice of
termination of employment.
(j) Other Termination. If the optionee's employment with the Company, any
Subsidiary and any Affiliate is involuntarily terminated by the optionee's
employer without Cause, the Stock Option shall terminate three months from the
date of termination of employment or upon the expiration of the stated term of
the Stock Option, whichever is shorter, unless otherwise determined by the
Committee. If an optionee's employment with the Company, any Subsidiary and
any Affiliate is voluntarily terminated for any reason, the Stock Option shall
terminate one month from the date of termination of employment or upon the
expiration of the stated term of the Stock Option, whichever is shorter. In
the event of involuntary termination without Cause or voluntary termination
for any reason, there shall be no acceleration of vesting of the Stock Option
unless otherwise determined by the Committee and said Stock Option may only be
exercised to the extent it is or has become exercisable prior to termination
of the Stock Option.
(k) Termination upon Change of Control. Notwithstanding the provisions of
Section 5(j) or the stated term of the Stock Option, if the optionee's
employment with the Company, any Subsidiary and any Affiliate is involuntarily
terminated by the optionee's employer without Cause by reason of or within
three months after a merger or other business combination resulting in a
"Change of Control" as defined in Section 13 of this Plan, the Stock Option
shall terminate upon the later of six months and one day after such merger or
business combination or ten business days following the expiration of the
period during which publication of financial results covering at least thirty
days of post-merger combined operations has occurred.
(l) Limit on Value of Incentive Stock Option First Exercisable Annually. The
aggregate Fair Market Value (determined at the time of grant) of the Stock for
which "incentive stock options" within the meaning of Section 422 of the Code
are exercisable for the first time by an optionee during any calendar year
under the Plan (and/or any other stock option plans of the Company, any
Subsidiary and any Affiliate) shall not exceed $100,000. Notwithstanding the
preceding sentence, the exercisability of such Stock Options may be
accelerated by the Committee and shall be accelerated as provided in Sections
5(f), 5(g), 5(h), and 13, in which case Stock Options which exceed such
$100,000 limit shall be treated as Non-Qualified Stock Options.
SECTION 6. DIRECTOR STOCK OPTIONS.
Director Stock Options granted under the Plan shall be options which are not
intended to be "incentive stock options" within the meaning of Section 422 of
the Code. Such Director Stock Options may be granted pursuant to a pre-
established formula contained in the Plan or may, in the sole discretion of
the entire Board of Directors, be granted as to such number of shares and upon
such terms and conditions as shall be determined by said Board of Directors.
Director Stock Options granted under the Plan shall be evidenced by a
written agreement in such form as the Committee shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Formula-based Director Stock Options. For each calendar year after 1995,
3,000 Director Stock Options shall be granted automatically on the first day
of each calendar year on which Stock is publicly traded on the New York Stock
Exchange to each member of the Board on that date who is not an employee of
the Company, its Subsidiaries or Affiliates ("Outside Director").
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The option price per share of Stock purchasable under such Director Stock
Option shall be 100% of the Fair Market Value of the Stock on the date of the
grant of the Director Stock Option. Except as provided in Section 13, said
Director Stock Options for calendar years after 1994 shall become exercisable
in full six months from the date of the grant of the option and shall remain
exercisable for a term of ten years and two days from the date such Director
Stock Option is granted.
(b) Non-Formula Based Director Stock Options. Within its sole discretion,
the entire Board may, for calendar years commencing with 1996, award Director
Stock Options on a non-formula basis to all or such individual Outside
Directors as it shall select. Such Director Stock Options may be awarded at
such times and for such number of shares as the Board in its discretion
determines. The price of such Director Stock Options may be fixed by the Board
at a discount not to exceed 25% of the fair market value of the Stock on the
date of grant or may be the fair market value of the Stock on the grant date.
Such Director Stock Options shall become first exercisable and have an option
term as determined by the Board in its discretion, provided however, that
except as described in Section 13 and in paragraph (e) of this section, no
such Director Stock Option shall be first exercisable until six months from
the date of grant. All other terms and conditions of such Director Stock
Options shall be as established by the Board in its sole discretion.
(c) Method of Exercise. Any Director Stock Option granted pursuant to the
Plan may be exercised in whole or in part at any time during the option
period, by giving written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment in full of the
purchase price, in cash, by check or such other instrument as may be
acceptable to the Committee (including instruments providing for "cashless
exercise"). Payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee (based on the Fair Market
Value of the Stock on the date the option is exercised). No shares of
unrestricted Stock shall be issued until full payment therefor has been made.
An optionee shall have the rights to dividends or other rights of a
stockholder with respect to shares subject to the option when the optionee has
given written notice of exercise and has paid in full for such shares.
(d) Transferability of Options. No Director Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Director Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee; provided, however, that the
Committee may (but need not) permit other transfers where the Committee
concludes that such transferability (i) does not result in accelerated
taxation, and (ii) is otherwise appropriate and desirable, taking into account
any state or federal securities laws applicable to transferable options.
(e) Termination of Service. Upon an optionee's termination of status as an
Outside Director with the Company for any reason, any Director Stock Options
held by such optionee shall become immediately exercisable and may thereafter
be exercised during the period ending on the expiration of the stated term of
such Director Stock Options or the first anniversary of the optionee's death,
whichever is later. Not withstanding the foregoing sentence, if the optionee's
status as an Outside Director terminates by reason of or within three months
after a merger or other business combination resulting in a "Change of
Control" as defined in Section 13 of this Plan, the Director Stock Option
shall terminate upon the latest of (i) six months and one day after the merger
or business combination, (ii) ten business days following the expiration of
the period during which publication of financial results covering at least
thirty days of post-merger combined operations has occurred, and (iii) the
expiration of the stated term of such Director Stock Option.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In
the case of a Non-Qualified Stock Option, such rights may be granted either at
or after the time of the grant of such Non-Qualified Stock Option. In the case
of an Incentive Stock Option, such rights may be granted only at the time of
the grant of such Incentive Stock Option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that,
unless otherwise provided by the Committee at the time of grant, a Stock
Appreciation Right granted with respect
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to less than the full number of shares covered by a related Stock Option shall
only be reduced if and to the extent that the number of shares covered by the
exercise or termination of the related Stock Option exceeds the number of
shares not covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in accordance
with paragraph (b) of this Section 7, by surrendering the applicable portion
of the related Stock Option. Upon such exercise and surrender, the optionee
shall be entitled to receive an amount determined in the manner prescribed in
paragraph (b) of this Section 7. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall
be exercisable in accordance with the provisions of Section 5 and this
Section 7 of the Plan; provided, however, that any Stock Appreciation Right
granted subsequent to the grant of the related Stock Option shall not be
exercisable during the first six months of the term of the Stock
Appreciation Right, except that this additional limitation shall not apply
in the event of death or Disability of the optionee prior to the expiration
of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive up to, but not more than, an amount in cash or
shares of Stock equal in value to the excess of the Fair Market Value of
one share of Stock over the option price per share specified in the related
Stock Option multiplied by the number of shares in respect of which the
Stock Appreciation Right shall have been exercised, with the Committee
having the right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under
paragraph (e) of Section 5 of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 of the Plan on the number of shares of Stock to be issued
under the Plan.
(v) A Stock Appreciation Right granted in connection with an Incentive
Stock Option may be exercised only if and when the market price of the
Stock subject to the Incentive Stock Option exceeds the exercise price of
such Stock Option.
(vi) In its sole discretion, the Committee may provide, at the time of
grant of a Stock Appreciation Right under this Section 7, that such Stock
Appreciation Right can be exercised only in the event of a "Change of
Control" and/or a "Potential Change of Control" (as defined in Section 13
below).
(vii) The Committee, in its sole discretion, may also provide that in the
event of a "Change of Control" and/or a "Potential Change of Control" (as
defined in Section 13 below) the amount to be paid upon the exercise of a
Stock Appreciation Right shall be based on the "Change of Control Price"
(as defined in Section 13 below).
SECTION 8. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued either alone or
in addition to other awards granted under the Plan. The Committee shall
determine the officers and key employees of the Company and its Subsidiaries
and Affiliates to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the price, if any, to
be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof),
the time or times within which such awards may be subject to forfeiture, and
all other conditions of the awards. The Committee may also condition the grant
and/or vesting of Restricted Stock upon the attainment of specified
performance goals, or such other criteria as the Committee may determine, in
its sole discretion. The provisions of Restricted Stock awards need not be the
same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of an award of shares
of Restricted Stock shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
(a "Restricted Stock Award Agreement"), has delivered a fully executed copy
thereof to the Company, and has otherwise complied with the then applicable
terms and conditions. Awards of Restricted Stock
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must be accepted within a period of 60 days (or such shorter period as the
Committee may specify) after the award date by executing a Restricted Stock
Award Agreement and paying the price specified in the Restricted Stock Award
Agreement. Each participant who is awarded Restricted Stock shall be issued a
stock certificate registered in the name of the participant in respect of such
shares of Restricted Stock. The Committee shall specify that the certificate
shall bear a legend, as provided in clause (i) below, and/or be held in
custody by the Company, as provided in clause (ii) below.
(i) The certificate shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award, substantially
in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Torchmark Corporation 1987 Stock Incentive Plan and a
Restricted Stock Award Agreement entered into between the registered owner
and Torchmark Corporation. Copies of such Plan and Agreement are on file in
the offices of Torchmark Corporation, 2001 Third Avenue South, Birmingham,
Alabama 35233."
(ii) The Committee shall require that the stock certificates evidencing
such shares be held in custody by the Company until the restrictions
thereon shall have lapsed, and that, as a condition of any Restricted Stock
award, the participant shall have delivered a stock power, endorsed in
blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 8 shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the Restricted Stock Award
Agreements, during such period as may be set by the Committee commencing on
the grant date (the "Restriction Period"), the participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock
awarded under the Plan. The Committee may, in its sole discretion, provide
for the lapse of such restrictions in installments and may accelerate or
waive such restrictions in whole or in part, before or after the
participant's termination of employment, based on performance and/or such
other factors as the Committee may determine, in its sole discretion.
(ii) Except as provided in paragraph (c)(i) of this Section 8, the
participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a stockholder of the Company, including the right to
receive any dividends. Dividends paid in stock of the Company or stock
received in connection with a stock split with respect to Restricted Stock
shall be subject to the same restrictions as on such Restricted Stock.
Certificates for shares of unrestricted Stock shall be delivered to the
participant promptly after, and only after, the period of forfeiture shall
expire without forfeiture in respect of such shares of Restricted Stock.
(iii) Subject to the provisions of the Restricted Stock Award Agreement
and this Section 8, upon termination of employment for any reason during
the Restriction Period, all shares still subject to restriction shall be
forfeited by the participant, and the participant shall only receive the
amount, if any, paid by the participant for such forfeited Restricted
Stock.
SECTION 9. DEFERRED STOCK AWARDS.
(a) Administration. Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the officers and key employees of the Company, its Subsidiaries and Affiliates
to whom, and the time or times at which, Deferred Stock shall be awarded, the
number of shares of Deferred Stock to be awarded to any participant, the
duration of the period (the "Deferral Period") during which, and the
conditions under which, receipt of the Stock will be deferred, and the terms
and conditions of the award in addition to those set forth in paragraph (b) of
this Section 9. The Committee may also condition the grant and/or vesting of
Deferred Stock upon the attainment of specified performance goals, or such
other criteria as the Committee shall determine, in its sole discretion. The
provisions of Deferred Stock awards need not be the same with respect to each
recipient.
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(b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to
this Section 9 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award agreement,
Deferred Stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Deferral Period. At the expiration of the
Deferral Period (or Elective Deferral Period, (as defined below) where
applicable), share certificates shall be delivered to the participant, or
his legal representative, in a number equal to the shares covered by the
Deferred Stock award.
(ii) At the time of the award, the Committee may, in its sole discretion,
determine that amounts equal to any dividends declared during the Deferral
Period (or Elective Deferral Period) with respect to the number of shares
covered by a Deferred Stock award will be: (a) paid to the participant
currently; (b) deferred and deemed to be reinvested; or (c) that such
participant has no rights with respect thereto.
(iii) Subject to the provisions of the award agreement and this Section
9, upon termination of employment for any reason during the Deferral Period
for a given award, the Deferred Stock in question shall be forfeited by the
participant.
(iv) Based on performance and/or such other criteria as the Committee may
determine, the Committee may, at or after grant (including after the
participant's termination of employment), accelerate the vesting of all or
any part of any Deferred Stock award and/or waive the deferral limitations
for all or any part of such award.
(v) A participant may elect to defer further receipt of the award for a
specified period or until a specified event (the "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee, all in its sole discretion.
Subject to any exceptions adopted by the Committee, such election must
generally be made at least six months prior to completion of the Deferral
Period for a Deferred Stock award (or for an installment of such an award).
(vi) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock award agreement executed by the Company and the participant.
SECTION 10. LOAN PROVISIONS.
With the consent of the Committee, the Company may make, or arrange for, a
loan or loans to an employee with respect to the exercise of any Stock Option
granted under the Plan and/or with respect to the payment of the purchase
price, if any, of any Restricted Stock awarded hereunder. The Committee shall
have full authority to decide whether to make a loan or loans hereunder and to
determine the amount, term and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and the conditions, if any, under
which the loan or loans may be forgiven.
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the right of
an optionee or participant under a Stock Option, Director Stock Option, Stock
Appreciation Right, Restricted Stock or Deferred Stock award theretofore
granted, without the optionee's or participant's consent.
Amendments may be made without stockholder approval except as required to
satisfy Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, or
other regulatory requirements.
The Committee may amend the terms of any award or option (other than
Director Stock Options) theretofore granted, prospectively or retroactively,
but no such amendment shall impair the rights of any holder without his
consent. The Committee may also substitute new Stock Options for previously
granted Stock Options including options granted under other plans applicable
to the participant and previously granted Stock Options having higher option
prices.
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SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing set forth herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder, provided, however, that the existence of such trusts or
other arrangements is consistent with the unfunded status of the Plan.
SECTION 13. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall apply in the event
of a "Change of Control" or "Potential Change of Control," as defined in this
Section 13:
(a) In the event of a "Change of Control" as defined in paragraph (b) of
this Section 13, unless otherwise determined by the Committee in writing at or
after grant, but prior to the occurrence of such Change of Control, or, if and
to the extent so determined by the Committee in writing at or after grant
(subject to any right of approval expressly reserved by the Committee at the
time of such determination) in the event of a "Potential Change of Control,"
as defined in paragraph (c) of this Section 13:
(i) any Stock Appreciation Rights and any Stock Options awarded under the
Plan not previously exercisable and vested shall become fully exercisable
and vested;
(ii) the restrictions and deferral limitations applicable to any
Restricted Stock and Deferred Stock awards under the Plan shall lapse and
such shares and awards shall be deemed fully vested; and
(iii) the value of all outstanding Stock Options, Director Stock Options,
Stock Appreciation Rights, Restricted Stock and Deferred Stock Awards,
shall, to the extent determined by the Committee at or after grant, be
settled on the basis of the "Change of Control Price" (as defined in
paragraph (d) of this Section 13) as of the date the Change of Control
occurs or Potential Change of Control is determined to have occurred, or
such other date as the Committee may determine prior to the Change of
Control or Potential Change of Control. In the sole discretion of the
Committee, such settlements may be made in cash or in stock, as shall be
necessary to effect the desired accounting treatment for the transaction
resulting in the Change of Control. In addition, any Stock Option, Director
Stock Option, and Stock Appreciation Right which has been outstanding for
less than six months shall be settled solely in stock.
(b) For purposes of paragraph (a) of this Section 13, a "Change of Control"
means the happening of any of the following:
(i) when any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company or a Subsidiary or any Company
employee benefit plan), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of securities of
the Company representing 20 percent or more of the combined voting power of
the Company's then outstanding securities;
(ii) the occurrence of any transaction or event relating to the Company
required to be described pursuant to the requirements of 6(e) of Schedule
14A of Regulation 14A of the Commission under the Exchange Act;
(iii) when, during any period of two consecutive years during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board cease, for any reason other than death, to
constitute at least a majority thereof, unless each director who was not a
director at the beginning of such period was elected by, or on the
recommendation of, at least two-thirds of the directors at the beginning of
such period; or
(iv) the occurrence of a transaction requiring stockholder approval for
the acquisition of the Company by an entity other than the Company or a
Subsidiary through purchase of assets, or by merger, or otherwise.
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(c) For purposes of paragraph (a) of this Section 13, a "Potential Change of
Control" means the happening of any of the following:
(i) the entering into an agreement by the Company, the consummation of
which would result in a Change of Control of the Company as defined in
paragraph (b) of this Section 13; or
(ii) the acquisition of beneficial ownership, directly or indirectly, by
any entity, person or group (other than the Company or a Subsidiary or any
Company employee benefit plan) of securities of the Company representing 5
percent or more of the combined voting power of the Company's outstanding
securities and the adoption by the Board of Directors of a resolution to
the effect that a Potential Change of Control of the Company has occurred
for purposes of this Plan.
(d) For purposes of this Section 13, "Change of Control Price" means the
highest price per share paid in any transaction reported on the New York Stock
Exchange Composite Tape, or paid or offered in any transaction related to a
potential or actual Change of Control of the Company at any time during the
preceding sixty day period as determined by the Committee, except that (i) in
the case of Incentive Stock Options and Stock Appreciation Rights relating to
Incentive Stock Options, such price shall be based only on transactions
reported for the date on which the Committee decides to cashout such options,
and (ii) in the case of Director Stock Options, the sixty day period shall be
the period immediately prior to the Change of Control.
SECTION 14. GENERAL PROVISIONS.
(a) All certificates for shares of Stock delivered under the Plan shall be
subject to such stop transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Commission, any stock exchange upon which the Stock is then listed, and any
applicable Federal or state securities law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(b) Nothing set forth in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan
shall not confer upon any employee or director of the Company, any Subsidiary
or any Affiliate, any right to continued employment (or, in the case of a
director, continued retention as a director) with the Company, a Subsidiary or
an Affiliate, as the case may be, nor shall it interfere in any way with the
right of the Company, a Subsidiary or an Affiliate to terminate the employment
of any of its employees at any time.
(c) Each participant shall, no later than the date as of which the value of
an award first becomes includible in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee, in its sole discretion, regarding payment of,
any Federal, FICA, state, or local taxes of any kind required by law to be
withheld with respect to the award. The obligations of the Company under the
Plan shall be conditional on such payment or arrangements.
The Committee may permit or require, in its sole discretion, participants to
elect to satisfy their Federal, and where applicable, FICA, state and local
tax withholding obligations with respect to all awards other than Stock
Options which have related Stock Appreciation Rights by the reduction, in an
amount necessary to pay all said withholding tax obligations, of the number of
shares of Stock or amount of cash otherwise issuable or payable to said
participants in respect of an award. The Company and, where applicable, its
Subsidiaries and Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes owed hereunder by a participant from any
payment of any kind otherwise due to said participant.
(d) At the time of grant or purchase, the Committee may provide in
connection with any grant or purchase made under this Plan that the shares of
Stock received as a result of such grant or purchase shall be subject to a
right of first refusal, pursuant to which the participant shall be required to
offer to the Company any shares that the participant wishes to sell, with the
price being the then Fair Market Value of the Stock, subject to the provisions
of Section 13 hereof and to such other terms and conditions as the Committee
may specify at the time of grant.
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(e) No member of the Board or the Committee, nor any officer or employee of
the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination, or interpretation taken or
made in good faith with respect to the Plan, and all members of the Board or
the Committee and each and any officer or employee of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company in respect of any such action, determination or
interpretation.
SECTION 15. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is approved by a majority vote of
the Company's stockholders. The Plan, as amended and restated as of March 4,
1997, shall be effective on the date it is approved by the Company's
stockholders at the 1997 annual meeting of stockholders.
SECTION 16. TERM OF PLAN.
No Stock Option, Director Stock Option, Stock Appreciation Right, Restricted
Stock award or Deferred Stock award shall be granted pursuant to the Plan on
or after April 28, 2004, but awards theretofore granted may extend beyond that
date.
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EXECUTION COPY
[364 Day]
$200,000,000
CREDIT AGREEMENT
Dated as of October 24, 1996
among
TORCHMARK CORPORATION,
THE LENDERS
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
ARTICLE I DEFINITIONS...................................................................... 1
ARTICLE II THE FACILITY..................................................................... 12
2.1. The Facility..................................................................... 12
2.1.1. Description of Facility.................................................. 12
2.1.2. Facility Amount.......................................................... 12
2.1.3. Availability of Facility................................................. 12
2.2. Ratable Advances................................................................. 13
2.2.1. Ratable Advances......................................................... 13
2.2.2. Ratable Advance Rate Options............................................. 13
2.2.3. Method of Selecting Types and Interest Periods for Ratable Advances...... 13
2.2.4. Conversion and Continuation of Outstanding Ratable Advances.............. 13
2.3. Competitive Bid Advances......................................................... 14
2.3.1. Competitive Bid Option................................................... 14
2.3.2. Competitive Bid Quote Request............................................ 14
2.3.3. Invitation for Competitive Bid Quotes.................................... 15
2.3.4. Submission and Contents of Competitive Bid Quotes........................ 15
2.3.5. Notice to Borrower....................................................... 16
2.3.6. Acceptance and Notice by Borrower........................................ 17
2.3.7. Allocation by Agent...................................................... 17
2.4. Availability of Funds............................................................ 17
2.5. Facility Fee; Reductions in Aggregate Commitment................................. 17
2.6. Minimum Amount of Each Advance................................................... 18
2.7. Optional Principal Payments...................................................... 18
2.8. Changes in Interest Rate, etc.................................................... 18
2.9. Rates Applicable After Default................................................... 18
2.10. Method of Payment................................................................ 18
2.11. Notes; Telephonic Notices........................................................ 19
2.12. Interest Payment Dates; Interest and Fee Basis................................... 19
2.13. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.. 19
2.14. Lending Installations............................................................ 20
2.15. Non-Receipt of Funds by the Agent................................................ 20
2.16. Withholding Tax Exemption........................................................ 20
2.17. Extension of Termination Date.................................................... 20
ARTICLE III CHANGE IN CIRCUMSTANCES.......................................................... 21
3.1. Yield Protection................................................................. 21
3.2. Changes in Capital Adequacy Regulations.......................................... 22
3.3. Availability of Types of Advances................................................ 22
3.4. Funding Indemnification.......................................................... 22
</TABLE>
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<TABLE>
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3.5. Lender Statements; Survival of Indemnity........................................ 22
3.6. Right to Substitute Lender...................................................... 23
ARTICLE IV CONDITIONS PRECEDENT............................................................ 23
4.1. Initial Advance................................................................. 23
4.2. Each Advance.................................................................... 24
ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................. 24
5.1. Corporate Existence and Standing................................................ 24
5.2. Authorization and Validity...................................................... 25
5.3. No Conflict; Government Consent................................................. 25
5.4. Financial Statements............................................................ 25
5.5. Material Adverse Change......................................................... 25
5.6. Taxes........................................................................... 25
5.7. Litigation and Contingent Obligations........................................... 26
5.8. Subsidiaries.................................................................... 26
5.9. ERISA........................................................................... 26
5.10. Accuracy of Information......................................................... 26
5.11. Regulation U.................................................................... 26
5.12. Material Agreements............................................................. 26
5.13. Compliance With Laws............................................................ 27
5.14. Ownership of Properties......................................................... 27
5.15. Investment Company Act.......................................................... 27
5.16. Public Utility Holding Company Act.............................................. 27
5.17. Insurance Licenses.............................................................. 27
ARTICLE VI COVENANTS....................................................................... 27
6.1. Financial Reporting............................................................. 28
6.2. Use of Proceeds................................................................. 29
6.3. Certain Notices................................................................. 29
6.4. Conduct of Business............................................................. 30
6.5. Taxes........................................................................... 30
6.6. Insurance....................................................................... 30
6.7. Compliance with Laws............................................................ 30
6.8. Maintenance of Properties....................................................... 30
6.9. Inspection...................................................................... 30
6.10. Merger.......................................................................... 31
6.11. Sale of Assets.................................................................. 31
6.12. Sale and Leaseback.............................................................. 31
6.13. Investments and Acquisitions.................................................... 31
6.14. Liens........................................................................... 31
6.15. Consolidated Net Worth.......................................................... 31
6.16. Ratio of Consolidated Indebtedness to Consolidated Capitalization............... 31
6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest Expense...... 31
6.18. Affiliates...................................................................... 31
</TABLE>
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ARTICLE VII DEFAULTS........................................................................ 32
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES.................................. 34
8.1. Acceleration.................................................................... 34
8.2. Amendments...................................................................... 34
8.3. Preservation of Rights.......................................................... 35
ARTICLE IX GENERAL PROVISIONS.............................................................. 35
9.1. Survival of Representations..................................................... 35
9.2. Governmental Regulation......................................................... 35
9.3. Taxes........................................................................... 35
9.4. Headings........................................................................ 35
9.5. Entire Agreement................................................................ 35
9.6. Several Obligations; Benefits of this Agreement................................. 35
9.7. Expenses; Indemnification....................................................... 36
9.8. Numbers of Documents............................................................ 36
9.9. Accounting...................................................................... 36
9.10. Severability of Provisions...................................................... 36
9.11. Nonliability of Lenders......................................................... 36
9.12. CHOICE OF LAW................................................................... 37
9.13. CONSENT TO JURISDICTION......................................................... 37
9.14. Confidentiality................................................................. 37
9.15. Nonreliance..................................................................... 37
9.16. WAIVER OF JURY TRIAL............................................................ 37
9.17. Disclosure...................................................................... 38
ARTICLE X THE AGENT....................................................................... 38
10.1. Appointment..................................................................... 38
10.2. Powers.......................................................................... 38
10.3. General Immunity................................................................ 38
10.4. No Responsibility for Loans, Recitals, etc...................................... 38
10.5. Action on Instructions of Lenders............................................... 38
10.6. Employment of Agents and Counsel................................................ 39
10.7. Reliance on Documents; Counsel.................................................. 39
10.8. Agent's Reimbursement and Indemnification....................................... 39
10.9. Notice of Default............................................................... 39
10.10. Rights as a Lender.............................................................. 39
10.11. Lender Credit Decision.......................................................... 40
10.12. Successor Agent................................................................. 40
10.13. Agent's Fee..................................................................... 40
ARTICLE XI SETOFF; RATABLE PAYMENTS........................................................ 40
11.1. Setoff.......................................................................... 41
11.2. Ratable Payments................................................................ 41
</TABLE>
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ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS............................... 41
12.1. Successors and Assigns.......................................................... 41
12.2. Participations.................................................................. 41
12.2.1. Permitted Participants; Effect......................................... 41
12.2.2. Voting Rights.......................................................... 42
12.2.3. Benefit of Setoff...................................................... 42
12.3. Assignments..................................................................... 42
12.3.1. Permitted Assignments.................................................. 42
12.3.2. Effect; Effective Date................................................. 42
12.4. Dissemination of Information.................................................... 43
12.5. Tax Treatment................................................................... 43
ARTICLE XIII NOTICES......................................................................... 43
13.1. Giving Notice................................................................... 43
13.2. Change of Address............................................................... 43
ARTICLE XIV COUNTERPARTS.................................................................... 43
</TABLE>
(iv)
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Exhibit "A" - Note (Ratable Loan)
Exhibit "B" - Note (Competitive Bid Loan)
Exhibit "C" - Competitive Bid Quote Request
Exhibit "D" - Invitation for Competitive Bid Quotes
Exhibit "E" - Competitive Bid Quote
Exhibit "F" - Opinion
Exhibit "G" - Compliance Certificate
Schedule I to Compliance Certificate
Exhibit "H" - Assignment Agreement
Exhibit "I" - to Assignment Agreement
(Notice of Assignment)
Exhibit "II" - to Assignment Agreement (Consent and Release of the
Borrower and Agent)
Exhibit "I" - Transfer Instructions
Schedule "1" - Significant Subsidiaries
Schedule "2" - Insurance Licenses
Schedule "3" - Pricing Grid
(v)
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CREDIT AGREEMENT
This Agreement, dated as of October 24, 1996, is among Torchmark
Corporation, the Lenders and The First National Bank of Chicago, as Agent. The
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement:
"Absolute Rate" means, with respect to an Absolute Rate Loan made by a
given Lender for the relevant Absolute Rate Interest Period, the rate of
interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender
and accepted by the Borrower.
"Absolute Rate Advance" means a borrowing hereunder consisting of the
aggregate amount of the several Absolute Rate Loans made by some or all of the
Lenders to the Borrower at the same time and for the same Interest Period.
"Absolute Rate Auction" means a solicitation of Competitive Bid Quotes
setting forth Absolute Rates pursuant to Section 2.3.
"Absolute Rate Interest Period" means, with respect to an Absolute Rate
Advance, a period of not less than 30 and not more than 180 days commencing on a
Business Day selected by the Borrower pursuant to this Agreement. If such
Absolute Rate Interest Period would end on a day which is not a Business Day,
such Absolute Rate Interest Period shall end on the next succeeding Business
Day.
"Absolute Rate Loan" means a Loan which bears interest at the Absolute
Rate.
"Acquisition" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which the Borrower or any
of its Subsidiaries (i) acquires any going business or all or substantially all
of the assets of any firm, corporation or division thereof, whether through
purchase of assets, merger or otherwise or (ii) directly or indirectly acquires
(in one transaction or as the most recent transaction in a series of
transactions) at least a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of directors
(other than securities having such power only by reason of the happening of a
contingency) or a majority (by percentage or voting power) of the outstanding
partnership interests of a partnership.
"Advance" means a borrowing hereunder consisting of the aggregate amount of
the several Loans made by some or all of the Lenders to the Borrower on the same
Borrowing Date, of the same Type (or on the same interest basis in the case of
Competitive Bid Advances) and, when applicable, for the same Interest Period and
includes a Competitive Bid Advance.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 10% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the
<PAGE>
management or policies of the controlled Person, whether through ownership of
stock, by contract or otherwise.
"Agent" means The First National Bank of Chicago in its capacity as agent
for the Lenders pursuant to Article X, and not in its individual capacity as a
Lender, and any successor Agent appointed pursuant to Article X.
"Agent Balance Transaction" means one or more receivables sales
transactions with respect to receivables arising out of advances made by AIL to
insurance agents in connection with life insurance policies underwritten by AIL.
"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders, as reduced from time to time pursuant to the terms hereof.
"Agreement" means this credit agreement, as it may be amended, modified or
restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
those used in preparing the financial statements referred to in Section 5.4.
"AIL" means American Income Life Insurance Company, an Indiana insurance
company.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum
of Federal Funds Effective Rate for such day plus 1/2% per annum.
"Annual Statement" means the annual statutory financial statement of any
Insurance Subsidiary required to be filed with the insurance commissioner (or
similar authority) of its jurisdiction of incorporation, which statement shall
be in the form required by such Insurance Subsidiary's jurisdiction of
incorporation or, if no specific form is so required, in the form of financial
statements recommended by the NAIC to be used for filing annual statutory
financial statements and shall contain the type of information recommended by
the NAIC to be disclosed therein, together with all exhibits or schedules filed
therewith.
"Applicable Eurodollar Margin" means, at any time, the percentage
determined in accordance with the Pricing Grid at such time. The Applicable
Eurodollar Margin shall change as and when the Borrower Debt Rating changes.
The initial Applicable Eurodollar Margin shall be .165%.
"Applicable Facility Fee Percentage" means, at any time, the percentage
determined in accordance with the Pricing Grid at such time. The Applicable
Facility Fee Percentage shall change as and when the Borrower Debt Rating
changes. The initial Applicable Facility Fee Percentage shall be .06%.
"Article" means an article of this Agreement unless another document is
specifically referenced.
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"Authorized Officer" means any of the Chairman, Vice Chairman, President,
Chief Financial Officer, Chief Accounting Officer, Treasurer, any Vice President
or any Assistant Treasurer of the Borrower, acting singly.
"Borrower" means Torchmark Corporation, a Delaware corporation, and its
successors and assigns.
"Borrower Debt Rating" means the senior unsecured long term debt (without
credit enhancement) rating of the Borrower as determined by a rating agency
identified on the Pricing Grid.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in Chicago and New York for the conduct of substantially all
of their commercial lending activities.
"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Change" means (i) any change after the date of this Agreement in the Risk-
Based Capital Guidelines for banks or (ii) any adoption of or change in any
other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement which affects the amount of capital required or
expected to be maintained by any Lender or any Lending Installation or any
corporation controlling any Lender.
"Change in Control" means the acquisition by any Person, or two or more
Persons acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 20% or more of the outstanding shares of voting stock of the
Borrower.
"Closing Date" means October 24, 1996.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to make
Loans not exceeding the amount set forth opposite its signature below or as set
forth in any Notice of Assignment relating to any assignment that has become
effective pursuant to Section 12.3.2, as such amount may be modified from time
to time pursuant to the terms hereof.
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<PAGE>
"Competitive Bid Advance" means a borrowing hereunder consisting of the
aggregate amount of the several Competitive Bid Loans made by some or all of the
Lenders to the Borrower at the same time and for the same Interest Period.
"Competitive Bid Borrowing Notice" is defined in Section 2.3.6.
"Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute Rate
Loan, or both, as the case may be.
"Competitive Bid Margin" means the margin above or below the applicable
Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan, expressed as a
percentage (rounded to the nearest 1/100 of 1%) to be added or subtracted from
such Eurodollar Base Rate.
"Competitive Bid Note" means a promissory note in substantially the form of
Exhibit "B" hereto, with appropriate insertions, duly executed and delivered to
the Agent by the Borrower for the account of a Lender and payable to the order
of such Lender, including any amendment, modification, renewal or replacement of
such promissory note.
"Competitive Bid Quote" means a Competitive Bid Quote substantially in the
form of Exhibit "E" hereto completed and delivered by a Lender to the Agent in
accordance with Section 2.3.4.
"Competitive Bid Quote Request" means a Competitive Bid Quote Request
substantially in the form of Exhibit "C" hereto completed and delivered by the
Borrower to the Agent in accordance with Section 2.3.2.
"Condemnation" is defined in Section 7.8.
"Consolidated Adjusted Net Income" means, for any period of calculation,
Consolidated Net Income plus (to the extent deducted in determining Consolidated
Net Income) (i) the provision for taxes in respect of, or measured by, income or
excess profits and (ii) Consolidated Interest Expense, in each case calculated
for such period for the Borrower and its Subsidiaries on a consolidated basis in
accordance with Agreement Accounting Principles.
"Consolidated Capitalization" means, at any date of determination, the sum
of (i) Consolidated Net Worth as at such date plus (ii) Consolidated
Indebtedness as at such date.
"Consolidated Indebtedness" means the Indebtedness of the Borrower and its
Subsidiaries determined on a consolidated basis in accordance with Agreement
Accounting Principles.
"Consolidated Interest Expense" means, for any period of calculation,
interest expense, whether paid or accrued, of the Borrower and its Subsidiaries
calculated on a consolidated basis in accordance with Agreement Accounting
Principles.
"Consolidated Net Income" means, for any period of calculation, the net
income of the Borrower and the Subsidiaries calculated on a consolidated basis
in accordance with Agreement Accounting Principles consistently applied.
Page 4
<PAGE>
"Consolidated Net Worth" means, at any date of determination, the amount of
consolidated common and preferred shareholders' equity of the Borrower and its
Subsidiaries (including, without limitation, the Series A Preferred Securities),
determined as at such date in accordance with Agreement Accounting Principles;
provided, however, that the effect of the application of FAS 115 shall be
- -------- -------
excluded when computing Consolidated Net Worth.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or application for a Letter of Credit, but
excluding (i) the endorsement of instruments for deposit or collection in the
ordinary course of business, (ii) the Payment and Guarantee Agreement and (iii)
obligations arising in connection with the Agent Balance Transaction.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in Section 2.2.4.
"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest announced by First Chicago from time to time, changing when and
as said corporate base rate changes. The Corporate Base Rate is a reference rate
and does not necessarily represent the lowest or best rate of interest actually
charged to any customer. First Chicago may make commercial loans or other loans
at rates of interest at, above or below the Corporate Base Rate.
"Default" means an event described in Article VII.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means a Eurodollar Bid Rate Advance or a Eurodollar
Ratable Advance, or both, as the case may be.
"Eurodollar Auction" means a solicitation of Competitive Bid Quotes setting
forth Eurodollar Bid Rates pursuant to Section 2.3.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the
relevant Eurodollar Interest Period, the rate determined by the Agent to be the
rate at which deposits in U.S. dollars are offered by First Chicago to first-
class banks in the London interbank market at approximately 11 a.m. (London
time) two Business Days prior to the first day of such Eurodollar Interest
Period, in the approximate amount of First Chicago's relevant Eurodollar Ratable
Loan (or in the case of a Eurodollar Bid Rate
Page 5
<PAGE>
Advance, in an amount comparable to the amount of such Advance) and having a
maturity approximately equal to such Eurodollar Interest Period.
"Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate Loan
made by a given Lender for the relevant Eurodollar Interest Period, the sum of
(i) the Eurodollar Base Rate and (ii) the Competitive Bid Margin offered by such
Lender and accepted by the Borrower.
"Eurodollar Bid Rate Advance" means a Competitive Bid Advance which bears
interest at a Eurodollar Bid Rate.
"Eurodollar Bid Rate Loan" means a Loan which bears interest at the
Eurodollar Bid Rate.
"Eurodollar Interest Period" means, with respect to a Eurodollar Ratable
Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or six
months commencing on a Business Day selected by the Borrower pursuant to this
Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day
which corresponds numerically to such date one, two, three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Eurodollar Interest Period shall end on the last Business Day of such next,
second, third or sixth succeeding month. If a Eurodollar Interest Period would
otherwise end on a day which is not a Business Day, such Eurodollar Interest
Period shall end on the next succeeding Business Day, provided, however, that if
said next succeeding Business Day falls in a new month, such Eurodollar Interest
Period shall end on the immediately preceding Business Day.
"Eurodollar Loan" means a Eurodollar Ratable Loan or Eurodollar Bid Rate
Loan, or both, as the case may be.
"Eurodollar Ratable Advance" means an Advance which bears interest at a
Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3.
"Eurodollar Ratable Loan" means a Loan which bears interest at a Eurodollar
Rate requested by the Borrower pursuant to Section 2.2.3.
"Eurodollar Rate" means, with respect to a Eurodollar Ratable Advance for
the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the
Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by
(b) one minus the Reserve Requirement (expressed as a decimal) applicable to
such Eurodollar Interest Period, plus (ii) the Applicable Eurodollar Margin.
The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1%
if the rate is not such a multiple.
"Existing Credit Agreements" means (i) that certain 364 Day Credit
Agreement dated as of December 6, 1994 among the Borrower, First Chicago, as
agent, and the lenders party thereto, as amended and (ii) that certain 5 Year
Credit Agreement dated as of December 6, 1994 among the Borrower, First Chicago,
as agent, and the lenders party thereto.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day
Page 6
<PAGE>
is not a Business Day, for the immediately preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations at approximately 10
a.m. (Chicago time) on such day on such transactions received by the Agent from
three Federal funds brokers of recognized standing selected by the Agent in its
sole discretion.
"Financial Statements" is defined in Section 5.4.
"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.
"Floating Rate Advance" means an Advance which bears interest at the
Alternate Base Rate.
"Floating Rate Loan" means a Ratable Loan which bears interest at the
Alternate Base Rate.
"Governmental Authority" means the federal government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
including, without limitation, any board of insurance, insurance department or
insurance commissioner.
"Indebtedness" of a Person means, without duplication, such Person's (i)
obligations for borrowed money, (ii) obligations representing the deferred
purchase price of Property or services (excluding accounts payable arising in
the ordinary course of such Person's business payable on terms customary in the
trade and obligations of Insurance Subsidiaries arising under insurance or
annuity products), (iii) obligations, whether or not assumed, secured by Liens
or payable out of the proceeds or production from property now or hereafter
owned or acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or similar instruments, (v) Capitalized Lease Obligations, (vi) net
liabilities under interest rate swap, exchange or cap agreements, and (vii)
Contingent Obligations, but excluding any indebtedness of the Borrower arising
under or in connection with the Series A Preferred Securities Loan Agreement.
"Insurance Subsidiary" means any Subsidiary of the Borrower which is
engaged in the life, health or accident insurance business.
"Interest Period" means a Eurodollar Interest Period or an Absolute Rate
Interest Period.
"Investment" of a Person means any loan, advance (other than commission,
travel and similar advances to officers and employees made in the ordinary
course of business), extension of credit (other than accounts receivable arising
in the ordinary course of business on terms customary in the trade), deposit
account or contribution of capital by such Person to any other Person or any
investment in, or purchase or other acquisition of, the stock, partnership
interests, notes, debentures or other securities of any other Person made by
such Person.
"Invitation for Competitive Bid Quotes" means an Invitation for Competitive
Bid Quotes substantially in the form of Exhibit "D" hereto, completed and
delivered by the Agent to the Lenders in accordance with Section 2.3.3.
Page 7
<PAGE>
"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"License" means any license, certificate of authority, permit or other
authorization which is required to be obtained from the Governmental Authority
in connection with the operation, ownership or transaction of insurance
business.
"Lien" means any lien (statutory or other), security interest, mortgage,
pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement but excluding rights in agent balances which are sold in an
Agent Balance Transaction).
"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.
"Loan Documents" means this Agreement, the Notes and the other documents,
certificates and agreements contemplated hereby and executed by the Borrower in
favor of the Agent or any Lender.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), results of operations,
or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the rights
or remedies of the Agent or the Lenders thereunder.
"Modified Required Lenders" means Lenders in the aggregate having at least
75% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 75% of the aggregate
unpaid principal amount of the outstanding Advances.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissions and similar Governmental
Authorities of the various states of the United States of America toward the
promotion of uniformity in the practices of such Governmental Authorities.
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<PAGE>
"Notes" means, collectively, the Competitive Bid Notes and the Ratable
Notes; and "Note" means any one of the Notes.
"Notice of Assignment" is defined in Section 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of the Borrower to the Lenders or to any
Lender, the Agent or any indemnified party hereunder arising under the Loan
Documents.
"Participants" is defined in Section 12.2.1.
"Payment and Guarantee Agreement" means the Payment and Guarantee Agreement
dated October 11, 1994, issued by the Borrower for the benefit of the holders of
the Series A Preferred Securities, without giving effect to any amendments
thereto.
"Payment Date" means the last day of each March, June, September and
December.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Permitted Acquisition" means the Acquisition of any Person which has been
approved and recommended by the board of directors (or the functional equivalent
thereof) of the Person being acquired.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title IV
of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"Pricing Grid" means the pricing grid attached hereto as Schedule "3".
"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.
"Purchasers" is defined in Section 12.3.1.
"Ratable Advance" means a borrowing hereunder consisting of the aggregate
amount of the several Ratable Loans made by the Lenders to the Borrower at the
same time, of the same Type and for the same Interest Period.
"Ratable Borrowing Notice" is defined in Section 2.2.3.
"Ratable Loan" means a Loan made by a Lender pursuant to Section 2.2
hereof.
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"Ratable Note" means a promissory note in substantially the form of Exhibit
"A" hereto, duly executed and delivered to the Agent by the Borrower for the
account of each Lender and payable to the order of a Lender in the amount of
its' Commitment, including any amendment, modification, renewal or replacement
of such promissory note.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 66 2/3%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66 2/3% of the aggregate unpaid
principal amount of the outstanding Advances.
"Reserve Requirement" means, with respect to Eurodollar Interest Period,
the maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities .
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines
in effect in the United States on the date of this Agreement, and (ii) the
corresponding capital regulations promulgated by regulatory authorities outside
the United States implementing the July 1988 report of the Basle Committee on
Banking Regulation and Supervisory Practices Entitled "International Convergence
of Capital Measurements and Capital Standards," and any amendments to such
regulations adopted prior to the date of this Agreement.
"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) as of the Closing Date in the jurisdiction of
incorporation of such Insurance Subsidiary for the preparation of annual
statements and other financial reports by insurance companies of the same type
as such Insurance Subsidiary.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
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<PAGE>
"Series A Preferred Securities" means the 9.18% Preferred Securities,
Series A, issued by Torchmark Capital L.L.C. on October 11, 1994.
"Series A Preferred Securities Loan Agreement" means the Loan Agreement
dated as of October 11, 1994 between the Borrower and Torchmark Capital L.L.C.
entered into in connection with the Series A Preferred Securities, as in effect
on the date hereof.
"Significant Insurance Subsidiary" means any Significant Subsidiary which
is an Insurance Subsidiary.
"Significant Subsidiary" of a Person means a "significant subsidiary" as
defined in Rule 1-02(v) of Regulation S-X of the Securities and Exchange
Commission (17 CFR Part 210), but excluding Velasco. Unless otherwise expressly
provided, all references herein to a "Significant Subsidiary" shall mean a
Significant Subsidiary of the Borrower.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, association, joint venture, limited liability company or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the Borrower
and its Subsidiaries, Property which (i) represents more than 10% of the
consolidated assets of the Borrower and its Subsidiaries as would be shown in
the consolidated financial statements of the Borrower and its Subsidiaries as at
the beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 10% of the
consolidated net sales or of the consolidated net income of the Borrower and its
Subsidiaries as reflected in the financial statements referred to in clause (i)
above.
"Termination Date" means (i) October 23, 1997, as such date may be from
time to time extended pursuant to Section 2.17, or (ii) such earlier date on
------------
which the obligations of the Lenders to make Loans hereunder are terminated
pursuant to the terms of this Agreement.
"Transferee" is defined in Section 12.4.
"Type" means, with respect to any Advance, its nature as a Floating Rate
Advance, Eurodollar Advance or Absolute Rate Advance.
"Unfunded Liabilities" means the amount (if any) by which the present value
of all vested nonforfeitable benefits under all Single Employer Plans exceeds
the fair market value of all such Plan assets allocable to such benefits, all
determined as of the then most recent valuation date for such Plans.
Page 11
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"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.
"Velasco" means Velasco Gas Company, Ltd., a Texas limited partnership and
Wholly-Owned Subsidiary of the Borrower.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the
outstanding voting securities of which shall at the time be owned or controlled,
directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries
of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of
such Person, or (ii) any partnership, association, joint venture, limited
liability company or similar business organization 100% of the ownership
interests having ordinary voting power of which shall at the time be so owned or
controlled. Unless otherwise expressly provided, all references herein to a
"Wholly-Owned Subsidiary" shall mean a Wholly-Owned Subsidiary of the Borrower.
The foregoing definitions shall be equally applicable to both the singular
and plural forms of the defined terms.
ARTICLE II
THE FACILITY
------------
2.1. The Facility.
------------
2.1.1. Description of Facility. The Lenders hereby establish in
-----------------------
favor of the Borrower a revolving credit facility pursuant to which, and upon
the terms and subject to the conditions herein set out:
(i) each Lender severally agrees to make Ratable Loans to the Borrower
in accordance with Section 2.2 in amounts not to exceed in the aggregate at any
one time outstanding the amount of its Commitment less the amount of such
Lender's pro rata (relative to its Commitment amount) share of the outstanding
principal amount of all Competitive Bid Advances (regardless of which Lender or
Lenders made such Competitive Bid Advances) exclusive of Competitive Bid
Advances being repaid substantially contemporaneously with the making of any
such Ratable Loans; and
(ii) each Lender may, in its sole discretion, make bids to make
Competitive Bid Loans to the Borrower, and make such Loans, in accordance with
Section 2.3.
2.1.2. Facility Amount. In no event may the aggregate principal
---------------
amount of all outstanding Advances (including both the Ratable Advances and the
Competitive Bid Advances) at any time exceed the Aggregate Commitment.
2.1.3. Availability of Facility. Subject to the terms hereof, such
------------------------
facility is available from the date hereof to the Termination Date. Subject to
the terms of this Agreement, the Borrower may borrow, repay and reborrow
Advances at any time prior to the Termination Date. Any outstanding Advances
and all other unpaid Obligations shall be paid in full by the Borrower on the
Termination Date.
Page 12
<PAGE>
2.2. Ratable Advances.
----------------
2.2.1. Ratable Advances. Each Ratable Advance hereunder shall
----------------
consist of borrowings made from the several Lenders ratably in proportion to the
amounts of their respective Commitments. The Borrower's obligation to pay the
principal of, and interest on, the Ratable Advances shall be evidenced by the
Ratable Notes. Although the Ratable Notes shall be dated the Closing Date,
interest in respect thereof shall be payable only for the periods during which
the Loans evidenced thereby are outstanding and, although the stated amount of
each Ratable Note shall be equal to the applicable Lender's Commitment, each
Ratable Note shall be enforceable, with respect to the Borrower's obligation to
pay the principal amount thereof, only to the extent of the unpaid principal
amount of the Ratable Loans at the time evidenced thereby.
2.2.2. Ratable Advance Rate Options. The Ratable Advances may be
----------------------------
Floating Rate Advances or Eurodollar Ratable Advances, or a combination thereof,
selected by the Borrower in accordance with Section 2.2.3 or 2.2.4. No Ratable
Advance may mature after, or have an Interest Period which extends beyond, the
Termination Date.
2.2.3. Method of Selecting Types and Interest Periods for Ratable
----------------------------------------------------------
Advances. The Borrower shall select the Type of each Ratable Advance and, in
- --------
the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period
applicable to such Ratable Advance from time to time; provided, however, that
-------- -------
for a period of at least three Business Days after the initial Advances the
Borrower shall maintain all Ratable Advances as Floating Rate Advances. The
Borrower shall give the Agent irrevocable notice (a "Ratable Borrowing Notice")
not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each Floating
Rate Advance and three Business Days before the Borrowing Date for each
Eurodollar Ratable Advance. Notwithstanding the foregoing, a Ratable Borrowing
Notice for a Floating Rate Advance may be given not later than 15 minutes after
the time which the Borrower is required to reject one or more bids offered in
connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Ratable
Borrowing Notice for a Eurodollar Ratable Advance may be given not later than 15
minutes after the time the Borrower is required to reject one or more bids
offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. A
Ratable Borrowing Notice shall specify:
(i) the Borrowing Date, which shall be a Business Day, of such Ratable
Advance;
(ii) the aggregate amount of such Ratable Advance, which, when added
to all outstanding Ratable Advances and Competitive Bid Advances and after
giving effect to the repayment of any such outstanding Advances out of the
proceeds of the requested Ratable Advance, shall not exceed the Aggregate
Commitment;
(iii) the Type of Advance selected; and
(iv) in the case of each Eurodollar Ratable Advance, the Eurodollar
Interest Period applicable thereto (which may not end after the Termination
Date).
2.2.4. Conversion and Continuation of Outstanding Ratable Advances.
-----------------------------------------------------------
Floating Rate Advances shall continue as Floating Rate Advances unless and until
such Floating Rate Advances are
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<PAGE>
converted into Eurodollar Ratable Advances. Each Eurodollar Ratable Advance
shall continue as a Eurodollar Ratable Advance until the end of the then
applicable Eurodollar Interest Period therefor, at which time such Eurodollar
Ratable Advance shall be automatically converted into a Floating Rate Advance
unless the Borrower shall have given the Agent a Conversion/Continuation Notice
requesting that, at the end of such Eurodollar Interest Period, such Eurodollar
Ratable Advance continue as a Eurodollar Ratable Advance for the same or another
Eurodollar Interest Period. Subject to the terms of Section 2.6, the Borrower
may elect from time to time to convert all or any part of a Ratable Advance of
any Type into any other Type or Types of Ratable Advances; provided that any
conversion of any Eurodollar Ratable Advance shall be made on, and only on, the
last day of the Eurodollar Interest Period applicable thereto. The Borrower
shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of
each conversion of a Ratable Advance or continuation of a Eurodollar Ratable
Advance not later than 10:00 a.m. (Chicago time) at least three Business Days,
in the case of a conversion into or continuation of a Eurodollar Ratable
Advance, prior to the date of the requested conversion or continuation,
specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation;
(ii) the aggregate amount and Type of Ratable Advance which is to be
converted or continued; and
(iii) the amount and Type(s) of Ratable Advance(s) into which such
Ratable Advance is to be converted or continued and, in the case of a conversion
into or continuation of an Eurodollar Ratable Advance, the duration of the
Eurodollar Interest Period applicable thereto.
2.3. Competitive Bid Advances.
------------------------
2.3.1. Competitive Bid Option. In addition to Ratable Advances
----------------------
pursuant to Section 2.2, but subject to the terms and conditions of this
Agreement (including, without limitation, the limitation set forth in Section
2.1.2 as to the maximum aggregate principal amount of all outstanding Advances
hereunder), the Borrower may, as set forth in this Section 2.3, request the
Lenders, prior to the Termination Date, to make offers to make Competitive Bid
Advances to the Borrower. Each Lender may, but shall have no obligation to,
make such offers and the Borrower may, but shall have no obligation to, accept
any such offers in the manner set forth in this Section 2.3. The Borrower's
obligation to pay the principal of, and interest on, the Competitive Bid
Advances shall be evidenced by the Competitive Bid Notes. Although the
Competitive Bid Notes shall be dated the Closing Date, interest in respect
thereof shall be payable only for the periods during which the Loans evidenced
thereby are outstanding.
2.3.2. Competitive Bid Quote Request. When the Borrower wishes to
-----------------------------
request offers to make Competitive Bid Loans under this Section 2.3, it shall
transmit to the Agent by telex or telecopy a Competitive Bid Quote Request
substantially in the form of Exhibit "C" hereto so as to be received no later
than (i) 10:00 a.m. (Chicago time) at least four Business Days prior to the
Borrowing Date proposed therein, in the case of a Eurodollar Auction or (ii)
9:00 a.m. (Chicago time) at least one Business Day prior to the Borrowing Date
proposed therein, in the case of an Absolute Rate Auction specifying:
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<PAGE>
(i) the proposed Borrowing Date, which shall be a Business Day, for
the proposed Competitive Bid Advance;
(ii) the aggregate principal amount of such Competitive Bid Advance;
(iii) whether the Competitive Bid Quotes requested are to set forth a
Eurodollar Bid Rate, an Absolute Rate, or both; and
(iv) the Interest Period applicable thereto (which may not end after
the Termination Date).
The Borrower may request offers to make Competitive Bid Loans for more than one
Interest Period in a single Competitive Bid Quote Request. No Competitive Bid
Quote Request shall be given within 5 Business Days (or such other number of
days as the Borrower and the Agent may agree) of any other Competitive Bid Quote
Request. A Competitive Bid Quote Request that does not conform substantially to
the format of Exhibit "C" hereto shall be rejected, and the Agent shall promptly
notify the Borrower of such rejection by telex or telecopy.
2.3.3. Invitation for Competitive Bid Quotes. Promptly and in any
-------------------------------------
event before the close of business on the same Business Day of receipt of a
Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2,
the Agent shall send to each of the Lenders by telex or telecopy an Invitation
for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto,
which shall constitute an invitation by the Borrower to each Lender to submit
Competitive Bid Quotes offering to make the Competitive Bid Loans to which such
Competitive Bid Quote Request relates in accordance with this Section 2.3.
2.3.4. Submission and Contents of Competitive Bid Quotes.
-------------------------------------------------
(i) Each Lender may, in its sole discretion, submit a Competitive Bid
Quote containing an offer or offers to make Competitive Bid Loans in response to
any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must
comply with the requirements of this Section 2.3.4 and must be submitted to the
Agent by telex or telecopy at its offices specified in or pursuant to Article
XIII not later than (a) 9:00 a.m. (Chicago time) at least three Business Days
prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (b)
9:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an
Absolute Rate Auction (or, in either case upon reasonable prior notice to the
Lenders, such other time and date as the Borrower and the Agent may agree);
provided that Competitive Bid Quotes submitted by First Chicago may only be
- --------
submitted if the Agent or First Chicago notifies the Borrower of the terms of
the offer or offers contained therein not later than 15 minutes prior to the
latest time at which the relevant Competitive Bid Quotes must be submitted by
the other Lenders. Subject to Articles IV and VIII, any Competitive Bid Quote
so made shall be irrevocable except with the written consent of the Agent given
on the instructions of the Borrower.
(ii) Each Competitive Bid Quote shall be in substantially the form of
Exhibit "E" hereto and shall in any case specify:
Page 15
<PAGE>
(a) the proposed Borrowing Date, which shall be the same as that set
forth in the applicable Invitation for Competitive Bid Quotes;
(b) the principal amount of the Competitive Bid Loan for which each
such offer is being made, which principal amount (1) may be greater than, less
than or equal to the Commitment of the quoting Lender, (2) must be at least
$10,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the
principal amount of Competitive Bid Loans for which offers were requested;
(c) in the case of a Eurodollar Auction, the Competitive Bid Margin
offered for each such Competitive Bid Loan;
(d) the minimum amount, if any, of the Competitive Bid Loan which may
be accepted by the Borrower;
(e) in the case of an Absolute Rate Auction, the Absolute Rate offered
for each such Competitive Bid Loan; and
(f) the identity of the quoting Lender.
(iii) The Agent shall reject any Competitive Bid Quote that:
(a) is not substantially in the form of Exhibit "E" hereto or does not
specify all of the information required by Section 2.3.4(ii);
(b) contains qualifying, conditional or similar language, other than
any such language contained in Exhibit "E" hereto;
(c) proposes terms other than or in addition to those set forth in the
applicable Invitation for Competitive Bid Quotes; or
(d) arrives after the time set forth in Section 2.3.4(i).
If any Competitive Bid Quote shall be rejected pursuant to this Section
2.3.4(iii), then the Agent shall notify the relevant Lender of such rejection
promptly.
2.3.5. Notice to Borrower. The Agent shall promptly notify the
------------------
Borrower of the terms (i) of any Competitive Bid Quote submitted by a Lender
that is in accordance with Section 2.3.4 and (ii) of any Competitive Bid Quote
that amends, modifies or is otherwise inconsistent with a previous Competitive
Bid Quote submitted by such Lender with respect to the same Competitive Bid
Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded
by the Agent unless such subsequent Competitive Bid Quote specifically states
that it is submitted solely to correct a manifest error in such former
Competitive Bid Quote. The Agent's notice to the Borrower shall specify the
aggregate principal amount of Competitive Bid Loans for which offers have been
received for each Interest Period specified in the related Competitive Bid Quote
Request and the respective principal amounts and Eurodollar Bid Rates or
Absolute Rates, as the case may be, so offered.
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<PAGE>
2.3.6. Acceptance and Notice by Borrower. Not later than (i) 10:00
---------------------------------
a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing
Date, in the case of a Eurodollar Auction or (ii) 10:00 a.m. (Chicago time) on
the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in
either case upon reasonable prior notice to the Lenders, such other time and
date as the Borrower and the Agent may agree), the Borrower shall notify the
Agent of its acceptance or rejection of the offers so notified to it pursuant to
Section 2.3.5; provided, however, that the failure by the Borrower to give such
-------- -------
notice to the Agent shall be deemed to be a rejection of all such offers. In
the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall
specify the aggregate principal amount of offers for each Interest Period that
are accepted. The Borrower may accept any Competitive Bid Quote in whole or in
part (subject to the terms of Section 2.3.4(ii)(d)); provided that:
--------
(i) the aggregate principal amount of each Competitive Bid Advance may
not exceed the applicable amount set forth in the related Competitive Bid Quote
Request,
(ii) acceptance of offers may only be made on the basis of ascending
Eurodollar Bid Rates or Absolute Rates, as the case may be, and
(iii) the Borrower may not accept any offer that is described in
Section 2.3.4(iii) or that otherwise fails to comply with the requirements of
this Agreement.
2.3.7. Allocation by Agent. If offers are made by two or more
-------------------
Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
offers are accepted for the related Interest Period, the principal amount of
Competitive Bid Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Lenders as nearly as possible (in such
multiples, not greater than $1,000,000, as the Agent may deem appropriate) in
proportion to the aggregate principal amount of such offers; provided, however,
-------- -------
that no Lender shall be allocated a portion of any Competitive Bid Advance which
is less than the minimum amount which such Lender has indicated that it is
willing to accept. Allocations by the Agent of the amounts of Competitive Bid
Loans shall be conclusive in the absence of manifest error. The Agent shall
promptly, but in any event on the same Business Day, notify each Lender of its
receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount
of such Competitive Bid Advance allocated to each participating Lender.
2.4. Availability of Funds. Not later than noon (Chicago time) on each
---------------------
Borrowing Date, each Lender (or in the case of a Competitive Bid Advance, each
Lender making a portion of such Advance) shall make available its Loan or Loans,
in funds immediately available in Chicago to the Agent at its address specified
pursuant to Article XIII. The Agent will make the funds so received from the
Lenders available to the Borrower at the Agent's aforesaid address.
2.5. Facility Fee; Reductions in Aggregate Commitment. The
------------------------------------------------
Borrower agrees to pay to the Agent for the ratable account of each Lender a
facility fee equal to the Applicable Facility Fee Percentage times such Lender's
Commitment from the date hereof to and including the Termination Date applicable
to such Lender, payable in arrears on each Payment Date hereafter and on the
Termination Date. The Borrower may permanently reduce the Aggregate Commitment
in whole, or in part ratably among the Lenders in integral multiples of
$25,000,000, upon at least three Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction; provided, however,
that the amount
Page 17
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of the Aggregate Commitment may not be reduced below the aggregate principal
amount of the outstanding Advances. All accrued facility fees shall be payable
on the effective date of any termination of the obligations of the Lenders to
make Loans hereunder.
2.6. Minimum Amount of Each Advance. Each Advance shall be in the
------------------------------
minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess
thereof), provided, however, that any Floating Rate Advance may be in the amount
of the unused Aggregate Commitment.
2.7. Optional Principal Payments. The Borrower may from time to time
---------------------------
pay, without penalty or premium, all outstanding Advances, or, in a minimum
aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess
thereof, any portion of the outstanding Advances upon two Business Days' prior
notice to the Agent. Any prepayment of a Eurodollar Advance or Absolute Rate
Advance prior to the last day of the applicable Eurodollar Interest Period shall
be subject to the indemnity provisions of Section 3.4.
2.8. Changes in Interest Rate, etc. Each Floating Rate Advance shall
------------------------------
bear interest at the Alternate Base Rate from and including the date such
Advance is made or is converted from a Ratable Eurodollar Advance into a
Floating Rate Advance pursuant to Section 2.2.4 to but excluding the date it
becomes due or is converted into a Eurodollar Ratable Advance pursuant to
Section 2.2.4 hereof, at a rate per annum equal to the Floating Rate for such
day. Changes in the rate of interest on that portion of any Advance maintained
as a Floating Rate Advance will take effect simultaneously with each change in
the Alternate Base Rate. Each Eurodollar Advance and Absolute Rate Advance
shall bear interest from and including the first day of the Interest Period
applicable thereto to (but not including) the last day of such Eurodollar
Interest Period at the interest rate determined as applicable to such Eurodollar
Advance or Absolute Rate Advance. No Interest Period may end after the
Termination Date.
2.9. Rates Applicable After Default. Notwithstanding anything to the
------------------------------
contrary contained in Section 2.2.3 or 2.2.4, no Advance may be made as,
converted into or continued as a Eurodollar Ratable Advance (except with the
consent of the Required Lenders) when any Default or Unmatured Default has
occurred and is continuing. During the continuance of a Default, the Required
Lenders may, at their option, by notice to the Borrower (which notice may be
revoked at the option of the Required Lenders notwithstanding any provision of
Section 8.2 requiring unanimous consent of the Lenders to changes in interest
rates), declare that (i) each Eurodollar Advance and Absolute Rate Advance shall
bear interest for the remainder of the applicable Interest Period at the
Eurodollar Rate or Absolute Rate otherwise applicable to such Interest Period
plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a
rate per annum equal to the Alternate Base Rate plus 2% per annum.
2.10. Method of Payment. All payments of the Obligations hereunder shall
-----------------
be made, without setoff, deduction, or counterclaim, in immediately available
funds to the Agent at the Agent's address specified pursuant to Article XIII, or
at any other Lending Installation of the Agent specified in writing by the Agent
to the Borrower, by 12:00 noon (local time) on the date when due and shall be
applied ratably by the Agent (i) first, ratably among the Lenders with respect
to any principal and interest due in connection with Ratable Advances, (ii)
second, after all amounts described in clause (i) have been satisfied, ratably
among those Lenders for whom any payment of principal and interest is due in
connection with any Competitive Bid Advances and (iii) third, after all amounts
described in clauses (i) and (ii) have been satisfied, ratably to any other
Obligations then due. Each payment delivered to the
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<PAGE>
Agent for the account of any Lender shall be delivered by the Agent to such
Lender in the same type of funds that the Agent received at its address
specified pursuant to Article XIII or at any Lending Installation specified in a
notice received by the Agent from such Lender. If such payment is received by
the Agent by 1:00 p.m. (Chicago time) such delivery to the Lenders shall be made
on the same day and if received thereafter shall be made on the next succeeding
Business Day. The Agent is hereby authorized to charge the account of the
Borrower maintained with First Chicago for each payment of principal, interest
and fees as it becomes due hereunder.
2.11. Notes; Telephonic Notices. Each Lender is hereby authorized to
-------------------------
record the principal amount of each of its Loans and each repayment on the
schedule attached to its Note, provided, however, that neither the failure to so
record nor any error in such recordation shall affect the Borrower's obligations
under such Note. The Borrower hereby authorizes the Lenders and the Agent to
extend, convert or continue Advances, effect selections of Types of Advances,
submit Competitive Bid Quotes and to transfer funds based on telephonic notices
made by any one of the Chairman, Vice Chairman, Treasurer, the Chief Accounting
Officer, any Vice-President or any Assistant Treasurer of the Borrower or any
person who identifies himself or herself to be any such officer; provided that,
without written notice from the Borrower, no proceeds of any Advance shall be
transferred based upon telephonic notice to any bank account other than a bank
account maintained by the Borrower. The Borrower agrees to deliver promptly to
the Agent a written confirmation, if such confirmation is requested by the Agent
or any Lender, of each telephonic notice signed by an Authorized Officer. If
the written confirmation differs in any material respect from the action taken
by the Agent and the Lenders, the records of the Agent and the Lenders shall
govern absent manifest error.
2.12. Interest Payment Dates; Interest and Fee Basis. Interest accrued
----------------------------------------------
on each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof, on any date on which
such Floating Rate Advance is prepaid, whether due to acceleration or otherwise,
and at maturity. Interest accrued on that portion of the outstanding principal
amount of any Floating Rate Advance converted into a Eurodollar Ratable Advance
on a day other than a Payment Date shall be payable on the date of conversion.
Interest accrued on each Eurodollar Advance or Absolute Rate Advance shall be
payable on the last day of its applicable Interest Period, on any date on which
the Eurodollar Advance or Absolute Rate Advance is prepaid, whether by
acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar
Advance or Absolute Rate Advance having an Interest Period longer than three
months shall also be payable on the last day of each three-month interval during
such Interest Period. Interest and facility fees shall be calculated for actual
days elapsed on the basis of a 360-day year. Interest shall be payable for the
day an Advance is made but not for the day of any payment on the amount paid if
payment is received prior to 12:00 noon (local time) at the place of payment.
If any payment of principal of or interest on an Advance shall become due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.
2.13. Notification of Advances, Interest Rates, Prepayments and
---------------------------------------------------------
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
- ---------------------
each Lender of the contents of each Aggregate Commitment reduction notice,
Ratable Borrowing Notice, Conversion/Continuation Notice, Invitation for
Competitive Quotes and repayment notice received by it hereunder. The Agent
will notify each Lender
Page 19
<PAGE>
of the interest rate applicable to each Eurodollar Advance promptly upon
determination of such interest rate and will give each Lender prompt notice of
each change in the Alternate Base Rate.
2.14. Lending Installations. Each Lender may book its Loans at any
---------------------
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.15. Non-Receipt of Funds by the Agent. Unless the Borrower or a
---------------------------------
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption.
If such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Agent, the recipient of such payment shall, on demand by the
Agent, repay to the Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to (i) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (ii) in the case of payment by the
Borrower, the interest rate applicable to the relevant Loan.
2.16. Withholding Tax Exemption. At least five Business Days prior to the
-------------------------
first date on which interest or fees are payable hereunder for the account of
any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrower and the Agent two duly completed copies of United States Internal
Revenue Service Form 1001 or 4224, certifying in either case that such Lender is
entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes. Each Lender
which so delivers a Form 1001 or 4224 further undertakes to deliver to each of
the Borrower and the Agent two additional copies of such form (or a successor
form) on or before the date that such form expires (currently, three successive
calendar years for Form 1001 and one calendar year for Form 4224) or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent forms so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrower or the Agent, in
each case certifying that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes, unless an event (including without limitation any change
in treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender advises the Borrower and the Agent that
it is not capable of receiving payments without any deduction or withholding of
United States federal income tax.
2.17. Extension of Termination Date. The Borrower may request an
-----------------------------
extension of the Termination Date by submitting a request for an extension to
the Agent (an "Extension Request") no more than 60 days, but no less than 40
days, prior to the then effective Termination Date. Each extension effected
pursuant to this Section 2.17 shall commence on the then effective Termination
------------
Date (the "Extension Date"). The
Page 20
<PAGE>
Extension Request must specify the new Termination Date requested by the
Borrower, which date shall be no more than 364 days (the "Extension Period")
after the Extension Date, including the Extension Date as one of the days in the
calculation of the days elapsed. Promptly upon receipt of an Extension Request,
the Agent shall notify each Lender of the contents thereof and shall request
each Lender to approve the Extension Request. Each Lender approving the
Extension Request shall deliver its written consent to the Agent no earlier than
30 days prior to the then effective Termination Date and no later than 30 days
after receipt of the Extension Request. Any consent delivered by a Lender prior
to such response date may be revoked prior to the Extension Date by the Lender
giving written notice of such revocation to the Agent before the Extension Date.
If the consent of the Required Lenders is received by the Agent and remains in
effect on the Extension Date, the new Termination Date specified in the
Extension Request shall become effective on the Extension Date as to such
consenting Lenders only (and not as to any Lender which has not consented to
such extension) and the Agent shall promptly notify the Borrower and each
consenting Lender of the new Termination Date. Notwithstanding anything
contained in this Agreement to the contrary, (a) all Obligations owing to the
non-extending Lenders shall be due and payable on the Termination Date without
giving effect to any requested extension, (b) the Aggregate Commitment as of the
commencement of the Extension Period shall be reduced to an amount equal to the
sum of the Commitments of the Lenders ultimately granting the Extension Request,
and (c) each Lender may, in its sole discretion, grant or deny its consent with
respect to any proposed extension of the Termination Date. Any Lender not
granting the Extension Request shall, if the Borrower has selected a "Purchaser"
(as defined in Section 12.3.1) for such Lender reasonably acceptable to the
--------------
Agent prior to the Extension Date, promptly assign to such Purchaser its rights
and obligations under the Loan Documents in respect of all or that portion of
such Lender's Commitment as such Purchaser is willing to accept, all in
accordance with Section 12.3.
------------
ARTICLE III
CHANGE IN CIRCUMSTANCES
-----------------------
3.1. Yield Protection. If, after the date hereof, in connection with a
----------------
Eurodollar Loan the adoption of or any change in any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether or
not having the force of law), or any change in the interpretation or
administration thereof, or the compliance of any Lender therewith,
(i) subjects any Lender or any applicable Lending Installation to any
tax, duty, charge or withholding on or from payments due from the Borrower
(excluding federal taxation of the overall net income of any Lender or
applicable Lending Installation imposed by the jurisdiction in which such Lender
or Lending Installation is incorporated or has its principal place of business),
or changes the basis of taxation of payments to any Lender or Lending
Installation in respect of its Loans or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, any Lender or any
applicable Lending Installation (other than reserves and assessments taken into
account in determining the interest rate applicable to Eurodollar Advances), or
Page 21
<PAGE>
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making, funding
or maintaining Loans or reduces any amount receivable by any Lender or any
applicable Lending Installation in connection with Loans, or requires any Lender
or any applicable Lending Installation to make any payment calculated by
reference to the amount of Loans held or interest received by it, by an amount
deemed material by such Lender,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.
3.2. Changes in Capital Adequacy Regulations. If a Lender determines the
---------------------------------------
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within 15 days of demand by such
Lender, the Borrower shall pay such Lender the amount necessary to compensate
for any shortfall in the rate of return on the portion of such increased capital
which such Lender determines is attributable to this Agreement, its Loans or its
obligation to make Loans hereunder (after taking into account such Lender's
policies as to capital adequacy).
3.3. Availability of Types of Advances. If any Lender determines that
---------------------------------
maintenance of any of its Eurodollar Loans at a suitable Lending Installation
would violate any applicable law, rule, regulation or directive, whether or not
having the force of law, the Agent shall suspend the availability of the
affected Type of Advance and require any Eurodollar Advances to be repaid or
converted into a Floating Rate Advance within five days after Borrower's receipt
of notice by such Lender; or if the Required Lenders determine that (i) deposits
of a type or maturity appropriate to match fund Eurodollar Advances are not
available, or (ii) an interest rate applicable to an Eurodollar Advance does not
accurately reflect the cost of making a Eurodollar Advance of such Type, then,
the Agent shall suspend the availability of Eurodollar Advances with respect to
any Eurodollar Advances made after the date of any such determination.
3.4. Funding Indemnification. If any payment of a Eurodollar Advance
-----------------------
occurs on a date which is not the last day of the applicable Eurodollar Interest
Period, whether because of acceleration, prepayment or otherwise, or a
Eurodollar Advance is not made on the date specified by the Borrower for any
reason other than default by the Lenders, the Borrower will indemnify each
Lender for any loss or cost incurred by it resulting therefrom, including,
without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Eurodollar Advance.
3.5. Lender Statements; Survival of Indemnity. To the extent reasonably
----------------------------------------
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to such
Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of
Advance under Section 3.3, so long as such designation is not disadvantageous to
such Lender. Each Lender shall deliver a written statement of such Lender to
the Borrower (with a copy to the Agent) as to the amount due, if any, under
Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable
detail the calculations upon which such Lender determined such amount and shall
be final, conclusive and binding on the Borrower in the absence of manifest
error. Determination of amounts payable under such Sections in connection with
a Eurodollar Loan shall be calculated as though each Lender funded its
Eurodollar Loan through the purchase of a deposit of the type and maturity
corresponding to the deposit
Page 22
<PAGE>
used as a reference in determining the Eurodollar Rate applicable to such Loan,
whether in fact that is the case or not. Unless otherwise provided herein, the
amount specified in the written statement of any Lender shall be payable on
demand after receipt by the Borrower of the written statement. The obligations
of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the
Obligations and termination of this Agreement.
3.6. Right to Substitute Lender. Any Lender claiming any additional
--------------------------
amounts payable pursuant to Section 3.1 or 3.2 materially in excess of those
being charged by other Lenders or unable to make a Eurodollar Advance available
in accordance with Section 3.3, shall, so long as no Default or Unmatured
Default has occurred and is continuing, upon the written request of the Borrower
delivered to such Lender and the Agent, assign, pursuant to and in accordance
with the provisions of Section 12.3, all of its rights and obligations under
this Agreement and under the Loan Documents to another Lender or to a commercial
bank, other financial institution, commercial finance company or other business
lender selected by the Borrower and reasonably acceptable to the Agent in
consideration for (a) the payment by such assignee to such assigning Lender of
the principal of, and interest accrued and unpaid to the date of such assignment
on, the Notes held by such assigning Lender, (b) the payment by the Borrower to
such assigning Lender of any and all other amounts owing to such assigning
Lender under any provision of this Agreement accrued and unpaid to the date of
such assignment and (c) the Borrower's release of such assigning Lender from any
further obligation or liability under this Agreement and the Loan Documents.
Notwithstanding anything to the contrary contained in this Section 3.6, in no
-----------
event shall the replacement of any Lender result in a decrease or reallocation
of the aggregate Commitments without the prior written consent of the remaining
Lenders.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1. Initial Advance. The Lenders shall not be required to make the
---------------
initial Advance hereunder unless the Borrower has furnished to the Agent with
sufficient copies for the Lenders:
(i) Copies of the articles of incorporation of the Borrower, together
with all amendments thereto, both certified by the appropriate governmental
officer in its jurisdiction of incorporation, together with a good standing
certificate issued by the Secretary of State of the jurisdiction of its
incorporation and such other jurisdictions as shall be requested by the Agent.
(ii) Copies, certified by the Secretary or an Assistant Secretary of
the Borrower, of its by-laws and Board of Directors' resolutions authorizing the
execution of the Loan Documents.
(iii) An incumbency certificate, executed by the Secretary or an
Assistant Secretary of the Borrower, which shall identify by name and title and
bear the signature of the officers of the Borrower authorized to sign the Loan
Documents and to make borrowings hereunder, upon which certificate the Agent and
the Lenders shall be entitled to rely until informed of any change in writing by
the Borrower.
Page 23
<PAGE>
(iv) A certificate, signed by the Chief Financial Officer or the
Treasurer of the Borrower, stating that on the date hereof (a) no Default or
Unmatured Default has occurred and is continuing and (b) each of the
representations and warranties set forth in Article V of this Agreement is true
and correct as of such date.
(v) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit "F" hereto.
(vi) Notes payable to the order of each of the Lenders.
(vii) Written money transfer instructions, in substantially the form
of Exhibit "I" hereto, addressed to the Agent and signed by an Authorized
Officer, together with such other related money transfer authorizations as the
Agent may have reasonably requested.
(viii) The Existing Credit Agreements shall have been terminated and
all amounts owing thereunder shall have been paid (or shall contemporaneously be
paid) in full.
(ix) Such other documents as any Lender or its counsel may have
reasonably requested.
4.2. Each Advance. The Lenders shall not be required to make any
------------
Advance, unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V (other
than Section 5.4 and 5.5) are true and correct as of such Borrowing Date except
for changes in the Schedules hereto reflecting transactions permitted by this
Agreement.
Each Ratable Borrowing Notice and Competitive Bid Quote Request with
respect to each such Advance shall constitute a representation and warranty by
the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been
satisfied. Any Lender may require a duly completed compliance certificate in
substantially the form of Exhibit "G" hereto as a condition to making an
Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lenders that:
5.1. Corporate Existence and Standing. Each of the Borrower and its
--------------------------------
Significant Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation and has
all requisite authority to conduct its business in each jurisdiction in which
its business is conducted.
Page 24
<PAGE>
5.2. Authorization and Validity. The Borrower has the corporate power
--------------------------
and authority and legal right to execute and deliver the Loan Documents and to
perform its obligations thereunder. The execution and delivery by the Borrower
of the Loan Documents and the performance of its obligations thereunder have
been duly authorized by proper corporate proceedings, and the Loan Documents
constitute legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally.
5.3. No Conflict; Government Consent. Neither the execution and delivery
-------------------------------
by the Borrower of the Loan Documents, nor the consummation of the transactions
therein contemplated, nor compliance with the provisions thereof will violate
any law, rule, regulation, order, writ, judgment, injunction, decree or award
binding on the Borrower or any of its Subsidiaries or the Borrower's or any of
its Subsidiaries' articles of incorporation or by-laws or the provisions of any
indenture, instrument or agreement to which the Borrower or any of its
Subsidiaries is a party or is subject, or by which it, or its Property, is
bound, or conflict with or constitute a default thereunder, or result in the
creation or imposition of any Lien in, of or on the Property of the Borrower or
any of its Subsidiaries pursuant to the terms of any such indenture, instrument
or agreement, other than such violations, conflicts or defaults which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect. No order, consent, approval, license, authorization,
or validation of, or filing, recording or registration with, or exemption by,
any governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with the execution, delivery
and performance of, or the legality, validity, binding effect or enforceability
of, any of the Loan Documents.
5.4. Financial Statements. The December 31, 1995 audited consolidated
--------------------
financial statements of the Borrower and its Subsidiaries and the June 30, 1996
unaudited consolidated financial statements of the Borrower and its
Subsidiaries heretofore delivered to the Lenders (the "Financial Statements")
were prepared in accordance with generally accepted accounting principles in
effect on the date such statements were prepared and fairly present the
consolidated financial condition and operations of the Borrower and its
Subsidiaries at such date and the consolidated results of their operations for
the period then ended.
5.5. Material Adverse Change. Since December 31, 1995, there has been no
-----------------------
change in the business, Property, prospects, condition (financial or otherwise)
or results of operations of the Borrower and its Subsidiaries which could
reasonably be expected to have a Material Adverse Effect.
5.6. Taxes. The Borrower and its Subsidiaries have filed all United
-----
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith and as to which, in the good
faith judgment of the Borrower, adequate reserves have been provided. The
United States income tax returns of the Borrower and its Subsidiaries have been
audited by the Internal Revenue Service through the fiscal year ended December
31, 1989. No tax liens have been filed and no claims against the Borrower or
its Subsidiaries are being asserted with respect to any such taxes except claims
being contested in good faith and as to which, in the good faith judgment of the
Borrower, adequate reserves have been provided. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate in the good faith judgment of
the Borrower.
Page 25
<PAGE>
5.7. Litigation and Contingent Obligations. There is no litigation,
-------------------------------------
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect (after giving effect to reserves which have been
provided with respect thereto on the books of the Borrower and its
Subsidiaries). As of the date hereof, the Borrower has no material Contingent
Obligations not provided for or disclosed in the Financial Statements. Solely
for purposes of any reaffirmation of the foregoing representations pursuant to
Section 4.2(ii) in connection with any Loans the proceeds of which are used to
repay maturing commercial paper, such representations shall not extend to any
proceeding in which a punitive damages judgment has been entered against the
Borrower or any Subsidiary, such judgment has been stayed on appeal or the time
for appeal from such judgment has not expired and such judgment could not
reasonably be expected to have a material adverse effect on the ability of the
Borrower to perform its obligations under the Loan Documents.
5.8. Subsidiaries. Schedule "1" hereto contains an accurate list of all
------------
of the Significant Subsidiaries of the Borrower in existence on the date of this
Agreement, setting forth their respective jurisdictions of incorporation and the
percentage of their respective capital stock owned by the Borrower or other
Subsidiaries. All of the issued and outstanding shares of capital stock of such
Subsidiaries have been duly authorized and issued and are fully paid and non-
assessable.
5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do not
-----
in the aggregate exceed $10,000,000. Each Plan complies in all material
respects with all applicable requirements of law and regulations. No Reportable
Event has occurred with respect to any Plan and neither the Borrower nor any
other members of the Controlled Group has withdrawn from any Plan or initiated
steps to do so, which occurrence or withdrawal could result in a Material
Adverse Effect. No steps have been taken to terminate any Plan which has
Unfunded Liabilities.
5.10. Accuracy of Information. No information, exhibit or report
-----------------------
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact, omitted to state a
material fact or omitted to state any fact necessary to make the statements
contained therein not misleading in any material respect.
5.11. Regulation U. Margin stock (as defined in Regulation U)
------------
constitutes less than 25% of those assets of the Borrower and its Subsidiaries
which are subject to any limitation on sale, pledge or other restriction
hereunder.
5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a
-------------------
party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect. Neither the
Borrower nor any Significant Subsidiary is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any agreement or instrument evidencing or governing Indebtedness.
Page 26
<PAGE>
5.13. Compliance With Laws. The Borrower and its Subsidiaries have
--------------------
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property, except where the
failure to so comply could not reasonably be expected to have a Material Adverse
Effect. Neither the Borrower nor any Subsidiary has received any notice to the
effect that its operations are not in material compliance with any of the
requirements of applicable federal, state and local environmental, health and
safety statutes and regulations or the subject of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release of any toxic or hazardous waste or substance into the environment, which
non-compliance or remedial action could reasonably be expected to have a
Material Adverse Effect.
5.14. Ownership of Properties. Except for Liens permitted by Section
-----------------------
6.14, on the date of this Agreement, the Borrower and its Subsidiaries have good
title to all of the Property and assets reflected in the Financial Statements as
owned by it, free of all Liens other than those permitted by this Agreement,
except for assets sold, transferred or otherwise disposed of in the ordinary
course of business since the date of such Financial Statements.
5.15. Investment Company Act. Neither the Borrower nor any Subsidiary
----------------------
thereof is an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
5.16. Public Utility Holding Company Act. Neither the Borrower nor any
----------------------------------
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.17. Insurance Licenses. Schedule "2" attached hereto (as said Schedule
------------------
"2" shall be revised or supplemented from time to time to reflect withdrawals or
changes in jurisdictions permitted by Section 6.4 or additional jurisdictions
set forth in the Annual Statements furnished pursuant to Section 6.1(vii)) lists
all of the jurisdictions in which any Significant Insurance Subsidiary holds
active Licenses and is authorized to transact insurance business. No such
License is the subject of a proceeding for suspension or revocation, there is no
sustainable basis for such suspension or revocation, and to the Borrower's best
knowledge no such suspension or revocation has been threatened by any
Governmental Authority. Schedule "2" also indicates the type or types of
insurance in which each such Insurance Subsidiary is permitted to engage with
respect to each License therein listed. None of the Insurance Subsidiaries
transacts any insurance business, directly or indirectly, in any state other
than those enumerated in Schedule "2".
ARTICLE VI
COVENANTS
---------
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
Page 27
<PAGE>
6.1. Financial Reporting. The Borrower will maintain, for itself and
-------------------
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified public accountants,
acceptable to the Lenders, prepared in accordance with Agreement Accounting
Principles on a consolidated and consolidating basis (consolidating statements
need not be certified by such accountants) for itself and the Subsidiaries,
including balance sheets as of the end of such period, related profit and loss
and reconciliation of surplus statements, and a statement of cash flows,
accompanied by certificate of said accountants that, in the course of their
examination necessary for their certification of the foregoing, they have
obtained no knowledge of any Default or Unmatured Default, or if, in the opinion
of such accountants, any Default or Unmatured Default shall exist, stating the
nature and status thereof.
(ii) Within 45 days after the close of the first three quarterly
periods of each of its fiscal years, for itself and the Subsidiaries,
consolidated and consolidating unaudited balance sheets as at the close of each
such period and consolidated and consolidating profit and loss statements and a
statement of cash flows for the period from the beginning of such fiscal year to
the end of such quarter, all certified by its Chief Financial Officer, Chief
Accounting Officer or Treasurer.
(iii) Together with the financial statements required hereunder, a
compliance certificate in substantially the form of Exhibit "G" hereto signed by
the Chief Financial Officer, Chief Accounting Officer or Treasurer of the
Borrower showing the calculations necessary to determine compliance with this
Agreement and stating that no Default or Unmatured Default exists, or if any
Default or Unmatured Default exists, stating the nature and status thereof.
(iv) Within 330 days after the close of each fiscal year, a statement
of the Unfunded Liabilities of each Single Employer Plan, certified as correct
by an actuary enrolled under ERISA.
(v) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with respect to any Plan,
a statement, signed by the Chief Financial Officer, Chief Accounting Officer,
Treasurer or Vice President of the Borrower, describing said Reportable Event
and the action which the Borrower proposes to take with respect thereto.
(vi) As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any Person as a
result of the release by the Borrower, any of its Subsidiaries, or any other
Person of any toxic or hazardous waste or substance into the environment, and
(b) any notice alleging any violation of any federal, state or local
environmental, health or safety law or regulation by the Borrower or any of its
Subsidiaries, which, in either the case of either (a) or (b) above, could
reasonably be expected to have a Material Adverse Effect.
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<PAGE>
(vii) Within 75 days after the close of each fiscal year of each
Insurance Subsidiary, copies of the Annual Statement of each of the Insurance
Subsidiaries, as certified by the president, secretary and treasurer of and the
actuary for each such Insurance Subsidiary and prepared on the NAIC annual
statement blanks (or such other form as shall be required by the jurisdiction of
incorporation of each such Insurance Subsidiary), all such statements to be
prepared in accordance with SAP consistently applied throughout the periods
reflected therein and to be certified by independent certified public
accountants reasonably acceptable to the Agent if so required by any
Governmental Authority.
(viii) Promptly upon the filing thereof, copies of all Forms 10Q, 10K
and 8K which the Borrower or any Subsidiary files with the Securities and
Exchange Commission and any Form A and any annual update of Form B which any
Insurance Subsidiary files with any insurance commission or department or
analogous Governmental Authority, and, together with copies of each Form 10K so
furnished, a list of such revisions to Schedule "1", if any, as shall be
necessary to cause Schedule "1" to accurately set forth all then existing
Significant Subsidiaries of the Borrower, their respective jurisdictions of
incorporation and the percentage of their respective capital stock owned by the
Borrower or other Subsidiaries.
(ix) Promptly upon the Borrower's receipt thereof, copies of reports
or valuations prepared by any Governmental Authority or actuary in respect of
any action or event which has resulted in the reduction by 5% or more in the
capital and surplus of any Insurance Subsidiary.
(x) Promptly and in any event within ten days after learning thereof,
notification of any decrease after the Closing Date in the rating given by A.M.
Best & Co. in respect of any Insurance Subsidiary.
(xi) Such other information (including, without limitation, non-
financial information) as the Agent or any Lender may from time to time
reasonably request.
6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary
---------------
to, use the proceeds of the Advances (i) for general corporate purposes,
including, without limitation, the repayment of Indebtedness and (ii) to finance
Permitted Acquisitions. The Borrower will not, nor will it permit any
Subsidiary to, use any of the proceeds of the Advances to purchase or carry any
"margin stock" (as defined in Regulation U).
6.3. Certain Notices. The Borrower will give prompt notice in writing to
---------------
the Agent and the Lenders of (i) the occurrence of any Default or Unmatured
Default and of any other development, financial or otherwise, relating
specifically to the Borrower which could reasonably be expected to have a
Material Adverse Effect, (ii) the receipt of any notice from any Governmental
Authority of the expiration without renewal, revocation or suspension of, or the
institution of any proceedings to revoke or suspend, any License now or
hereafter held by any Insurance Subsidiary which is required to conduct
insurance business in compliance with all applicable laws and regulations, other
than such expiration, revocation or suspension which, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect,
(iii) the receipt of any notice from any Governmental Authority of the
institution of any disciplinary proceedings against or in respect of any
Insurance Subsidiary, or the issuance of any order, the taking of any action or
any request for an extraordinary audit for cause by any Governmental Authority
Page 29
<PAGE>
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect or (iv) any judicial or administrative order limiting or
controlling the insurance business of any Insurance Subsidiary (and not the
insurance industry generally) which has been issued or adopted and which could
reasonably be expected to have a Material Adverse Effect. Any such notice shall
state that it is given pursuant to this Section 6.3.
6.4. Conduct of Business. The Borrower will, and will cause each
-------------------
Significant Subsidiary to, do all things necessary to remain duly incorporated,
validly existing and in good standing as a domestic corporation in its
jurisdiction of incorporation and maintain all requisite authority to conduct
its business in each jurisdiction in which its business is conducted. The
Borrower will cause each Significant Insurance Subsidiary to (i) carry on or
otherwise be associated with the business of a licensed insurance carrier and
(ii) do all things necessary to renew, extend and continue in effect all
Licenses which may at any time and from time to time be necessary for such
Significant Insurance Subsidiary to operate its insurance business in compliance
with all applicable laws and regulations; provided, however, that any such
-------- -------
Significant Insurance Subsidiary may withdraw from one or more states as an
admitted insurer or change the state of its domicile, if such withdrawal or
change is in the best interests of the Borrower and such Significant Insurance
Subsidiary and could not reasonably be expected to have a Material Adverse
Effect.
6.5. Taxes. The Borrower will, and will cause each Subsidiary to, pay
-----
when due all taxes, assessments and governmental charges and levies upon it or
its income, profits or Property, except those which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves
have been set aside.
6.6. Insurance. The Borrower will, and will cause each Subsidiary to,
---------
maintain with financially sound and reputable insurance companies insurance on
all or substantially all of its Property, or shall maintain self-insurance, in
such amounts and covering such risks as is consistent with sound business
practice for Persons in substantially the same industry as the Borrower or such
Subsidiary, and the Borrower will furnish to any Lender upon request full
information as to the insurance carried.
6.7. Compliance with Laws. The Borrower will, and will cause each
--------------------
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, except
where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.
6.8. Maintenance of Properties. The Borrower will, and will cause each
-------------------------
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times, except where the
failure to so maintain, preserve, protect and repair could not reasonably be
expected to have a Material Adverse Effect.
6.9. Inspection. The Borrower will, and will cause each Subsidiary to,
----------
permit the Agent and the Lenders, by their respective representatives and
agents, to inspect any of the Property, corporate books and financial records of
the Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their
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<PAGE>
respective officers upon reasonable notice and at such reasonable times and
intervals as the Lenders may designate.
6.10. Merger. The Borrower will not, nor will it permit any Subsidiary
------
to, merge or consolidate with or into any other Person, except that (i) a
Subsidiary may merge with the Borrower or a Wholly-Owned Subsidiary and (ii) the
Borrower and any Subsidiary may merge or consolidate with or into any other
Person provided that the Borrower or such Subsidiary shall be the continuing or
surviving corporation and, after giving effect to such merger or consolidation,
no Default or Unmatured Default shall exist.
6.11. Sale of Assets. The Borrower will not, nor will it permit any
--------------
Subsidiary to, lease, sell or otherwise dispose of all or a Substantial Portion
of its Property (exclusive of Investments sold in the ordinary course of
business) to any other Person(s) in any calendar year.
6.12. Sale and Leaseback. The Borrower will not, nor will it permit any
------------------
Subsidiary to, sell or transfer a Substantial Portion of its Property in order
to concurrently or subsequently lease as lessee such or similar Property.
6.13. Investments and Acquisitions. The Borrower will not make, and will
----------------------------
not permit any Subsidiary to make, any Acquisitions except Permitted
Acquisitions.
6.14. Liens. The Borrower will not, nor will it permit any Subsidiary
-----
to, create, incur, or suffer to exist any Lien in, of or on its Property other
than Liens securing in the aggregate not more than $100,000,000 of
Indebtedness.
6.15. Consolidated Net Worth. The Borrower will maintain at all times
----------------------
Consolidated Net Worth equal to not less than the sum of (i) $1,500,000,000 plus
(ii) 25% of the Borrower's Consolidated Net Income, if positive, for each fiscal
quarter ending after June 30, 1996.
6.16. Ratio of Consolidated Indebtedness to Consolidated Capitalization.
-----------------------------------------------------------------
The Borrower will maintain at all times a ratio of Consolidated Indebtedness to
Consolidated Capitalization of not greater than .5 to 1.0.
6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest
------------------------------------------------------------------
Expense. The Borrower will maintain, as at the last day of each fiscal quarter,
- -------
a ratio of (i) Consolidated Adjusted Net Income to (ii) Consolidated Interest
Expense, in each case calculated for the four fiscal quarters then ending, of
not less than 2.5 to 1.0.
6.18. Affiliates. The Borrower will not, and will not permit any
----------
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate (other than a Wholly-Owned Subsidiary) except (i) any
such transactions, payments or transfers with or to such Affiliates as are made
in the ordinary course of business and pursuant to the reasonable requirements
of the Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than the Borrower or
such Subsidiary would obtain in a comparable arms-length transaction and (ii)
any such other transactions,
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<PAGE>
payments or transfers with or to such Affiliates as could not reasonably be
expected to have a Material Adverse Effect.
6.19 Series A Preferred Securities. The Borrower will not, and will not
-----------------------------
permit Torchmark Capital L.L.C. to, declare or pay dividends or distributions
on, or redeem, purchase or otherwise acquire, the Series A Preferred Securities
or any portion thereof if, after giving effect thereto, a Default or Unmatured
Default would exist.
ARTICLE VII
DEFAULTS
--------
The occurrence of any one or more of the following events shall constitute
a Default:
7.1. Any representation or warranty made or deemed made by or on behalf of
the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in
connection with this Agreement, any Loan, or any certificate or information
delivered in connection with this Agreement or any other Loan Document shall be
materially false or misleading on the date as of which made.
7.2. Nonpayment of any principal of any Note when due, or nonpayment of
any interest upon any Note or of any facility fee or other obligations under any
of the Loan Documents within five days after the same becomes due.
7.3. The breach by the Borrower of any of the terms or provisions of
Section 6.2, 6.3, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17 or 6.19; or the
breach by the Borrower of any of the terms or provisions of Section 6.14 or 6.18
which is not remedied within ten days after the Borrower learns thereof.
7.4. The breach by the Borrower (other than a breach which constitutes a
Default under Section 7.1, 7.2 or 7.3) of any of the terms or provisions of this
Agreement which is not remedied within twenty days after written notice from the
Agent or any Lender.
7.5. Failure of the Borrower or any of its Subsidiaries to pay when due
any Indebtedness in excess of, singly or in the aggregate for all such
Subsidiaries, $10,000,000; or the default by the Borrower or any of its
Subsidiaries in the performance of any term, provision or condition contained in
any agreement under which any such Indebtedness was created or is governed, or
any other event shall occur or condition exist, the effect of which is to cause,
or to permit the holder or holders of such Indebtedness to cause, such
Indebtedness to become due prior to its stated maturity (which default,
condition or event, in the case of Velasco, shall continue for at least 30 days
beyond any applicable grace period); or any such Indebtedness of the Borrower or
any Subsidiary shall be declared to be due and payable or required to be prepaid
(other than by a regularly scheduled payment) prior to the stated maturity
thereof.
7.6. The Borrower or any of its Subsidiaries shall (i) have an order for
relief entered with respect to it under the Federal bankruptcy laws as now or
hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii)
apply for, seek, consent to, or acquiesce in, the appointment of a receiver,
custodian, trustee, examiner, liquidator or similar official for it or any
Substantial Portion of its Property,
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<PAGE>
(iv) institute any proceeding seeking an order for relief under the Federal
bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (v) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 7.6, (vi) fail to contest in good faith any appointment or proceeding
described in Section 7.7 or not pay, or admit in writing its inability to pay,
its debts generally as they become due.
7.7. Without the application, approval or consent of the Borrower or any
of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Borrower or any of its Subsidiaries or any
Substantial Portion of its Property, or a proceeding described in Section
7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and
such appointment continues undischarged or such proceeding continues undismissed
or unstayed for a period of 30 consecutive days.
7.8. Any court, government or governmental agency shall condemn, seize or
otherwise appropriate, or take custody or control of (each a "Condemnation"),
all or any portion of the Property of the Borrower or any of its Subsidiaries
which, when taken together with all other Property of the Borrower and its
Subsidiaries so condemned, seized, appropriated, or taken custody or control of,
during the twelve-month period ending with the month in which any such
Condemnation occurs, constitutes a Substantial Portion of its Property.
7.9. The Borrower or any of its Subsidiaries shall fail within 45 days to
pay, bond or otherwise discharge any judgment or order for the payment of money,
either singly or in the aggregate, in excess of $10,000,000, which is not stayed
on appeal or otherwise being appropriately contested in good faith.
7.10. The Unfunded Liabilities of all Single Employer Plans shall exceed
in the aggregate $10,000,000 or any Reportable Event shall occur in connection
with any Plan.
7.11. The Borrower or any other member of the Controlled Group shall have
been notified by the sponsor of a Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan in an amount which, when
aggregated with all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as withdrawal liability
(determined as of the date of such notification), exceeds $5,000,000 or requires
payments exceeding $500,000 per annum.
7.12. The Borrower or any of its Subsidiaries shall be the subject of any
proceeding or investigation pertaining to the release by the Borrower or any of
its Subsidiaries, or any other person of any toxic or hazardous waste or
substance into the environment, or any violation of any federal, state or local
environmental, health or safety law or regulation, which, in either case, could
reasonably be expected to have a Material Adverse Effect.
7.13. Any Change in Control shall occur.
7.14. Any License of any Insurance Subsidiary held by such Insurance
Subsidiary on the Closing Date or acquired by such Insurance Subsidiary
thereafter, the loss of which would have, in the reasonable judgment of the
Lenders, a Material Adverse Effect, (i) shall be revoked by a final non-
appealable order
Page 33
<PAGE>
by the state which shall have issued such License, or any action (whether
administrative or judicial) to revoke such License shall have been commenced
against such Insurance Subsidiary which shall not have been dismissed or
contested in good faith within 30 days of the commencement thereof, (ii) shall
be suspended by such state for a period in excess of 30 days or (iii) shall not
be reissued or renewed by such state upon the expiration thereof following
application for such reissuance or renewal by such Insurance Subsidiary.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
----------------------------------------------
8.1. Acceleration. If any Default described in Section 7.6 or 7.7 occurs
------------
with respect to the Borrower, the obligations of the Lenders to make Loans
hereunder shall automatically terminate and the Obligations shall immediately
become due and payable without any election or action on the part of the Agent
or any Lender. If any other Default occurs, the Required Lenders (or the Agent
with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, before any judgment or decree for the payment of the Obligations due
shall have been obtained or entered, the Modified Required Lenders (or, in the
case of an automatic termination upon the occurrence of a Default under Section
7.6 or 7.7, all the Lenders), in their sole discretion, shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
8.2. Amendments. Subject to the provisions of this Article VIII, the
----------
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or thereunder
or waiving any Default hereunder or thereunder; provided, however, that no such
supplemental agreement shall, without the consent of each Lender:
(i) Extend the Termination Date (other than as provided in Section
-------
2.17), or compromise or forgive the principal amount of any Loan, or reduce the
- ----
rate of interest or compromise or forgive payment of interest on any Loan, or
reduce the amount of any fee payable hereunder.
(ii) Reduce the percentage specified in the definition of Required
Lenders or Modified Required Lenders.
(iii) Increase the amount of the Commitment of any Lender hereunder,
or permit the Borrower to assign its rights under this Agreement.
(iv) Amend this Section 8.2.
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<PAGE>
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under Section 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. Preservation of Rights. No delay or omission of the Lenders or the
----------------------
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1. Survival of Representations. All representations and warranties of
---------------------------
the Borrower contained in this Agreement shall survive delivery of the Notes and
the making of the Loans herein contemplated.
9.2. Governmental Regulation. Anything contained in this Agreement to
-----------------------
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. Taxes. Any taxes (excluding federal income taxes on the overall net
-----
income of any Lender) or other similar assessments or charges payable or ruled
payable by any governmental or revenue authority in respect of the Loan
Documents shall be paid by the Borrower, together with interest and penalties,
if any.
9.4. Headings. Section headings in the Loan Documents are for
--------
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.5. Entire Agreement. The Loan Documents embody the entire agreement
----------------
and understanding among the Borrower, the Agent and the Lenders and supersede
all prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof other than the Commitment Letter
dated August 26, 1996 and that certain fee letter agreement dated August 26,
1996, in each case by and between the Borrower and First Chicago.
9.6. Several Obligations; Benefits of this Agreement. The respective
-----------------------------------------------
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any
of its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This
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<PAGE>
Agreement shall not be construed so as to confer any right or benefit upon any
Person other than the parties to this Agreement and their respective successors
and assigns.
9.7. Expenses; Indemnification. The Borrower shall reimburse the Agent
-------------------------
for any costs, internal charges and out-of-pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, amendment, modification,
and administration of the Loan Documents. The Borrower also agrees to reimburse
the Agent and the Lenders for any costs, internal charges and out-of-pocket
expenses (including attorneys' fees and time charges of attorneys for the Agent
and the Lenders, which attorneys may be employees of the Agent or the Lenders)
paid or incurred by the Agent or any Lender in connection with the collection of
the Obligations or the enforcement of the Loan Documents. The Borrower further
agrees to indemnify the Agent and each Lender, its directors, officers and
employees against all losses, claims, damages, penalties, judgments, liabilities
and expenses (collectively, the "indemnified obligations") (including, without
limitation, all expenses of litigation or preparation therefor whether or not
the Agent or any Lender is a party thereto, but excluding those indemnified
obligations arising solely from any Lender's failure to perform its obligations
under this Agreement) which any of them may pay or incur arising out of or
relating to this Agreement, the other Loan Documents, the transactions
contemplated hereby or the direct or indirect application or proposed
application of the proceeds of any Loan hereunder, except that no indemnified
party shall be indemnified for any indemnified obligations arising from its own
gross negligence or willful misconduct as finally determined by a court of
competent jurisdiction. The obligations of the Borrower under this Section 9.7
shall survive the termination of this Agreement.
9.8. Numbers of Documents. All statements, notices, closing documents,
--------------------
and requests hereunder shall be furnished to the Agent with sufficient
counterparts so that the Agent may furnish one to each of the Lenders. The
Agent shall promptly remit same to the Lenders.
9.9. Accounting. Except as provided to the contrary herein, all
----------
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
9.10. Severability of Provisions. Any provision in any Loan Document
--------------------------
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.11. Nonliability of Lenders. The relationship between the Borrower and
-----------------------
the Lenders and the Agent shall be solely that of borrower and lender. Neither
the Agent nor any Lender shall have any fiduciary responsibilities to the
Borrower. Neither the Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations. The Borrower shall rely
entirely upon its own judgment with respect to its business, and any review,
inspection or supervision of, or information supplied to the Borrower by the
Agent or the Lenders is for the protection of the Agent and the Lenders and
neither the Borrower nor any other Person is entitled to rely thereon. The
Borrower agrees that neither the Agent nor any Lender shall have any liability
with respect to, and the Borrower hereby waives, releases and agrees not to sue
for,
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<PAGE>
any punitive damages in connection with, arising out of, or in any way related
to the Loan Documents or the transactions contemplated thereby or the
relationship established by the Loan Documents, or any act, omission or event
occurring in connection therewith.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
-------------
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
-----------------------
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS.
9.14. Confidentiality. Each Lender agrees to hold any confidential
---------------
information which it may receive from the Borrower pursuant to this Agreement in
confidence and for use in connection with this Agreement, including without
limitation, for use in connection with its rights and remedies hereunder, except
for disclosure (i) to other Lenders and their respective Affiliates, (ii) to
legal counsel, accountants, and other professional advisors to, and Affiliates
of, that Lender, (iii) to regulatory officials, (iv) as requested pursuant to or
as required by law, regulation, or legal process, (v) in connection with any
legal proceeding to which that Lender is a party, and (vi) permitted by Section
12.4.
9.15. Nonreliance. Each Lender hereby represents that it is not relying
-----------
on or looking to any margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) for the repayment of the Loans provided
for herein.
9.16. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
--------------------
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
Page 37
<PAGE>
9.17. Disclosure. The Borrower and each Lender hereby (a) acknowledge
----------
and agree that First Chicago and/or its Affiliates from time to time may hold
other investments in, make other loans to or have other relationships with the
Borrower and its Subsidiaries, including, without limitation, acting as
commercial paper dealer or in connection with any securitizations, interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability of First Chicago or such Affiliate to the Borrower or any Lender,
respectively, arising out of or resulting from such investments, loans or other
relationships other than liabilities arising out of the gross negligence or
willful misconduct of First Chicago or its Affiliates.
ARTICLE X
THE AGENT
---------
10.1. Appointment. The First National Bank of Chicago is hereby
-----------
appointed Agent hereunder and under each other Loan Document, and each of the
Lenders irrevocably authorizes the Agent to act as the agent of such Lender.
The Agent agrees to act as such upon the express conditions contained in this
Article X. The Agent shall not have a fiduciary relationship in respect of the
Borrower or any Lender by reason of this Agreement or any other Loan Document.
10.2. Powers. The Agent shall have and may exercise such powers under
------
the Loan Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder, except any action specifically provided
by the Loan Documents to be taken by the Agent.
10.3. General Immunity. Neither the Agent nor any of its directors,
----------------
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith except
for its or their own gross negligence or willful misconduct.
10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor
-------------------------------------------
any of its directors, officers, agents or employees shall be responsible for or
have any duty to ascertain, inquire into, or verify (i) any statement, warranty
or representation made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered to the Agent; or (iv) the validity,
enforceability, effectiveness, sufficiency or genuineness of any Loan Document
or any other instrument or writing furnished in connection therewith. Except
for notices or reports which the Agent is expressly hereby required to provide
to the Lenders, the Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by the Borrower to the Agent at
such time, but is voluntarily furnished by the Borrower to the Agent (either in
its capacity as Agent or in its individual capacity).
10.5. Action on Instructions of Lenders. The Agent shall in all cases be
---------------------------------
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written
Page 38
<PAGE>
instructions signed by the Required Lenders, and such instructions and any
action taken or failure to act pursuant thereto shall be binding on all of the
Lenders and on all holders of Notes. The Agent shall be fully justified in
failing or refusing to take any action hereunder and under any other Loan
Document unless it shall first be indemnified to its satisfaction by the Lenders
pro rata against any and all liability, cost and expense that it may incur by
reason of taking or continuing to take any such action. The Lenders hereby
acknowledge that the Agent shall be under no duty to take any discretionary
action permitted to be taken by it pursuant to the provisions of this Agreement
unless it shall be requested in writing to do so by the Required Lenders.
10.6. Employment of Agents and Counsel. The Agent may execute any of its
--------------------------------
duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7. Reliance on Documents; Counsel. The Agent shall be entitled to
------------------------------
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. Agent's Reimbursement and Indemnification. The Lenders agree to
-----------------------------------------
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (i) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Loan Documents, (ii) for any other expenses not
reimbursed by the Borrower under the Loan Documents and incurred by the Agent on
behalf of the Lenders in connection with the preparation, execution, delivery,
administration and enforcement of the Loan Documents and (iii) for any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent in any way relating to or
arising out of the Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the enforcement of any of
the terms thereof or of any such other documents, provided that no Lender shall
be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. The obligations of the Lenders
under this Section 10.8 shall survive payment of the Obligations and termination
of this Agreement.
10.9. Notice of Default. The Agent shall not be deemed to have knowledge
-----------------
or notice of the occurrence of any Default or Unmatured Default hereunder unless
the Agent has received written notice from a Lender or the Borrower referring to
this Agreement describing such Default or Unmatured Default and stating that
such notice is a "notice of default". In the event that the Agent receives such
a notice, the Agent shall give prompt notice thereof to the Lenders stating that
such notice is a "notice of default".
10.10. Rights as a Lender. In the event the Agent is a Lender, the Agent
------------------
shall have the same rights and powers hereunder and under any other Loan
Document as any Lender and may exercise the same as
Page 39
<PAGE>
though it were not the Agent, and the term "Lender" or "Lenders" shall, at any
time when the Agent is a Lender, unless the context otherwise indicates, include
the Agent in its individual capacity. The Agent may accept deposits from, lend
money to, and generally engage in any kind of trust, debt, equity or other
transaction, in addition to those contemplated by this Agreement or any other
Loan Document, with the Borrower or any of its Subsidiaries in which the
Borrower or such Subsidiary is not restricted hereby from engaging with any
other Person. The Agent, in its individual capacity, is not obligated to remain
a Lender.
10.11. Lender Credit Decision. Each Lender acknowledges that it has,
----------------------
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.12. Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. The Agent may be removed at any time with or without cause
by written notice received by the Agent from the Required Lenders, such removal
to be effective on the date specified by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint, on
behalf of the Borrower and the Lenders, a successor Agent. If no successor
Agent shall have been so appointed by the Required Lenders within thirty days
after the resigning Agent's giving notice of its intent to resign, then the
resigning Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Agent. If the Agent has resigned or been removed and no successor
Agent has been appointed, the Lenders may perform all the duties of the Agent
hereunder and the Borrower shall make all payments in respect of the Obligations
to the applicable Lenders and for all other purposes shall deal directly with
the Lenders. No successor Agent shall be deemed to be appointed hereunder until
such successor Agent has accepted the appointment. Any such successor Agent
shall be a Lender or another commercial bank having capital and retained
earnings of at least $200,000,000. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning or removed Agent, and the resigning or removed Agent shall be
discharged from its duties and obligations hereunder and under the other Loan
Documents. After the effectiveness of the resignation or removal of an Agent,
the provisions of this Article X shall continue in effect for the benefit of
such Agent in respect of any actions taken or omitted to be taken by it while it
was acting as the Agent hereunder and under the other Loan Documents.
10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its own
-----------
account, the fees agreed to by the Borrower and the Agent pursuant to that
certain letter agreement dated August 26, 1996, or as otherwise agreed from time
to time.
Page 40
<PAGE>
ARTICLE XI
SETOFF; RATABLE PAYMENTS
------------------------
11.1. Setoff. In addition to, and without limitation of, any rights of
------
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
11.2. Ratable Payments. Except for payments received from the Agent
----------------
pursuant to Section 2.10, if any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
Sections 3.1, 3.2 or 3.4) in a proportion greater than that received by any
other Lender, such Lender agrees, promptly upon demand, to purchase a portion of
the Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
-------------------------------------------------
12.1. Successors and Assigns. The terms and provisions of the Loan
----------------------
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of the immediately preceding
sentence, any Lender may at any time, without the consent of the Borrower or the
Agent, assign all or any portion of its rights under this Agreement and its
Notes to a Federal Reserve Bank; provided, however, that no such assignment to a
Federal Reserve Bank shall release the transferor Lender from its obligations
hereunder. The Agent may treat the payee of any Note as the owner thereof for
all purposes hereof unless and until such payee complies with Section 12.3 in
the case of an assignment thereof or, in the case of any other transfer, a
written notice of the transfer is filed with the Agent. Any assignee or
transferee of a Note agrees by acceptance thereof to be bound by all the terms
and provisions of the Loan Documents. Any request, authority or consent of any
Person, who at the time of making such request or giving such authority or
consent is the holder of any Note, shall be conclusive and binding on any
subsequent holder, transferee or assignee of such Note or of any Note or Notes
issued in exchange therefor.
12.2. Participations.
--------------
12.2.1. Permitted Participants; Effect. Any Lender may, in the
------------------------------
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations
Page 41
<PAGE>
under the Loan Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
such Lender shall remain the holder of any such Note for all purposes under the
Loan Documents, all amounts payable by the Borrower under this Agreement shall
be determined as if such Lender had not sold such participating interests, and
the Borrower and the Agent shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under the Loan
Documents.
12.2.2. Voting Rights. Each Lender shall retain the sole right to
-------------
approve, without the consent of any Participant, any amendment, modification or
waiver of any provision of the Loan Documents other than any amendment,
modification or waiver with respect to any Loan or Commitment in which such
Participant has an interest which forgives principal, interest or fees or
reduces the interest rate or fees payable with respect to any such Loan or
Commitment, postpones any date fixed for any regularly-scheduled payment of
principal of, or interest or fees on, any such Loan or Commitment, or extends
the Termination Date.
12.2.3. Benefit of Setoff. The Borrower agrees that each Participant
-----------------
shall be deemed to have the right of setoff provided in Section 11.1 in respect
of its participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing directly
to it as a Lender under the Loan Documents, provided that each Lender shall
retain the right of setoff provided in Section 11.1 with respect to the amount
of participating interests sold to each Participant. Each Participant, by
exercising the right of setoff provided in Section 11.1, agrees to share with
each Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with Section 11.2 as if each
Participant were a Lender.
12.3. Assignments.
-----------
12.3.1. Permitted Assignments. Any Lender may, in the ordinary course of
---------------------
its business and in accordance with applicable law, at any time assign to one or
more banks or other entities ("Purchasers") all or any part of its rights and
obligations under the Loan Documents; provided, however, that in the case of an
-------- -------
assignment to an entity which is not a Lender or an Affiliate of a Lender, such
assignment shall be in a minimum amount of $5,000,000 or, if less, the entire
amount of its Commitment and Loans. Such assignment shall be substantially in
the form of Exhibit "H" hereto or in such other form as may be agreed to by the
parties thereto. The consent of the Borrower and the Agent shall be required
prior to an assignment becoming effective with respect to a Purchaser which is
not a Lender or an Affiliate thereof; provided, however, that the consent of the
Borrower shall not be required if, on the date of such assignment, a Default
shall have occurred and be continuing. Such consent shall not be unreasonably
withheld or delayed.
12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a
----------------------
notice of assignment, substantially in the form attached as Exhibit "I" to
Exhibit "H" hereto (a "Notice of Assignment"), together with any consents
required by Section 12.3.1, and (ii) payment of a $3,500 fee to the Agent for
processing such assignment, such assignment shall become effective on the
effective date specified in such Notice of Assignment. On and after the
effective date of such assignment, such Purchaser shall for all purposes be a
Lender party to this Agreement and any other Loan Document executed by the
Lenders and shall have all the rights and obligations of a Lender under the Loan
Documents, to the same extent as if it were an original party hereto, and no
further
Page 42
<PAGE>
consent or action by the Borrower, the Lenders or the Agent shall be required to
release the transferor Lender with respect to the percentage of the Aggregate
Commitment and Loans assigned to such Purchaser. Upon the consummation of any
assignment to a Purchaser pursuant to this Section 12.3.2, the transferor
Lender, the Agent and the Borrower shall make appropriate arrangements so that a
replacement Note is issued to such transferor Lender and a new Note or, as
appropriate, replacement Note, is issued to such Purchaser, in each case in
principal amounts reflecting their respective Commitments, as adjusted pursuant
to such assignment.
12.4. Dissemination of Information. The Borrower authorizes each Lender
----------------------------
to disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries; provided
that each Transferee and prospective Transferee agrees to be bound by Section
9.14 of this Agreement.
12.5. Tax Treatment. If any interest in any Loan Document is transferred
-------------
to any Transferee which is organized under the laws of any jurisdiction other
than the United States or any State thereof, the transferor Lender shall cause
such Transferee, concurrently with the effectiveness of such transfer, to comply
with the provisions of Section 2.16.
ARTICLE XIII
NOTICES
-------
13.1. Giving Notice. Except as otherwise permitted by Section 2.11 with
-------------
respect to borrowing notices, all notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing and shall be delivered or mailed (or in the case of telegraphic
communication, delivered by telecopy or telex) addressed to such party at its
address set forth below its signature hereto or at such other address as may be
designated by such party in a notice to the other parties. Any notice, if
personally delivered or mailed (properly addressed with postage prepaid), shall
be deemed given when received; any notice, if transmitted by telecopy or telex,
shall be deemed given when transmitted (receipt confirmed by telephone in the
case of telecopies and answerback confirmed in the case of telexes).
13.2. Change of Address. The Borrower, the Agent and any Lender may each
-----------------
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE XIV
COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower, the Agent and the Lenders
and each party has notified the Agent by telex or telephone, that it has taken
such action.
Page 43
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed
this Agreement as of the date first above written.
Commitments TORCHMARK CORPORATION
- -----------
By: /s/ Michael J. Klyce
----------------------
Print Name: Michael J. Klyce
------------------
Title: Vice President and Treasurer
-----------------------------
2001 Third Avenue South
Birmingham, Alabama 35233
Attention: Mr. Michael J. Klyce
Telephone No.: (205) 325-2051
Telecopier No.: (205) 325-4157
$20,000,000 THE FIRST NATIONAL BANK OF CHICAGO,
- -----------
Individually and as Agent
By: /s/ Paul T. Schultz
-------------------------------
Print Name: Paul T. Schultz
----------------
Title: Managing Director
------------------
One First National Plaza
Chicago, Illinois 60670
Attention: Financial Services Division
Telephone No.: (312) 732-7074
Telecopier No.: (312) 732-4033
Telex No.: 4330253
Page 44
<PAGE>
$13,000,000 AMSOUTH BANK OF ALABAMA
- -----------
By: /s/ John M. Kettig
-------------------------------
Print Name: John M. Kettig
Title: Senior Vice President
1900 5th Avenue North - 7th Floor
Birmingham, AL 35203
Attention: John M. Kettig
Telephone No.: (205) 326-5240
Telecopier No.: (205) 801-0157
$13,000,000 BANK OF AMERICA ILLINOIS
- -----------
By: /s/ Dana L. Ragiel
-------------------------------
Print Name: Dana L. Ragiel
Title: Vice President
231 South LaSalle Street
Chicago, IL 60697
Attention: Dana L. Ragiel
Telephone No.: (312) 828-6723
Telecopier No.: (312) 987-0889
Page 45
<PAGE>
$13,000,000 BANK OF MONTREAL
- -----------
By: /s/ Dan Streiff
-------------------------------
Print Name: Dan Streiff
Title:
115 South LaSalle Street
Chicago, IL 60697
Attention: Dan Streiff
Telephone No.: (312) 750-3775
Telecopier No.: (312) 750-3783
$13,000,000 THE BANK OF NEW YORK
- -----------
By: /s/ Michael Barry
-------------------------------
Print Name: Michael Barry
Title: Assistant Treasurer
One Wall Street, 17th Floor
New York, NY 10286
Attention: Michael Barry
Telephone No.: (212) 635-6460
Telecopier No.: (212) 809-9520
Page 46
<PAGE>
$13,000,000 THE CHASE MANHATTAN BANK
- -----------
By: /s/ J. David Parker, Jr.
-------------------------------
Print Name: J. David Parker, Jr.
Title: Vice President
One Chase Manhattan Plaza, 4th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Telephone No.: (212) 552-7631
Telecopier No.: (212) 552-3651
$13,000,000 FIRST ALABAMA BANK
- -----------
By: /s/ Robert Kuhn
-------------------------------
Print Name: Robert Kuhn
Title: Vice President
417 North 20th Street, 2nd Floor
Birmingham, AL 35203
Attention: Robert Kuhn
Telephone No.: (205) 326-7104
Telecopier No.: (205) 326-7739
Page 47
<PAGE>
$13,000,000 FLEET NATIONAL BANK
- -----------
By: /s/ Jeffrey Simpson
-------------------------------
Print Name: Jeffrey Simpson
Title: Vice President
777 Main Street, MSN 250
Hartford, CT 06115
Attention: Jeffrey Simpson
Telephone No.: (860) 986-5600
Telecopier No.: (860) 986-1264
$13,000,000 SOUTHTRUST BANK OF ALABAMA
- -----------
By: /s/ Curtis J. Perry
-------------------------------
Print Name: Curtis J. Perry
Title: Vice President
420 North 20th Street
Birmingham, AL 35203
Attention: Curtis J. Perry
Telephone No.: (205) 254-5799
Telecopier No.: (205) 254-5022
Page 48
<PAGE>
$10,000,000 COMPASS BANK
- -----------
By: /s/ Con Holland
-------------------------------
Print Name: Con Holland
Title: Vice President
15 South 20th Street, 2nd Floor
Birmingham, AL 35233
Attention: Con Holland
Telephone No.: (205) 933-3238
Telecopier No.: (205) 933-3926
$10,000,000 UNION BANK OF SWITZERLAND, NEW YORK
- ----------- BRANCH
By: /s/ Robert Mendeles
-------------------------------
Print Name: Robert Mendeles
Title: Assistant Vice President
By:
-------------------------------
Print Name:
Title:
299 Park Avenue
New York, NY 10171
Attention: Robert Mendeles
Telephone No.: (212) 821-3020
Telecopier No.: (212) 821-4540
Page 49
<PAGE>
$8,000,000 BANQUE NATIONALE DE PARIS
- ----------
By: /s/ Phil Trusdale
-------------------------------
Print Name: Phil Trusdale
Title: Vice President
By:
-------------------------------
Print Name:
Title:
499 Park Avenue
New York, NY 10022
Attention: Phil Trusdale
Telephone No.: (212) 415-9719
Telecopier No.: (212) 415-9695
$8,000,000 BOATMEN'S NATIONAL BANK
- ----------
By: /s/ Mike Helak
-------------------------------
Print Name: Mike Helak
Title: Senior Vice President
10th and Baltimore
Kansas City, MO 64183
Attention: Mike Helak
Telephone No.: (816) 691-7032
Telecopier No.: (816) 691-7426
Page 50
<PAGE>
$8,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR
- ---------- CAYMAN ISLANDS BRANCH
By:
-------------------------------
Print Name:
Title:
By:
-------------------------------
Print Name:
Title:
31 West 52nd Street
New York, NY 10019
Attention:
Telephone No.: (212) 474-8104
Telecopier No.: (212) 474-8108
$8,000,000 DRESDNER BANK AG, NEW YORK BRANCH AND
- ---------- GRAND CAYMAN BRANCH
By:
-------------------------------
Print Name:
Title:
By:
-------------------------------
Print Name:
Title:
75 Wall Street
New York, NY 10005-2889
Attention: Lloyd C. Stevens
Telephone No.: (212) 429-2229
Telecopier No.: (212) 429-2524
Page 51
<PAGE>
$8,000,000 MELLON BANK, N.A.
- ----------
By:
-------------------------------
Print Name: Robert E. Brandenstein
Title: Vice President
One Mellon Bank Center
Pittsburgh, PA 15258
Attention: Robert E. Brandenstein
Telephone No.: (412) 234-7922
Telecopier No.: (412) 234-8087
$8,000,000 THE SAKURA BANK, LIMITED
- ----------
By: /s/ Hiroyasu Imanishi
-------------------------------
Print Name: Hiroyasu Imanishi
Title: Vice President and Senior Manager
245 Peachtree Center Ave. N.E.
Atlanta, GA 30303
Attention: Charles Zimmerman
Telephone No.: (404) 521-3111
Telecopier No.: (404) 521-1133
Page 52
<PAGE>
$8,000,000 UMB BANK, N.A.
- ----------
By: /s/ Jim Sangster
-------------------------------
Print Name: Jim Sangster
Title: Divisional Executive Vice President
1010 Grand Avenue
Kansas City, MO 64103
Attention: Jim Sangster
Telephone No.: (816) 860-7919
Telecopier No.: (816) 860-7143
Page 53
<PAGE>
EXECUTION COPY
[5 Year]
$400,000,000
CREDIT AGREEMENT
Dated as of October 24, 1996
among
TORCHMARK CORPORATION,
THE LENDERS
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<C> <S> <C>
ARTICLE I DEFINITIONS....................................................... 1
ARTICLE II THE FACILITY...................................................... 13
2.1. The Facility...................................................... 13
2.1.1. Description of Facility.................................. 13
2.1.2. Facility Amount.......................................... 13
2.1.3. Availability of Facility................................. 13
2.2. Ratable Advances.................................................. 14
2.2.1. Ratable Advances......................................... 14
2.2.2. Ratable Advance Rate Options............................. 14
2.2.3. Method of Selecting Types and Interest Periods for
Ratable Advances......................................... 14
2.2.4. Conversion and Continuation of Outstanding Ratable
Advances................................................. 15
2.3. Competitive Bid Advances.......................................... 15
2.3.1. Competitive Bid Option................................... 15
2.3.2. Competitive Bid Quote Request............................ 16
2.3.3. Invitation for Competitive Bid Quotes.................... 16
2.3.4. Submission and Contents of Competitive Bid Quotes........ 16
2.3.5. Notice to Borrower....................................... 18
2.3.6. Acceptance and Notice by Borrower........................ 18
2.3.7. Allocation by Agent...................................... 18
2.4. Availability of Funds............................................. 19
2.5. Facility Fee; Reductions in Aggregate Commitment.................. 19
2.6. Minimum Amount of Each Advance.................................... 19
2.7. Optional Principal Payments....................................... 19
2.8. Changes in Interest Rate, etc..................................... 19
2.9. Rates Applicable After Default.................................... 20
2.10. Method of Payment................................................. 20
2.11. Notes; Telephonic Notices......................................... 20
2.12. Interest Payment Dates; Interest and Fee Basis.................... 21
2.13. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions............................................. 21
2.14. Lending Installations............................................. 21
2.15. Non-Receipt of Funds by the Agent................................. 21
2.16. Withholding Tax Exemption......................................... 22
ARTICLE III CHANGE IN CIRCUMSTANCES........................................... 22
3.1. Yield Protection.................................................. 22
3.2. Changes in Capital Adequacy Regulations........................... 23
(i)
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
3.3. Availability of Types of Advances................................. 23
3.4. Funding Indemnification........................................... 23
3.5. Lender Statements; Survival of Indemnity.......................... 24
3.6. Right to Substitute Lender........................................ 24
ARTICLE IV CONDITIONS PRECEDENT.............................................. 25
4.1. Initial Advance................................................... 25
4.2. Each Advance...................................................... 26
ARTICLE V REPRESENTATIONS AND WARRANTIES.................................... 26
5.1. Corporate Existence and Standing.................................. 26
5.2. Authorization and Validity........................................ 26
5.3. No Conflict; Government Consent................................... 26
5.4. Financial Statements.............................................. 27
5.5. Material Adverse Change........................................... 27
5.6. Taxes............................................................. 27
5.7. Litigation and Contingent Obligations............................. 27
5.8. Subsidiaries...................................................... 28
5.9. ERISA............................................................. 28
5.10. Accuracy of Information........................................... 28
5.11. Regulation U...................................................... 28
5.12. Material Agreements............................................... 28
5.13. Compliance With Laws.............................................. 28
5.14. Ownership of Properties........................................... 29
5.15. Investment Company Act............................................ 29
5.16. Public Utility Holding Company Act................................ 29
5.17. Insurance Licenses................................................ 29
ARTICLE VI COVENANTS......................................................... 29
6.1. Financial Reporting............................................... 29
6.2. Use of Proceeds................................................... 31
6.3. Certain Notices................................................... 31
6.4. Conduct of Business............................................... 32
6.5. Taxes............................................................. 32
6.6. Insurance......................................................... 32
6.7. Compliance with Laws.............................................. 32
6.8. Maintenance of Properties......................................... 32
6.9. Inspection........................................................ 33
6.10. Merger............................................................ 33
6.11. Sale of Assets.................................................... 33
6.12. Sale and Leaseback................................................ 33
6.13. Investments and Acquisitions...................................... 33
6.14. Liens............................................................. 33
6.15. Consolidated Net Worth............................................ 33
(ii)
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
6.16. Ratio of Consolidated Indebtedness to............................ 33
Consolidated Capitalization
6.17. Ratio of Consolidated Adjusted Net Income to
Consolidated Interest Expense.................................... 33
6.18. Affiliates....................................................... 34
ARTICLE VII DEFAULTS......................................................... 34
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES................... 36
8.1. Acceleration..................................................... 36
8.2. Amendments....................................................... 37
8.3. Preservation of Rights........................................... 37
ARTICLE IX GENERAL PROVISIONS............................................... 37
9.1. Survival of Representations...................................... 37
9.2. Governmental Regulation.......................................... 38
9.3. Taxes............................................................ 38
9.4. Headings......................................................... 38
9.5. Entire Agreement................................................. 38
9.6. Several Obligations; Benefits of this Agreement.................. 38
9.7. Expenses; Indemnification........................................ 38
9.8. Numbers of Documents............................................. 39
9.9. Accounting....................................................... 39
9.10. Severability of Provisions....................................... 39
9.11. Nonliability of Lenders.......................................... 39
9.12. CHOICE OF LAW.................................................... 39
9.13. CONSENT TO JURISDICTION.......................................... 39
9.14. Confidentiality.................................................. 40
9.15. Nonreliance...................................................... 40
9.16. WAIVER OF JURY TRIAL............................................. 40
9.17. Disclosure....................................................... 40
ARTICLE X THE AGENT........................................................ 41
10.1. Appointment...................................................... 41
10.2. Powers........................................................... 41
10.3. General Immunity................................................. 41
10.4. No Responsibility for Loans, Recitals, etc....................... 41
10.5. Action on Instructions of Lenders................................ 41
10.6. Employment of Agents and Counsel................................. 42
10.7. Reliance on Documents; Counsel................................... 42
10.8. Agent's Reimbursement and Indemnification........................ 42
10.9. Notice of Default................................................ 42
10.10. Rights as a Lender............................................... 42
10.11. Lender Credit Decision........................................... 43
10.12. Successor Agent.................................................. 43
(iii)
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.13. Agent's Fee...................................................... 43
ARTICLE XI SETOFF; RATABLE PAYMENTS......................................... 44
11.1. Setoff........................................................... 44
11.2. Ratable Payments................................................. 44
ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS................ 44
12.1. Successors and Assigns........................................... 44
12.2. Participations................................................... 44
12.2.1. Permitted Participants; Effect......................... 45
12.2.2. Voting Rights.......................................... 45
12.2.3. Benefit of Setoff...................................... 45
12.3. Assignments...................................................... 45
12.3.1. Permitted Assignments.................................. 45
12.3.2. Effect; Effective Date................................. 46
12.4. Dissemination of Information..................................... 46
12.5. Tax Treatment.................................................... 46
ARTICLE XIII NOTICES.......................................................... 46
13.1. Giving Notice.................................................... 46
13.2. Change of Address................................................ 47
ARTICLE XIV COUNTERPARTS..................................................... 47
</TABLE>
(iv)
<PAGE>
Exhibit "A" - Note (Ratable Loan)
Exhibit "B" - Note (Competitive Bid Loan)
Exhibit "C" - Competitive Bid Quote Request
Exhibit "D" - Invitation for Competitive Bid Quotes
Exhibit "E" - Competitive Bid Quote
Exhibit "F" - Opinion
Exhibit "G" - Compliance Certificate
Schedule I to Compliance Certificate
Exhibit "H" - Assignment Agreement
Exhibit "I" - to Assignment Agreement
(Notice of Assignment)
Exhibit "II" - to Assignment Agreement (Consent and Release of
the Borrower and Agent)
Exhibit "I" - Transfer Instructions
Schedule "1" - Significant Subsidiaries
Schedule "2" - Insurance Licenses
Schedule "3" - Pricing Grid
(v)
<PAGE>
CREDIT AGREEMENT
This Agreement, dated as of October 24, 1996, is among Torchmark
Corporation, the Lenders and The First National Bank of Chicago, as Agent. The
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement:
"Absolute Rate" means, with respect to an Absolute Rate Loan made by a
given Lender for the relevant Absolute Rate Interest Period, the rate of
interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender
and accepted by the Borrower.
"Absolute Rate Advance" means a borrowing hereunder consisting of the
aggregate amount of the several Absolute Rate Loans made by some or all of the
Lenders to the Borrower at the same time and for the same Interest Period.
"Absolute Rate Auction" means a solicitation of Competitive Bid Quotes
setting forth Absolute Rates pursuant to Section 2.3.
"Absolute Rate Interest Period" means, with respect to an Absolute
Rate Advance, a period of not less than 30 and not more than 180 days commencing
on a Business Day selected by the Borrower pursuant to this Agreement. If such
Absolute Rate Interest Period would end on a day which is not a Business Day,
such Absolute Rate Interest Period shall end on the next succeeding Business
Day.
"Absolute Rate Loan" means a Loan which bears interest at the Absolute
Rate.
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business or all or
substantially all of the assets of any firm, corporation or division thereof,
whether through purchase of assets, merger or otherwise or (ii) directly or
indirectly acquires (in one transaction or as the most recent transaction in a
series of transactions) at least a majority (in number of votes) of the
securities of a corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage or voting power) of the
outstanding partnership interests of a partnership.
"Advance" means a borrowing hereunder consisting of the aggregate
amount of the several Loans made by some or all of the Lenders to the Borrower
on the same Borrowing Date, of the same Type (or on the same interest basis in
the case of Competitive Bid Advances) and, when applicable, for the same
Interest Period and includes a Competitive Bid Advance.
<PAGE>
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control with such Person.
A Person shall be deemed to control another Person if the controlling Person
owns 10% or more of any class of voting securities (or other ownership
interests) of the controlled Person or possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies of the
controlled Person, whether through ownership of stock, by contract or otherwise.
"Agent" means The First National Bank of Chicago in its capacity as
agent for the Lenders pursuant to Article X, and not in its individual capacity
as a Lender, and any successor Agent appointed pursuant to Article X.
"Agent Balance Transaction" means one or more receivables sales
transactions with respect to receivables arising out of advances made by AIL to
insurance agents in connection with life insurance policies underwritten by AIL.
"Aggregate Commitment" means the aggregate of the Commitments of all
the Lenders, as reduced from time to time pursuant to the terms hereof.
"Agreement" means this credit agreement, as it may be amended,
modified or restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
those used in preparing the financial statements referred to in Section 5.4.
"AIL" means American Income Life Insurance Company, an Indiana
insurance company.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum
of Federal Funds Effective Rate for such day plus 1/2% per annum.
"Annual Statement" means the annual statutory financial statement of
any Insurance Subsidiary required to be filed with the insurance commissioner
(or similar authority) of its jurisdiction of incorporation, which statement
shall be in the form required by such Insurance Subsidiary's jurisdiction of
incorporation or, if no specific form is so required, in the form of financial
statements recommended by the NAIC to be used for filing annual statutory
financial statements and shall contain the type of information recommended by
the NAIC to be disclosed therein, together with all exhibits or schedules filed
therewith.
"Applicable Eurodollar Margin" means, at any time, the percentage
determined in accordance with the Pricing Grid at such time. The Applicable
Eurodollar Margin shall change as and when the Borrower Debt Rating changes.
The initial Applicable Eurodollar Margin shall be .145%.
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<PAGE>
"Applicable Facility Fee Percentage" means, at any time, the
percentage determined in accordance with the Pricing Grid at such time. The
Applicable Facility Fee Percentage shall change as and when the Borrower Debt
Rating changes. The initial Applicable Facility Fee Percentage shall be .08%.
"Article" means an article of this Agreement unless another document
is specifically referenced.
"Authorized Officer" means any of the Chairman, Vice Chairman,
President, Chief Financial Officer, Chief Accounting Officer, Treasurer, any
Vice President or any Assistant Treasurer of the Borrower, acting singly.
"Borrower" means Torchmark Corporation, a Delaware corporation, and
its successors and assigns.
"Borrower Debt Rating" means the senior unsecured long term debt
(without credit enhancement) rating of the Borrower as determined by a rating
agency identified on the Pricing Grid.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Business Day" means (i) with respect to any borrowing, payment or
rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday)
on which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in Chicago and New York for the conduct of substantially all
of their commercial lending activities.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Change" means (i) any change after the date of this Agreement in the
Risk-Based Capital Guidelines for banks or (ii) any adoption of or change in any
other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement which affects the amount of capital required or
expected to be maintained by any Lender or any Lending Installation or any
corporation controlling any Lender.
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<PAGE>
"Change in Control" means the acquisition by any Person, or two or
more Persons acting in concert, of beneficial ownership (within the meaning of
Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock
of the Borrower.
"Closing Date" means October 24, 1996.
"Code" means the Internal Revenue Code of 1986, as amended, reformed
or otherwise modified from time to time.
"Commitment" means, for each Lender, the obligation of such Lender to
make Loans not exceeding the amount set forth opposite its signature below or as
set forth in any Notice of Assignment relating to any assignment that has become
effective pursuant to Section 12.3.2, as such amount may be modified from time
to time pursuant to the terms hereof.
"Competitive Bid Advance" means a borrowing hereunder consisting of
the aggregate amount of the several Competitive Bid Loans made by some or all of
the Lenders to the Borrower at the same time and for the same Interest Period.
"Competitive Bid Borrowing Notice" is defined in Section 2.3.6.
"Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute
Rate Loan, or both, as the case may be.
"Competitive Bid Margin" means the margin above or below the
applicable Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan,
expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added or
subtracted from such Eurodollar Base Rate.
"Competitive Bid Note" means a promissory note in substantially the
form of Exhibit "B" hereto, with appropriate insertions, duly executed and
delivered to the Agent by the Borrower for the account of a Lender and payable
to the order of such Lender, including any amendment, modification, renewal or
replacement of such promissory note.
"Competitive Bid Quote" means a Competitive Bid Quote substantially in
the form of Exhibit "E" hereto completed and delivered by a Lender to the Agent
in accordance with Section 2.3.4.
"Competitive Bid Quote Request" means a Competitive Bid Quote Request
substantially in the form of Exhibit "C" hereto completed and delivered by the
Borrower to the Agent in accordance with Section 2.3.2.
"Condemnation" is defined in Section 7.8.
Page 4
<PAGE>
"Consolidated Adjusted Net Income" means, for any period of
calculation, Consolidated Net Income plus (to the extent deducted in determining
Consolidated Net Income) (i) the provision for taxes in respect of, or measured
by, income or excess profits and (ii) Consolidated Interest Expense, in each
case calculated for such period for the Borrower and its Subsidiaries on a
consolidated basis in accordance with Agreement Accounting Principles.
"Consolidated Capitalization" means, at any date of determination, the
sum of (i) Consolidated Net Worth as at such date plus (ii) Consolidated
Indebtedness as at such date.
"Consolidated Indebtedness" means the Indebtedness of the Borrower and
its Subsidiaries determined on a consolidated basis in accordance with Agreement
Accounting Principles.
"Consolidated Interest Expense" means, for any period of calculation,
interest expense, whether paid or accrued, of the Borrower and its Subsidiaries
calculated on a consolidated basis in accordance with Agreement Accounting
Principles.
"Consolidated Net Income" means, for any period of calculation, the
net income of the Borrower and the Subsidiaries calculated on a consolidated
basis in accordance with Agreement Accounting Principles consistently applied.
"Consolidated Net Worth" means, at any date of determination, the
amount of consolidated common and preferred shareholders' equity of the Borrower
and its Subsidiaries (including, without limitation, the Series A Preferred
Securities), determined as at such date in accordance with Agreement Accounting
Principles; provided, however, that the effect of the application of FAS 115
-------- -------
shall be excluded when computing Consolidated Net Worth.
"Contingent Obligation" of a Person means any agreement, undertaking
or arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or application for a Letter of Credit, but
excluding (i) the endorsement of instruments for deposit or collection in the
ordinary course of business, (ii) the Payment and Guarantee Agreement and (iii)
obligations arising in connection with the Agent Balance Transaction.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Conversion/Continua tion Notice" is defined in Section 2.2.4.
"Corporate Base Rate" means a rate per annum equal to the corporate
base rate of interest announced by First Chicago from time to time, changing
when and as said corporate base rate changes. The Corporate Base Rate is a
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<PAGE>
reference rate and does not necessarily represent the lowest or best rate of
interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.
"Default" means an event described in Article VII.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means a Eurodollar Bid Rate Advance or a
Eurodollar Ratable Advance, or both, as the case may be.
"Eurodollar Auction" means a solicitation of Competitive Bid Quotes
setting forth Eurodollar Bid Rates pursuant to Section 2.3.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Eurodollar Interest Period, the rate determined by the Agent to be
the rate at which deposits in U.S. dollars are offered by First Chicago to
first-class banks in the London interbank market at approximately 11 a.m.
(London time) two Business Days prior to the first day of such Eurodollar
Interest Period, in the approximate amount of First Chicago's relevant
Eurodollar Ratable Loan (or in the case of a Eurodollar Bid Rate Advance, in an
amount comparable to the amount of such Advance) and having a maturity
approximately equal to such Eurodollar Interest Period.
"Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate
Loan made by a given Lender for the relevant Eurodollar Interest Period, the sum
of (i) the Eurodollar Base Rate and (ii) the Competitive Bid Margin offered by
such Lender and accepted by the Borrower.
"Eurodollar Bid Rate Advance" means a Competitive Bid Advance which
bears interest at a Eurodollar Bid Rate.
"Eurodollar Bid Rate Loan" means a Loan which bears interest at the
Eurodollar Bid Rate.
"Eurodollar Interest Period" means, with respect to a Eurodollar
Ratable Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or
six months commencing on a Business Day selected by the Borrower pursuant to
this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the
day which corresponds numerically to such date one, two, three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Eurodollar Interest Period shall end on the last Business Day of such next,
second, third or sixth succeeding month. If a Eurodollar Interest Period would
otherwise end on a day which is not a Business Day, such Eurodollar Interest
Period shall end on the next succeeding Business Day, provided, however, that if
said next succeeding Business Day falls in a new month, such Eurodollar Interest
Period shall end on the immediately preceding Business Day.
Page 6
<PAGE>
"Eurodollar Loan" means a Eurodollar Ratable Loan or Eurodollar Bid
Rate Loan, or both, as the case may be.
"Eurodollar Ratable Advance" means an Advance which bears interest at
a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3.
"Eurodollar Ratable Loan" means a Loan which bears interest at a
Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3.
"Eurodollar Rate" means, with respect to a Eurodollar Ratable Advance
for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a)
the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided
by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to
such Eurodollar Interest Period, plus (ii) the Applicable Eurodollar Margin. The
Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if
the rate is not such a multiple.
"Existing Credit Agreements" means (i) that certain 364 Day Credit
Agreement dated as of December 6, 1994 among the Borrower, First Chicago, as
agent, and the lenders party thereto, as amended and (ii) that certain 5 Year
Credit Agreement dated as of December 6, 1994 among the Borrower, First Chicago,
as agent, and the lenders party thereto.
"Federal Funds Effective Rate" means, for any day, an interest rate
per annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Financial Statements" is defined in Section 5.4.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"Floating Rate Advance" means an Advance which bears interest at the
Alternate Base Rate.
"Floating Rate Loan" means a Ratable Loan which bears interest at the
Alternate Base Rate.
"Governmental Authority" means the federal government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government including, without limitation, any board of insurance, insurance
department or insurance commissioner.
Page 7
<PAGE>
"Indebtedness" of a Person means, without duplication, such Person's
(i) obligations for borrowed money, (ii) obligations representing the deferred
purchase price of Property or services (excluding accounts payable arising in
the ordinary course of such Person's business payable on terms customary in the
trade and obligations of Insurance Subsidiaries arising under insurance or
annuity products), (iii) obligations, whether or not assumed, secured by Liens
or payable out of the proceeds or production from property now or hereafter
owned or acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or similar instruments, (v) Capitalized Lease Obligations, (vi) net
liabilities under interest rate swap, exchange or cap agreements, and (vii)
Contingent Obligations, but excluding any indebtedness of the Borrower arising
under or in connection with the Series A Preferred Securities Loan Agreement.
"Insurance Subsidiary" means any Subsidiary of the Borrower which is
engaged in the life, health or accident insurance business.
"Interest Period" means a Eurodollar Interest Period or an Absolute
Rate Interest Period.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade), deposit account or contribution of capital by such Person to any other
Person or any investment in, or purchase or other acquisition of, the stock,
partnership interests, notes, debentures or other securities of any other Person
made by such Person.
"Invitation for Competitive Bid Quotes" means an Invitation for
Competitive Bid Quotes substantially in the form of Exhibit "D" hereto,
completed and delivered by the Agent to the Lenders in accordance with Section
2.3.3.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent,
any office, branch, subsidiary or affiliate of such Lender or the Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"License" means any license, certificate of authority, permit or other
authorization which is required to be obtained from the Governmental Authority
in connection with the operation, ownership or transaction of insurance
business.
"Lien" means any lien (statutory or other), security interest,
mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
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<PAGE>
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement but excluding rights in agent balances which are sold in an
Agent Balance Transaction).
"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.
"Loan Documents" means this Agreement, the Notes and the other
documents, certificates and agreements contemplated hereby and executed by the
Borrower in favor of the Agent or any Lender.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), results of operations,
or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the rights
or remedies of the Agent or the Lenders thereunder.
"Modified Required Lenders" means Lenders in the aggregate having at
least 75% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 75% of the aggregate
unpaid principal amount of the outstanding Advances.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners or
any successor thereto, or in lieu thereof, any other association, agency or
other organization performing advisory, coordination or other like functions
among insurance departments, insurance commissions and similar Governmental
Authorities of the various states of the United States of America toward the
promotion of uniformity in the practices of such Governmental Authorities.
"Notes" means, collectively, the Competitive Bid Notes and the Ratable
Notes; and "Note" means any one of the Notes.
"Notice of Assignment" is defined in Section 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party hereunder arising under the
Loan Documents.
"Participants" is defined in Section 12.2.1.
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<PAGE>
"Payment and Guarantee Agreement" means the Payment and Guarantee
Agreement dated October 11, 1994, issued by the Borrower for the benefit of the
holders of the Series A Preferred Securities, without giving effect to any
amendments thereto.
"Payment Date" means the last day of each March, June, September and
December.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Acquisition" means the Acquisition of any Person which has
been approved and recommended by the board of directors (or the functional
equivalent thereof) of the Person being acquired.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code as to which the Borrower or any member of the Controlled Group may
have any liability.
"Pricing Grid" means the pricing grid attached hereto as Schedule "3".
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"Purchasers" is defined in Section 12.3.1.
"Ratable Advance" means a borrowing hereunder consisting of the
aggregate amount of the several Ratable Loans made by the Lenders to the
Borrower at the same time, of the same Type and for the same Interest Period.
"Ratable Borrowing Notice" is defined in Section 2.2.3.
"Ratable Loan" means a Loan made by a Lender pursuant to Section 2.2
hereof.
"Ratable Note" means a promissory note in substantially the form of
Exhibit "A" hereto, duly executed and delivered to the Agent by the Borrower for
the account of each Lender and payable to the order of a Lender in the amount of
its' Commitment, including any amendment, modification, renewal or replacement
of such promissory note.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
Page 10
<PAGE>
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 66
2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 66 2/3% of the aggregate
unpaid principal amount of the outstanding Advances.
"Reserve Requirement" means, with respect to Eurodollar Interest
Period, the maximum aggregate reserve requirement (including all basic,
supplemental, marginal and other reserves) which is imposed under Regulation D
on Eurocurrency liabilities .
"Risk-Based Capital Guidelines" means (i) the risk-based capital
guidelines in effect in the United States on the date of this Agreement, and
(ii) the corresponding capital regulations promulgated by regulatory authorities
outside the United States implementing the July 1988 report of the Basle
Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital Standards," and
any amendments to such regulations adopted prior to the date of this Agreement.
"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) as of the Closing Date in the jurisdiction of
incorporation of such Insurance Subsidiary for the preparation of annual
statements and other financial reports by insurance companies of the same type
as such Insurance Subsidiary.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Series A Preferred Securities" means the 9.18% Preferred Securities,
Series A, issued by Torchmark Capital L.L.C. on October 11, 1994.
"Series A Preferred Securities Loan Agreement" means the Loan
Agreement dated as of October 11, 1994 between the Borrower and Torchmark
Capital L.L.C. entered into in connection with the Series A Preferred
Securities, as in effect on the date hereof.
Page 11
<PAGE>
"Significant Insurance Subsidiary" means any Significant Subsidiary
which is an Insurance Subsidiary.
"Significant Subsidiary" of a Person means a "significant subsidiary"
as defined in Rule 1-02(v) of Regulation S-X of the Securities and Exchange
Commission (17 CFR Part 210), but excluding Velasco. Unless otherwise expressly
provided, all references herein to a "Significant Subsidiary" shall mean a
Significant Subsidiary of the Borrower.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Subsidiary" of a Person means (i) any corporation more than 50% of
the outstanding securities having ordinary voting power of which shall at the
time be owned or controlled, directly or indirectly, by such Person or by one or
more of its Subsidiaries or by such Person and one or more of its Subsidiaries,
or (ii) any partnership, association, joint venture, limited liability company
or similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 10% of
the consolidated assets of the Borrower and its Subsidiaries as would be shown
in the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 10% of the
consolidated net sales or of the consolidated net income of the Borrower and its
Subsidiaries as reflected in the financial statements referred to in clause (i)
above.
"Termination Date" means (i) October 24, 2001, or (ii) such earlier
date on which the obligations of the Lenders to make Loans hereunder are
terminated pursuant to the terms of this Agreement.
"Transferee" is defined in Section 12.4.
"Type" means, with respect to any Advance, its nature as a Floating
Rate Advance, Eurodollar Advance or Absolute Rate Advance.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested nonforfeitable benefits under all Single Employer Plans
exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
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<PAGE>
"Velasco" means Velasco Gas Company, Ltd., a Texas limited partnership
and Wholly-Owned Subsidiary of the Borrower.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
Subsidiaries of such Person, or (ii) any partnership, association, joint
venture, limited liability company or similar business organization 100% of the
ownership interests having ordinary voting power of which shall at the time be
so owned or controlled. Unless otherwise expressly provided, all references
herein to a "Wholly-Owned Subsidiary" shall mean a Wholly-Owned Subsidiary of
the Borrower.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE FACILITY
------------
2.1. The Facility.
------------
2.1.1. Description of Facility. The Lenders hereby establish in
-----------------------
favor of the Borrower a revolving credit facility pursuant to which, and upon
the terms and subject to the conditions herein set out:
(i) each Lender severally agrees to make Ratable Loans to the Borrower
in accordance with Section 2.2 in amounts not to exceed in the aggregate at any
one time outstanding the amount of its Commitment less the amount of such
Lender's pro rata (relative to its Commitment amount) share of the outstanding
principal amount of all Competitive Bid Advances (regardless of which Lender or
Lenders made such Competitive Bid Advances) exclusive of Competitive Bid
Advances being repaid substantially contemporaneously with the making of any
such Ratable Loans; and
(ii) each Lender may, in its sole discretion, make bids to make
Competitive Bid Loans to the Borrower, and make such Loans, in accordance with
Section 2.3.
2.1.2. Facility Amount. In no event may the aggregate principal
---------------
amount of all outstanding Advances (including both the Ratable Advances and the
Competitive Bid Advances) at any time exceed the Aggregate Commitment.
2.1.3. Availability of Facility. Subject to the terms hereof, such
------------------------
facility is available from the date hereof to the Termination Date. Subject to
the terms of this Agreement, the Borrower
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<PAGE>
may borrow, repay and reborrow Advances at any time prior to the Termination
Date. Any outstanding Advances and all other unpaid Obligations shall be paid
in full by the Borrower on the Termination Date.
2.2. Ratable Advances.
----------------
2.2.1. Ratable Advances. Each Ratable Advance hereunder shall
----------------
consist of borrowings made from the several Lenders ratably in proportion to the
amounts of their respective Commitments. The Borrower's obligation to pay the
principal of, and interest on, the Ratable Advances shall be evidenced by the
Ratable Notes. Although the Ratable Notes shall be dated the Closing Date,
interest in respect thereof shall be payable only for the periods during which
the Loans evidenced thereby are outstanding and, although the stated amount of
each Ratable Note shall be equal to the applicable Lender's Commitment, each
Ratable Note shall be enforceable, with respect to the Borrower's obligation to
pay the principal amount thereof, only to the extent of the unpaid principal
amount of the Ratable Loans at the time evidenced thereby.
2.2.2. Ratable Advance Rate Options. The Ratable Advances may be
----------------------------
Floating Rate Advances or Eurodollar Ratable Advances, or a combination thereof,
selected by the Borrower in accordance with Section 2.2.3 or 2.2.4. No Ratable
Advance may mature after, or have an Interest Period which extends beyond, the
Termination Date.
2.2.3. Method of Selecting Types and Interest Periods for Ratable
----------------------------------------------------------
Advances. The Borrower shall select the Type of each Ratable Advance and, in
- --------
the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period
applicable to such Ratable Advance from time to time; provided, however, that
for a period of at least three Business Days after the initial Advances the
Borrower shall maintain all Ratable Advances as Floating Rate Advances. The
Borrower shall give the Agent irrevocable notice (a "Ratable Borrowing Notice")
not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each Floating
Rate Advance and three Business Days before the Borrowing Date for each
Eurodollar Ratable Advance. Notwithstanding the foregoing, a Ratable Borrowing
Notice for a Floating Rate Advance may be given not later than 15 minutes after
the time which the Borrower is required to reject one or more bids offered in
connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Ratable
Borrowing Notice for a Eurodollar Ratable Advance may be given not later than 15
minutes after the time the Borrower is required to reject one or more bids
offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. A
Ratable Borrowing Notice shall specify:
(i) the Borrowing Date, which shall be a Business Day, of such Ratable
Advance;
(ii) the aggregate amount of such Ratable Advance, which, when added
to all outstanding Ratable Advances and Competitive Bid Advances and after
giving effect to the repayment of any such outstanding Advances out of the
proceeds of the requested Ratable Advance, shall not exceed the Aggregate
Commitment;
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<PAGE>
(iii) the Type of Advance selected; and
(iv) in the case of each Eurodollar Ratable Advance, the Eurodollar
Interest Period applicable thereto (which may not end after the Termination
Date).
2.2.4. Conversion and Continuation of Outstanding Ratable Advances.
-----------------------------------------------------------
Floating Rate Advances shall continue as Floating Rate Advances unless and until
such Floating Rate Advances are converted into Eurodollar Ratable Advances.
Each Eurodollar Ratable Advance shall continue as a Eurodollar Ratable Advance
until the end of the then applicable Eurodollar Interest Period therefor, at
which time such Eurodollar Ratable Advance shall be automatically converted into
a Floating Rate Advance unless the Borrower shall have given the Agent a
Conversion/Continuation Notice requesting that, at the end of such Eurodollar
Interest Period, such Eurodollar Ratable Advance continue as a Eurodollar
Ratable Advance for the same or another Eurodollar Interest Period. Subject to
the terms of Section 2.6, the Borrower may elect from time to time to convert
all or any part of a Ratable Advance of any Type into any other Type or Types of
Ratable Advances; provided that any conversion of any Eurodollar Ratable Advance
shall be made on, and only on, the last day of the Eurodollar Interest Period
applicable thereto. The Borrower shall give the Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of a Ratable Advance or
continuation of a Eurodollar Ratable Advance not later than 10:00 a.m. (Chicago
time) at least three Business Days, in the case of a conversion into or
continuation of a Eurodollar Ratable Advance, prior to the date of the requested
conversion or continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation;
(ii) the aggregate amount and Type of Ratable Advance which is to be
converted or continued; and
(iii) the amount and Type(s) of Ratable Advance(s) into which such
Ratable Advance is to be converted or continued and, in the case of a conversion
into or continuation of an Eurodollar Ratable Advance, the duration of the
Eurodollar Interest Period applicable thereto.
2.3. Competitive Bid Advances.
------------------------
2.3.1. Competitive Bid Option. In addition to Ratable Advances
----------------------
pursuant to Section 2.2, but subject to the terms and conditions of this
Agreement (including, without limitation, the limitation set forth in Section
2.1.2 as to the maximum aggregate principal amount of all outstanding Advances
hereunder), the Borrower may, as set forth in this Section 2.3, request the
Lenders, prior to the Termination Date, to make offers to make Competitive Bid
Advances to the Borrower. Each Lender may, but shall have no obligation to,
make such offers and the Borrower may, but shall have no obligation to, accept
any such offers in the manner set forth in this Section 2.3. The Borrower's
obligation to pay the principal of, and interest on, the Competitive Bid
Advances shall be evidenced
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<PAGE>
by the Competitive Bid Notes. Although the Competitive Bid Notes shall be dated
the Closing Date, interest in respect thereof shall be payable only for the
periods during which the Loans evidenced thereby are outstanding.
2.3.2. Competitive Bid Quote Request. When the Borrower wishes to
-----------------------------
request offers to make Competitive Bid Loans under this Section 2.3, it shall
transmit to the Agent by telex or telecopy a Competitive Bid Quote Request
substantially in the form of Exhibit "C" hereto so as to be received no later
than (i) 10:00 a.m. (Chicago time) at least four Business Days prior to the
Borrowing Date proposed therein, in the case of a Eurodollar Auction or (ii)
9:00 a.m. (Chicago time) at least one Business Day prior to the Borrowing Date
proposed therein, in the case of an Absolute Rate Auction specifying:
(i) the proposed Borrowing Date, which shall be a Business Day, for
the proposed Competitive Bid Advance;
(ii) the aggregate principal amount of such Competitive Bid Advance;
(iii) whether the Competitive Bid Quotes requested are to set forth a
Eurodollar Bid Rate, an Absolute Rate, or both; and
(iv) the Interest Period applicable thereto (which may not end after
the Termination Date).
The Borrower may request offers to make Competitive Bid Loans for more than one
Interest Period in a single Competitive Bid Quote Request. No Competitive Bid
Quote Request shall be given within 5 Business Days (or such other number of
days as the Borrower and the Agent may agree) of any other Competitive Bid Quote
Request. A Competitive Bid Quote Request that does not conform substantially to
the format of Exhibit "C" hereto shall be rejected, and the Agent shall promptly
notify the Borrower of such rejection by telex or telecopy.
2.3.3. Invitation for Competitive Bid Quotes. Promptly and in any
-------------------------------------
event before the close of business on the same Business Day of receipt of a
Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2,
the Agent shall send to each of the Lenders by telex or telecopy an Invitation
for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto,
which shall constitute an invitation by the Borrower to each Lender to submit
Competitive Bid Quotes offering to make the Competitive Bid Loans to which such
Competitive Bid Quote Request relates in accordance with this Section 2.3.
2.3.4. Submission and Contents of Competitive Bid Quotes.
-------------------------------------------------
(i) Each Lender may, in its sole discretion, submit a Competitive Bid
Quote containing an offer or offers to make Competitive Bid Loans in response to
any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must
comply with the requirements of this Section 2.3.4 and must be submitted to the
Agent by telex or telecopy
Page 16
<PAGE>
at its offices specified in or pursuant to Article XIII not later than (a) 9:00
a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing
Date, in the case of a Eurodollar Auction or (b) 9:00 a.m. (Chicago time) on the
proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either
case upon reasonable prior notice to the Lenders, such other time and date as
the Borrower and the Agent may agree); provided that Competitive Bid Quotes
--------
submitted by First Chicago may only be submitted if the Agent or First Chicago
notifies the Borrower of the terms of the offer or offers contained therein not
later than 15 minutes prior to the latest time at which the relevant Competitive
Bid Quotes must be submitted by the other Lenders. Subject to Articles IV and
VIII, any Competitive Bid Quote so made shall be irrevocable except with the
written consent of the Agent given on the instructions of the Borrower.
(ii) Each Competitive Bid Quote shall be in substantially the form of
Exhibit "E" hereto and shall in any case specify:
(a) the proposed Borrowing Date, which shall be the same as that
set forth in the applicable Invitation for Competitive Bid Quotes;
(b) the principal amount of the Competitive Bid Loan for which
each such offer is being made, which principal amount (1) may be greater than,
less than or equal to the Commitment of the quoting Lender, (2) must be at least
$10,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the
principal amount of Competitive Bid Loans for which offers were requested;
(c) in the case of a Eurodollar Auction, the Competitive Bid
Margin offered for each such Competitive Bid Loan;
(d) the minimum amount, if any, of the Competitive Bid Loan which
may be accepted by the Borrower;
(e) in the case of an Absolute Rate Auction, the Absolute Rate
offered for each such Competitive Bid Loan; and
(f) the identity of the quoting Lender.
(iii) The Agent shall reject any Competitive Bid Quote that:
(a) is not substantially in the form of Exhibit "E" hereto or does
not specify all of the information required by Section 2.3.4(ii);
(b) contains qualifying, conditional or similar language, other
than any such language contained in Exhibit "E" hereto;
Page 17
<PAGE>
(c) proposes terms other than or in addition to those set forth in
the applicable Invitation for Competitive Bid Quotes; or
(d) arrives after the time set forth in Section 2.3.4(i).
If any Competitive Bid Quote shall be rejected pursuant to this Section
2.3.4(iii), then the Agent shall notify the relevant Lender of such rejection
promptly.
2.3.5. Notice to Borrower. The Agent shall promptly notify the
------------------
Borrower of the terms (i) of any Competitive Bid Quote submitted by a Lender
that is in accordance with Section 2.3.4 and (ii) of any Competitive Bid Quote
that amends, modifies or is otherwise inconsistent with a previous Competitive
Bid Quote submitted by such Lender with respect to the same Competitive Bid
Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded
by the Agent unless such subsequent Competitive Bid Quote specifically states
that it is submitted solely to correct a manifest error in such former
Competitive Bid Quote. The Agent's notice to the Borrower shall specify the
aggregate principal amount of Competitive Bid Loans for which offers have been
received for each Interest Period specified in the related Competitive Bid Quote
Request and the respective principal amounts and Eurodollar Bid Rates or
Absolute Rates, as the case may be, so offered.
2.3.6. Acceptance and Notice by Borrower. Not later than (i) 10:00
---------------------------------
a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing
Date, in the case of a Eurodollar Auction or (ii) 10:00 a.m. (Chicago time) on
the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in
either case upon reasonable prior notice to the Lenders, such other time and
date as the Borrower and the Agent may agree), the Borrower shall notify the
Agent of its acceptance or rejection of the offers so notified to it pursuant to
Section 2.3.5; provided, however, that the failure by the Borrower to give such
-------- -------
notice to the Agent shall be deemed to be a rejection of all such offers. In
the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall
specify the aggregate principal amount of offers for each Interest Period that
are accepted. The Borrower may accept any Competitive Bid Quote in whole or in
part (subject to the terms of Section 2.3.4(ii)(d)); provided that:
--------
(i) the aggregate principal amount of each Competitive Bid Advance may
not exceed the applicable amount set forth in the related Competitive Bid Quote
Request,
(ii) acceptance of offers may only be made on the basis of ascending
Eurodollar Bid Rates or Absolute Rates, as the case may be, and
(iii) the Borrower may not accept any offer that is described in
Section 2.3.4(iii) or that otherwise fails to comply with the requirements of
this Agreement.
2.3.7. Allocation by Agent. If offers are made by two or more
-------------------
Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
offers are accepted for the related Interest Period, the
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<PAGE>
principal amount of Competitive Bid Loans in respect of which such offers are
accepted shall be allocated by the Agent among such Lenders as nearly as
possible (in such multiples, not greater than $1,000,000, as the Agent may deem
appropriate) in proportion to the aggregate principal amount of such offers;
provided, however, that no Lender shall be allocated a portion of any
- -------- -------
Competitive Bid Advance which is less than the minimum amount which such Lender
has indicated that it is willing to accept. Allocations by the Agent of the
amounts of Competitive Bid Loans shall be conclusive in the absence of manifest
error. The Agent shall promptly, but in any event on the same Business Day,
notify each Lender of its receipt of a Competitive Bid Borrowing Notice and the
aggregate principal amount of such Competitive Bid Advance allocated to each
participating Lender.
2.4. Availability of Funds. Not later than noon (Chicago time) on
---------------------
each Borrowing Date, each Lender (or in the case of a Competitive Bid Advance,
each Lender making a portion of such Advance) shall make available its Loan or
Loans, in funds immediately available in Chicago to the Agent at its address
specified pursuant to Article XIII. The Agent will make the funds so received
from the Lenders available to the Borrower at the Agent's aforesaid address.
2.5. Facility Fee; Reductions in Aggregate Commitment. The
------------------------------------------------
Borrower agrees to pay to the Agent for the ratable account of each Lender a
facility fee equal to the Applicable Facility Fee Percentage times such Lender's
Commitment from the date hereof to and including the Termination Date applicable
to such Lender, payable in arrears on each Payment Date hereafter and on the
Termination Date. The Borrower may permanently reduce the Aggregate Commitment
in whole, or in part ratably among the Lenders in integral multiples of
$25,000,000, upon at least three Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction; provided, however,
that the amount of the Aggregate Commitment may not be reduced below the
aggregate principal amount of the outstanding Advances. All accrued facility
fees shall be payable on the effective date of any termination of the
obligations of the Lenders to make Loans hereunder.
2.6. Minimum Amount of Each Advance. Each Advance shall be in the
------------------------------
minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess
thereof), provided, however, that any Floating Rate Advance may be in the amount
of the unused Aggregate Commitment.
2.7. Optional Principal Payments. The Borrower may from time to
---------------------------
time pay, without penalty or premium, all outstanding Advances, or, in a minimum
aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess
thereof, any portion of the outstanding Advances upon two Business Days' prior
notice to the Agent. Any prepayment of a Eurodollar Advance or Absolute Rate
Advance prior to the last day of the applicable Eurodollar Interest Period shall
be subject to the indemnity provisions of Section 3.4.
2.8. Changes in Interest Rate, etc. Each Floating Rate Advance
------------------------------
shall bear interest at the Alternate Base Rate from and including the date such
Advance is made or is converted from a Ratable Eurodollar Advance into a
Floating Rate Advance pursuant to Section 2.2.4 to but excluding the date it
becomes due or is converted into a Eurodollar Ratable Advance pursuant to
Section 2.2.4 hereof, at a rate per annum equal to the Floating Rate for such
day. Changes in the rate
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<PAGE>
of interest on that portion of any Advance maintained as a Floating Rate Advance
will take effect simultaneously with each change in the Alternate Base Rate.
Each Eurodollar Advance and Absolute Rate Advance shall bear interest from and
including the first day of the Interest Period applicable thereto to (but not
including) the last day of such Eurodollar Interest Period at the interest rate
determined as applicable to such Eurodollar Advance or Absolute Rate Advance.
No Interest Period may end after the Termination Date.
2.9. Rates Applicable After Default. Notwithstanding anything to
------------------------------
the contrary contained in Section 2.2.3 or 2.2.4, no Advance may be made as,
converted into or continued as a Eurodollar Ratable Advance (except with the
consent of the Required Lenders) when any Default or Unmatured Default has
occurred and is continuing. During the continuance of a Default, the Required
Lenders may, at their option, by notice to the Borrower (which notice may be
revoked at the option of the Required Lenders notwithstanding any provision of
Section 8.2 requiring unanimous consent of the Lenders to changes in interest
rates), declare that (i) each Eurodollar Advance and Absolute Rate Advance shall
bear interest for the remainder of the applicable Interest Period at the
Eurodollar Rate or Absolute Rate otherwise applicable to such Interest Period
plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a
rate per annum equal to the Alternate Base Rate plus 2% per annum.
2.10. Method of Payment. All payments of the Obligations hereunder
-----------------
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower, by 12:00 noon (local time) on the date
when due and shall be applied ratably by the Agent (i) first, ratably among the
Lenders with respect to any principal and interest due in connection with
Ratable Advances, (ii) second, after all amounts described in clause (i) have
been satisfied, ratably among those Lenders for whom any payment of principal
and interest is due in connection with any Competitive Bid Advances and (iii)
third, after all amounts described in clauses (i) and (ii) have been satisfied,
ratably to any other Obligations then due. Each payment delivered to the Agent
for the account of any Lender shall be delivered by the Agent to such Lender in
the same type of funds that the Agent received at its address specified pursuant
to Article XIII or at any Lending Installation specified in a notice received by
the Agent from such Lender. If such payment is received by the Agent by 1:00
p.m. (Chicago time) such delivery to the Lenders shall be made on the same day
and if received thereafter shall be made on the next succeeding Business Day.
The Agent is hereby authorized to charge the account of the Borrower maintained
with First Chicago for each payment of principal, interest and fees as it
becomes due hereunder.
2.11. Notes; Telephonic Notices. Each Lender is hereby authorized to
-------------------------
record the principal amount of each of its Loans and each repayment on the
schedule attached to its Note, provided, however, that neither the failure to so
record nor any error in such recordation shall affect the Borrower's obligations
under such Note. The Borrower hereby authorizes the Lenders and the Agent to
extend, convert or continue Advances, effect selections of Types of Advances,
submit Competitive Bid Quotes and to transfer funds based on telephonic notices
made by any one of the Chairman, Vice Chairman, Treasurer, the Chief Accounting
Officer, any Vice-President or any
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<PAGE>
Assistant Treasurer of the Borrower or any person who identifies himself or
herself to be any such officer; provided that, without written notice from the
Borrower, no proceeds of any Advance shall be transferred based upon telephonic
notice to any bank account other than a bank account maintained by the Borrower.
The Borrower agrees to deliver promptly to the Agent a written confirmation, if
such confirmation is requested by the Agent or any Lender, of each telephonic
notice signed by an Authorized Officer. If the written confirmation differs in
any material respect from the action taken by the Agent and the Lenders, the
records of the Agent and the Lenders shall govern absent manifest error.
2.12. Interest Payment Dates; Interest and Fee Basis. Interest
----------------------------------------------
accrued on each Floating Rate Advance shall be payable on each Payment Date,
commencing with the first such date to occur after the date hereof, on any date
on which such Floating Rate Advance is prepaid, whether due to acceleration or
otherwise, and at maturity. Interest accrued on that portion of the outstanding
principal amount of any Floating Rate Advance converted into a Eurodollar
Ratable Advance on a day other than a Payment Date shall be payable on the date
of conversion. Interest accrued on each Eurodollar Advance or Absolute Rate
Advance shall be payable on the last day of its applicable Interest Period, on
any date on which the Eurodollar Advance or Absolute Rate Advance is prepaid,
whether by acceleration or otherwise, and at maturity. Interest accrued on each
Eurodollar Advance or Absolute Rate Advance having an Interest Period longer
than three months shall also be payable on the last day of each three-month
interval during such Interest Period. Interest and facility fees shall be
calculated for actual days elapsed on the basis of a 360-day year. Interest
shall be payable for the day an Advance is made but not for the day of any
payment on the amount paid if payment is received prior to 12:00 noon (local
time) at the place of payment. If any payment of principal of or interest on an
Advance shall become due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and, in the case of a
principal payment, such extension of time shall be included in computing
interest in connection with such payment.
2.13. Notification of Advances, Interest Rates, Prepayments and
---------------------------------------------------------
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
- ---------------------
each Lender of the contents of each Aggregate Commitment reduction notice,
Ratable Borrowing Notice, Conversion/Continuation Notice, Invitation for
Competitive Quotes and repayment notice received by it hereunder. The Agent
will notify each Lender of the interest rate applicable to each Eurodollar
Advance promptly upon determination of such interest rate and will give each
Lender prompt notice of each change in the Alternate Base Rate.
2.14. Lending Installations. Each Lender may book its Loans at any
---------------------
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.15. Non-Receipt of Funds by the Agent. Unless the Borrower or a
---------------------------------
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent
Page 21
<PAGE>
of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of
the Borrower, a payment of principal, interest or fees to the Agent for the
account of the Lenders, that it does not intend to make such payment, the Agent
may assume that such payment has been made. The Agent may, but shall not be
obligated to, make the amount of such payment available to the intended
recipient in reliance upon such assumption. If such Lender or the Borrower, as
the case may be, has not in fact made such payment to the Agent, the recipient
of such payment shall, on demand by the Agent, repay to the Agent the amount so
made available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the Agent
until the date the Agent recovers such amount at a rate per annum equal to (i)
in the case of payment by a Lender, the Federal Funds Effective Rate for such
day or (ii) in the case of payment by the Borrower, the interest rate applicable
to the relevant Loan.
2.16. Withholding Tax Exemption. At least five Business Days prior
-------------------------
to the first date on which interest or fees are payable hereunder for the
account of any Lender, each Lender that is not incorporated under the laws of
the United States of America, or a state thereof, agrees that it will deliver to
each of the Borrower and the Agent two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224, certifying in either case that such
Lender is entitled to receive payments under this Agreement and the Notes
without deduction or withholding of any United States federal income taxes.
Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver
to each of the Borrower and the Agent two additional copies of such form (or a
successor form) on or before the date that such form expires (currently, three
successive calendar years for Form 1001 and one calendar year for Form 4224) or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent forms so delivered by it, and such amendments thereto or extensions
or renewals thereof as may be reasonably requested by the Borrower or the Agent,
in each case certifying that such Lender is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender advises the Borrower
and the Agent that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax.
ARTICLE III
CHANGE IN CIRCUMSTANCES
-----------------------
3.1. Yield Protection. If, after the date hereof, in connection
----------------
with a Eurodollar Loan the adoption of or any change in any law or any
governmental or quasi-governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or any change in the
interpretation or administration thereof, or the compliance of any Lender
therewith,
(i) subjects any Lender or any applicable Lending Installation to any
tax, duty, charge or withholding on or from payments due from the Borrower
(excluding federal
Page 22
<PAGE>
taxation of the overall net income of any Lender or applicable Lending
Installation imposed by the jurisdiction in which such Lender or Lending
Installation is incorporated or has its principal place of business), or changes
the basis of taxation of payments to any Lender or Lending Installation in
respect of its Loans or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, any Lender or any
applicable Lending Installation (other than reserves and assessments taken into
account in determining the interest rate applicable to Eurodollar Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making, funding
or maintaining Loans or reduces any amount receivable by any Lender or any
applicable Lending Installation in connection with Loans, or requires any Lender
or any applicable Lending Installation to make any payment calculated by
reference to the amount of Loans held or interest received by it, by an amount
deemed material by such Lender,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.
3.2. Changes in Capital Adequacy Regulations. If a Lender
---------------------------------------
determines the amount of capital required or expected to be maintained by such
Lender, any Lending Installation of such Lender or any corporation controlling
such Lender is increased as a result of a Change, then, within 15 days of demand
by such Lender, the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy).
3.3. Availability of Types of Advances. If any Lender determines
---------------------------------
that maintenance of any of its Eurodollar Loans at a suitable Lending
Installation would violate any applicable law, rule, regulation or directive,
whether or not having the force of law, the Agent shall suspend the availability
of the affected Type of Advance and require any Eurodollar Advances to be repaid
or converted into a Floating Rate Advance within five days after Borrower's
receipt of notice by such Lender; or if the Required Lenders determine that (i)
deposits of a type or maturity appropriate to match fund Eurodollar Advances are
not available, or (ii) an interest rate applicable to an Eurodollar Advance does
not accurately reflect the cost of making a Eurodollar Advance of such Type,
then, the Agent shall suspend the availability of Eurodollar Advances with
respect to any Eurodollar Advances made after the date of any such
determination.
3.4. Funding Indemnification. If any payment of a Eurodollar
-----------------------
Advance occurs on a date which is not the last day of the applicable Eurodollar
Interest Period, whether because of acceleration, prepayment or otherwise, or a
Eurodollar Advance is not made on the date specified
Page 23
<PAGE>
by the Borrower for any reason other than default by the Lenders, the Borrower
will indemnify each Lender for any loss or cost incurred by it resulting
therefrom, including, without limitation, any loss or cost in liquidating or
employing deposits acquired to fund or maintain the Eurodollar Advance.
3.5. Lender Statements; Survival of Indemnity. To the extent
----------------------------------------
reasonably possible, each Lender shall designate an alternate Lending
Installation with respect to its Eurodollar Loans to reduce any liability of the
Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the
unavailability of a Type of Advance under Section 3.3, so long as such
designation is not disadvantageous to such Lender. Each Lender shall deliver a
written statement of such Lender to the Borrower (with a copy to the Agent) as
to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written
statement shall set forth in reasonable detail the calculations upon which such
Lender determined such amount and shall be final, conclusive and binding on the
Borrower in the absence of manifest error. Determination of amounts payable
under such Sections in connection with a Eurodollar Loan shall be calculated as
though each Lender funded its Eurodollar Loan through the purchase of a deposit
of the type and maturity corresponding to the deposit used as a reference in
determining the Eurodollar Rate applicable to such Loan, whether in fact that is
the case or not. Unless otherwise provided herein, the amount specified in the
written statement of any Lender shall be payable on demand after receipt by the
Borrower of the written statement. The obligations of the Borrower under
Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and
termination of this Agreement.
3.6. Right to Substitute Lender. Any Lender claiming any
--------------------------
additional amounts payable pursuant to Section 3.1 or 3.2 materially in excess
of those being charged by other Lenders or unable to make a Eurodollar Advance
available in accordance with Section 3.3, shall, so long as no Default or
Unmatured Default has occurred and is continuing, upon the written request of
the Borrower delivered to such Lender and the Agent, assign, pursuant to and in
accordance with the provisions of Section 12.3, all of its rights and
obligations under this Agreement and under the Loan Documents to another Lender
or to a commercial bank, other financial institution, commercial finance company
or other business lender selected by the Borrower and reasonably acceptable to
the Agent in consideration for (a) the payment by such assignee to such
assigning Lender of the principal of, and interest accrued and unpaid to the
date of such assignment on, the Notes held by such assigning Lender, (b) the
payment by the Borrower to such assigning Lender of any and all other amounts
owing to such assigning Lender under any provision of this Agreement accrued and
unpaid to the date of such assignment and (c) the Borrower's release of such
assigning Lender from any further obligation or liability under this Agreement
and the Loan Documents. Notwithstanding anything to the contrary contained in
this Section 3.6, in no event shall the replacement of any Lender result in a
-----------
decrease or reallocation of the aggregate Commitments without the prior written
consent of the remaining Lenders.
Page 24
<PAGE>
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1. Initial Advance. The Lenders shall not be required to make
---------------
the initial Advance hereunder unless the Borrower has furnished to the Agent
with sufficient copies for the Lenders:
(i) Copies of the articles of incorporation of the Borrower, together
with all amendments thereto,both certified by the appropriate governmental
officer in its jurisdiction of incorporation, together with a good standing
certificate issued by the Secretary of State of the jurisdiction of its
incorporation and such other jurisdictions as shall be requested by the Agent.
(ii) Copies, certified by the Secretary or an Assistant Secretary of
the Borrower, of its by-laws and Board of Directors' resolutions authorizing the
execution of the Loan Documents.
(iii) An incumbency certificate, executed by the Secretary or an
Assistant Secretary of the Borrower, which shall identify by name and title and
bear the signature of the officers of the Borrower authorized to sign the Loan
Documents and to make borrowings hereunder, upon which certificate the Agent and
the Lenders shall be entitled to rely until informed of any change in writing by
the Borrower.
(iv) A certificate, signed by the Chief Financial Officer or the
Treasurer of the Borrower, stating that on the date hereof (a) no Default or
Unmatured Default has occurred and is continuing and (b) each of the
representations and warranties set forth in Article V of this Agreement is true
and correct as of such date.
(v) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit "F" hereto.
(vi) Notes payable to the order of each of the Lenders.
(vii) Written money transfer instructions, in substantially the form
of Exhibit "I" hereto, addressed to the Agent and signed by an Authorized
Officer, together with such other related money transfer authorizations as the
Agent may have reasonably requested.
(viii) The Existing Credit Agreements shall have been terminated and
all amounts owing thereunder shall have been paid (or shall contemporaneously be
paid) in full.
(ix) Such other documents as any Lender or its counsel may have
reasonably requested.
Page 25
<PAGE>
4.2. Each Advance. The Lenders shall not be required to make any
------------
Advance, unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V (other
than Section 5.4 and 5.5) are true and correct as of such Borrowing Date except
for changes in the Schedules hereto reflecting transactions permitted by this
Agreement.
Each Ratable Borrowing Notice and Competitive Bid Quote Request with
respect to each such Advance shall constitute a representation and warranty by
the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been
satisfied. Any Lender may require a duly completed compliance certificate in
substantially the form of Exhibit "G" hereto as a condition to making an
Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lenders that:
5.1. Corporate Existence and Standing. Each of the Borrower and
--------------------------------
its Significant Subsidiaries is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite authority to conduct its business in each
jurisdiction in which its business is conducted.
5.2. Authorization and Validity. The Borrower has the corporate
--------------------------
power and authority and legal right to execute and deliver the Loan Documents
and to perform its obligations thereunder. The execution and delivery by the
Borrower of the Loan Documents and the performance of its obligations thereunder
have been duly authorized by proper corporate proceedings, and the Loan
Documents constitute legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.
5.3. No Conflict; Government Consent. Neither the execution and
-------------------------------
delivery by the Borrower of the Loan Documents, nor the consummation of the
transactions therein contemplated, nor compliance with the provisions thereof
will violate any law, rule, regulation, order, writ, judgment, injunction,
decree or award binding on the Borrower or any of its Subsidiaries or the
Borrower's or any of its Subsidiaries' articles of incorporation or by-laws or
the provisions of any indenture, instrument or agreement to which the Borrower
or any of its Subsidiaries is a party or is subject, or by which it, or its
Property, is bound, or conflict with or constitute a default thereunder, or
result in the creation or imposition of any Lien in, of or on the Property of
the Borrower or any of its Subsidiaries pursuant to the terms of any such
indenture, instrument or agreement, other than
Page 26
<PAGE>
such violations, conflicts or defaults which, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect. No order,
consent, approval, license, authorization, or validation of, or filing,
recording or registration with, or exemption by, any governmental or public body
or authority, or any subdivision thereof, is required to authorize, or is
required in connection with the execution, delivery and performance of, or the
legality, validity, binding effect or enforceability of, any of the Loan
Documents.
5.4. Financial Statements. The December 31, 1995 audited
--------------------
consolidated financial statements of the Borrower and its Subsidiaries and the
June 30, 1996 unaudited consolidated financial statements of the Borrower and
its Subsidiaries heretofore delivered to the Lenders (the "Financial
Statements") were prepared in accordance with generally accepted accounting
principles in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Borrower and
its Subsidiaries at such date and the consolidated results of their operations
for the period then ended.
5.5. Material Adverse Change. Since December 31, 1995, there has
-----------------------
been no change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect.
5.6. Taxes. The Borrower and its Subsidiaries have filed all
-----
United States federal tax returns and all other tax returns which are required
to be filed and have paid all taxes due pursuant to said returns or pursuant to
any assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith and as to which, in the good
faith judgment of the Borrower, adequate reserves have been provided. The
United States income tax returns of the Borrower and its Subsidiaries have been
audited by the Internal Revenue Service through the fiscal year ended December
31, 1989. No tax liens have been filed and no claims against the Borrower or
its Subsidiaries are being asserted with respect to any such taxes except claims
being contested in good faith and as to which, in the good faith judgment of the
Borrower, adequate reserves have been provided. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate in the good faith judgment of
the Borrower.
5.7. Litigation and Contingent Obligations. There is no
-------------------------------------
litigation, arbitration, governmental investigation, proceeding or inquiry
pending or, to the knowledge of any of their officers, threatened against or
affecting the Borrower or any of its Subsidiaries which could reasonably be
expected to have a Material Adverse Effect (after giving effect to reserves
which have been provided with respect thereto on the books of the Borrower and
its Subsidiaries). As of the date hereof, the Borrower has no material
Contingent Obligations not provided for or disclosed in the Financial
Statements. Solely for purposes of any reaffirmation of the foregoing
representations pursuant to Section 4.2(ii) in connection with any Loans the
proceeds of which are used to repay maturing commercial paper, such
representations shall not extend to any proceeding in which a punitive damages
judgment has been entered against the Borrower or any Subsidiary, such judgment
has been stayed on appeal or the time for appeal from such judgment has not
expired and such
Page 27
<PAGE>
judgment could not reasonably be expected to have a material adverse effect on
the ability of the Borrower to perform its obligations under the Loan Documents.
5.8. Subsidiaries. Schedule "1" hereto contains an accurate list
------------
of all of the Significant Subsidiaries of the Borrower in existence on the date
of this Agreement, setting forth their respective jurisdictions of incorporation
and the percentage of their respective capital stock owned by the Borrower or
other Subsidiaries. All of the issued and outstanding shares of capital stock
of such Subsidiaries have been duly authorized and issued and are fully paid and
non-assessable.
5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans
-----
do not in the aggregate exceed $10,000,000. Each Plan complies in all material
respects with all applicable requirements of law and regulations. No Reportable
Event has occurred with respect to any Plan and neither the Borrower nor any
other members of the Controlled Group has withdrawn from any Plan or initiated
steps to do so, which occurrence or withdrawal could result in a Material
Adverse Effect. No steps have been taken to terminate any Plan which has
Unfunded Liabilities.
5.10. Accuracy of Information. No information, exhibit or report
-----------------------
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact, omitted to state a
material fact or omitted to state any fact necessary to make the statements
contained therein not misleading in any material respect.
5.11. Regulation U. Margin stock (as defined in Regulation U)
------------
constitutes less than 25% of those assets of the Borrower and its Subsidiaries
which are subject to any limitation on sale, pledge or other restriction
hereunder.
5.12. Material Agreements. Neither the Borrower nor any Subsidiary
-------------------
is a party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect. Neither the
Borrower nor any Significant Subsidiary is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any agreement or instrument evidencing or governing Indebtedness.
5.13. Compliance With Laws. The Borrower and its Subsidiaries have
--------------------
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property, except where the
failure to so comply could not reasonably be expected to have a Material Adverse
Effect. Neither the Borrower nor any Subsidiary has received any notice to the
effect that its operations are not in material compliance with any of the
requirements of applicable federal, state and local environmental, health and
safety statutes and regulations or the subject of any federal or state
investigation evaluating whether any
Page 28
<PAGE>
remedial action is needed to respond to a release of any toxic or hazardous
waste or substance into the environment, which non-compliance or remedial action
could reasonably be expected to have a Material Adverse Effect.
5.14. Ownership of Properties. Except for Liens permitted by Section
-----------------------
6.14, on the date of this Agreement, the Borrower and its Subsidiaries have
good title to all of the Property and assets reflected in the Financial
Statements as owned by it, free of all Liens other than those permitted by this
Agreement, except for assets sold, transferred or otherwise disposed of in the
ordinary course of business since the date of such Financial Statements.
5.15. Investment Company Act. Neither the Borrower nor any
----------------------
Subsidiary thereof is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
5.16. Public Utility Holding Company Act. Neither the Borrower nor
----------------------------------
any Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.17. Insurance Licenses. Schedule "2" attached hereto (as said
------------------
Schedule "2" shall be revised or supplemented from time to time to reflect
withdrawals or changes in jurisdictions permitted by Section 6.4 or additional
jurisdictions set forth in the Annual Statements furnished pursuant to Section
6.1(vii)) lists all of the jurisdictions in which any Significant Insurance
Subsidiary holds active Licenses and is authorized to transact insurance
business. No such License is the subject of a proceeding for suspension or
revocation, there is no sustainable basis for such suspension or revocation, and
to the Borrower's best knowledge no such suspension or revocation has been
threatened by any Governmental Authority. Schedule "2" also indicates the type
or types of insurance in which each such Insurance Subsidiary is permitted to
engage with respect to each License therein listed. None of the Insurance
Subsidiaries transacts any insurance business, directly or indirectly, in any
state other than those enumerated in Schedule "2".
ARTICLE VI
COVENANTS
---------
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. Financial Reporting. The Borrower will maintain, for itself
-------------------
and each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified public accountants,
acceptable to
Page 29
<PAGE>
the Lenders, prepared in accordance with Agreement Accounting Principles on a
consolidated and consolidating basis (consolidating statements need not be
certified by such accountants) for itself and the Subsidiaries, including
balance sheets as of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of cash flows, accompanied
by certificate of said accountants that, in the course of their examination
necessary for their certification of the foregoing, they have obtained no
knowledge of any Default or Unmatured Default, or if, in the opinion of such
accountants, any Default or Unmatured Default shall exist, stating the nature
and status thereof.
(ii) Within 45 days after the close of the first three quarterly
periods of each of its fiscal years, for itself and the Subsidiaries,
consolidated and consolidating unaudited balance sheets as at the close of each
such period and consolidated and consolidating profit and loss statements and a
statement of cash flows for the period from the beginning of such fiscal year to
the end of such quarter, all certified by its Chief Financial Officer, Chief
Accounting Officer or Treasurer.
(iii) Together with the financial statements required hereunder, a
compliance certificate in substantially the form of Exhibit "G" hereto signed by
the Chief Financial Officer, Chief Accounting Officer or Treasurer of the
Borrower showing the calculations necessary to determine compliance with this
Agreement and stating that no Default or Unmatured Default exists, or if any
Default or Unmatured Default exists, stating the nature and status thereof.
(iv) Within 330 days after the close of each fiscal year, a statement
of the Unfunded Liabilities of each Single Employer Plan, certified as correct
by an actuary enrolled under ERISA.
(v) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with respect to any Plan,
a statement, signed by the Chief Financial Officer, Chief Accounting Officer,
Treasurer or Vice President of the Borrower, describing said Reportable Event
and the action which the Borrower proposes to take with respect thereto.
(vi) As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any Person as a
result of the release by the Borrower, any of its Subsidiaries, or any other
Person of any toxic or hazardous waste or substance into the environment, and
(b) any notice alleging any violation of any federal, state or local
environmental, health or safety law or regulation by the Borrower or any of its
Subsidiaries, which, in either the case of either (a) or (b) above, could
reasonably be expected to have a Material Adverse Effect.
(vii) Within 75 days after the close of each fiscal year of each
Insurance Subsidiary, copies of the Annual Statement of each of the Insurance
Subsidiaries, as certified
Page 30
<PAGE>
by the president, secretary and treasurer of and the actuary for each such
Insurance Subsidiary and prepared on the NAIC annual statement blanks (or such
other form as shall be required by the jurisdiction of incorporation of each
such Insurance Subsidiary), all such statements to be prepared in accordance
with SAP consistently applied throughout the periods reflected therein and to be
certified by independent certified public accountants reasonably acceptable to
the Agent if so required by any Governmental Authority.
(viii) Promptly upon the filing thereof, copies of all Forms 10Q, 10K
and 8K which the Borrower or any Subsidiary files with the Securities and
Exchange Commission and any Form A and any annual update of Form B which any
Insurance Subsidiary files with any insurance commission or department or
analogous Governmental Authority, and, together with copies of each Form 10K so
furnished, a list of such revisions to Schedule "1", if any, as shall be
necessary to cause Schedule "1" to accurately set forth all then existing
Significant Subsidiaries of the Borrower, their respective jurisdictions of
incorporation and the percentage of their respective capital stock owned by the
Borrower or other Subsidiaries.
(ix) Promptly upon the Borrower's receipt thereof, copies of reports
or valuations prepared by any Governmental Authority or actuary in respect of
any action or event which has resulted in the reduction by 5% or more in the
capital and surplus of any Insurance Subsidiary.
(x) Promptly and in any event within ten days after learning thereof,
notification of any decrease after the Closing Date in the rating given by A.M.
Best & Co. in respect of any Insurance Subsidiary.
(xi) Such other information (including, without limitation, non-
financial information) as the Agent or any Lender may from time to time
reasonably request.
6.2. Use of Proceeds. The Borrower will, and will cause each
---------------
Subsidiary to, use the proceeds of the Advances (i) for general corporate
purposes, including, without limitation, the repayment of Indebtedness and (ii)
to finance Permitted Acquisitions. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances to purchase or carry
any "margin stock" (as defined in Regulation U).
6.3. Certain Notices. The Borrower will give prompt notice in
---------------
writing to the Agent and the Lenders of (i) the occurrence of any Default or
Unmatured Default and of any other development, financial or otherwise, relating
specifically to the Borrower which could reasonably be expected to have a
Material Adverse Effect, (ii) the receipt of any notice from any Governmental
Authority of the expiration without renewal, revocation or suspension of, or the
institution of any proceedings to revoke or suspend, any License now or
hereafter held by any Insurance Subsidiary which is required to conduct
insurance business in compliance with all applicable laws and regulations, other
than such expiration, revocation or suspension which, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect,
(iii) the receipt of
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<PAGE>
any notice from any Governmental Authority of the institution of any
disciplinary proceedings against or in respect of any Insurance Subsidiary, or
the issuance of any order, the taking of any action or any request for an
extraordinary audit for cause by any Governmental Authority which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect or
(iv) any judicial or administrative order limiting or controlling the insurance
business of any Insurance Subsidiary (and not the insurance industry generally)
which has been issued or adopted and which could reasonably be expected to have
a Material Adverse Effect. Any such notice shall state that it is given
pursuant to this Section 6.3.
6.4. Conduct of Business. The Borrower will, and will cause each
-------------------
Significant Subsidiary to, do all things necessary to remain duly incorporated,
validly existing and in good standing as a domestic corporation in its
jurisdiction of incorporation and maintain all requisite authority to conduct
its business in each jurisdiction in which its business is conducted. The
Borrower will cause each Significant Insurance Subsidiary to (i) carry on or
otherwise be associated with the business of a licensed insurance carrier and
(ii) do all things necessary to renew, extend and continue in effect all
Licenses which may at any time and from time to time be necessary for such
Significant Insurance Subsidiary to operate its insurance business in compliance
with all applicable laws and regulations; provided, however, that any such
-------- -------
Significant Insurance Subsidiary may withdraw from one or more states as an
admitted insurer or change the state of its domicile, if such withdrawal or
change is in the best interests of the Borrower and such Significant Insurance
Subsidiary and could not reasonably be expected to have a Material Adverse
Effect.
6.5. Taxes. The Borrower will, and will cause each Subsidiary to,
-----
pay when due all taxes, assessments and governmental charges and levies upon it
or its income, profits or Property, except those which are being contested in
good faith by appropriate proceedings and with respect to which adequate
reserves have been set aside.
6.6. Insurance. The Borrower will, and will cause each Subsidiary
---------
to, maintain with financially sound and reputable insurance companies insurance
on all or substantially all of its Property, or shall maintain self-insurance,
in such amounts and covering such risks as is consistent with sound business
practice for Persons in substantially the same industry as the Borrower or such
Subsidiary, and the Borrower will furnish to any Lender upon request full
information as to the insurance carried.
6.7. Compliance with Laws. The Borrower will, and will cause each
--------------------
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, except
where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.
6.8. Maintenance of Properties. The Borrower will, and will cause
-------------------------
each Subsidiary to, do all things necessary to maintain, preserve, protect and
keep its Property in good repair, working order and condition, and make all
necessary and proper repairs, renewals and replacements so that its business
carried on in connection therewith may be properly conducted at
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<PAGE>
all times, except where the failure to so maintain, preserve, protect and repair
could not reasonably be expected to have a Material Adverse Effect.
6.9. Inspection. The Borrower will, and will cause each Subsidiary
----------
to, permit the Agent and the Lenders, by their respective representatives and
agents, to inspect any of the Property, corporate books and financial records of
the Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their respective officers upon
reasonable notice and at such reasonable times and intervals as the Lenders may
designate.
6.10. Merger. The Borrower will not, nor will it permit any
------
Subsidiary to, merge or consolidate with or into any other Person, except that
(i) a Subsidiary may merge with the Borrower or a Wholly-Owned Subsidiary and
(ii) the Borrower and any Subsidiary may merge or consolidate with or into any
other Person provided that the Borrower or such Subsidiary shall be the
continuing or surviving corporation and, after giving effect to such merger or
consolidation, no Default or Unmatured Default shall exist.
6.11. Sale of Assets. The Borrower will not, nor will it permit any
--------------
Subsidiary to, lease, sell or otherwise dispose of all or a Substantial Portion
of its Property (exclusive of Investments sold in the ordinary course of
business) to any other Person(s) in any calendar year.
6.12. Sale and Leaseback. The Borrower will not, nor will it permit
------------------
any Subsidiary to, sell or transfer a Substantial Portion of its Property in
order to concurrently or subsequently lease as lessee such or similar Property.
6.13. Investments and Acquisitions. The Borrower will not make, and
----------------------------
will not permit any Subsidiary to make, any Acquisitions except Permitted
Acquisitions.
6.14. Liens. The Borrower will not, nor will it permit any
-----
Subsidiary to, create, incur, or suffer to exist any Lien in, of or on its
Property other than Liens securing in the aggregate not more than $100,000,000
of Indebtedness.
6.15. Consolidated Net Worth. The Borrower will maintain at all
----------------------
times Consolidated Net Worth equal to not less than the sum of (i)
$1,500,000,000 plus (ii) 25% of the Borrower's Consolidated Net Income, if
positive, for each fiscal quarter ending after June 30, 1996.
6.16. Ratio of Consolidated Indebtedness to Consolidated
--------------------------------------------------
Capitalization. The Borrower will maintain at all times a ratio of Consolidated
- --------------
Indebtedness to Consolidated Capitalization of not greater than .5 to 1.0.
6.17. Ratio of Consolidated Adjusted Net Income to Consolidated
---------------------------------------------------------
Interest Expense. The Borrower will maintain, as at the last day of each fiscal
- ----------------
quarter, a ratio of (i) Consolidated Adjusted
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<PAGE>
Net Income to (ii) Consolidated Interest Expense, in each case calculated for
the four fiscal quarters then ending, of not less than 2.5 to 1.0.
6.18. Affiliates. The Borrower will not, and will not permit any
----------
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate (other than a Wholly-Owned Subsidiary) except (i) any
such transactions, payments or transfers with or to such Affiliates as are made
in the ordinary course of business and pursuant to the reasonable requirements
of the Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than the Borrower or
such Subsidiary would obtain in a comparable arms-length transaction and (ii)
any such other transactions, payments or transfers with or to such Affiliates as
could not reasonably be expected to have a Material Adverse Effect.
6.19 Series A Preferred Securities. The Borrower will not, and will
-----------------------------
not permit Torchmark Capital L.L.C. to, declare or pay dividends or
distributions on, or redeem, purchase or otherwise acquire, the Series A
Preferred Securities or any portion thereof if, after giving effect thereto, a
Default or Unmatured Default would exist.
ARTICLE VII
DEFAULTS
--------
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent
under or in connection with this Agreement, any Loan, or any certificate or
information delivered in connection with this Agreement or any other Loan
Document shall be materially false or misleading on the date as of which made.
7.2. Nonpayment of any principal of any Note when due, or
nonpayment of any interest upon any Note or of any facility fee or other
obligations under any of the Loan Documents within five days after the same
becomes due.
7.3. The breach by the Borrower of any of the terms or provisions
of Section 6.2, 6.3, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17 or 6.19; or the
breach by the Borrower of any of the terms or provisions of Section 6.14 or 6.18
which is not remedied within ten days after the Borrower learns thereof.
7.4. The breach by the Borrower (other than a breach which
constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or
provisions of this Agreement which is not remedied within twenty days after
written notice from the Agent or any Lender.
7.5. Failure of the Borrower or any of its Subsidiaries to pay when
due any Indebtedness in excess of, singly or in the aggregate for all such
Subsidiaries, $10,000,000; or the
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<PAGE>
default by the Borrower or any of its Subsidiaries in the performance of any
term, provision or condition contained in any agreement under which any such
Indebtedness was created or is governed, or any other event shall occur or
condition exist, the effect of which is to cause, or to permit the holder or
holders of such Indebtedness to cause, such Indebtedness to become due prior to
its stated maturity (which default, condition or event, in the case of Velasco,
shall continue for at least 30 days beyond any applicable grace period); or any
such Indebtedness of the Borrower or any Subsidiary shall be declared to be due
and payable or required to be prepaid (other than by a regularly scheduled
payment) prior to the stated maturity thereof.
7.6. The Borrower or any of its Subsidiaries shall (i) have an
order for relief entered with respect to it under the Federal bankruptcy laws as
now or hereafter in effect, (ii) make an assignment for the benefit of
creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment
of a receiver, custodian, trustee, examiner, liquidator or similar official for
it or any Substantial Portion of its Property, (iv) institute any proceeding
seeking an order for relief under the Federal bankruptcy laws as now or
hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other pleading denying the material allegations of any such proceeding
filed against it, (v) take any corporate action to authorize or effect any of
the foregoing actions set forth in this Section 7.6, (vi) fail to contest in
good faith any appointment or proceeding described in Section 7.7 or not pay, or
admit in writing its inability to pay, its debts generally as they become due.
7.7. Without the application, approval or consent of the Borrower
or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Borrower or any of its Subsidiaries or any
Substantial Portion of its Property, or a proceeding described in Section
7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and
such appointment continues undischarged or such proceeding continues undismissed
or unstayed for a period of 30 consecutive days.
7.8. Any court, government or governmental agency shall condemn,
seize or otherwise appropriate, or take custody or control of (each a
"Condemnation"), all or any portion of the Property of the Borrower or any of
its Subsidiaries which, when taken together with all other Property of the
Borrower and its Subsidiaries so condemned, seized, appropriated, or taken
custody or control of, during the twelve-month period ending with the month in
which any such Condemnation occurs, constitutes a Substantial Portion of its
Property.
7.9. The Borrower or any of its Subsidiaries shall fail within 45
days to pay, bond or otherwise discharge any judgment or order for the payment
of money, either singly or in the aggregate, in excess of $10,000,000, which is
not stayed on appeal or otherwise being appropriately contested in good faith.
7.10. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $10,000,000 or any Reportable Event shall occur in
connection with any Plan.
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<PAGE>
7.11. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan in an amount which, when
aggregated with all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as withdrawal liability
(determined as of the date of such notification), exceeds $5,000,000 or requires
payments exceeding $500,000 per annum.
7.12. The Borrower or any of its Subsidiaries shall be the subject of
any proceeding or investigation pertaining to the release by the Borrower or any
of its Subsidiaries, or any other person of any toxic or hazardous waste or
substance into the environment, or any violation of any federal, state or local
environmental, health or safety law or regulation, which, in either case, could
reasonably be expected to have a Material Adverse Effect.
7.13. Any Change in Control shall occur.
7.14. Any License of any Insurance Subsidiary held by such Insurance
Subsidiary on the Closing Date or acquired by such Insurance Subsidiary
thereafter, the loss of which would have, in the reasonable judgment of the
Lenders, a Material Adverse Effect, (i) shall be revoked by a final non-
appealable order by the state which shall have issued such License, or any
action (whether administrative or judicial) to revoke such License shall have
been commenced against such Insurance Subsidiary which shall not have been
dismissed or contested in good faith within 30 days of the commencement thereof,
(ii) shall be suspended by such state for a period in excess of 30 days or (iii)
shall not be reissued or renewed by such state upon the expiration thereof
following application for such reissuance or renewal by such Insurance
Subsidiary.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
----------------------------------------------
8.1. Acceleration. If any Default described in Section 7.6 or 7.7
------------
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrower hereby expressly waives.
If, before any judgment or decree for the payment of the Obligations
due shall have been obtained or entered, the Modified Required Lenders (or, in
the case of an automatic termination upon the occurrence of a Default under
Section 7.6 or 7.7, all the Lenders), in their sole discretion, shall so direct,
the Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
Page 36
<PAGE>
8.2. Amendments. Subject to the provisions of this Article VIII,
----------
the Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or thereunder
or waiving any Default hereunder or thereunder; provided, however, that no such
supplemental agreement shall, without the consent of each Lender:
(i) Extend the Termination Date or compromise or forgive the principal
amount of any Loan, or reduce the rate of interest or compromise or forgive
payment of interest on any Loan, or reduce the amount of any fee payable
hereunder.
(ii) Reduce the percentage specified in the definition of Required
Lenders or Modified Required Lenders.
(iii) Increase the amount of the Commitment of any Lender hereunder,
or permit the Borrower to assign its rights under this Agreement.
(iv) Amend this Section 8.2.
No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under Section 12.3.2 without obtaining the consent of any
other party to this Agreement.
8.3. Preservation of Rights. No delay or omission of the Lenders
----------------------
or the Agent to exercise any right under the Loan Documents shall impair such
right or be construed to be a waiver of any Default or an acquiescence therein,
and the making of a Loan notwithstanding the existence of a Default or the
inability of the Borrower to satisfy the conditions precedent to such Loan shall
not constitute any waiver or acquiescence. Any single or partial exercise of
any such right shall not preclude other or further exercise thereof or the
exercise of any other right, and no waiver, amendment or other variation of the
terms, conditions or provisions of the Loan Documents whatsoever shall be valid
unless in writing signed by the Lenders required pursuant to Section 8.2, and
then only to the extent in such writing specifically set forth. All remedies
contained in the Loan Documents or by law afforded shall be cumulative and all
shall be available to the Agent and the Lenders until the Obligations have been
paid in full.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1. Survival of Representations. All representations and
---------------------------
warranties of the Borrower contained in this Agreement shall survive delivery of
the Notes and the making of the Loans herein contemplated.
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<PAGE>
9.2. Governmental Regulation. Anything contained in this Agreement
-----------------------
to the contrary notwithstanding, no Lender shall be obligated to extend credit
to the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. Taxes. Any taxes (excluding federal income taxes on the
-----
overall net income of any Lender) or other similar assessments or charges
payable or ruled payable by any governmental or revenue authority in respect of
the Loan Documents shall be paid by the Borrower, together with interest and
penalties, if any.
9.4. Headings. Section headings in the Loan Documents are for
--------
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.5. Entire Agreement. The Loan Documents embody the entire
----------------
agreement and understanding among the Borrower, the Agent and the Lenders and
supersede all prior agreements and understandings among the Borrower, the Agent
and the Lenders relating to the subject matter thereof other than the Commitment
Letter dated August 26, 1996 and that certain fee letter agreement dated August
26, 1996, in each case by and between the Borrower and First Chicago.
9.6. Several Obligations; Benefits of this Agreement. The
-----------------------------------------------
respective obligations of the Lenders hereunder are several and not joint and no
Lender shall be the partner or agent of any other (except to the extent to which
the Agent is authorized to act as such). The failure of any Lender to perform
any of its obligations hereunder shall not relieve any other Lender from any of
its obligations hereunder. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the parties to this
Agreement and their respective successors and assigns.
9.7. Expenses; Indemnification. The Borrower shall reimburse the
-------------------------
Agent for any costs, internal charges and out-of-pocket expenses (including
reasonable attorneys' fees and time charges of attorneys for the Agent, which
attorneys may be employees of the Agent) paid or incurred by the Agent in
connection with the preparation, negotiation, execution, delivery, review,
amendment, modification, and administration of the Loan Documents. The Borrower
also agrees to reimburse the Agent and the Lenders for any costs, internal
charges and out-of-pocket expenses (including attorneys' fees and time charges
of attorneys for the Agent and the Lenders, which attorneys may be employees of
the Agent or the Lenders) paid or incurred by the Agent or any Lender in
connection with the collection of the Obligations or the enforcement of the Loan
Documents. The Borrower further agrees to indemnify the Agent and each Lender,
its directors, officers and employees against all losses, claims, damages,
penalties, judgments, liabilities and expenses (collectively, the "indemnified
obligations") (including, without limitation, all expenses of litigation or
preparation therefor whether or not the Agent or any Lender is a party thereto,
but excluding those indemnified obligations arising solely from any Lender's
failure to perform its obligations under this Agreement) which any of them may
pay or incur arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of any Loan hereunder,
except that no indemnified party shall be indemnified for any indemnified
obligations arising from its own gross
Page 38
<PAGE>
negligence or willful misconduct as finally determined by a court of competent
jurisdiction. The obligations of the Borrower under this Section 9.7 shall
survive the termination of this Agreement.
9.8. Numbers of Documents. All statements, notices, closing
--------------------
documents, and requests hereunder shall be furnished to the Agent with
sufficient counterparts so that the Agent may furnish one to each of the
Lenders. The Agent shall promptly remit same to the Lenders.
9.9. Accounting. Except as provided to the contrary herein, all
----------
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
9.10. Severability of Provisions. Any provision in any Loan Document
--------------------------
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.11. Nonliability of Lenders. The relationship between the Borrower
-----------------------
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
the Borrower. Neither the Agent nor any Lender undertakes any responsibility to
the Borrower to review or inform the Borrower of any matter in connection with
any phase of the Borrower's business or operations. The Borrower shall rely
entirely upon its own judgment with respect to its business, and any review,
inspection or supervision of, or information supplied to the Borrower by the
Agent or the Lenders is for the protection of the Agent and the Lenders and
neither the Borrower nor any other Person is entitled to rely thereon. The
Borrower agrees that neither the Agent nor any Lender shall have any liability
with respect to, and the Borrower hereby waives, releases and agrees not to sue
for, any punitive damages in connection with, arising out of, or in any way
related to the Loan Documents or the transactions contemplated thereby or the
relationship established by the Loan Documents, or any act, omission or event
occurring in connection therewith.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING
-------------
A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS,
BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
-----------------------
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR
ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION
Page 39
<PAGE>
IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING
PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY
JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY
AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN
DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
9.14. Confidentiality. Each Lender agrees to hold any confidential
---------------
information which it may receive from the Borrower pursuant to this Agreement in
confidence and for use in connection with this Agreement, including without
limitation, for use in connection with its rights and remedies hereunder, except
for disclosure (i) to other Lenders and their respective Affiliates, (ii) to
legal counsel, accountants, and other professional advisors to, and Affiliates
of, that Lender, (iii) to regulatory officials, (iv) as requested pursuant to or
as required by law, regulation, or legal process, (v) in connection with any
legal proceeding to which that Lender is a party, and (vi) permitted by Section
12.4.
9.15. Nonreliance. Each Lender hereby represents that it is not
-----------
relying on or looking to any margin stock (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) for the repayment of the Loans
provided for herein.
9.16. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
--------------------
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.17. Disclosure. The Borrower and each Lender hereby (a)
----------
acknowledge and agree that First Chicago and/or its Affiliates from time to time
may hold other investments in, make other loans to or have other relationships
with the Borrower and its Subsidiaries, including, without limitation, acting as
commercial paper dealer or in connection with any securitizations, interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability of First Chicago or such Affiliate to the Borrower or any Lender,
respectively, arising out of or resulting from such investments, loans or other
relationships other than liabilities arising out of the gross negligence or
willful misconduct of First Chicago or its Affiliates.
Page 40
<PAGE>
ARTICLE X
THE AGENT
---------
10.1. Appointment. The First National Bank of Chicago is hereby
-----------
appointed Agent hereunder and under each other Loan Document, and each of the
Lenders irrevocably authorizes the Agent to act as the agent of such Lender.
The Agent agrees to act as such upon the express conditions contained in this
Article X. The Agent shall not have a fiduciary relationship in respect of the
Borrower or any Lender by reason of this Agreement or any other Loan Document.
10.2. Powers. The Agent shall have and may exercise such powers
------
under the Loan Documents as are specifically delegated to the Agent by the terms
of each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder, except any action specifically provided
by the Loan Documents to be taken by the Agent.
10.3. General Immunity. Neither the Agent nor any of its directors,
----------------
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith except
for its or their own gross negligence or willful misconduct.
10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent
-------------------------------------------
nor any of its directors, officers, agents or employees shall be responsible for
or have any duty to ascertain, inquire into, or verify (i) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder; (ii) the performance or observance of any of the covenants
or agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered to the Agent; or (iv) the validity,
enforceability, effectiveness, sufficiency or genuineness of any Loan Document
or any other instrument or writing furnished in connection therewith. Except
for notices or reports which the Agent is expressly hereby required to provide
to the Lenders, the Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by the Borrower to the Agent at
such time, but is voluntarily furnished by the Borrower to the Agent (either in
its capacity as Agent or in its individual capacity).
10.5. Action on Instructions of Lenders. The Agent shall in all
---------------------------------
cases be fully protected in acting, or in refraining from acting, hereunder and
under any other Loan Document in accordance with written instructions signed by
the Required Lenders, and such instructions and any action taken or failure to
act pursuant thereto shall be binding on all of the Lenders and on all holders
of Notes. The Agent shall be fully justified in failing or refusing to take any
action hereunder and under any other Loan Document unless it shall first be
indemnified to its satisfaction by the Lenders pro rata against any and all
liability, cost and expense that it may incur by reason of taking or continuing
to take any such action. The Lenders hereby acknowledge that the Agent shall be
under no duty to take
Page 41
<PAGE>
any discretionary action permitted to be taken by it pursuant to the provisions
of this Agreement unless it shall be requested in writing to do so by the
Required Lenders.
10.6. Employment of Agents and Counsel. The Agent may execute any of
--------------------------------
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7. Reliance on Documents; Counsel. The Agent shall be entitled to
------------------------------
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
10.8. Agent's Reimbursement and Indemnification. The Lenders agree
-----------------------------------------
to reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (i) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Loan Documents, (ii) for any other expenses not
reimbursed by the Borrower under the Loan Documents and incurred by the Agent on
behalf of the Lenders in connection with the preparation, execution, delivery,
administration and enforcement of the Loan Documents and (iii) for any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent in any way relating to or
arising out of the Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the enforcement of any of
the terms thereof or of any such other documents, provided that no Lender shall
be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the Agent. The obligations of the Lenders
under this Section 10.8 shall survive payment of the Obligations and termination
of this Agreement.
10.9. Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders stating that such notice is a "notice of default".
10.10. Rights as a Lender. In the event the Agent is a Lender, the
------------------
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender and may exercise the same as though it were not the
Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
Page 42
<PAGE>
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those contemplated by this Agreement or any other Loan Document,
with the Borrower or any of its Subsidiaries in which the Borrower or such
Subsidiary is not restricted hereby from engaging with any other Person. The
Agent, in its individual capacity, is not obligated to remain a Lender.
10.11. Lender Credit Decision. Each Lender acknowledges that it has,
----------------------
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.12. Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. The Agent may be removed at any time with or without cause
by written notice received by the Agent from the Required Lenders, such removal
to be effective on the date specified by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint, on
behalf of the Borrower and the Lenders, a successor Agent. If no successor
Agent shall have been so appointed by the Required Lenders within thirty days
after the resigning Agent's giving notice of its intent to resign, then the
resigning Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Agent. If the Agent has resigned or been removed and no successor
Agent has been appointed, the Lenders may perform all the duties of the Agent
hereunder and the Borrower shall make all payments in respect of the Obligations
to the applicable Lenders and for all other purposes shall deal directly with
the Lenders. No successor Agent shall be deemed to be appointed hereunder until
such successor Agent has accepted the appointment. Any such successor Agent
shall be a Lender or another commercial bank having capital and retained
earnings of at least $200,000,000. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning or removed Agent, and the resigning or removed Agent shall be
discharged from its duties and obligations hereunder and under the other Loan
Documents. After the effectiveness of the resignation or removal of an Agent,
the provisions of this Article X shall continue in effect for the benefit of
such Agent in respect of any actions taken or omitted to be taken by it while it
was acting as the Agent hereunder and under the other Loan Documents.
10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its
-----------
own account, the fees agreed to by the Borrower and the Agent pursuant to that
certain letter agreement dated August 26, 1996, or as otherwise agreed from time
to time.
Page 43
<PAGE>
ARTICLE XI
SETOFF; RATABLE PAYMENTS
------------------------
11.1. Setoff. In addition to, and without limitation of, any rights
------
of the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.
11.2. Ratable Payments. Except for payments received from the Agent
----------------
pursuant to Section 2.10, if any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
Sections 3.1, 3.2 or 3.4) in a proportion greater than that received by any
other Lender, such Lender agrees, promptly upon demand, to purchase a portion of
the Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
-------------------------------------------------
12.1. Successors and Assigns. The terms and provisions of the Loan
----------------------
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of the immediately preceding
sentence, any Lender may at any time, without the consent of the Borrower or the
Agent, assign all or any portion of its rights under this Agreement and its
Notes to a Federal Reserve Bank; provided, however, that no such assignment to a
Federal Reserve Bank shall release the transferor Lender from its obligations
hereunder. The Agent may treat the payee of any Note as the owner thereof for
all purposes hereof unless and until such payee complies with Section 12.3 in
the case of an assignment thereof or, in the case of any other transfer, a
written notice of the transfer is filed with the Agent. Any assignee or
transferee of a Note agrees by acceptance thereof to be bound by all the terms
and provisions of the Loan Documents. Any request, authority or consent of any
Person, who at the time of making such request or giving such authority or
consent is the holder of any Note, shall be conclusive and binding on any
subsequent holder, transferee or assignee of such Note or of any Note or Notes
issued in exchange therefor.
12.2. Participations.
--------------
Page 44
<PAGE>
12.2.1. Permitted Participants; Effect. Any Lender may, in the
------------------------------
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and the Borrower and the
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.
12.2.2. Voting Rights. Each Lender shall retain the sole right to
-------------
approve, without the consent of any Participant, any amendment, modification or
waiver of any provision of the Loan Documents other than any amendment,
modification or waiver with respect to any Loan or Commitment in which such
Participant has an interest which forgives principal, interest or fees or
reduces the interest rate or fees payable with respect to any such Loan or
Commitment, postpones any date fixed for any regularly-scheduled payment of
principal of, or interest or fees on, any such Loan or Commitment, or extends
the Termination Date.
12.2.3. Benefit of Setoff. The Borrower agrees that each Participant
-----------------
shall be deemed to have the right of setoff provided in Section 11.1 in respect
of its participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing directly
to it as a Lender under the Loan Documents, provided that each Lender shall
retain the right of setoff provided in Section 11.1 with respect to the amount
of participating interests sold to each Participant. Each Participant, by
exercising the right of setoff provided in Section 11.1, agrees to share with
each Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with Section 11.2 as if each
Participant were a Lender.
12.3. Assignments.
-----------
12.3.1. Permitted Assignments. Any Lender may, in the ordinary
---------------------
course of its business and in accordance with applicable law, at any time assign
to one or more banks or other entities ("Purchasers") all or any part of its
rights and obligations under the Loan Documents; provided, however, that in the
-------- -------
case of an assignment to an entity which is not a Lender or an Affiliate of a
Lender, such assignment shall be in a minimum amount of $5,000,000 or, if less,
the entire amount of its Commitment and Loans. Such assignment shall be
substantially in the form of Exhibit "H" hereto or in such other form as may be
agreed to by the parties thereto. The consent of the Borrower and the Agent
shall be required prior to an assignment becoming effective with respect to a
Purchaser which is not a Lender or an Affiliate thereof; provided, however, that
the consent of the Borrower shall not be required if, on the date of such
assignment, a Default shall have occurred and be continuing. Such consent shall
not be unreasonably withheld or delayed.
Page 45
<PAGE>
12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a
----------------------
notice of assignment, substantially in the form attached as Exhibit "I" to
Exhibit "H" hereto (a "Notice of Assignment"), together with any consents
required by Section 12.3.1, and (ii) payment of a $3,500 fee to the Agent for
processing such assignment, such assignment shall become effective on the
effective date specified in such Notice of Assignment. On and after the
effective date of such assignment, such Purchaser shall for all purposes be a
Lender party to this Agreement and any other Loan Document executed by the
Lenders and shall have all the rights and obligations of a Lender under the Loan
Documents, to the same extent as if it were an original party hereto, and no
further consent or action by the Borrower, the Lenders or the Agent shall be
required to release the transferor Lender with respect to the percentage of the
Aggregate Commitment and Loans assigned to such Purchaser. Upon the
consummation of any assignment to a Purchaser pursuant to this Section 12.3.2,
the transferor Lender, the Agent and the Borrower shall make appropriate
arrangements so that a replacement Note is issued to such transferor Lender and
a new Note or, as appropriate, replacement Note, is issued to such Purchaser, in
each case in principal amounts reflecting their respective Commitments, as
adjusted pursuant to such assignment.
12.4. Dissemination of Information. The Borrower authorizes each
----------------------------
Lender to disclose to any Participant or Purchaser or any other Person acquiring
an interest in the Loan Documents by operation of law (each a "Transferee") and
any prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries; provided
that each Transferee and prospective Transferee agrees to be bound by Section
9.14 of this Agreement.
12.5. Tax Treatment. If any interest in any Loan Document is
-------------
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 2.16.
ARTICLE XIII
NOTICES
-------
13.1. Giving Notice. Except as otherwise permitted by Section 2.11
-------------
with respect to borrowing notices, all notices and other communications provided
to any party hereto under this Agreement or any other Loan Document shall be in
writing and shall be delivered or mailed (or in the case of telegraphic
communication, delivered by telecopy or telex) addressed to such party at its
address set forth below its signature hereto or at such other address as may be
designated by such party in a notice to the other parties. Any notice, if
personally delivered or mailed (properly addressed with postage prepaid), shall
be deemed given when received; any notice, if transmitted by telecopy or telex,
shall be deemed given when transmitted (receipt confirmed by telephone in the
case of telecopies and answerback confirmed in the case of telexes).
Page 46
<PAGE>
13.2. Change of Address. The Borrower, the Agent and any Lender may
-----------------
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.
ARTICLE XIV
COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Agent and the Lenders and each party has notified the Agent by telex or
telephone, that it has taken such action.
Page 47
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this
Agreement as of the date first above written.
Commitments TORCHMARK CORPORATION
- -----------
By: /s/ Michael J. Klyce
--------------------------------
Print Name: Michael J. Klyce
Title: Vice President and Treasurer
2001 Third Avenue South
Birmingham, Alabama 35233
Attention: Mr. Michael J. Klyce
Telephone No.: (205) 325-2051
Telecopier No.: (205) 325-4157
$40,000,000 THE FIRST NATIONAL BANK OF CHICAGO,
- -----------
Individually and as Agent
By: /s/ Paul T. Schultz
----------------------------------
Print Name: Paul T. Schultz
Title: Managing Director
One First National Plaza
Chicago, Illinois 60670
Attention: Financial Services Division
Telephone No.: (312) 732-7074
Telecopier No.: (312) 732-4033
Telex No.: 4330253
Page 48
<PAGE>
$26,000,000 AMSOUTH BANK OF ALABAMA
- -----------
By: /s/ John M. Kettig
------------------------------
Print Name: John M. Kettig
Title: Senior Vice President
1900 5th Avenue North - 7th Floor
Birmingham, AL 35203
Attention: John M. Kettig
Telephone No.: (205) 326-5240
Telecopier No.: (205) 801-0157
$26,000,000 BANK OF AMERICA ILLINOIS
- -----------
By: /s/ Dana L. Ragiel
------------------------------
Print Name: Dana L. Ragiel
Title: Vice President
231 South LaSalle Street
Chicago, IL 60697
Attention: Dana L. Ragiel
Telephone No.: (312) 828-6723
Telecopier No.: (312) 987-0889
Page 49
<PAGE>
$26,000,000 BANK OF MONTREAL
- -----------
By: /s/ Dan Streiff
--------------------------
Print Name: Dan Streiff
Title:
115 South LaSalle Street
Chicago, IL 60697
Attention: Dan Streiff
Telephone No.: (312) 750-3775
Telecopier No.: (312) 750-3783
$26,000,000 THE BANK OF NEW YORK
- -----------
By: /s/ Michael Barry
--------------------------
Print Name: Michael Barry
Title: Assistant Treasurer
One Wall Street, 17th Floor
New York, NY 10286
Attention: Michael Barry
Telephone No.: (212) 635-6460
Telecopier No.: (212) 809-9520
Page 50
<PAGE>
$26,000,000 THE CHASE MANHATTAN BANK
- -----------
By: /s/ J. David Parker, Jr.
--------------------------
Print Name: J. David Parker, Jr.
Title: Vice President
One Chase Manhattan Plaza, 4th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Telephone No.: (212) 552-7631
Telecopier No.: (212) 552-3651
$26,000,000 FIRST ALABAMA BANK
- -----------
By: /s/ Robert Kuhn
--------------------------
Print Name: Robert Kuhn
Title: Vice President
417 North 20th Street, 2nd Floor
Birmingham, AL 35203
Attention: Robert Kuhn
Telephone No.: (205) 326-7104
Telecopier No.: (205) 326-7739
Page 51
<PAGE>
$26,000,000 FLEET NATIONAL BANK
- -----------
By: /s/ Jeffrey Simpson
--------------------------
Print Name: Jeffrey Simpson
Title: Vice President
777 Main Street, MSN 250
Hartford, CT 06115
Attention: Jeffrey Simpson
Telephone No.: (860) 986-5600
Telecopier No.: (860) 986-1264
$26,000,000 SOUTHTRUST BANK OF ALABAMA
- -----------
By: /s/ Curtis J. Perry
--------------------------
Print Name: Curtis J. Perry
Title: Vice President
420 North 20th Street
Birmingham, AL 35203
Attention: Curtis J. Perry
Telephone No.: (205) 254-5799
Telecopier No.: (205) 254-5022
Page 52
<PAGE>
$20,000,000 COMPASS BANK
- -----------
By: /s/ Con Holland
--------------------------
Print Name: Con Holland
Title: Vice President
15 South 20th Street, 2nd Floor
Birmingham, AL 35233
Attention: Con Holland
Telephone No.: (205) 933-3238
Telecopier No.: (205) 933-3926
$20,000,000 UNION BANK OF SWITZERLAND, NEW YORK
- ----------- BRANCH
By: /s/ Robert Mendeles
--------------------------
Print Name: Robert Mendeles
Title: Assistant Vice President
By:
--------------------------
Print Name:
Title:
299 Park Avenue
New York, NY 10171
Attention: Robert Mendeles
Telephone No.: (212) 821-3020
Telecopier No.: (212) 821-4540
Page 53
<PAGE>
$16,000,000 BANQUE NATIONALE DE PARIS
- -----------
By: /s/ Phil Trusdale
--------------------------
Print Name: Phil Trusdale
Title: Vice President
By:
--------------------------
Print Name:
Title:
499 Park Avenue
New York, NY 10022
Attention: Phil Trusdale
Telephone No.: (212) 415-9719
Telecopier No.: (212) 415-9695
$16,000,000 BOATMEN'S NATIONAL BANK
- -----------
By: /s/ Mike Helak
--------------------------
Print Name: Mike Helak
Title: Senior Vice President
10th and Baltimore
Kansas City, MO 64183
Attention: Mike Helak
Telephone No.: (816) 691-7032
Telecopier No.: (816) 691-7426
Page 54
<PAGE>
$16,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR
- ----------- CAYMAN ISLANDS BRANCH
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
31 West 52nd Street
New York, NY 10019
Attention:
Telephone No.: (212) 474-8104
Telecopier No.: (212) 474-8108
$16,000,000 DRESDNER BANK AG, NEW YORK BRANCH AND
- ----------- GRAND CAYMAN BRANCH
By:
--------------------------
Print Name:
Title:
By:
--------------------------
Print Name:
Title:
75 Wall Street
New York, NY 10005-2889
Attention: Lloyd C. Stevens
Telephone No.: (212) 429-2229
Telecopier No.: (212) 429-2524
Page 55
<PAGE>
$16,000,000 MELLON BANK, N.A.
- -----------
By: /s/ Robert E. Brandenstein
--------------------------
Print Name: Robert E. Brandenstein
-----------------------
Title: Vice President
---------------
One Mellon Bank Center
Pittsburgh, PA 15258
Attention: Robert E. Brandenstein
Telephone No.: (412) 234-7922
Telecopier No.: (412) 234-8087
$16,000,000 THE SAKURA BANK, LIMITED
- -----------
By: /s/ Hiroyasu Imanishi
--------------------------
Print Name: Hiroyasu Imanishi
Title: Vice President and Senior Manager
245 Peachtree Center Ave. N.E.
Atlanta, GA 30303
Attention: Charles Zimmerman
Telephone No.: (404) 521-3111
Telecopier No.: (404) 521-1133
Page 56
<PAGE>
$16,000,000 UMB BANK, N.A.
- -----------
By: /s/ Jim Sangster
--------------------------
Print Name: Jim Sangster
Title: Divisional Executive Vice President
1010 Grand Avenue
Kansas City, MO 64103
Attention: Jim Sangster
Telephone No.: (816) 860-7919
Telecopier No.: (816) 860-7143
Page 57
<PAGE>
EXHIBIT 2
TORCHMARK CORPORATION
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE 1
PURPOSE OF THE PLAN
Section 1.1. Purpose. The purpose of the Torchmark Corporation 1996 Non-
Employee Director Stock Option Plan is to attract and retain highly qualified
and capable Non-Employee Directors and to promote the long-term growth of
Torchmark Corporation by providing a vehicle for Non-Employee Directors to
increase their proprietary interest in Torchmark Corporation. The Plan will be
effective for Annual Compensation payable in 1997 or thereafter.
ARTICLE 2
DEFINITIONS
Section 2.1. Unless the context clearly indicates otherwise, the following
terms shall have the following meanings:
"Acquisition" has the meaning assigned such term in Section 9.3 hereof.
"Acquisition Consideration" has the meaning assigned such term in Section
9.3 hereof.
"Annual Compensation" means the annual cash retainer and meeting fees
payable by the Company to a Non-Employee Director for services as a director
(and, if applicable, as the member or chairman of a committee of the Board) of
the Company, as such amount may be changed from time to time. For purposes of
an election to receive Options under the Plan in lieu of Annual Compensation,
meeting fees will be deemed to be earned at the beginning of the year for all
scheduled meetings during the year, whether or not the Optionee later attends
such meetings.
"Beneficiary" means any person or persons designated by a Participant, in
accordance with procedures established by the Committee or Plan Administrator,
to receive benefits hereunder in the event of the Participant's death. If any
Participant shall fail to designate a Beneficiary or shall designate a
Beneficiary who shall fail to survive the Participant, the Beneficiary shall
be the Participant's surviving spouse, or, if none, the Participant's
surviving descendants (who shall take per stirpes) and if there are no
surviving descendants, the Beneficiary shall be the Participant's estate.
"Board" means the Board of Directors of the Company.
"Business Day" means a day on which the New York Stock Exchange or any
national securities exchange or over-the-counter market on which the Shares
are traded is open for business.
"Change in Control" means the happening of any of the following:
(i) when any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) (other than the Company or a subsidiary thereof or any
Company employee benefit plan), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities;
(ii) the occurrence of any transaction or event relating to the Company
that is required to be described pursuant to the requirements of Item 6(e)
of Schedule 14A of Regulation 14A of the Securities and Exchange Commission
under the Exchange Act;
B-1
<PAGE>
(iii) when, during any period of two consecutive years during the existence
of the Plan, the individuals who, at the beginning of such period,
constitute the Board, cease for any reason other than death to constitute
at least a majority thereof, unless each director who was not a director at
the beginning of such period was elected by, or on the recommendation of,
at least two-thirds of the directors at the beginning of such period; or
(iv) the occurrence of a transaction requiring stockholder approval for the
acquistion of the Company by an entity other than the Company or a
subsidiary thereof through the purchase of assets, by merger, or otherwise.
"Committee" means the Compensation Committee of the Board.
"Company" means Torchmark Corporation, a Delaware corporation.
"Disability" means total and permanent disability as determined under the
Company's long term disability program, whether or not the Optionee is covered
under such program. If no such program is in effect, the Disability of a
Participant shall be determined in good faith by the Board (excluding the
Participant).
"Election Date" means the date established by the Plan as the date by which
a Participant must submit a valid Primary Election Form to the Plan
Administrator in order to participate in the Plan for a calendar year. For
each calendar year, the Election Date is December 31 of the preceding calendar
year; provided, however, that the Election Date for a newly eligible
Participant shall be the 30th day following the date on which such individual
becomes a Non-Employee Director.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, as of any given date, the closing price of the
Stock on such date on the New York Stock Exchange Composite Tape.
"Interest Account" means the account established by the Company for each
Participant for Annual Compensation deferred pursuant to the Plan and which
shall be credited with interest on the last day of each calendar quarter (or
such other day as determined by the Plan Administrator). The maintenance of
individual Interest Accounts is for bookkeeping purposes only.
"Non-Employee Director" means a director of the Company who is not an
employee of the Company or of any subsidiary (as determined by the Committee).
"Option" means an option to purchase Shares awarded under Article 6.
"Option Grant Date" means the date upon which an Option is granted to a Non-
Employee Director pursuant to Article 6.
"Optionee" means a Non-Employee Director of the Company to whom an Option
has been granted or, in the event of such Non-Employee Director's death prior
to the expiration of an Option, such Non-Employee Director's Beneficiary.
"Participant" means any Non-Employee Director who is participating in the
Plan.
"Plan" means the Torchmark Corporation 1996 Non-Employee Director Stock
Option Plan.
"Plan Administrator" means the Committee or its delegee of administrative
duties under the Plan pursuant to Section 3.2.
B-2
<PAGE>
"Primary Election Form" means a form, substantially in the form attached
hereto as Exhibit A, pursuant to which a Non-Employee Director elects to defer
Annual Compensation under the Plan.
"Secondary Election Form" means a form, substantially in the form attached
hereto as Exhibit B, pursuant to which a Non-Employee Director elects to
convert previously deferred compensation to Options pursuant to Section 6.1 of
the Plan.
"Shares" means shares of the common stock of the Company.
"Stock Option Award Notice" means a written award notice to a Non-Employee
Director from the Company evidencing an Option.
ARTICLE 3
ADMINISTRATION OF THE PLAN
Section 3.1. Administrator of the Plan. The Plan shall be administered by
the Committee.
Section 3.2. Authority of Committee. The Committee shall have full power and
authority to: (i) interpret and construe the Plan and adopt such rules and
regulations as it shall deem necessary and advisable to implement and
administer the Plan, and (ii) designate persons other than members of the
Committee or the Board to carry out its responsibilities, subject to such
limitations, restrictions and conditions as it may prescribe, such
determinations to be made in accordance with the Committee's best business
judgment as to the best interests of the Company and its stockholders and in
accordance with the purposes of the Plan. The Committee may delegate
administrative duties under the Plan to one or more agents as it shall deem
necessary or advisable.
Section 3.3. Effect of Committee Determinations. No member of the Committee
or the Board or the Plan Administrator shall be personally liable for any
action or determination made in good faith with respect to the Plan or any
Option or to any settlement of any dispute between a Non-Employee Director and
the Company. Any decision or action taken by the Committee or the Board with
respect to an Option or the administration or interpretation of the Plan shall
be conclusive and binding upon all persons.
ARTICLE 4
PARTICIPATION
Section 4.1. Election to Participate. Each Non-Employee Director is
automatically eligible to participate in the Plan. A Non-Employee Director may
participate in the Plan for a calendar year by delivering a properly completed
and signed Primary Election Form to the Plan Administrator on or before the
Election Date. The Non-Employee Director's participation in the Plan will be
effective as of the first day of the calendar year beginning after the Plan
Administrator receives the Non-Employee Director's Primary Election Form, or,
in the case of a newly eligible Participant, on the first day of the calendar
month beginning after the Plan Administrator receives such Non-Employee
Director's Primary Election Form. A Participant shall not be entitled to any
benefit hereunder unless such Participant has properly completed a Primary
Election Form and deferred the receipt of his or her Annual Compensation
pursuant to the Plan.
Section 4.2. Irrevocable Election. A Participant may not revoke or change
his or her Primary Election Form for a calendar year; provided, however, that
a Participant may, by filing a Secondary Election Form with the Plan
Administrator within the period provided in the Plan, subsequently elect to
convert the balance in his or her Interest Account to Options in accordance
with Article 6.
Section 4.3. No Right to Continue as a Director. Nothing contained in the
Plan shall be deemed to give any Non-Employee Director the right to be
retained as a director of the Company.
ARTICLE 5
PLAN BENEFITS
Section 5.1. Deferred Annual Compensation. A Non-Employee Director may elect
to defer up to 100% of his or her Annual Compensation (in 10% increments but
not less than 50%) to his or her Interest Account
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and/or by conversion to Options in accordance with the terms of the Plan. For
bookkeeping purposes, the amount of the Annual Compensation which a Non-
Employee Director elects to defer pursuant to the Plan shall be transferred to
and held in individual Interest Accounts (in annual designations) pending
distribution in cash or the conversion to Options, if applicable, pursuant to
Article 6.
Section 5.2. Time of Election of Deferral. A Non-Employee Director who
wishes to defer Annual Compensation for a calendar year must irrevocably elect
to do so on or prior to the Election Date for such calendar year, by
delivering a valid Primary Election Form to the Plan Administrator. The
Primary Election Form shall indicate: (1) the percentage of Annual
Compensation to be deferred, and (2) the form and timing of payout of deferred
amounts.
Section 5.3. Interest Accounts. Amounts in a Participant's Interest Account
will be credited with interest as of the last day of each calendar quarter (or
such other day as determined by the Plan Administrator, which, in the case of
amounts converted to Options under the Plan, shall be the date of such
conversion) at the rate set from time to time by the Committee to be
applicable to the Interest Accounts of all Participants under the Plan. To the
extent required for bookkeeping purposes, a Participant's Interest Accounts
will be segregated to reflect deferred Annual Compensation on a year-by-year
basis. For example, a 1997 Interest Account, a 1998 Interest Account, and so
on. Within a reasonable time after the end of each calendar year, the Plan
Administrator shall report in writing to each Participant the amount held in
his or her Interest Accounts at the end of the year.
Section 5.4. Responsibility for Investment Choices. Each Participant is
solely responsible for any decision to defer Annual Compensation into his or
her Interest Account or convert Annual Compensation to Options under the Plan
and accepts all investment risks entailed by such decision, including the risk
of loss and a decrease in the value of the amounts he or she elects to defer.
Section 5.5. Form of Payment.
(a) Payment Commencement Date. Payment of the balances in a Participant's
Interest Accounts shall commence on the earliest to occur of (a) December
31 of the fifth year after the year with respect to which the deferral was
made, (b) the first Business Day of the fourth month after the
Participant's death, or (c) the Participant's termination as a Non-Employee
Director other than by reason of death.
(b) Optional Forms of Payment. Distributions from a Participant's Interest
Accounts may be paid to the Participant either in a lump sum or in a number
of approximately equal monthly installments designated by the Participant
on his or her Primary Election Form. Such monthly installments may be for
any number of months up to 120 months; provided, however, that in the event
of the Participant's death during the payout period, the remaining balance
shall be payable to the Participant's Beneficiary in a lump sum on the
first Business Day of the fourth month after the Participant's death. If a
Participant elects to receive a distribution of his or her Interest
Accounts in installments, the Plan Administrator may purchase an annuity
from an insurance company which annuity will pay the Participant the
desired annual installments. If the Plan Administrator purchases an annuity
contract, the Eligible Executive will have no further rights to receive
payments from the Company or the Plan with respect to the amounts subject
to the annuity. If the Plan Administrator does not purchase an annuity
contract, the value of the Interest Accounts remaining unpaid shall
continue to receive allocations of return as provided in Section 5.3. If
the Participant fails to designate a payment method in the Participant's
Primary Election Form, the Participant's Account shall be distributed in a
lump sum.
(c) Irrevocable Elections. A Participant may elect a different payment form
for each year's Annual Compensation deferred under the Plan. The payment
form elected or deemed elected on the Participant's Primary Election Form
shall be irrevocable.
(d) Acceleration of Payment. If a Participant elects an installment
distribution and the value of such installment payment elected by the
Participant would result in a distribution of less than $3,000 per year,
the Plan Administrator may accelerate payment of the Participant's benefits
over a lesser number of whole
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years so that the annual amount distributed is at least $3,000. If payment
of the Participant's benefits over a five year period will not provide
annual distributions of at least $3,000, the Participant's Account shall be
paid in a lump sum.
(e) Effect of Competition. Notwithstanding the Primary Election Form or any
provision set forth herein, the entire balance of a Participant's Interest
Accounts shall be paid immediately to the Participant a lump sum in the
event the Participant ceases to be a Non-Employee Director and becomes a
proprietor, officer, partner, employee or otherwise becomes affiliated with
any business that is in competition with the Company or an affiliated
company, or becomes employed by any governmental agency having jurisdiction
over the activities of the Company or an affiliated company.
(f) Effect of Adverse Determination. Notwithstanding the Primary Election
Form or any provision set forth herein, if the Internal Revenue Service
determines, for any reason, that all or any portion of the amounts credited
under this Plan is currently includable in the taxable income of any
Participant, then the amounts so determined to be includable in income
shall be distributed in a lump sum to such Participant as soon as
practicable.
(g) Payment to Beneficiary. Upon the Participant's death, all unpaid
amounts held in the Participant's Account shall be paid to the
Participant's Beneficiary in a lump sum on the first Business Day of the
fourth month following the Participant's death.
Section 5.6. Financial Hardship. The Plan Administrator may, in its sole
discretion, accelerate the making of payment to a Participant of an amount
reasonably necessary to handle a severe financial hardship of a sudden and
unexpected nature due to causes not within the control of the Participant. All
financial hardship distributions shall be made in cash in a lump sum. Such
payments will be made on a first-in, first-out basis so that the oldest Annual
Compensation deferred under the Plan shall be deemed distributed first in a
financial hardship.
Section 5.7. Payment to Minors and Incapacitated Persons. In the event that
any amount is payable to a minor or to any person who, in the judgment of the
Plan Administrator, is incapable of making proper disposition thereof, such
payment shall be made for the benefit of such minor or such person in any of
the following ways as the Plan Administrator, in its sole discretion, shall
determine:
(a) By payment to the legal representative of such minor or such person;
(b) By payment directly to such minor or such person;
(c) By payment in discharge of bills incurred by or for the benefit of such
minor or such person. The Plan Administrator shall make such payments
without the necessary intervention of any guardian or like fiduciary, and
without any obligation to require bond or to see to the further application
of such payment. Any payment so made shall be in complete discharge of the
Plan's obligation to the Participant and his or her Beneficiaries.
Section 5.8. Application for Benefits. The Plan Administrator may require a
Participant or Beneficiary to complete and file certain forms as a condition
precedent to receiving the payment of benefits. The Plan Administrator may
rely upon all such information given to it, including the Participant's
current mailing address. It is the responsibility of all persons interested in
receiving a distribution pursuant to the Plan to keep the Plan Administrator
informed of their current mailing addresses.
Section 5.9. Designation of Beneficiary. Each Participant from time to time
may designate any person or persons (who may be designated contingently or
successively and who may be an entity other than a natural person) as his or
her Beneficiary or Beneficiaries to whom the Participant's Account is to be
paid if the Participant dies before receipt of all such benefits. Each
Beneficiary designation shall be on the form prescribed by the Plan
Administrator and will be effective only when filed with the Plan
Administrator during the Participant's lifetime. Each Beneficiary designation
filed with the Plan Administrator will cancel all Beneficiary designations
previously filed with the Plan Administrator. The revocation of a Beneficiary
designation, no matter how effected, shall not require the consent of any
designated Beneficiary.
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ARTICLE 6
ELECTIVE OPTIONS
Each Non-Employee Director shall be granted Options subject to the following
terms and conditions:
Section 6.1. Election to Receive Options. At any time, but only one time,
during the calendar year immediately following the filing of a Primary
Election Form under Article 5, a Participant shall have the right to convert
into Options pursuant to this Article 6 the then-current balance (as of the
date of such election to receive Options) in his or her Interest Account for
the calendar year to which the Primary Election Form relates. For example, if
a Primary Election Form is filed in December 1996 to defer Annual Compensation
to be earned in 1997, the director may elect at any time in 1997 to convert
such deferred amount to Options. To make such election, the Participant must
file with the Plan Administrator a written irrevocable Secondary Election Form
to receive Options as of the date of the election (the "Option Grant Date").
The exercise price per Share under each Option granted pursuant to this
Article 6 shall, at the election of the Optionee as indicated on the Secondary
Election Form, be either 100% of the Fair Market Value per Share on the Option
Grant Date or a lesser percentage (but not less than 75%) of the Fair Market
Value per Share on the Option Grant Date, such lesser percentage to be
determined by the Committee from time to time. Such Secondary Election Form
shall indicate the percentage of such Options to be granted at each Exercise
Price, which choice may affect the number of Options to be received pursuant
to Section 6.2.
Section 6.2. Number and Terms of Options. The number of Shares subject to an
Option granted pursuant to this Article 6 shall be the number of whole Shares
equal to A divided by B, where:
A = the dollar amount which the Non-Employee Director has elected pursuant to
Section 6.1 to convert to Options; and
B = the per share value of an Option on the Option Grant Date, as determined
by the Committee using an option valuation model selected by the Committee in
its discretion (such value to be expressed as a percentage of the Fair Market
Value per Share on the Option Grant Date).
In determining the number of Shares subject to an Option, (i) the Committee
may designate the assumptions to be used in the selected option valuation
model, and (ii) any fraction of a Share will be rounded up to the next whole
number of Shares.
Section 6.3. Exercise of Options. Each Option shall be first exercisable,
cumulatively, as to 10% commencing on the each of the first through tenth
anniversaries of the Option Grant Date. An Optionee's death, Disability,
retirement or other termination of directorship or failure to be reelected as
a director shall not shorten the term of any outstanding Option. In no event
shall the period of time over which the Option may be exercised exceed eleven
years from the Option Grant Date. An Option, or portion thereof, may be
exercised in whole or in part only with respect to whole Shares. Shares shall
be issued to the Optionee pursuant to the exercise of an Option only upon
receipt by the Company from the Optionee of payment in full in cash of the
aggregate purchase price for the Shares subject to the Option or portion
thereof being exercised.
Section 6.4. Accelerated Vesting. Notwithstanding the normal vesting
schedule set forth in Section 6.3 hereof, any and all outstanding Options
shall become immediately exercisable upon the first to occur of (i) the death
of the Optionee, (ii) the Disability of the Optionee, (iii) the occurrence of
a Change in Control, or (iv) the unanimous determination by the Committee that
a particular Option or Options shall become fully exercisable. Upon
acceleration, an Option will remain exercisable for the remainder of its
original term.
Section 6.5. Stock Option Award Notice. Each Option granted under the Plan
shall be evidenced by a Stock Option Award Notice which shall be executed by
an authorized officer of the Company. Such Award Notice shall contain
provisions regarding (a) the number of Shares that may be issued upon exercise
of the Option,
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(b) the exercise price per Share of the Option and the means of payment
therefor, (c) the term of the Option, and (d) such other terms and conditions
not inconsistent with the Plan as may be determined from time to time by the
Committee.
Section 6.6. Transferability of Options. No Option shall be assignable or
transferable by the Optionee other than by will or the laws of descent and
distribution; provided, however, that the Committee may (but need not) permit
other transfers where the Committee concludes that such transferability (i)
does not result in accelerated taxation, and (ii) is otherwise appropriate and
desirable, taking into account any state or federal securities laws applicable
to transferable Options.
ARTICLE 7
SHARES SUBJECT TO THE PLAN
Section 7.1. Shares Subject to the Plan. Subject to adjustment as provided
in Article 9, the aggregate number of Shares which may be acquired upon the
exercise of Options shall not exceed 400,000 Shares. Shares acquired upon
exercise of Options may be newly issued Shares or previously issued and
reacquired Shares, and there are hereby reserved for issuance under the Plan
400,000 Shares. To the extent that Shares subject to an outstanding Option are
not issued or delivered by reason of the expiration, termination, cancellation
or forfeiture of such Option or by reason of the delivery of Shares to pay all
or a portion of the exercise price of such Option, then such Shares shall
again be available under the Plan.
ARTICLE 8
AMENDMENT AND TERMINATION
Section 8.1. Amendment, Suspension or Early Termination. The Board may
amend, suspend or terminate the Plan or any Stock Option Award Notice at any
time; provided, however, that the Board may condition any amendment or
modification on the approval of stockholders of the Company if such approval
is necessary or deemed advisable with respect to tax, securities or other
applicable laws, policies or regulations, and no such amendment, modification
or termination shall adversely affect any outstanding Options or Interest
Accounts without the consent of the Participant.
ARTICLE 9
ADJUSTMENT PROVISIONS
Section 9.1. Change in Corporate Structure Affecting Shares. If the Company
shall at any time change the number of issued Shares without new consideration
to the Company (such as by stock dividend, stock split, recapitalization,
reorganization, exchange of shares, liquidation, combination or other change
in corporate structure affecting the Shares) or make a distribution of cash or
property which has a substantial impact on the value of issued Shares, the
total number of Shares reserved for issuance under the Plan shall be
appropriately adjusted and the number of Shares covered by each outstanding
Option and the exercise price per Share under each outstanding Option and the
number of shares underlying Options shall be adjusted so that the aggregate
consideration payable to the Company and the value of each such Option shall
not be changed.
Section 9.2. Certain Reorganizations. Notwithstanding any other provision of
the Plan, and without affecting the number of Shares reserved or available
hereunder, the Committee shall authorize the issuance, continuation or
assumption of outstanding Options or provide for other equitable adjustments
after changes in the Shares resulting from any merger, consolidation, sale of
assets, acquisition of property or stock, recapitalization, reorganization or
similar occurrence in which the Company is the continuing or surviving
corporation, upon such terms and conditions as it may deem necessary to
preserve Optionees' rights under the Plan.
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Section 9.3. Acquisitions. In the case of any sale of assets, merger,
consolidation or combination of the Company with or into another corporation
other than a transaction in which the Company is the continuing or surviving
corporation and which does not result in the outstanding Shares being
converted into or exchanged for different securities, cash or other property,
or any combination thereof (an "Acquisition"), any Optionee who holds an
outstanding Option shall have the right (subject to the provisions of the Plan
and any limitation applicable to the Option) thereafter and during the term of
the Option, to receive upon exercise thereof the Acquisition Consideration (as
defined below) receivable upon the Acquisition by a holder of the number of
Shares which would have been obtained upon exercise of the Option or portion
thereof, as the case may be, immediately prior to the Acquisition. The term
"Acquisition Consideration" shall mean the kind and amount of shares of the
surviving or new corporation, cash, securities, evidence of indebtedness,
other property or any combination thereof receivable in respect of one Share
of the Company upon consummation of an Acquisition.
ARTICLE 10
MISCELLANEOUS
Section 10.1. Withholding. If any Option granted under the Plan is or
becomes subject to any withholding requirement, the Committee may require the
Optionee to remit such withholding as a condition to exercising the Option or
any portion thereof.
Section 10.2. Compliance with SEC Regulations. All grants and exercises of
Options under the Plan shall be executed in accordance with the requirements
of Section 16 of the Exchange Act, as amended and any regulations promulgated
thereunder, to the extent applicable. To the extent that any of the provisions
contained herein do not conform with Rule 16b-3 of the Exchange Act or any
amendments thereto or any successor regulation, then the Committee may make
such modifications so as to conform the Plan and any Options granted
thereunder to the Rule's requirements.
Section 10.3. Validity. In the event that any provision of the Plan or any
related Stock Option Award Notice is held to be invalid, void or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provision of the Plan or any related Stock Option Award
Notice.
Section 10.4. Inurement of Rights and Obligations. The rights and
obligations under the Plan and any related agreements shall inure to the
benefit of, and shall be binding upon the Company, its successors and assigns,
and the Non-Employee Directors and their beneficiaries.
Section 10.5. Titles. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of the Plan.
Section 10.6. Governing Law. The Plan shall be construed, governed and
enforced in accordance with the law of Delaware, except as such laws are
preempted by applicable federal law.
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EXHIBIT A
PRIMARY ELECTION FORM
[FOR CALENDAR YEAR 1997]
ELECTION TO DEFER DIRECTOR COMPENSATION PURSUANT TO THE
TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (the
"Plan") with respect to the undersigned's annual cash retainer and meeting
fees payable to the undersigned by Torchmark Corporation (the "Company") for
services as a director (and, if applicable, as a member or chairman of a
committee of the Board of Directors) of the Company during the calendar year
identified above ("Next Year's Annual Compensation"). Capitalized terms used
herein and not otherwise defined have the meanings assigned such terms in the
Plan.
I hereby irrevocably elect to defer into my Interest Account under the Plan
% [INDICATE ANY PERCENTAGE FROM 50% TO 100%, IN 10% INCREMENTS] of my
Next Year's Annual Compensation until the earliest of (a) December 31 of the
fifth year after the year identified above, (b) the first Business Day of the
fourth month after my death, or (c) my termination as a director of the
Company for any reason other than my death (the "Payment Date"); subject to,
however, my ability under the Plan to make a one-time election at any time
during the calendar year identified above, to be effective on the date such
subsequent election is received by the Plan administrator, to convert the
balance on such date in my Interest Account for such year to Options to
purchase common stock of the Company in accordance with the terms and
provisions of the Plan. Any amount remaining in my Interest Account on the
Payment Date will be paid to me or my Beneficiary [PLEASE CHECK ONE BOX]
[_] in cash in a lump sum on the Payment Date, or [_] in approximately equal
installments over months [UP TO 120 MONTHS] beginning on the Payment
Date; provided, however, that in the event of my death during such payout
period, the remaining balance shall be payable to my Beneficiary in a lump sum
on the first Business Day of the fourth month after my death.
Executed this day of December, 1996.
---------------------------------------
(Name)
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EXHIBIT B
SECONDARY ELECTION FORM
[FOR CALENDAR YEAR 1997]
ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE
TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (the
"Plan") with respect to the conversion to Options of the balance in the
undersigned's Interest Account under the Plan for the year identified above.
Capitalized terms used herein and not otherwise defined have the meanings
assigned such terms in the Plan.
I hereby irrevocably elect to convert, as of the date hereof, the balance in
my Interest Account under the Plan for the year identified above to Options to
purchase common stock of the Company in accordance with the terms and
provisions of the Plan.
I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]:
% of such Options will be granted at an exercise price of % of the Fair
Market Value of the Company's common stock on the date of grant, and
% of such Options will be granted at an exercise price of 100% of the Fair
Market Value of the Company's common stock on the date of grant.
Executed this day of , 1997.
---------------------------------------
(Name)
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EXHIBIT 3
TORCHMARK CORPORATION
1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
ARTICLE 1. PURPOSE OF THE PLAN.
Section 1.1. Purpose. The purpose of the Torchmark Corporation 1996
Executive Deferred Compensation Stock Option Plan is to promote the long-term
growth of Torchmark Corporation by providing a vehicle for Eligible Executives
to increase their proprietary interest in Torchmark Corporation and to attract
and retain highly qualified and capable Eligible Executives.
ARTICLE 2. DEFINITIONS.
Section 2.1. Unless the context clearly indicates otherwise, the following
terms shall have the following meanings:
"Acquisition" has the meaning assigned such term in Section 9.3 hereof.
"Acquisition Consideration" has the meaning assigned such term in Section
9.3 hereof.
"Annual Bonus" means the annual cash bonus payable by the Company to an
Eligible Executive for services to the Company or any of its affiliates, as
such amount may be determined from year to year.
"Beneficiary" means any person or persons designated by a Participant, in
accordance with procedures established by the Committee or Plan Administrator,
to receive benefits hereunder in the event of the Participant's death. If any
Participant shall fail to designate a Beneficiary or shall designate a
Beneficiary who shall fail to survive the Participant, the Beneficiary shall
be the Participant's surviving spouse, or, if none, the Participant's
surviving descendants (who shall take per stirpes) and if there are no
surviving descendants, the Beneficiary shall be the Participant's estate.
"Board" means the Board of Directors of the Company.
"Bonus Deferral Election Date" means the date established by the Plan as the
date by which a Participant must submit a valid Primary Election Form for
Bonus to the Plan Administrator in order to defer Annual Bonus under the Plan
for a calendar year. For each calendar year, the Bonus Deferral Election Date
is December 31 of the calendar year for which the Bonus is to be earned.
"Business Day" shall mean a day on which the New York Stock Exchange or any
national securities exchange or over-the-counter market on which the Shares
are traded is open for business.
"Change in Control" means the happening of any of the following:
(i) when any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) (other than the Company or a subsidiary thereof or any
Company employee benefit plan), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting
power of the Company's then outstanding securities;
(ii) the occurrence of any transaction or event relating to the Company
that is required to be described pursuant to the requirements of Item 6(e)
of Schedule 14A of Regulation 14A of the Securities and Exchange Commission
under the Exchange Act;
(iii) when, during any period of two consecutive years during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board, cease for any reason other than death to
constitute at least a majority thereof, unless each director who was not a
director at the beginning of such period was elected by, or on the
recommendation of, at least two-thirds of the directors at the beginning of
such period; or
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(iv) the occurrence of a transaction requiring stockholder approval for
the acquistion of the Company by an entity other than the Company or a
subsidiary thereof through the purchase of assets, by merger, or otherwise.
"Committee" means the Compensation Committee of the Board.
"Company" means Torchmark Corporation, a Delaware corporation.
"Covered Employee" means an individual defined in Section 162(m)(3) of the
Internal Revenue Code of 1986, as amended, with respect to the Company.
"Disability" means total and permanent disability as determined under the
Company's long term disability program, whether or not the Optionee is covered
under such program. If no such program is in effect, the Disability of a
Participant shall be determined in good faith by the Board (excluding the
Participant).
"Eligible Executive" means an executive officer of the Company or any of its
affiliates, as such officers may be selected by the Chairman of the Board of
Directors or the Committee or its designee from year to year.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, as of any given date, the closing price of the
Stock on such date on the New York Stock Exchange Composite Tape.
"Interest Account" means the Interest Account for Bonus and/or the Interest
Account for Salary, as the context requires. The maintenance of individual
Interest Accounts is for bookkeeping purposes only.
"Interest Account for Bonus" means the account established by the Company
for each Participant for Annual Bonus deferred pursuant to the Plan and which
shall be credited with interest on the last day of each calendar quarter (or
such other day as determined by the Plan Administrator).
"Interest Account for Salary" means the account established by the Company
for each Participant for Salary deferred pursuant to the Plan and which shall
be credited with interest on the last day of each calendar quarter (or such
other day as determined by the Plan Administrator).
"Option" means an option to purchase Shares awarded under Article 6. Options
granted under the Plan are not incentive stock options within the meaning of
Section 422 of the Internal Revenue Code.
"Option Grant Date" means the date upon which an Option is granted to an
Eligible Executive pursuant to Article 6.
"Optionee" means an Eligible Executive of the Company to whom an Option has
been granted or, in the event of such Eligible Executive's death prior to the
expiration of an Option, such Eligible Executive's Beneficiary.
"Participant" means any Eligible Executive who is participating in the Plan.
"Plan" means the Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan.
"Plan Administrator" means the Committee or its delegee of administrative
duties under the Plan pursuant to Section 3.2.
"Primary Election Form" means a Primary Election Form for Salary and/or a
Primary Election Form for Bonus, as the context requires.
"Primary Election Form for Bonus" means a form, substantially in the form
attached hereto as Exhibit B, pursuant to which an Eligible Executive elects
to defer Bonus under the Plan.
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"Primary Election Form for Salary" means a form, substantially in the form
attached hereto as Exhibit A, pursuant to which an Eligible Executive elects
to defer Salary under the Plan.
"Salary" means the salary payable by the Company to an Eligible Executive
for services to the Company or any of its affiliates, as such amount may be
changed from time to time.
"Salary Deferral Election Date" means the date established by the Plan as
the date by which a Participant must submit a valid Primary Election Form for
Salary to the Plan Administrator in order to defer Salary under the Plan for a
calendar quarter. For each calendar quarter, the Salary Deferral Election Date
is the last day of the preceding calendar quarter.
"Secondary Election Form" means a Secondary Election Form for Salary and/or
a Secondary Election Form for Bonus, as the context requires.
"Secondary Election Form for Bonus" means a form, substantially in the form
attached hereto as Exhibit D, pursuant to which an Eligible Executive elects
to convert previously deferred Annual Bonus to Options pursuant to Section 6.1
of the Plan.
"Secondary Election Form for Salary" means a form, substantially in the form
attached hereto as Exhibit C, pursuant to which an Eligible Executive elects
to convert previously deferred Salary to Options pursuant to Section 6.1 of
the Plan.
"Shares" means shares of the common stock of the Company.
"Stock Option Award Notice" means a written award notice to an Eligible
Executive from the Company evidencing an Option.
ARTICLE 3. ADMINISTRATION OF THE PLAN.
Section 3.1. Administrator of the Plan. The Plan shall be administered by
the Committee.
Section 3.2. Authority of Committee. The Committee shall have full power and
authority to: (i) interpret and construe the Plan and adopt such rules and
regulations as it shall deem necessary and advisable to implement and
administer the Plan, and (ii) designate persons other than members of the
Committee or the Board to carry out its responsibilities, subject to such
limitations, restrictions and conditions as it may prescribe, such
determinations to be made in accordance with the Committee's best business
judgment as to the best interests of the Company and its stockholders and in
accordance with the purposes of the Plan. The Committee may delegate
administrative duties under the Plan to one or more agents as it shall deem
necessary or advisable.
Section 3.3. Effect of Committee Determinations. No member of the Committee
or the Board or the Plan Administrator shall be personally liable for any
action or determination made in good faith with respect to the Plan or any
Option or to any settlement of any dispute between an Eligible Executive and
the Company. Any decision or action taken by the Committee or the Board with
respect to an Option or the administration or interpretation of the Plan shall
be conclusive and binding upon all persons.
ARTICLE 4. PARTICIPATION.
Section 4.1. Election to Participate. The Chairman of the Board or the
Committee or its designee shall designate each year those executives who shall
be Eligible Executives for the coming year. An Eligible Executive may
participate in the Plan by delivering to the Plan Administrator a properly
completed and signed (i) Primary Election Form for Salary on or before the
Salary Deferral Election Date, and/or (ii) Primary Election Form for Bonus on
or before the Bonus Deferral Election Date. An Eligible Executive's
participation in the Plan will be effective (i) as of the first day of the
calendar quarter beginning after the Plan Administrator receives the Eligible
Executive's Primary Election Form for Salary, or (ii) as of the first day of
the year for which an Annual Bonus
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is earned, in the case of an Eligible Executive's Primary Election Form for
Bonus. A Participant shall not be entitled to any benefit hereunder unless
such Participant has properly completed a Primary Election Form and deferred
the receipt of his or her Annual Bonus and/or Salary pursuant to the Plan.
Section 4.2. Irrevocable Election. A Participant may not revoke or change
his or her Primary Election Form; provided, however, that a Participant may,
by filing a Secondary Election Form with the Plan Administrator within the
period provided in the Plan, subsequently elect to convert the balance in his
or her Interest Account to Options in accordance with Article 6.
Section 4.3. No Right to Continue as an Employee. Nothing contained in the
Plan shall be deemed to give any Eligible Executive the right to be retained
as an employee of the Company or any of its affiliates.
ARTICLE 5. PLAN BENEFITS.
Section 5.1. Deferred Annual Bonus or Salary. An Eligible Executive may
elect to defer up to 100% (in increments of 10% or $10,000) of his or her
Annual Bonus and/or Salary to his or her Interest Account, and/or by
conversion to Options in accordance with the terms of the Plan. For
bookkeeping purposes, the amount of the Annual Bonus and/or Salary which an
Eligible Executive elects to defer pursuant to the Plan shall be transferred
to and held in individual Interest Accounts (in annual designations) pending
distribution in cash or the conversion to Options, if applicable, pursuant to
Article 6.
Section 5.2. Time of Election of Deferral. An Eligible Executive who wishes
to defer Salary for a calendar quarter must irrevocably elect to do so on or
prior to the Salary Deferral Election Date for such calendar quarter, by
delivering a valid Primary Election Form for Salary to the Plan Administrator.
The Primary Election Form for Salary shall indicate: (1) the percentage of
Salary to be deferred, and (2) the form and timing of payout of deferred
amounts; provided, however, that if a Participant elects to defer Salary for
more than one quarter during a particular calendar year, the form and timing
of payout for each quarter's deferral shall be identical. An Eligible
Executive who wishes to defer Annual Bonus for a calendar year must
irrevocably elect to do so on or prior to the Bonus Deferral Election Date for
such calendar year, by delivering a valid Primary Election Form for Bonus to
the Plan Administrator. The Primary Election Form for Bonus shall indicate:
(1) the percentage of Annual Bonus to be deferred, and (2) the form and timing
of payout of deferred amounts; provided, however, that if a Participant elects
to defer both Salary and Annual Bonus for a particular calendar year, the form
and timing of payout for each shall be identical.
Section 5.3. Interest Accounts. Amounts in a Participant's Interest Account
will be credited with interest as of the last day of each calendar quarter (or
such other day as determined by the Plan Administrator, which, in the case of
amounts converted to Options under the Plan, shall be the date of such
conversion) at the rate set from time to time by the Committee to be
applicable to the Interest Accounts of all Participants under the Plan. To the
extent required for bookkeeping purposes, a Participant's Interest Accounts
will be segregated to reflect deferred compensation on a year-by-year basis
and on the basis of the type of compensation deferred. For example, a 1997
Interest Account for Bonus, a 1997 Interest Account for Salary, a 1998
Interest Account for Bonus, a 1998 Interest Account for Salary, and so on.
Within a reasonable time after the end of each calendar year, the Plan
Administrator shall report in writing to each Participant the amount held in
his or her Interest Accounts at the end of the year.
Section 5.4. Responsibility for Investment Choices. Each Participant is
solely responsible for any decision to defer Annual Bonus and/or Salary into
his or her Interest Account or convert Annual Bonus and/or Salary to Options
under the Plan and accepts all investment risks entailed by such decision,
including the risk of loss and a decrease in the value of the amounts he or
she elects to defer.
Section 5.5. Form of Payment.
(a) Payment Commencement Date. Payment of the balances in a Participant's
Interest Accounts shall commence on the earliest to occur of (a) December
31 of the fifth year after the year with respect to which the deferral was
made, (b) the first Business Day of the fourth month after the
Participant's death, or (c) the Participant's termination as an employee of
the Company or any of its subsidiaries or affiliates, other than by reason
of death.
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(b) Optional Forms of Payment. Distributions from a Participant's
Interest Accounts may be paid to the Participant either in a lump sum or in
a number of approximately equal monthly installments designated by the
Participant on his or her Primary Election Form. Such monthly installments
may be for any number of months up to 120 months; provided, however, that
in the event of the Participant's death during the payout period, the
remaining balance shall be payable to the Participant's Beneficiary in a
lump sum on the first Business Day of the fourth month after the
Participant's death. If a Participant elects to receive a distribution of
his or her Interest Accounts in installments, the Plan Administrator may
purchase an annuity from an insurance company which annuity will pay the
Participant the desired annual installments. If the Plan Administrator
purchases an annuity contract, the Eligible Executive will have no further
rights to receive payments from the Company or the Plan with respect to the
amounts subject to the annuity. If the Plan Administrator does not purchase
an annuity contract, the value of the Interest Accounts remaining unpaid
shall continue to receive allocations of return as provided in Section 5.3.
If the Participant fails to designate a payment method in the Participant's
Primary Election Form, the Participant's Account shall be distributed in a
lump sum.
(c) Irrevocable Elections. A Participant may elect a different payment
form for each year's compensation deferred under the Plan; provided,
however, that if a Participant elects to defer Salary for more than one
quarter during a particular calendar year, or if a Participant elects to
defer Salary and Annual Bonus for a particular calendar year, the form and
timing of payout for each such deferral shall be identical. The payment
form elected or deemed elected on the Participant's Primary Election Form
shall be irrevocable.
(d) Acceleration of Payment. If a Participant elects an installment
distribution and the value of such installment payment elected by the
Participant would result in a distribution of less than $3,000 per year,
the Plan Administrator may accelerate payment of the Participant's benefits
over a lesser number of whole years so that the annual amount distributed
is at least $3,000. If payment of the Participant's benefits over a five
year period will not provide annual distributions of at least $3,000, the
Participant's Account shall be paid in a lump sum.
(e) Effect of Competition. Notwithstanding the Primary Election Form or
any provision set forth herein, the entire balance of a Participant's
Interest Accounts shall be paid immediately to the Participant a lump sum
in the event the Participant ceases to be an employee of the Company or any
of its subsidiaries or affiliates and becomes a proprietor, officer,
partner, employee or otherwise becomes affiliated with any business that is
in competition with the Company or an affiliated company, or becomes
employed by any governmental agency having jurisdiction over the activities
of the Company or an affiliated company.
(f) Effect of Adverse Determination. Notwithstanding the Primary Election
Form or any provision set forth herein, if the Internal Revenue Service
determines, for any reason, that all or any portion of the amounts credited
under this Plan is currently includable in the taxable income of any
Participant, then the amounts so determined to be includable in income
shall be distributed in a lump sum to such Participant as soon as
practicable.
(g) Payment to Beneficiary. Upon the Participant's death, all unpaid
amounts held in the Participant's Account shall be paid to the
Participant's Beneficiary in a lump sum on the first Business Day of the
fourth month following the Participant's death.
Section 5.6. Financial Hardship. The Plan Administrator may, in its sole
discretion, accelerate the making of payment to a Participant of an amount
reasonably necessary to handle a severe financial hardship of a sudden and
unexpected nature due to causes not within the control of the Participant. All
financial hardship distributions shall be made in cash in a lump sum. Such
payments will be made on a first-in, first-out basis so that the oldest
compensation deferred under the Plan shall be deemed distributed first in a
financial hardship.
Section 5.7. Payment to Minors and Incapacitated Persons. In the event that
any amount is payable to a minor or to any person who, in the judgment of the
Plan Administrator, is incapable of making proper disposition
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thereof, such payment shall be made for the benefit of such minor or such
person in any of the following ways as the Plan Administrator, in its sole
discretion, shall determine:
(a) By payment to the legal representative of such minor or such person;
(b) By payment directly to such minor or such person;
(c) By payment in discharge of bills incurred by or for the benefit of
such minor or such person. The Plan Administrator shall make such payments
without the necessary intervention of any guardian or like fiduciary, and
without any obligation to require bond or to see to the further application
of such payment. Any payment so made shall be in complete discharge of the
Plan's obligation to the Participant and his or her Beneficiaries.
Section 5.8. Application for Benefits. The Plan Administrator may require a
Participant or Beneficiary to complete and file certain forms as a condition
precedent to receiving the payment of benefits. The Plan Administrator may
rely upon all such information given to it, including the Participant's
current mailing address. It is the responsibility of all persons interested in
receiving a distribution pursuant to the Plan to keep the Plan Administrator
informed of their current mailing addresses.
Section 5.9. Designation of Beneficiary. Each Participant from time to time
may designate any person or persons (who may be designated contingently or
successively and who may be an entity other than a natural person) as his or
her Beneficiary or Beneficiaries to whom the Participant's Account is to be
paid if the Participant dies before receipt of all such benefits. Each
Beneficiary designation shall be on the form prescribed by the Plan
Administrator and will be effective only when filed with the Plan
Administrator during the Participant's lifetime. Each Beneficiary designation
filed with the Plan Administrator will cancel all Beneficiary designations
previously filed with the Plan Administrator. The revocation of a Beneficiary
designation, no matter how effected, shall not require the consent of any
designated Beneficiary.
ARTICLE 6. ELECTIVE OPTIONS.
Each Eligible Executive shall be granted Options subject to the following
terms and conditions:
Section 6.1. Election to Receive Options.
(a) Options Converted from Deferred Salary. At any time, but only one time,
during the twelve-month period following the end of a calendar year with
respect to which a Participant deferred Salary into the Plan, the Participant
shall have the right to convert some or all of his or her Interest Account for
Salary for such previous year into Options pursuant to this Article 6. To make
such election, the Participant must file with the Plan Administrator a written
irrevocable Secondary Election Form for Salary to receive Options as of the
date of the filing of such Secondary Election Form (the "Option Grant Date").
(b) Options Converted from Deferred Bonus. At any time, but only one time,
during the twelve-month period following the end of a calendar year with
respect to which a Participant deferred Annual Bonus into the Plan, the
Participant shall have the right to convert some or all of his or her Interest
Account for Bonus for such previous year into Options pursuant to this Article
6. To make such election, the Participant must file with the Plan
Administrator a written irrevocable Secondary Election Form for Bonus to
receive Options as of the date of the filing of such Secondary Election Form
(the "Option Grant Date").
(c) Exercise Price of Options. The exercise price per Share under each
Option granted pursuant to this Article 6 shall, at the election of the
Optionee as indicated on the Secondary Election Form, be either 100% of the
Fair Market Value per Share on the Option Grant Date, or a lesser percentage
(but not less than 75%) of the Fair Market Value per Share on the Option Grant
Date, such lesser percentage to be determined by the Committee from time to
time. Such Secondary Election Form shall indicate the percentage of such
Options to be granted at each Exercise Price, which choice may affect the
number of Options to be received pursuant to Section 6.2.
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Section 6.2. Number and Terms of Options. The number of Shares subject to an
Option granted pursuant to this Article 6 shall be the number of whole Shares
equal to A divided by B, where:
A = the dollar amount which the Eligible Executive has elected pursuant to
Section 6.1 to convert to Options; and
B = the per share value of an Option on the Option Grant Date, as determined
by the Committee using the Black Scholes option valuation model or another
recognized option valuation model selected by the Committee in its discretion
(such value to be expressed as a percentage of the Fair Market Value per Share
on the Option Grant Date).
In determining the number of Shares subject to an Option, (i) the Committee
may designate the assumptions to be used in the selected option valuation
model, and (ii) any fraction of a Share will be rounded up to the next whole
number of Shares.
Section 6.3. Exercise of Options. Each Option shall be first exercisable,
cumulatively, as to 10% commencing on the each of the first through tenth
anniversaries of the Option Grant Date; provided, however, that any Option
held by a Covered Employee shall not be exercisable before the first day of
the calendar year immediately following the year in which the Optionee ceased
to be a Covered Employee. An Optionee's death, Disability, retirement or other
termination of employment shall not shorten the term of any outstanding
Option. In no event shall the period of time over which the Option may be
exercised exceed the longer of (i) eleven years from the Option Grant Date, or
(ii) the thirtieth (30th) day of the calendar year immediately following the
year in which an Optionee ceased to be a Covered Employee. An Option, or
portion thereof, may be exercised in whole or in part only with respect to
whole Shares. Shares shall be issued to the Optionee pursuant to the exercise
of an Option only upon receipt by the Company from the Optionee of payment in
full in cash of the aggregate purchase price for the Shares subject to the
Option or portion thereof being exercised.
Section 6.4. Accelerated Vesting. Notwithstanding the normal vesting
schedule set forth in Section 6.3 hereof, any and all outstanding Options
shall become immediately exercisable upon the first to occur of (i) the death
of the Optionee, (ii) the Disability of the Optionee, (iii) the occurrence of
a Change in Control, or (iv) the unanimous determination by the Committee that
a particular Option or Options shall become fully exercisable. Upon
acceleration, an Option will remain exercisable for the remainder of its
original term.
Section 6.5. Stock Option Award Notice. Each Option granted under the Plan
shall be evidenced by a Stock Option Award Notice which shall be executed by
an authorized officer of the Company. Such Award Notice shall contain
provisions regarding (a) the number of Shares that may be issued upon exercise
of the Option, (b) the exercise price per Share of the Option and the means of
payment therefor, (c) the term of the Option, and (d) such other terms and
conditions not inconsistent with the Plan as may be determined from time to
time by the Committee.
Section 6.6. Transferability of Options. No Option shall be assignable or
transferable by the Optionee other than by will or the laws of descent and
distribution; provided, however, that the Committee may (but need not) permit
other transfers where the Committee concludes that such transferability (i)
does not result in accelerated taxation, and (ii) is otherwise appropriate and
desirable, taking into account any state or federal securities laws applicable
to transferable Options.
ARTICLE 7. SHARES SUBJECT TO THE PLAN.
Section 7.1. Shares Subject to the Plan. Subject to adjustment as provided
in Article 9, the aggregate number of Shares which may be acquired upon the
exercise of Options shall not exceed 1,000,000 Shares. Shares acquired upon
exercise of Options may be newly issued Shares or previously issued and
reacquired Shares, and there are hereby reserved for issuance under the Plan
1,000,000 Shares. To the extent that Shares subject to an outstanding Option
are not issued or delivered by reason of the expiration, termination,
cancellation or forfeiture of such Option or by reason of the delivery of
Shares to pay all or a portion of the exercise price of such Option, then such
Shares shall again be available under the Plan.
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ARTICLE 8. AMENDMENT AND TERMINATION.
Section 8.1. Amendment, Suspension or Early Termination. The Board may
amend, suspend or terminate the Plan or any Stock Option Award Notice at any
time; provided, however, that the Board may condition any amendment or
modification on the approval of stockholders of the Company if such approval
is necessary or deemed advisable with respect to tax, securities or other
applicable laws, policies or regulations, and no such amendment, modification
or termination shall adversely affect any outstanding Options or Interest
Accounts without the consent of the Participant.
ARTICLE 9. ADJUSTMENT PROVISIONS.
Section 9.1. Change in Corporate Structure Affecting Shares. If the Company
shall at any time change the number of issued Shares without new consideration
to the Company (such as by stock dividend, stock split, recapitalization,
reorganization, exchange of shares, liquidation, combination or other change
in corporate structure affecting the Shares) or make a distribution of cash or
property which has a substantial impact on the value of issued Shares, the
total number of Shares reserved for issuance under the Plan shall be
appropriately adjusted and the number of Shares covered by each outstanding
Option and the exercise price per Share under each outstanding Option and the
number of shares underlying Options shall be adjusted so that the aggregate
consideration payable to the Company and the value of each such Option shall
not be changed.
Section 9.2. Certain Reorganizations. Notwithstanding any other provision of
the Plan, and without affecting the number of Shares reserved or available
hereunder, the Committee shall authorize the issuance, continuation or
assumption of outstanding Options or provide for other equitable adjustments
after changes in the Shares resulting from any merger, consolidation, sale of
assets, acquisition of property or stock, recapitalization, reorganization or
similar occurrence in which the Company is the continuing or surviving
corporation, upon such terms and conditions as it may deem necessary to
preserve Optionees' rights under the Plan.
Section 9.3. Acquisitions. In the case of any sale of assets, merger,
consolidation or combination of the Company with or into another corporation
other than a transaction in which the Company is the continuing or surviving
corporation and which does not result in the outstanding Shares being
converted into or exchanged for different securities, cash or other property,
or any combination thereof (an "Acquisition"), any Optionee who holds an
outstanding Option shall have the right (subject to the provisions of the Plan
and any limitation applicable to the Option) thereafter and during the term of
the Option, to receive upon exercise thereof the Acquisition Consideration (as
defined below) receivable upon the Acquisition by a holder of the number of
Shares which would have been obtained upon exercise of the Option or portion
thereof, as the case may be, immediately prior to the Acquisition. The term
"Acquisition Consideration" shall mean the kind and amount of shares of the
surviving or new corporation, cash, securities, evidence of indebtedness,
other property or any combination thereof receivable in respect of one Share
of the Company upon consummation of an Acquisition.
ARTICLE 10. MISCELLANEOUS.
Section 10.1. Withholding. If any Option granted under the Plan is or
becomes subject to any withholding requirement, the Committee may require the
Optionee to remit such withholding as a condition to exercising the Option or
any portion thereof.
Section 10.2. Compliance with SEC Regulations. All grants and exercises of
Options under the Plan shall be executed in accordance with the requirements
of Section 16 of the Exchange Act, as amended and any regulations promulgated
thereunder, to the extent applicable. To the extent that any of the provisions
contained herein do not conform with Rule 16b-3 of the Exchange Act or any
amendments thereto or any successor regulation, then the Committee may make
such modifications so as to conform the Plan and any Options granted
thereunder to the Rule's requirements.
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Section 10.3. Validity. In the event that any provision of the Plan or any
related Stock Option Award Notice is held to be invalid, void or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provision of the Plan or any related Stock Option Award
Notice.
Section 10.4. Inurement of Rights and Obligations. The rights and
obligations under the Plan and any related agreements shall inure to the
benefit of, and shall be binding upon the Company, its successors and assigns,
and the Eligible Executives and their beneficiaries.
Section 10.5. Titles. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of the Plan.
Section 10.6. Governing Law. The Plan shall be construed, governed and
enforced in accordance with the law of Delaware, except as such laws are
preempted by applicable federal law.
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EXHIBIT A
PRIMARY ELECTION FORM FOR SALARY
FOR THE [SECOND QUARTER OF 1997]
ELECTION TO DEFER SALARY PURSUANT TO THE
TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option
Plan (the "Plan") with respect to the undersigned's salary as an executive
officer of Torchmark Corporation (the "Company") or its subsidiaries and
affiliates to be earned by the undersigned during the calendar quarter
identified above ("Next Quarter's Salary"). Capitalized terms used herein and
not otherwise defined have the meanings assigned such terms in the Plan.
I hereby irrevocably elect to defer into my Interest Account for Salary under
the Plan for the year identified above, % [INDICATE ANY PERCENTAGE UP
TO 100%, IN 10% INCREMENTS] or $ [INDICATE ANY DOLLAR AMOUNT IN
INCREMENTS OF $10,000] of my Next Quarter's Salary until the earliest of (a)
December 31 of the fifth year after the year identified above, (b) the first
Business Day of the fourth month after my death, or (b) my termination as an
employee of the Company or any of its subsidiaries or affiliates for any
reason other than my death (the "Payment Date"); subject to, however, my
ability under the Plan to make a one-time election at any time during the
twelve-month period following the end of the year identified above, to be
effective on the date such subsequent election is received by the Plan
Administrator, to convert some or all of the balance in my Interest Account
for Salary for such year to Options to purchase common stock of the Company in
accordance with the terms and provisions of the Plan. Any amount remaining in
my Interest Account for Salary on the Payment Date will be paid to me or my
Beneficiary as follows:
. if I have previously filed a Primary Election Form for Bonus or a Primary
Election Form for Salary for the year identified above, then in the same
manner as indicated on such form, or
. if I have not previously filed a Primary Election Form for Bonus or a
Primary Election Form for Salary for such year, then [PLEASE CHECK ONE BOX]
[_] in cash in a lump sum on the Payment Date, or [_] in approximately equal
installments over months [UP TO 120 MONTHS] beginning on the Payment
Date; provided, however, that in the event of my death during such payout
period, the remaining balance shall be payable to my Beneficiary in a lump sum
on the first Business Day of the fourth month after my death.
Executed this day of , 1997.
---------------------------------------
(Name)
<PAGE>
EXHIBIT B
PRIMARY ELECTION FORM FOR BONUS
FOR [CALENDAR YEAR 1997]
ELECTION TO DEFER BONUS PURSUANT TO THE
TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option
Plan (the "Plan") with respect to the undersigned's bonus as an executive
officer of Torchmark Corporation (the "Company") or its subsidiaries and
affiliates to be earned by the undersigned during the calendar year identified
above ("Current Year Bonus"). Capitalized terms used herein and not otherwise
defined have the meanings assigned such terms in the Plan.
I hereby irrevocably elect to defer into my Interest Account for Bonus under
the Plan for the year identified above, % [INDICATE ANY PERCENTAGE UP
TO 100%, IN 10% INCREMENTS] or $ [INDICATE ANY DOLLAR AMOUNT IN
INCREMENTS OF $10,000] of my Current Year Bonus, if any, until the earliest of
(a) December 31 of the fifth year after the year identified above, (b) the
first Business Day of the fourth month after my death, or (c) my termination
as an employee of the Company or any of its subsidiaries or affiliates for any
reason other than my death (the "Payment Date"); subject to, however, my
ability under the Plan to make a one-time election at any time during the
twelve-month period following the end of the year identified above, to be
effective on the date such subsequent election is received by the Plan
Administrator, to convert some or all of the balance in my Interest Account
for Bonus for such year to Options to purchase common stock of the Company in
accordance with the terms and provisions of the Plan. Any amount remaining in
my Interest Account for Bonus on the Payment Date will be paid to me or my
Beneficiary as follows:
. if I have filed a Primary Election Form for Salary for the year identified
above, then in the same manner as indicated on such form, or
. if I have not filed a Primary Election Form for Salary for such year, then
[PLEASE CHECK ONE BOX] [_] in cash in a lump sum on the Payment Date, or
[_] in approximately equal installments over months [UP TO 120 MONTHS]
beginning on the Payment Date; provided, however, that in the event of my
death during such payout period, the remaining balance shall be payable to my
Beneficiary in a lump sum on the first Business Day of the fourth month after
my death.
Executed this day of , 1997.
---------------------------------------
(Name)
<PAGE>
EXHIBIT C
SECONDARY ELECTION FORM FOR SALARY
[FOR CALENDAR YEAR 1997]
ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE
TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option
Plan (the "Plan") with respect to the conversion to Options of the balance in
the undersigned's Interest Account for Salary under the Plan for the year
identified above. Capitalized terms used herein and not otherwise defined have
the meanings assigned such terms in the Plan.
I hereby irrevocably elect to convert, as of the date hereof, %
[INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] of the balance in my
Interest Account for Salary under the Plan for the year identified above to
Options to purchase common stock of the Company in accordance with the terms
and provisions of the Plan.
I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]:
% of such Options will be granted at an exercise price of % of the Fair
Market Value of the Company's common stock on the date of grant, and
% of such Options will be granted at an exercise price of 100% of the Fair
Market Value of the Company's common stock on the date of grant.
Executed this day of , 1998.
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(Name)
<PAGE>
EXHIBIT D
SECONDARY ELECTION FORM FOR BONUS
[FOR CALENDAR YEAR 1997]
ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE
TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option
Plan (the "Plan") with respect to the conversion to Options of the balance in
the undersigned's Interest Account for Bonus under the Plan for the year
identified above. Capitalized terms used herein and not otherwise defined have
the meanings assigned such terms in the Plan.
I hereby irrevocably elect to convert, as of the date hereof, %
[INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] of the balance in my
Interest Account for Bonus under the Plan for the year identified above to
Options to purchase common stock of the Company in accordance with the terms
and provisions of the Plan.
I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]:
% of such Options will be granted at an exercise price of % of the Fair
Market Value of the Company's common stock on the date of grant, and
% of such Options will be granted at an exercise price of 100% of the Fair
Market Value of the Company's common stock on the date of grant.
Executed this day of , 1998.
---------------------------------------
(Name)
<PAGE>
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Net income from continuing operations ... $318,508,976 $ 271,945,720 $263,814,601
Discontinued operations of energy segment:
Income (loss) from operations ......... -0- (128,710,390) 5,131,667
Loss on disposal ...................... (7,137,124) -0- -0-
------------ ------------- ------------
Net income .............................. 311,371,852 143,235,330 268,946,268
Preferred dividends ..................... -0- 0 (804,130)
------------ ------------- ------------
Adjusted net income ..................... $311,371,852 $ 143,235,330 $268,142,138
============ ============= ============
Weighted average shares outstanding ..... 71,229,892 71,593,774 72,095,657
============ ============= ============
Primary earnings per share:
From continuing operations ............ $ 4.47 $ 3.80 $ 3.65
From discontinued operations of
energy segment:
Income (loss) from operations ....... -0- (1.80) 0.07
Loss on disposal .................... (0.10) -0- -0-
------------ ------------- ------------
Net income .......................... $ 4.37 $ 2.00 $ 3.72
============ ============= ============
</TABLE>
There were no common stock equivalents included in weighted average shares
outstanding.
<PAGE>
[LOGO OF TORCHMARK CORPORATION
APPEARS HERE]
March 25, 1997
To the Stockholders of
Torchmark Corporation:
Torchmark's 1997 annual meeting of stockholders will be held in the
auditorium at the executive offices of the Company, 2001 Third Avenue South,
Birmingham, Alabama at 10:00 a.m., Central Daylight Time, on Thursday, April
24, 1997.
The accompanying formal notice and proxy statement discuss matters which
will be presented for a stockholder vote. If you have any questions or
comments about the matters discussed in the proxy statement or about the
operations of your Company, we will be pleased to hear from you.
It is important that your shares be voted at this meeting. Please mark,
sign, and return your proxy. If you attend the meeting in person, you may
withdraw your proxy and vote your stock if you desire to do so.
We hope that you will take this opportunity to meet with us to discuss the
results and operations of the Company during 1996.
Sincerely,
/s/ R. K. Richey
-----------------------------------
R. K. Richey
Chairman & Chief Executive Officer
/s/ Keith A. Tucker
-----------------------------------
Keith A. Tucker
Vice Chairman
<PAGE>
---------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
---------------------------------
To the Holders of Common Stock of
Torchmark Corporation
The annual meeting of stockholders of Torchmark Corporation will be held at
the executive offices of the Company, 2001 Third Avenue South, Birmingham,
Alabama 35233 on Thursday, April 24, 1997 at 10:00 a.m., Central Daylight
Time, for the following purposes:
(1) To elect the nominees shown in the proxy statement as directors to
serve for three year terms or until their successors have been duly elected
and qualified.
(2) To approve amendments to and the restatement of the Torchmark
Corporation 1987 Stock Incentive Plan.
(3) To approve the Torchmark Corporation 1996 Non-Employee Director Stock
Option Plan and the Torchmark Corporation 1996 Executive Deferred
Compensation Stock Option Plan.
(4) To ratify the Torchmark political contributions program.
(5) To consider the appointment of independent auditors.
(6) To transact such other business as may properly come before the
meeting.
These matters are more fully discussed in the accompanying proxy statement.
The close of business on Wednesday, March 5, 1997 has been fixed as the date
for determining the stockholders who are entitled to notice of and to vote at
the annual meeting. All stockholders, whether or not they expect to attend the
annual meeting in person, are requested to mark, date, sign, and return the
enclosed form of proxy in the accompanying envelope. Your proxy may be revoked
at any time before it is voted.
The annual meeting for which this notice is given may be adjourned from time
to time without further notice other than announcement at the meeting or any
adjournment thereof. Any business for which notice is hereby given may be
transacted at any such adjourned meeting.
By Order of the Board of Directors
/s/ Carol A. McCoy
-----------------------------------
Carol A. McCoy
Associate Counsel & Secretary
Birmingham, Alabama
March 25, 1997
<PAGE>
PROXY STATEMENT
SOLICITATION OF PROXIES
The Board of Directors of Torchmark Corporation (the "Company" or
"Torchmark") solicits your proxy in the form enclosed with this statement for
use at the annual meeting of stockholders to be held at the executive offices
of the Company, 2001 Third Avenue South, Birmingham, Alabama 35233 at 10:00
a.m., Central Daylight Time, on Thursday, April 24, 1997, and at any
adjournment of such meeting. R. K. Richey and Keith A. Tucker are named as
proxies in the form and have been designated as directors' proxies by the
Board of Directors.
When the enclosed proxy/direction card is returned, properly executed, and
in time for the meeting, the shares represented thereby will be voted at the
meeting. All proxies will be voted in accordance with the instructions set
forth on the proxy/direction card, but if proxies which are executed and
returned do not specify a vote on the proposals considered, the proxies will
be voted FOR such proposals. Any stockholder giving a proxy has the right to
revoke it by giving written notice of revocation to the Secretary of the
Company (at the address set forth above) at any time before the proxy is
voted.
The card is considered to be voting instructions furnished to the respective
trustees of the Torchmark Corporation Savings and Investment Plan, the United
Investors Management Company Savings and Investment Plan, the Liberty National
Life Insurance Company 401(k) Plan and the Profit-Sharing and Retirement Plan
of Liberty National Life Insurance Company with respect to shares allocated to
individual accounts under such plans. To the extent that account information
is the same, participants in one or more of the plans who are also
shareholders of record will receive a single card representing all shares. If
a plan participant does not return a proxy/direction card to the Company, the
trustees of a plan in which shares are allocated to his or her individual
account will vote such shares in the same proportion as the total shares in
such plan for which directions have been received.
A simple majority vote of the holders of the issued and outstanding common
stock of the Company represented in person or by proxy at the stockholders
meeting is required to elect directors and approve all other matters put to a
vote of stockholders. Abstentions are considered as shares present and
entitled to vote and therefore have the same legal effect as a vote against a
matter presented at the meeting. Any shares regarding which a broker or
nominee does not have discretionary voting authority under applicable New York
Stock Exchange rules will be considered as shares not entitled to vote and
will therefore not be considered in the tabulation of the votes.
RECORD DATE AND VOTING STOCK
Each stockholder of record at the close of business on March 5, 1997 is
entitled to one vote for each share of common stock held on that date upon
each matter to be voted on by the stockholders at the meeting. At the close of
business on March 5, 1997, there were 69,832,952 shares of common capital
stock of the Company outstanding (not including 71,181,588 shares held by the
Company and its subsidiaries which are non-voting while so held). There is no
cumulative voting of the common stock.
1
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table lists all persons known to be the beneficial owner of
more than five percent of the Company's outstanding common stock as of
December 31, 1996.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES(1) CLASS
---------------- ------------------- ----------
<S> <C> <C>
INVESCO PLC 4,225,127 6.0%
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- --------
(1) All stock reported is held by holding companies (INVESCO North American
Group, Ltd, INVESCO Group Services, Inc., INVESCO, Inc. and INVESCO North
American Holdings, Inc.) and an investment advisor (INVESCO Capital
Management, Inc.), which are subsidiaries of INVESCO PLC. These entities
share the voting and the dispositive power over the shares and have
disclaimed beneficial ownership of such stock.
PROPOSAL NUMBER 1
ELECTION OF DIRECTORS
The Company's By-laws provide that the number of directors shall be not less
than seven nor more than fifteen with the exact number to be fixed by the
Board of Directors. In March, 1997, the Board of Directors fixed the number of
directors at nine persons, effective upon the retirement of Yetta G. Samford,
Jr. at the April 24, 1997 annual meeting of stockholders.
The Board of Directors proposes the election of David L. Boren, Louis T.
Hagopian, and Harold T. McCormick as directors, to hold office for a term of
three years, expiring at the close of the annual meeting of stockholders to be
held in 2000 or until their successors are elected and qualified. The current
terms of office of Messrs. Boren, Hagopian and McCormick expire in 1997. The
term of office of each of the other six directors continues until the close of
the annual meeting of stockholders in the year shown in the biographical
information below.
Non-officer directors retire from the Board of Directors at the annual
meeting of stockholders which immediately follows their 73rd birthday.
Directors who are officers of the Company retire from active service as
directors at the annual stockholders meeting immediately following their 65th
birthday, except that the director holding the position of Chairman of the
Board retires at the annual meeting of stockholders following his 73rd
birthday.
If any of the nominees becomes unavailable for election, which is not
anticipated, the directors' proxies will vote for the election of such other
person as the Board of Directors may recommend unless the Board reduces the
number of directors.
The Board recommends that the stockholders vote FOR the nominees.
PROFILES OF DIRECTORS AND NOMINEES(/1/)
David L. Boren (age 56) has been a director of the Company since April,
1996. He is a director of Phillips Petroleum Corporation, AMR Corporation and
Texas Instruments, Inc. Principal occupation: President of The University of
Oklahoma, Norman, Oklahoma since November, 1994. (United States Senator from
Oklahoma, 1979-1994; Member, Senate Finance Committee).
Joseph M. Farley (age 69) has been a director of the Company since 1980. His
term expires in 1998. He is an advisory director of The Southern Company.
Principal occupation: Of Counsel at Balch & Bingham, Attorneys and Counselors,
Birmingham, Alabama since November, 1992. (President and Chief Executive
Officer of Southern Nuclear Operating Company, Birmingham, Alabama, a nuclear
utility operating company,
2
<PAGE>
December, 1990-May, 1992; Chairman of the Board of Southern Nuclear Operating
Company, May-October, 1992; Executive Vice President and Corporate Counsel of
The Southern Company, Birmingham, Alabama, July, 1991-October, 1992).
Louis T. Hagopian (age 71) has been a director of the Company since 1988.
Principal occupation: Owner of Meadowbrook Enterprises, Darien, Connecticut,
an advertising and marketing consultancy, since January, 1990. Vice Chairman,
Partnership for a Drug-Free America, New York, New York.
C. B. Hudson (age 51) has been a director since 1986. His term expires in
1998. Principal occupation: Chairman of Insurance Operations of the Company
since January, 1993; Chairman of Liberty, United American and Globe since
October, 1991 and Chief Executive Officer of Liberty since December, 1989, of
United American since November, 1982 and of Globe since February, 1986.
(President of Liberty, January, 1993-December, 1994).
Joseph L. Lanier, Jr. (age 65) has been a director of the Company since
1980. His term expires in 1998. He is a director of Flowers Industries, Inc.,
Dimon Inc. and SunTrust Banks, Inc. Principal occupation: Chairman of the
Board and Chief Executive Officer of Dan River Incorporated, Danville,
Virginia, a textile manufacturer, since November, 1989.
Harold T. McCormick (age 68) has been a director since April, 1992.
Principal occupation: Chairman and Chief Executive Officer of Bay Point Yacht
& Country Club, Panama City, Florida, since March, 1988; Chairman, First
Ireland Spirits Co., Ltd., Dublin, Ireland, since February, 1996.
George J. Records (age 62) has been a director of the Company since April,
1993. His term expires in 1999. Principal occupation: Chairman of Midland
Financial Co., Oklahoma City, Oklahoma, a bank and financial holding company
for retail banking and mortgage operations, since 1982.
R. K. Richey (age 70) has been a director of the Company since 1980. His
term expires in 1999. He is a director of Full House Resorts, Inc., Vesta
Insurance Group, Inc., the United Group of Mutual Funds (17 funds), Waddell &
Reed Funds, Inc. (6 funds) and TMK/United Funds, Inc. (10 funds). Principal
occupation: Chairman of Company since August, 1986 and Chief Executive Officer
of the Company since December, 1984.
Keith A. Tucker (age 52) has been a director since October, 1989. His term
expires in 1999. He is a director of Vesta Insurance Group, Inc., the United
Group of Mutual Funds (17 funds), Waddell & Reed Funds, Inc. (6 funds) and
TMK/United Funds, Inc. (10 funds). Principal occupation: Vice Chairman of
Company since May, 1991.
- --------
(1) "Liberty", "Globe" and "United American" as used in this proxy statement
refer to Liberty National Life Insurance Company, Globe Life And Accident
Insurance Company and United American Insurance Company, respectively,
subsidiaries of the Company.
3
<PAGE>
PROPOSAL NUMBER 2
AMENDMENT TO AND RESTATEMENT OF 1987 TORCHMARK STOCK INCENTIVE PLAN
On October 22, 1996 and March 4, 1997, the Board of Directors of the Company
adopted amendments to the provisions of and determined to restate the
Torchmark Corporation 1987 TMK Stock Incentive Plan (the "TMK Incentive
Plan"), subject to approval by the stockholders of the Company. The amendments
are discussed in more detail below. The full text of the TMK Incentive Plan,
as amended and restated, is attached hereto as Exhibit 1 and the following
description is qualified in its entirety by reference to said Exhibit 1.
Capitalized terms used herein shall have the same meaning as set forth in the
TMK Incentive Plan.
SUMMARY OF AMENDMENTS
The TMK Incentive Plan presently provides that 11,300,000 shares are
available for issuance thereunder. The Board has amended the plan, subject to
shareholder approval, to increase the number of shares available for awards
from 11,300,000 to 12,300,000. The additional 1,000,000 shares which would be
available for awards may come from authorized but unissued shares or from the
treasury stock of the Company. If a stock option expires unexercised or an
award is forfeited, the shares subject to such award will generally be
available for future awards.
The TMK Incentive Plan currently provides that non-employee ("outside")
directors are automatically awarded a Director Stock Option for 3,000 shares
on the first day of each calendar year on which the Company's common stock is
traded on the New York Stock Exchange. In 1996, changes were made in federal
securities laws and regulations which would allow non-formula based stock
options to be awarded to outside directors pursuant to option plans which
comply with Rule 16b-3 of the Securities Exchange Act of 1934. After review
and deliberation, the Board determined that it was desirable to amend the TMK
Incentive Plan to permit the Board, in its discretion, to grant non-formula
based stock options to outside directors from time to time. Thus, the Board
amended the plan, subject to shareholder approval at the 1997 Annual Meeting,
to provide that the entire Board, in its sole discretion, may for calendar
years commencing with 1996, award Director Stock Options on a non-formula
basis to all or such individual Outside Directors as it may select upon such
terms and conditions as it may determine. The price of such Director Stock
Options may be fixed by the Board at a discount not to exceed 25% of the fair
market value of the Company's common stock on the grant date or may be the
fair market value of the stock on the grant date.
Contingent upon shareholder approval, on December 18, 1996, each of Messrs.
Boren, McCormick and Records were granted options on 10,000 shares at $37.22
per share (25% discount to fair market value on December 18, 1996). The Board
in its discretion determined to award these non-formula options to all non-
employee directors elected after January 1, 1992 (the newer directors) to
provide them a greater economic interest in the Company through ownership of
common stock.
DESCRIPTION OF THE TMK INCENTIVE PLAN
The following is a description of the amended and restated TMK Incentive
Plan as submitted for stockholder approval. The TMK Incentive Plan authorizes
the Compensation Committee to grant Stock Options, Stock Appreciation Rights,
Restricted Stock and/or Deferred Stock awards to officers and other key
employees of the Company and its Subsidiaries and Affiliates, during the
period ending April 28, 2004. Each Outside Director of the Company is
automatically granted a Director Stock Option for 3,000 shares on the first
day of each calendar year on which the Company's common stock is traded on the
New York Stock Exchange. Outside Directors may from time to the be awarded, in
the sole discretion of the Board, non-formula based Director Stock Options in
such amounts and upon such terms as are determined by the Board.
A maximum of 12,300,000 shares (plus such shares subject to options under
the 1984 Torchmark Corporation Stock Option Plan which expire unexercised) of
common stock of the Company are available for awards under the terms of the
TMK Incentive Plan, subject to adjustment for future stock splits, stock
dividends and similar events. Options, awards and other grants under the TMK
Incentive Plan which expire unexercised or are forfeited are generally not
counted in applying the maximum shares authorization. Presently, 671,288
shares remain available for awards pursuant to the TMK Incentive Plan. The
closing price of Company common stock on the New York Stock Exchange on March
7, 1997 was $59.625 per share.
4
<PAGE>
The TMK Incentive Plan permits the granting of incentive stock options and
non-qualified stock options. The Stock Option term is set by the Compensation
Committee but cannot exceed ten years in the case of incentive stock options.
Automatic-formula-based Director Stock Options are non-qualified stock options
with a ten year and two day term. Non-formula based Director Stock Options are
non-qualified options with the term specified by the Board at the time of
grant. The exercise price for any Stock Option and formula-based Director
Stock Option will be determined by the Compensation Committee but will never
be less than 100% of the market price of the stock on the date of grant. A
non-formula based Director Stock Option may be awarded by the Board, in its
discretion, with an exercise price equal to the fair market value of the stock
on the grant date or at a discount not to exceed 25% of the market value on
the grant date. Options become exercisable, in full or in installments, at the
time determined by the Compensation Committee, which can also accelerate the
exercisability of options. Generally, Stock Options and Director Stock Options
(both formula-based and discretionary) may not be first exercised prior to six
months from the option grant date except in certain circumstances more fully
described below. The Compensation Committee may also substitute new Stock
Options for previously granted Stock Options including options granted under
other plans applicable to the participant and previously granted Stock Options
having higher prices.
All shares purchased upon the exercise of a Stock Option or either type of
Director Stock Option must be paid for in full at the time of purchase in cash
or, if permitted by the Compensation Committee, by delivery of unrestricted
stock, restricted stock or deferred stock valued at Fair Market Value on the
exercise date. The Compensation Committee may allow "pyramiding" in the
exercise of Stock Options and permits the exercise and simultaneous sale
("cashless exercise") of Stock Options and Director Stock Options through a
program operated in conjunction with local brokerages.
Stock Options, in the case of termination of employment by death,
Disability, or Normal Retirement, and Director Stock Options, in all
situations where Outside Director status terminates, become immediately
exercisable upon the termination date and may thereafter be exercised during
the period which ends upon the expiration of the stated term of the option or
in the case of death, the expiration of the stated term of the option or the
first anniversary of the optionee's death, whichever is later. If the officer
or key employee's employment terminates as a result of Early Retirement, the
Stock Options terminate three years from the termination date or upon the
expiration of the stated term of the option, whichever is shorter, and may be
exercised to the extent they become exercisable during such period. When an
optionee's employment is involuntarily terminated without Cause, the Stock
Options expire three months from the termination date or upon the expiration
of the stated term of the option, whichever is shorter, and may be exercised
to the extent they become exercisable during such period. When an optionee's
employment is terminated for Cause, the options are immediately forfeited to
the Company. In the case of voluntary termination of employment for any
reason, Stock Options terminate one month from the termination date or upon
the expiration of the stated term of the option, whichever is shorter, and may
be exercised to the extent they become exercisable during such period.
The Compensation Committee is authorized to grant Stock Options which may be
transferred during the optionee's lifetime in limited circumstances with the
express written consent of the Compensation Committee. Such transfers may only
be made to members of the Immediate Family of the optionee, a partnership
where such Immediate Family members are the only partners, or one or more
trusts for the benefit of such Immediate Family members, and without
consideration for the transfer. Any Stock Option not (i) granted pursuant to
any agreement expressly allowing the transfer of said Stock Option or (ii)
amended expressly to permit its transfer will not be transferable otherwise
than by will or by the laws of descent and distribution.
Optionees recognize income for purposes of Federal income tax immediately
upon the exercise of non-qualified options, generally in an amount equal to
the option spread on the date of exercise, and the employer corporation
generally receives a deduction in the same amount, subject to limitations on
deductibility imposed by Sections 162(m) and 280G of the Internal Revenue
Code. Upon the exercise of incentive stock options if the optionee holds the
shares received for the longer of one year from the date of the option
exercise or two years from the date of the option grant, the optionee
generally does not recognize income until the shares are actually sold (at
which time the difference between the sale proceeds and the exercise price is
taxed as capital gain) and the employer corporation does not receive any
deduction.
The TMK Incentive Plan provides that optionees may elect, subject to the
approval of the Compensation Committee, to have their tax withholding
obligations met by the reduction of the number of shares of stock or amount of
cash otherwise issuable or payable to such person.
5
<PAGE>
Stock appreciation rights ("SARs") may be granted in conjunction with
options, entitling the holder upon exercise to receive an amount in any
combination of cash or unrestricted common stock of the Company (as determined
by the Compensation Committee), not greater in value than the increase in the
value of the shares covered by such right since the date of grant. Each SAR
will terminate upon the termination of the related option.
The Compensation Committee may also award non-transferable restricted shares
of common stock subject to such conditions and restrictions as it may
determine, which may include continued employment or the attainment of
performance goals. The Compensation Committee may permit the restrictions to
lapse in installments within the restricted period and may accelerate or waive
any restrictions at any time (including after termination of employment). A
recipient of restricted stock may be required to pay a purchase price per
share for such stock or may receive such restricted stock without any payment
in cash or property as determined by the Compensation Committee. If a
participant who holds shares of restricted stock terminates employment for any
reason (including death) prior to the lapse or waiver of the restrictions, the
participant will forfeit the shares in exchange for the amount, if any, which
the participant paid for them.
Deferred stock awards may be made by the Compensation Committee under the
TMK Incentive Plan. These non-transferable awards entitle the recipient to
receive shares without any payment in cash or property in one or more
installments at a future date or dates, as determined by the Compensation
Committee. Receipt of deferred stock may be conditioned on such matters as the
Compensation Committee shall determine, including continued employment or
attainment of performance goals. All such rights will generally terminate upon
the participant's termination of employment. Any deferral restrictions under a
deferred stock award may be accelerated or waived by the Compensation
Committee at any time (including following termination of employment).
The TMK Incentive Plan authorizes the Company, with the consent of the
Compensation Committee, to make or arrange for loans to employees in
connection with the exercise of options or the payment of any purchase price
for restricted stock granted under the TMK Incentive Plan. The Compensation
Committee has full authority to decide whether to make such loans and to
determine the terms and provisions of any such loans including the interest
charged and repayment terms.
The TMK Incentive Plan provides that (1) in the event of a "Change of
Control" (as defined in the TMK Incentive Plan), unless otherwise determined
by the Compensation Committee prior to such Change of Control, or (2) to the
extent expressly provided by the Compensation Committee at or after the time
of grant, in the event of a "Potential Change of Control" (as defined in the
TMK Incentive Plan), (i) all stock options and related SARs will become
immediately exercisable, (ii) the restrictions and deferral limitations
applicable to outstanding restricted stock awards and deferred stock awards
will lapse and the shares in question will fully vest, and (iii) the value of
such options and awards, to the extent determined by the Compensation
Committee, will be settled on the basis of the highest price paid (or offered)
during the preceding 60-day period, as determined by the Compensation
Committee. In the sole discretion of the Committee, such settlements may be
made in cash or in stock, as shall be necessary to effect the desired
accounting treatment for the transaction resulting in the Change of Control.
In addition, at any time prior to or after a Change of Control or a Potential
Change of Control, the Compensation Committee may accelerate awards and waive
conditions and restrictions on any awards to the extent it may determine
appropriate. Generally, if an optionee's employment or consultant status with
the Company or a director's status as an Outside Director terminates by reason
of or within three months following a merger or other business combination
resulting in a Change of Control, the Plan provides that such optionee's stock
options will terminate upon the latest of (i) six months and one day after the
merger or business combination, (ii) ten business days following the
expiration of the period during which publication of financial results
covering at least thirty days of post-merger combined operations has occurred,
and (iii) the expiration of the stated term of such Stock Option or Director
Stock Option.
The following table sets forth the stock options awarded in 1996 pursuant to
the TMK Incentive Plan. It is within the sole discretion of the Compensation
Committee whether stock options will be granted to officers and employees.
Thus, the 1996 stock options shown below as awarded to officers and employees
may not be indicative of any future stock options which might be granted to
such persons. Outside Directors annually receive formula-based Director Stock
Options for a fixed number of shares pursuant to the provisions of the TMK
6
<PAGE>
Incentive Plan. Such formula-based Director Stock Options are reflective of
the number of shares to be awarded in the future years. Non-formula based
Director Stock Options are granted within the sole discretion of the entire
Board and such options granted in 1996, subject to shareholder approval of the
amendments to the TMK Incentive Plan, may not be indicative of any future non-
formula based Director Stock Options awarded.
TORCHMARK CORPORATION 1987 STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
R. K. Richey................................................. 100,000
Chairman and CEO
Keith A. Tucker.............................................. 65,000
Vice Chairman
C. B. Hudson................................................. 65,000
Chairman & CEO of Liberty, Globe
and United American
Henry J. Herrmann............................................ 18,000
Vice President and Chief Investment
Officer of W&R Financial
Bernard Rapoport............................................. 40,000
Chairman and CEO of American Income
Executive Group.............................................. 288,000
Non-Executive Director Group................................. 51,000
Non-Executive Officer Employee Group......................... 382,100
</TABLE>
The Board recommends that stockholders vote FOR the amendments to and
restatement of the TMK Incentive Plan.
7
<PAGE>
PROPOSAL NUMBER 3
APPROVAL OF TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
AND TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION
PLAN
On December 18, 1996, the Board adopted the Torchmark Corporation 1996 Non-
Employee Director Stock Option Plan (the "Non-Employee Director Plan") and the
Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan
(the "Executive Deferral Plan"), subject to shareholder approval at the 1997
Annual Meeting of the Company. The stated purpose of the Non-Employee Director
Plan is to attract and retain highly qualified and capable non-employee
directors and to promote the long term growth of the Company by providing a
vehicle for such directors to increase their proprietary interest in the
Company. The purpose of the Executive Deferral Plan is to promote long-term
growth of the Company by providing a vehicle for eligible executives to
increase their proprietary interest in the Company and to attract and retain
highly qualified and capable eligible executives. A copy of the Non-Employee
Director Plan is attached as Exhibit II and a copy of the Executive Deferral
Plan is attached as Exhibit II and this description is qualified in its
entirety by reference to such exhibits. Capitalized terms used herein have the
same meaning as in the Non-Employee Director Plan or the Executive Deferral
Plan, as applicable.
NON-EMPLOYEE DIRECTOR PLAN
If approved, the Non-Employee Director Plan would permit directors who are
not employees of the Company, its subsidiaries or affiliates to elect to defer
on an annual basis all or a designated portion of their director compensation
payable in 1997 or thereafter into the interest-bearing account of the Non-
Employee Director Plan. Such deferrals would be made subject to a one-time
opportunity by the Non-Employee Director to convert that year's deferred
director compensation into options, granted either at market value or at a
designated discount not to exceed 25%, to acquire Company common stock. The
Company's seven current Non-Employee Directors as well as any subsequently
elected Non-Employee Directors constitute the class of persons eligible to
participate in this plan. Up to 400,000 shares of Company common stock are
proposed to be reserved for issuance pursuant to the Non-Employee Director
Plan. The closing price of common stock of the Company on the New York Stock
Exchange on March 7, 1997 was $59.625 per share.
Contingent upon shareholder approval of the Non-Employee Director Stock
Plan, in December 1996, Messrs. Hagopian, Lanier, McCormick, Records and
Samford deferred 100% of their 1997 director compensation into the Interest
Account of the Non-Employee Director Plan. Mr. Lanier elected to convert his
interest-bearing account balance on January 2, 1997 to fair market value stock
options on 9,084 Company common shares with an exercise price of $50.25 per
share. On January 31, 1997, Messrs. Hagopian, McCormick, Records and Samford
converted their respective interest-bearing account balances to fair market
value stock options on 9,041, 9,137, 9,137 and 3,142 shares, respectively,
with a $51.75 exercise price per share. Messrs. Boren and Farley, who are
eligible to participate in the Non-Employee Director Plan, chose not to make
deferrals of any 1997 director compensation and will be paid all such
compensation in cash.
DESCRIPTION OF PLAN
On or before December 31 of each year, each Non-Employee Director will
determine whether to receive all or a portion of his or her annual retainer
and Board and committee meeting fees for the following calendar year in cash
or to defer all or a portion (in 10% increments, but not less than 50%) of
such Annual Compensation (assuming maximum attendance at scheduled Board and
Committee meetings) into an interest-bearing account in the Non-Employee
Director Plan. In the case of a newly elected Non-Employee Director, such
determination to defer compensation must be made within the 30 day period
immediately following election to the Board. The determination to defer, if
made, shall be indicated upon a Primary Election Form, which shall specify the
percentage of compensation deferred and the basis for payment of the interest-
bearing account balance (a lump sum or designated number of monthly payments
not to exceed 120) to the Non-Employee Director upon the earliest of (a)
December 31 of the fifth year after the year with respect to which the
deferral was made, (b) the first Business Day of the fourth month after such
Non-Employee Director's death or (c) termination as a Non-Employee Director,
for any reason other than by death.
8
<PAGE>
At any time, but only once, during the calendar year immediately following
the filing of a Primary Election Form, a participating Non-Employee Director
may elect to convert the then current balance in his or her Interest Account
for the calendar year to which such Primary Election Form relates into options
to acquire Company common stock. For example, if a Primary Election Form was
filed in December 1996 deferring Annual Compensation to be earned in 1997, the
Non-Employee Director may elect at any time during 1997 to convert such
deferred amount plus accrued interest to the conversion election date into
stock options. The irrevocable election to receive options as of this election
date, which is made on a Secondary Election Form, will specify the percentage
of such stock options to be granted at an exercise price of 100% of the Fair
Market Value per Share on the Option Grant Date and the percentage of Options
to be granted at an exercise price of not less than 75% of the Fair Market
Value per Share (with the discount of up to 25% to be determined by the
Committee in its discretion). Non-Employee Directors may elect to receive
discounted stock options, market value stock options or a combination of both.
To the extent that a Non-Employee Director chooses to receive discounted stock
options, he or she will receive options on a smaller number of shares with a
lower exercise price per share while a decision to receive market value
options will result a larger number of shares subject to option with a higher
exercise price per share.
Options granted pursuant to the Non-Employee Director Plan will be non-
qualified stock options. Based upon the Non-Employee Director's decision as to
the exercise price (discounted or market value) of the options to be received,
the number of Shares subject to such option will be the whole number of Shares
equal to (a) the dollar amount which the Non-Employee Director has elected to
convert to Options divided by (b) the per share value of an Option on the
Option Grant Date, as determined using an option valuation model selected by
the Compensation Committee of the Board of the Company. Options are first
exercisable, cumulatively, as to 10% of the Shares on each of the first
through tenth anniversaries of the Option Grant Date. The term of the option
will be as specified by the Committee but in no event may the period of time
over which an Option may be exercised exceed eleven years from the Option
Grant Date. In no event will death, Disability, retirement, other termination
of directorship or failure to be reelected as a director shorten the term of
any outstanding Option. Options may be subject to accelerated vesting and
shall be immediately exercisable upon the Non-Employee Director's death or
Disability, a Change in Control of the Company as defined in the plan or the
unanimous decision of the Committee to accelerate. Upon acceleration, an
Option remains exercisable for the remainder of its original term.
Options may be exercised in whole or in part. Shares will be issued pursuant
to the exercise of an Option only upon receipt by the Company of payment in
full in cash of the aggregate purchase price for the Shares subject to the
Option or portion thereof being exercised. The Committee may determine the
specific method of payment, including permitting "cashless exercises"
(exercise and simultaneous sale), and other terms and provisions of Options in
its sole discretion.
Options will not be assignable or transferrable other than by will or by the
laws of descent and distribution; provided, however, the Committee may permit
transfers which it, in its sole discretion, concludes do not result in
accelerated taxation and which are otherwise appropriate and desirable taking
into account any applicable securities laws.
Based upon current Federal tax laws, a Non-Employee Director will not
recognize income upon the making of a proper and timely deferral to the
Interest Account nor will income be recognized upon the conversion of such
account balance to Options. The Non-Employee Director will recognize income
for purposes of Federal income tax when the amount in his or her Interest
Account is paid out or immediately upon the exercise of the Options, generally
in an amount equal to the option spread on the date of exercise. The Company
generally receives a corresponding tax deduction when the Non-Employee
Director recognizes income subject to any applicable deductibility limitations
of the Internal Revenue Code.
The Non-Employee Director Plan will be administered by the Compensation
Committee of the Board of the Company, which shall have the authority to
interpret and construe the plan, make necessary rules and regulations to
administer the plan and designate persons as its agents who are neither
members of the Committee or the Board to carry out administrative
responsibilities under the plan.
9
<PAGE>
Adjustments will be made to the total number of Shares reserved for issuance
under the Non-Employee Director Plan, the number of Shares covered by and the
Exercise Price of each outstanding Option if the Company at any time changes
the number of issued Shares through a stock dividend, stock split,
recapitalization, reorganization, or other change in corporate structure
affecting the Shares. The Committee will authorize the issuance, continuation
or assumption of outstanding Options or provide for other equitable
adjustments after changes in Shares resulting from any merger, consolidation,
sale of assets, acquisition of property or stock or similar occurrence in
which the Company is the surviving or continuing corporation upon such terms
and conditions as it deems necessary. In the case of an acquisition where the
Company is not the surviving or continuing corporation and outstanding Shares
are not converted into or exchanged for different securities, cash or other
property, a Non-Employee Director who holds an outstanding Option will have
the right then and during the remaining term of the Option to receive the same
acquisition consideration received by other Company shareholders.
The Board may amend, suspend or terminate the Non-Employee Director Plan or
any Stock Option Award Notice thereunder at any time; provided, however, that
it may condition amendments or modifications on shareholder approval if
necessary or advisable because of tax, securities or other applicable laws,
policies or regulations. No amendment, modification or termination shall
adversely affect any outstanding Options or Interest Accounts without the
consent of the Participant.
The following table shows the Options granted under the Non-Employee
Director Plan as of March 25, 1997 to the named individuals and groups.
TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
R. K. Richey................................................. 0
Chairman and Chief Executive Officer
Keith A. Tucker.............................................. 0
Vice Chairman
C. B. Hudson................................................. 0
Chairman and Chief Executive Officer of Liberty,
Globe and United American
Henry J. Herrmann............................................ 0
Vice President and Chief Investment Officer
of Waddell & Reed Financial
Bernard Rapoport............................................. 0
Chairman and Chief Executive Officer of American Income
Executive Group.............................................. 0
Non-Executive Director Group................................. 39,541
Non-Executive Officer Employee Group......................... 0
</TABLE>
10
<PAGE>
EXECUTIVE DEFERRAL PLAN
The Executive Deferral Plan, if approved, would permit Eligible Executives
to defer salary and/or bonus into interest-bearing accounts in the plan,
subject to a one-time opportunity to elect to convert within a designated time
period any deferred salary for that year as well as a one-time opportunity to
elect within a designated time period to convert any deferred bonus for that
calendar year into options to acquire the Company's common stock. Such options
may be granted with an exercise price of the fair market value of the stock or
at a discount not to exceed 25% of the stock's market value. The executives
eligible to participate in the Executive Deferral Plan will be determined from
time to time by the Compensation Committee of the Board or its designee or by
the Chairman of the Board. Currently, three persons have been designated as
eligible to participate in this plan and it is contemplated that the number of
Eligible Executives will not in any case exceed ten persons. Up to 1,000,000
shares of Company common stock have been reserved for issuance pursuant to the
Executive Deferral Plan. The closing price of common stock of the Company on
the New York Stock Exchange on March 7, 1997 was $59.625.
Contingent upon shareholder approval, Messrs. Richey and Tucker deferred all
of their respective 1996 bonuses and Mr. Hudson deferred a portion of his 1996
bonus into interest-bearing accounts in the plan prior to December 31, 1996.
On January 31, 1997, each of Messrs. Richey, Tucker and Hudson elected to
convert 100% of his Interest Account for Bonus into stock options with an
exercise price of 100% of the fair market value of the common stock on that
date. They received the number of shares set forth opposite their respective
names in the table on page 13.
DESCRIPTION OF PLAN
On or before the last day of each calendar quarter, an Eligible Executive
may elect to receive all or a portion of his or her salary for the next
calendar quarter in cash or may irrevocably elect to defer all or a portion in
10% or $10,000 increments of next quarter's salary into an Interest Account
for Salary under the Executive Deferral Plan by delivering a Primary Election
Form for Salary to the plan administrator. Such Primary Election Form for
Salary will specify the amount of Salary to be deferred into the interest-
bearing account and the form and timing of the payout of deferred amounts;
provided, however, if an executive elects to defer Salary for more than one
quarter in a calendar year, the form and timing of payout for each quarter's
deferral must be identical.
At any time prior to December 31 of each year, an Eligible Executive may
also elect to receive all or a portion of his or her bonus for the current
calendar year in cash or may irrevocably elect to defer all or a portion (in
10% or $10,000 increments) of such current calendar year bonus into an
Interest Account for Bonus under the Executive Deferral Plan by delivering a
Primary Election Form for Bonus to the plan administrator. Such Primary
Election Form for Bonus will specify the amount of Annual Bonus to be deferred
and the form and timing of payout of the deferred amount; provided, however,
that if an executive elects to defer both Salary and Annual Bonus for a
particular calendar year, the form and timing must be identical.
The Interest Accounts of a participating executive shall be segregated to
reflect deferred compensation on a year-by-year basis and as to the type of
compensation deferred (salary or bonus). Interest will be credited to such
Interest Accounts at the rate determined from time to time by the Compensation
Committee. Payment of the balances in an executive's Interest Accounts will be
made as designated by the executive in a lump sum or in the number of
approximately equal monthly installments not to exceed 120 which have been
selected by the executive. Such payments shall begin on the earliest of (a)
December 31 of the fifth year after the year with respect to which the
deferral was made, (b) the first Business Day of the fourth month after the
executive's death or (c) termination as an employee of the Company or any of
its subsidiaries or affiliates, for any reason other than by death.
At any time, but only once, during the twelve month period following the end
of the calendar year with respect to which an executive deferred Salary into
this plan, such executive will have the right to convert his or her Interest
Account for Salary for the previous year into options in Company common stock
by filing an irrevocable Secondary Election Form for Salary. Also, at any
time, but only one time, during the twelve month
11
<PAGE>
period following the end of a calendar year with respect to which an executive
has deferred Annual Bonus into the plan, such executive shall have the right
to convert his or her Interest Account for Bonus for such previous year into
options in Company common stock by filing an irrevocable Secondary Election
Form for Bonus. The filing of such Secondary Election Form for Salary or
Secondary Election Form for Bonus will result in receipt by the executive of
Options as of the date of such filing. The Secondary Election Form will
specify the percentage of Options to be granted at an Exercise Price of 100%
of the Fair Market Value per Share on the Option Grant Date and the percentage
of Options to be granted at an exercise price of not less than 75% of the Fair
Market Value per Share on the Option Grant Date (with the discount of up to
25% to be determined by Compensation Committee in its discretion). An Eligible
Executive may elect to receive market value stock options, discounted stock
options or a combination of both. To the extent that an executive selects
market value options, he or she will receive options on a larger number of
shares with a higher exercise price than if discounted options on fewer shares
with a lower exercise price were selected.
Options issued pursuant to the Executive Deferral Plan will be non-qualified
stock options. Based upon the Eligible Executive's decision as to the exercise
price (discounted or market value) of the options to be received, the number
of Shares subject to such option will be the whole number of Shares equal to
the dollar amount which the executive has elected to convert to Options
divided by the per share value of an Option on the Option Grant Date, as
determined using an option valuation model selected by the Compensation
Committee of the Board. Options are first exercisable, cumulatively, as to 10%
of the Shares on each of the first through tenth anniversaries of the Option
Grant Date; provided, however, that any Option held by a Covered Employee as
defined in Section 162(m) of the Internal Revenue Code shall not be
exercisable before the first day of the calendar year immediately following
the year in which the executive ceased to be a Covered Employee. The term of
the option will be as specified by the Committee but in no event may the
period of time over which an Option may be exercised exceed the longer of
eleven years from the Option Grant Date or the thirtieth day of the calendar
year immediately following the year in which the executive ceased to be a
Covered Employee. In no event will death, Disability, retirement or other
termination of employment shorten the term of any outstanding Option. Options
will be subject to accelerated vesting and shall be immediately exercisable
upon the executive's death or Disability, a Change in Control of the Company
as defined in the plan or the unanimous decision of the Committee to
accelerate. Upon acceleration, an Option remains exercisable for the remainder
of its original term.
Options may be exercised in whole or in part. Shares will be issued pursuant
to the exercise of an Option only upon receipt by the Company of payment in
full in cash of the aggregate purchase price for the Shares subject to the
Option or portion thereof being exercised. The Committee may determine the
specific method of payment, including permitting "cashless exercises"
(exercise and simultaneous sale), and other terms and provisions of Options in
their sole discretion.
Options will not be assignable or transferrable other than by will or by the
laws of descent and distribution; provided, however, the Committee may permit
transfers which it, in its sole discretion, concludes do not result in
accelerated taxation and which are otherwise appropriate and desirable taking
into account any applicable securities laws.
Based on current Federal tax laws, a participating executive will not
recognize income upon the making of a proper and timely deferral to Interest
Accounts nor will income be recognized when the amounts in his or her Interest
Accounts are paid out or upon the conversion of such account balances to
Options. The executive will recognize income for purposes of Federal income
tax immediately upon the exercise of the non-qualified Options, generally in
an amount equal to the option spread on the date of exercise. The Company
generally receives a corresponding tax deduction when the executive recognizes
income, subject to any applicable deductibility limitations of the Internal
Revenue Code.
The Executive Deferral Plan will be administered by the Compensation
Committee of the Board of the Company, which shall have the authority to
interpret and construe the plan, make necessary rules and regulations to
administer the plan and designate persons as its agents who are neither
members of the Committee or the Board to carry out administrative
responsibilities under the plan.
12
<PAGE>
Adjustments will be made to the total number of Shares reserved for issuance
under the Executive Deferral Plan, the number of Shares covered by and the
Exercise Price of each outstanding Option if the Company at any time changes
the number of issued Shares through a stock dividend, stock split,
recapitalization, reorganization, or other change in corporate structure
affecting the Shares. The Committee will authorize the issuance continuation
or assumption of outstanding Options or provide for other equitable
adjustments after changes in Shares resulting from any merger, consolidation,
sale of assets, acquisition of property or stock or similar occurrence in
which the Company is the surviving or continuing corporation upon such terms
and conditions as it deems necessary. In the case of an acquisition where the
Company is not the surviving or continuing corporation and outstanding Shares
are not converted into or exchanged for different securities, cash or other
property, a participating executive who holds an outstanding Option will have
the right then and during the remaining term of the Option to receive the same
acquisition consideration received by other Company shareholders.
The Board may amend, suspend or terminate the Executive Deferral Plan or any
Stock Option Award Notice thereunder at any time; provided, however, that it
may condition amendments or modifications on shareholder approval if necessary
or advisable because of tax, securities or other applicable laws, policies or
regulations. No amendment, modification or termination shall adversely affect
any outstanding Options or Interest Accounts without the consent of the
participating executive.
The following table shows the Options granted under the Executive Deferral
Plan to the named executives and groups as of March 25, 1997.
TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
R. K. Richey................................................. 157,081
Chairman and Chief Executive Officer
Keith A. Tucker.............................................. 81,746
Vice Chairman
C. B. Hudson................................................. 38,468
Chairman and Chief Executive Officer of Liberty,
Globe and United American
Henry J. Herrmann............................................ 0
Vice President and Chief Investment Officer
of Waddell & Reed Financial
Bernard Rapoport............................................. 0
Chairman and Chief Executive Officer of American Income
Executive Group.............................................. 277,295
Non-Executive Director Group................................. 0
Non-Executive Officer Employee Group......................... 0
</TABLE>
The Board recommends that the shareholders vote FOR the Non-Employee
Director Plan and the Executive Deferral Plan.
13
<PAGE>
PROPOSAL NUMBER 4
RATIFICATION OF TORCHMARK POLITICAL CONTRIBUTIONS PROGRAM
Torchmark's financial and competitive well-being are subject to many
different factors, some within its control and some outside its control.
Governmental action is a key factor that can effect the Company's results.
Torchmark's traditional lines of business have always been affected by
governmental action. While the insurance industry is regulated by various
state insurance departments, it is affected by laws passed by the U. S.
Congress as well as by regulations and actions of other federal agencies.
Likewise, the mutual fund industry in the United States is regulated at both
the state and federal levels and is subject to laws passed at all levels.
In an effort to protect the financial position of Torchmark and the best
interests of its shareholders, the Company participates in the political
process through the making of corporate political contributions which qualify
under Federal election law. Increasingly, however, there is criticism of such
corporate expenditures even though qualified under Federal law. To respond to
these criticisms, the Board of the Company determined at its March 1997
meeting to submit a program for shareholder ratification whereby .05% of the
Company's pre-tax earnings per year could be set aside for disbursement over a
two-year election cycle in full accordance with all Federal election laws.
Management of the Company, acting in what it determined to be the best
interests of Company shareholders, would then utilize these funds to make
contributions, in accordance with all Federal election laws, supporting
candidates and political parties which they believe will work for preservation
of the insurance industry and the mutual fund industry.
If the shareholders do not ratify this political contributions program, the
Board will re-examine its political contributions process and will in all
respects continue to comply with Federal election laws.
The Board recommends that the Shareholders vote FOR the proposal.
PROPOSAL NUMBER 5
APPROVAL OF AUDITORS
A proposal to approve the appointment of the firm of KPMG Peat Marwick LLP
as the principal independent accountants of the Company to audit the financial
statements of the Company and its subsidiaries for the year ending December
31, 1997 will be presented to the stockholders at the annual meeting. The
audit committee of the Board recommends the appointment of the firm, which has
served as the principal independent accountants for the Company since 1981. A
representative of KPMG Peat Marwick LLP is expected to be present at the
meeting and available to respond to appropriate questions and, although the
firm has indicated that no statement will be made, an opportunity for a
statement will be provided.
If the stockholders do not approve the appointment of KPMG Peat Marwick LLP,
the selection of independent auditors will be reconsidered by the Board of
Directors.
The Board recommends that stockholders vote FOR the proposal.
OTHER BUSINESS
The directors know of no other matters which may properly be and are likely
to be brought before the meeting. If any other proper matters are brought
before the meeting, however, the persons named in the enclosed proxy, or in
the event no person is named, R. K. Richey and Keith A. Tucker will vote in
accordance with their judgment on such matters.
14
<PAGE>
INFORMATION REGARDING DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table shows certain information concerning each person deemed
to be an executive officer of the Company, except those persons also serving
as directors. Each executive officer is elected by the Board of Directors of
the Company or its subsidiaries annually and serves at the pleasure of that
board. There are no arrangements or understandings between any executive
officer and any other person pursuant to which the officer was selected.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
AND BUSINESS EXPERIENCE
NAME AGE FOR THE PAST FIVE YEARS(1)
---- --- --------------------------
<C> <C> <S>
Henry J. Herrmann........... 54 Vice President and Chief Investment Officer
of W&R Financial since April, 1993; Senior
Vice President and Chief Investment Officer
of United Management since March, 1987;
President and Chief Investment Officer of
WRAMCO since September, 1987.
Bernard Rapoport............ 79 Chairman of the Board and Chief Executive
Officer of American Income since 1975.
(Chairman of the Board and Chief Executive
Officer of American Income Holding, Inc.
1988-1995).
</TABLE>
- --------
(1) Waddell & Reed Financial Services, Inc. ("W&R Financial"), United
Investors Management Company ("United Management"), Waddell & Reed Asset
Management Company ("WRAMCO") and American Income Life Insurance Company
("American Income") are wholly-owned subsidiaries of the Company.
15
<PAGE>
STOCK OWNERSHIP
The following table shows certain information about stock ownership of the
directors, director nominees and executive officers in the Company.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK
OR OPTIONS BENEFICIALLY
OWNED AS OF
DECEMBER 31, 1996(1)
-------------------------
NAME DIRECTLY(2) INDIRECTLY(3)
---- ----------- -------------
<S> <C> <C>
David L. Boren....................................... 150 0
Norman, OK
Joseph M. Farley..................................... 61,805 3,000
Birmingham, AL
Louis T. Hagopian.................................... 61,718 0
Darien, CT
C. B. Hudson......................................... 749,484 11,390
Plano, TX
Joseph L. Lanier, Jr. ............................... 59,501 9,456
Lanett, AL
Harold T. McCormick ................................. 12,000 0
Panama City, FL
George J. Records.................................... 11,000 0
Oklahoma City, OK
R. K. Richey......................................... 416,002 791,007
Birmingham, AL
Keith A. Tucker...................................... 214,612 27,859
Kansas City, MO
Henry J. Herrmann.................................... 101,750 2,494
Overland Park, KS
Bernard Rapoport..................................... 10,000 0
Waco, TX
All Directors, Nominees and Executive Officers as a
group:(4)............................................ 1,698,022 845,206
</TABLE>
- --------
(1) No directors, director nominees or executive officers other than R. K.
Richey (1.66%) and C.B. Hudson (1.05%) beneficially own 1% or more of the
common stock of the Company.
(2) Includes: for Joseph Farley, 39,000 shares; for Joseph Lanier, 49,001
shares; for Louis Hagopian, 54,218 shares; for Harold McCormick, 12,000
shares; for George Records, 9,000 shares; for R. K. Richey, 286,221
shares; for C. B. Hudson, 414,744 shares; for Keith Tucker, 178,612
shares; for Henry Herrmann, 99,100 shares; for Bernard Rapoport, 10,000
shares and for all directors, executive officers and nominees as a group,
1,151,896 shares, that are subject to presently exercisable Company stock
options.
David L. Boren holds options on 13,000 Torchmark shares. None of such
options are presently exercisable prior to July 2, 1997.
(3) Indirect beneficial ownership includes shares (a) owned by the director,
executive officer or spouse as trustee of a trust or executor of an
estate, (b) held in a trust in which the director, executive officer or a
family member living in his home has a beneficial interest, (c) owned by
the spouse or a family member living in the director's, executive
officer's or nominee's home or (d) owned by the director or executive
officer in a personal corporation. Indirect beneficial ownership also
includes 5,390 Company shares, 11,452 Company shares, 1,984 Company shares
and 2,494 Company shares held in the accounts of Messrs. Hudson, Richey,
Tucker and Herrmann, respectively, in the Company or United Management
Savings and Investment Plans.
Mr. Lanier disclaims beneficial ownership of 8,256 shares owned by his
spouse and 1,200 shares owned by his children. Mr. Farley disclaims 2,400
shares held as trustee of a church endowment fund.
(4) All directors, nominees and executive officers as a group, beneficially
own 3.49% of the common stock of the Company.
16
<PAGE>
During 1996, the Board of Directors met five times. In 1996, all of the
directors attended more than 75% of the meetings of the Board and the
committees on which they served.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has the following committees: audit, comprised in
1996 of Messrs. Farley, Hagopian and Samford; compensation, comprised in 1996
of Messrs. Lanier, McCormick and Records; finance, comprised in 1996 of
Messrs. Farley, Lanier, McCormick and Records; and nominating, comprised in
1996 of Messrs. Boren, Farley, Hagopian, Lanier, McCormick, Records and
Samford.
The audit committee recommends the independent auditors to be selected by
the Board; discusses the scope of the proposed audit with the independent
auditors and considers the audit reports; discusses the implementation of the
auditors' recommendations with management; reviews the fees of the independent
auditors for audit and non-audit services; reviews the adequacy of the
Company's system of internal accounting controls; reviews, before publication
or issuance, the annual financial statement and any annual reports to be filed
with the Securities and Exchange Commission and periodically reviews pending
litigation. Additionally, the audit committee meets with the Company's
independent accountants and internal auditors both with and without management
being present. The audit committee met twice in 1996.
The compensation committee determines the compensation of senior management
of the Company and its subsidiaries and affiliates. Additionally, the
compensation committee administers the Stock Incentive Plan of the Company.
The compensation committee met three times in 1996.
The finance committee serves as the pricing committee in connection with
capital financing by the Company. The finance committee did not meet in 1996.
The nominating committee reviews the qualifications of potential candidates
for the Board of Directors from whatever source received, reports its findings
to the Board and proposes nominations for Board membership for approval by the
Board of Directors and for submission to the stockholders for approval.
Recommendations of potential Board candidates may be directed to the
nominating committee in care of the Corporate Secretary of the Company at the
address stated herein. The nominating committee met twice in 1996.
17
<PAGE>
COMPENSATION AND OTHER TRANSACTIONS WITH
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------- --------------------------------
AWARDS
---------------
(G)
(E) SECURITIES (I)
(A) (C) (D) OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND (B) SALARY BONUS COMPENSATION OPTIONS/SARS(5) COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(3) ($) (4) (#) ($)(6)
------------------ ---- --------- ------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R.K. Richey 1996 1,166,688 0 315,592 257,081 25,058
Chairman and CEO 1995 1,166,688 500,000 181,716 150,000 24,401
1994 1,166,676 580,000 189,420 70,000 23,538
Keith A. Tucker 1996 700,008 0 146,746 6,114
Vice Chairman(1) 1995 700,008 350,000 100,000 6,062
1994 700,008 400,000 65,000 5,995
C.B. Hudson 1996 650,000 185,000 103,468 5,442
Chairman and Chief 1995 650,000 250,000 100,000 5,412
Executive Officer of 1994 650,000 350,000 35,000 5,373
Liberty, Globe and
United American
Henry J. Herrmann 1996 420,000 392,000 18,000 4,500
Vice President and 1995 320,000 357,000 22,000 4,500
Chief Investment 1994 320,000 327,000 19,500 4,500
Officer of W&R Financial
Bernard Rapoport 1996 480,000 115,000 9,405 40,000 0
Chairman and CEO of 1995 480,000 175,269 7,695 20,000 9,000
American Income(2) 1994 460,000 0 148,500 20,000 9,000
</TABLE>
- --------
(1) At year end 1996, Mr. Tucker held 30,000 restricted shares valued at
$1,515,000 (based on a year end closing price of $50.50 per share).
Restrictions on the 60,000 share award made pursuant to the Capital
Accumulation and Bonus Plan expire over a ten year period and 6,000 shares
vest annually commencing May 1, 1992. Dividends on all these restricted
shares are paid directly to Mr. Tucker at the same rate as on unrestricted
shares.
(2) Mr. Rapoport serves as Chairman and CEO of American Income, a company
acquired by Torchmark in November 1994. Prior to that time, American
Income was a subsidiary of an unaffiliated publicly-held company, American
Income Holding, Inc.
(3) Messrs. Richey, Tucker and Hudson elected to defer $816,673, $425,000 and
$200,000, respectively, of their 1996 bonuses to the Torchmark Corporation
1996 Executive Deferred Compensation Stock Option Plan ("TMK Executive
Deferral Plan"), which is subject to shareholder approval at the 1997
Annual Meeting.
(4) Includes perquisites for Mr. Richey--$121,102 in 1996 as premium
equivalent for group term life insurance; $89,265, $87,747 as additional
premiums paid for group term life insurance in 1995 and 1994,
respectively; and $57,728 in 1996 for 1996, $57,728 in 1996 for 1997 and
$57,728 in each of 1995 and 1994 as premiums for personal life insurance.
Includes for Mr. Rapoport--$9,405, $7,695 and $148,500 paid to him from
the American Income Life Insurance Company Exempt Employees 401K Profit
Sharing Plan ("American Income Profit Sharing Plan") in 1996, 1995 and
1994, respectively.
(5) Messrs. Richey, Tucker, Hudson, Herrmann and Rapoport received stock
option grants in Company common stock pursuant to the Torchmark
Corporation 1987 Stock Incentive Plan ("TMK Incentive Plan") in 1995 and
1994. In 1996, Messrs. Richey, Tucker and Hudson received stock option
grants of 100,000, 65,000 and 65,000 shares, respectively, pursuant to the
TMK Incentive Plan. On January 31, 1997, Messrs. Richey, Tucker and Hudson
elected to convert all 1996 bonus amounts plus accrued interest of $4,703
$2,447 and $1,151, respectively, held in the TMK Executive Deferral Plan,
subject to shareholder approval, to stock options of 157,081, 81,746 and
38,468 shares, respectively.
18
<PAGE>
(6) Includes Company contributions to Torchmark Corporation Savings and
Investment Plan, a funded, qualified defined contribution plan, for each
of Messrs. Richey, Tucker and Hudson of $4,500.00 in 1996 and 1995 and of
$7,075.20 in 1994. Includes in 1996, 1995 and 1994, interest only on prior
contributions to the Torchmark Corporation Supplemental Savings and
Investment Plan, an unfunded, non-qualified defined contribution plan, for
Mr. Richey of $20,557.75, $19,901.08 and $19,038.70, for Mr. Tucker of
$1,613.82, $1,562.26 and $1,494.57 and for Mr. Hudson of $942.11, $912.03
and $872.51, respectively. Includes for Mr. Herrmann, employer company
contributions to the United Investors Management Company Savings and
Investment Plan, a funded, qualified defined contribution plan, of $4,500
in 1996, 1995 and 1994. Includes for Mr. Rapoport, employer company
contributions to the American Income Profit Sharing Plan, a funded,
qualified defined contribution plan, of $0 in 1996 and $9,000 in 1995 and
1994, respectively.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ---------------------------------------------------------------------- -----------------------------------
NUMBER OF
SECURITIES % OF EXERCISE
UNDERLYING TOTAL OPTIONS OR
OPTIONS GRANTED TO BASE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
(A) (B) (C) (D) (E) 0% ($) (F) (G)
- ----------------------- ---------- ------------- --------- ---------- ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
All Company Common
Shareholders(2) N/A N/A N/A N/A 0 2,213,488,235 5,609,408,831
R.K. Richey 100,000 14.9% 49.75 12/18/06 0 3,128,753 7,928,866
CEO gain on 1996 grants
as % of All Company
Common Shareholders
gain N/A N/A N/A N/A N/A .14% .14%
Keith A. Tucker 65,000 9.7% 49.75 12/18/06 0 2,033,689 5,153,763
C.B. Hudson 65,000 9.7% 49.75 12/18/06 0 2,033,689 5,153,763
Henry J. Herrmann 18,000 2.7% 49.75 12/18/06 0 563,175 1,427,196
Bernard Rapoport 40,000 5.9% 49.75 12/18/06 0 1,251,501 3,171,547
</TABLE>
- --------
(1) All options are non-qualified stock options granted in Company common
stock pursuant to the TMK Incentive Plan with a ten year and two day term
at an exercise price equal to the closing price of the Company's common
stock on the grant date. Options granted at $49.75 per share in 1996 are
not exercisable during the first two years after the grant date and become
first exercisable on 50% of the shares two years after the grant date and
on the remaining 50% of the shares three years after the grant date.
(2) Calculated based upon 69,695,975 publicly-held Torchmark common shares
outstanding as of December 31, 1996 (excluding treasury shares and stock
held by subsidiaries which is treated as treasury stock).
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------
(C) (D) (E)
(B) VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
(A) SHARES ACQUIRED REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME ON EXERCISE (#) ($) OPTIONS AT FY-END (#) AT FY-END ($)
----- --------------- -------- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richey, R.K. 0 0 286,221 285,000 4,316,575 1,721,250
Tucker, Keith A. 0 0 178,612 197,500 2,141,681 1,297,500
Hudson, C.B. 0 0 414,744 182,500 8,586,600 1,050,000
Herrmann, Henry J. 2,625 95,484 99,100 49,750 1,454,487 331,125
Rapoport, Bernard 0 0 10,000 70,000 165,000 337,500
</TABLE>
19
<PAGE>
PENSION PLANS
Torchmark Corporation Pension Plan; United Investors Management Company
Retirement Income Plan. These plans are non-contributory pension plans which
cover all eligible employees who are 21 years of age or older and have one or
more years of credited service. The benefits at age 65 under the Torchmark
Pension Plan are determined by multiplying the average of the participant's
earnings in the five consecutive years in which they were highest during the
ten years before the participant's retirement by a percentage equal to 1% for
each of the participant's first 40 years of credited service plus 2% for each
year of credited service up to 20 years after the participant's 45th birthday
and then reducing that result by a Social Security offset and by other
benefits from certain other plans of affiliates. Benefits under the United
Management Retirement Income Plan are determined by multiplying the average of
the participant's earnings in the five consecutive years in which they were
highest during the last ten years before the participant's retirement by a
percentage equal to 2% for each year of credited service up to 30 years and by
1% for each year of credited service for the next 10 years and then reducing
that result by a Social Security offset and by other benefits from certain
other plans of affiliates. Earnings for purposes of the Torchmark Pension Plan
include compensation paid by subsidiaries and affiliates, and do not include
commissions, directors' fees, expense reimbursements, employer contributions
to retirement plans, deferred compensation, or any amounts in excess of
$150,000 (as adjusted). Earnings for purposes of the United Management
Retirement Income Plan do not include bonuses or commissions (other than for
Regional Vice Presidents, Division Managers and District Managers), directors'
fees, expense reimbursements, employer contributions to retirement plans,
deferred compensation or any amounts in excess of $150,000 per year (as
adjusted). Benefits under the Torchmark Pension Plan and the United Management
Retirement Income Plan vest 100% at five years. Upon the participant's
retirement, benefits under both plans are payable as an annuity or in a lump
sum. In 1996, covered compensation was $150,000 for Messrs. Richey, Tucker,
and Hudson under the Torchmark Pension Plan and for Mr. Herrmann under the
United Management Retirement Income Plan.
Vested benefits under the non-qualified Torchmark Supplemental Retirement
Plan, in which Messrs. Richey, Tucker and Hudson have participated, were
frozen as of December 31, 1994 and no additional benefits accrue after that
date pursuant to the supplementary retirement plan. Mr. Herrmann does not
participate in any supplementary pension plan.
Messrs. Richey, Hudson and Tucker have 33 years, 22 years and five years of
credited service under the Torchmark Pension Plan, respectively. Mr. Herrmann
is covered under the United Management Retirement Income Plan and has 23 years
of credited service thereunder. Mr. Rapoport is not covered by any pension
plan.
The following tables show the estimated annual benefits payable under the
Torchmark Pension Plan along with its supplementary retirement plan (which was
frozen in 1994) and under the United Management Retirement Income Plan upon
retirement of participants with varying final average earnings and years of
service. Primarily because of the termination of the Torchmark Supplemental
Retirement Plan, the benefits shown below as payable pursuant to the Torchmark
Pension and Supplemental Retirement Plans may in most cases exceed the actual
amounts paid. The benefits shown are offset as described above and the amounts
are calculated on the basis of payments for the life of a participant who is
65 years of age.
TORCHMARK PENSION AND SUPPLEMENTAL RETIREMENT PLANS*
<TABLE>
<CAPTION>
FINAL YEARS OF CREDITED SERVICE
AVERAGE -----------------------------------------------------------------
EARNINGS 15 20 25 30 35
-------- ------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$1,000,000 450,000 600,000 650,000 700,000 750,000
1,200,000 540,000 720,000 780,000 840,000 900,000
1,400,000 630,000 840,000 910,000 980,000 1,050,000
1,600,000 720,000 960,000 1,040,000 1,120,000 1,200,000
</TABLE>
- --------
* Benefits paid under a qualified defined benefit plan are limited by law in
1996 to $120,000 per year. The balance of the benefit payments shown above
thus comes from the Supplemental Retirement Plan. Because benefit accruals
under the Supplemental Retirement Plan ceased as of December 31, 1994, each
of Messrs. Richey, Tucker and Hudson have two years less of credited
service under the Supplemental Retirement Plan than under the Torchmark
Pension Plan.
20
<PAGE>
UNITED MANAGEMENT RETIREMENT INCOME PLAN*
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$200,000 $ 60,000 $ 80,000 $100,000 $120,000 $120,000
250,000 75,000 100,000 120,000 120,000 120,000
300,000 90,000 120,000 120,000 120,000 120,000
350,000 105,000 120,000 120,000 120,000 120,000
400,000 120,000 120,000 120,000 120,000 120,000
500,000 120,000 120,000 120,000 120,000 120,000
</TABLE>
- --------
*Benefits paid under a qualified defined benefit plan which does not operate
in conjunction with a defined benefit supplementary or excess pension award
plan are limited by law in 1996 to $120,000 per year. The United Management
Retirement Plan has no supplementary or excess pension award plan.
Waddell & Reed, Inc. Career Field Retirement Plan. Until January 1, 1973,
W&R employees participated in the Waddell & Reed, Inc. Career Field Retirement
Plan (the "Career Field Retirement Plan"). Under this plan, W&R contributed
annually up to 10% of its profits less forfeitures, which were allocated to
the participants on the basis of their compensation. Voluntary employee
contributions were permitted under the plan but not required. Since January 1,
1973, no new participants have been admitted to the plan, and participants and
the employer make no further contributions. All participants are fully vested.
Upon the participant's retirement, termination of employment, disability,
death or reaching age 65, his account is used to purchase an annuity or is
paid in a lump sum. Mr. Herrmann is covered under the Career Field Retirement
Plan for his service while employed by W&R prior to 1973. Benefits paid under
this plan do not offset benefits paid under any other pension plan.
PAYMENTS TO DIRECTORS
Directors of the Company are currently compensated on the following basis:
(1) Directors who are not officers or employees of the Company or a
subsidiary of the Company ("Outside Directors") receive a fee of $1,000 for
each attended Board meeting, a fee of $500 for each attended Board
committee meeting, and an annual retainer of $40,000, payable each January
for the entire year. They do not receive fees for the execution of written
consents in lieu of Board meetings and Board committee meetings. They
receive an allowance for their travel and lodging expenses if they do not
live in the area where the meeting is held.
Each Outside Director also is automatically awarded annually non-
qualified stock options on 3,000 shares of Company common stock on the
first day of each calendar year in which stock is traded on the New York
Stock Exchange.
(2) Beginning in January, 1993, directors who are officers or employees
of the Company or a subsidiary of the Company waived receipt of all fees
for attending Board meetings. They do not receive fees for the execution of
written consents in lieu of Board meetings. They also do not receive a fee
for attending Board committee meetings or an annual retainer. They are
reimbursed their travel and lodging expenses, if any.
Subject to shareholder approval of amendments to the TMK Incentive Plan at
the 1997 Annual Meeting, the entire Board may, for calendar years commencing
with 1996, award non-qualified stock options on a non-formula basis to all or
such individual Outside Directors as it shall select. Such options may be
awarded at such times and for such number of shares as the Board in its
discretion determines. The price of such options may be fixed by the Board at
a discount not to exceed 25% of the fair market value on the grant date or at
the fair market value of the stock on the grant date. In 1996, subject to
shareholder approval as described above, three Outside Directors (Messrs.
Boren, McCormick and Records) each received 10,000 shares at a 25% discount to
the grant date price as non-formula based options.
21
<PAGE>
Also, subject to shareholder approval of the Non-Employee Director Plan,
commencing with 1997 annual retainer and meeting and committee fees (assuming
attendance at all scheduled meetings), Outside Directors may elect to make
deferrals of compensation into the interest-bearing account of the Non-
Employee Director Plan and subsequently elect to convert such balances to
stock options with either fair market value or discounted exercise prices. In
1996, subject to shareholder approval as described above, Messrs. Hagopian,
Lanier, McCormick, Records and Samford chose to make such deferrals of 1997
compensation. Additional information regarding the Non-Employee Director Plan
and deferrals thereunder is contained in Proposal Number 3.
A director who is an officer of the Company and who retires as a director
after his 65th birthday may be elected by the Board as an advisory director
for one year terms until his 70th birthday. An advisory director receives an
annual retainer of $25,000 payable in quarterly installments.
Each person who has retired as a director and who is not currently serving
as an advisory director may receive a retirement benefit payable annually, in
an amount equal to $200 a year for each year of service as a director or
advisory director up to 25 years, but not less than $1,200 a year. In
determining this benefit, the number of years of service may include years as
a director of a subsidiary of the Company if the payment for such years by the
Company is in place of a payment which would otherwise be made by the
subsidiary.
OTHER TRANSACTIONS
Robert Richey, Vice President of a Company subsidiary and son of R. K.
Richey, received compensation and fringe benefits in 1996 of $117,310.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors, its
executive officers, and any persons holding more than ten percent of the
Company's common stock are required to report their initial ownership of the
Company's common stock and other equity securities and any subsequent changes
in that ownership to the Securities and Exchange Commission and the New York
Stock Exchange and to submit copies of these reports to the Company. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports
were required, during the fiscal year ended December 31, 1996, all required
Section 16(a) filings applicable to its executive officers, directors, and
greater than ten percent beneficial owners were timely and correctly made
except that Mr. Herrmann filed an amended Form 5 after its due date to report
25 owned shares inadvertently omitted from his total direct holdings.
22
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation of senior executives of Torchmark and its subsidiaries and
affiliates is determined by the Compensation Committee of the Board of
Directors (the "Committee"). The Committee, comprised entirely of outside
directors, meets to fix annual salaries in advance and bonuses for the current
year of executives earning more than $150,000, to review annual goals and
reward outstanding annual performance of executives and to grant stock options
pursuant to the 1987 TMK Incentive Plan.
In 1993, the Committee employed an unaffiliated executive compensation
consulting firm, Towers Perrin, to assist it in reviewing executive
compensation policies and the payment of bonuses to executives. In 1996, the
Committee met on several occasions with the Chairman to discuss the salaries
and bonuses of the five most highly compensated executives, including the
Chairman. Also, the Committee received written reports from certain of the
other four most highly compensated executives of the Company discussing
compensation of persons reporting to that executive.
COMPENSATION PRINCIPLES
The business philosophy of the Company focuses on maintenance and
improvement of insurance operating margins and other operating margins through
the efficient management of assets and control of costs. The Company's
executive compensation program is based on principles which align compensation
with this business philosophy, company values and management initiative. The
program seeks to attract and retain key executives necessary to the long-term
success of the Company, to mesh compensation with both annual and long-term
strategic plans and goals and to reward executives for their efforts in the
continued growth and success of the Company. Annual goals for executive
compensation focus on insurance operating income for the insurance
subsidiaries and operating income in other Company subsidiaries.
To the extent readily determinable and as one of the factors in its
consideration of compensation matters, the Committee considers the anticipated
tax treatment to the Company and to the executives of various payments and
benefits. Some types of compensation payments and their deductibility depend
upon the timing of an executive's vesting or exercise of previously granted
rights. Further, interpretations of and changes in the tax laws and other
factors beyond the Committee's control also affect the deductibility of
compensation. For these and other reasons, the Committee will not necessarily
and in all circumstances limit executive compensation to that deductible under
Section 162(m). The Committee will consider various alternatives to preserving
the deductibility of compensation payments and benefits to the extent
reasonably practicable and to the extent consistent with its other
compensation objectives.
SALARY AND BONUS SYSTEM
For some time the Company has used a system of salaries and bonuses to
reward executives of the Company and its subsidiaries for performance relative
to annual goals. These goals focus on insurance operating income for the
insurance subsidiaries and operating income for the other subsidiaries and
vary by operating company based upon that particular company's current
position. Annually, the Committee, in consultation with the Company's Chairman
and Chief Executive Officer and with the Chief Executive Officer of certain
operating subsidiaries, reviews each subsidiary's performance relative to the
goals and fixes salaries and bonuses for that operating subsidiary's
executives. The degree to which these executives have met their particular
subsidiary's goals in turn determines the amount of the bonus, if any, and
whether senior executive officers of the Company receive salary increases.
Such executives do not receive any cost of living salary adjustments.
STOCK OPTION PROGRAM
The Company began awarding stock options to executives and key employees in
1984. The option plan under which options in Company common stock are
currently awarded was adopted in 1987 and has as its stated purpose attracting
and retaining employees who contribute to the Company's, its subsidiaries' and
affiliates' success and enabling those persons to participate in that long-
term success and growth through an equity interest in the Company. To this
end, the Committee, as administrator of the TMK Incentive Plan, grants non-
qualified stock options to officers and key employees at the market value of
the Company's common stock on the date of the grant, the size of the grant
being based generally on the current compensation of such officers or key
23
<PAGE>
employees. The five most highly compensated executive officers are paid
salaries and bonuses commensurate with the level of their responsibilities and
therefore they typically are awarded a larger number of option shares than
other employees with lesser levels of compensation and responsibility. In
1996, for the five most highly compensated executive officers, the options
granted were in proportion to current compensation adjusted by a subjective
factor ranging from 2.2 to 13.0.
Decisions regarding stock option grants are made annually and the number of
options previously awarded to an individual executive officer is not a
substantial consideration in determining the amount of options granted to that
officer in the future. Once an officer has been awarded options and becomes a
part of the stock option program, he or she will typically continue to receive
from year to year stock options related to salary.
Stock options may be exercised using cash or previously-owned stock for
payment or through a simultaneous exercise and sale program. Such stock
options become first exercisable to the extent of 50% of the shares on the
second anniversary of the option grant date and on the remaining 50% of the
shares on the third anniversary of the option grant date.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
R. K. Richey, was deeply involved in the formation of the Company in 1980
and has served as one of its principal executives and a director since that
time. He assumed the responsibilities of Chief Executive Officer of the
Company on January 1, 1985. Since 1980, the market value of Torchmark has
increased over nine times, at over $3.5 billion, and the number of outstanding
shares has been reduced by more than 38%. Cash dividends during the same
period increased at a 12.4% compound growth rate and the price of Company
stock has compounded at 19.7%.
The Committee, in determining Mr. Richey's bonus for 1996, focused primarily
on earnings per share and return on equity, while giving consideration to Mr.
Richey's ability and determination as well as his vision and leadership in
continuing to enhance the long term value of the Company.
During 1993, the Committee developed, in conjunction with its consultant
Towers Perrin, and adopted a precise bonus formula for Mr. Richey as Chairman
and Chief Executive Officer of the Company based upon the combination of
growth in earnings per share and in return on equity adjusted for certain
items, including, but not limited to, changes in income tax rates, guaranty
fund assessments and punitive damage awards.
In 1996, there was 12.7% growth in earnings per share resulting in an
earnings per share bonus component of 30% and return on equity exceeded 20%
resulting in a return on equity bonus component of 50%, making Mr. Richey
eligible pursuant to the formula for the maximum bonus on his base salary of
$1,166,688. The Committee, however, has capped Mr. Richey's total compensation
at $2 million and thus determined has to award him a bonus of $816,673 in
1996.
Mr. Richey's base salary and stock option award are not directly related to
specific measures of corporate performance. His base salary is determined by
his tenure of service with the Company and its subsidiaries and affiliates,
his current job responsibilities and the progression of responsibilities and
positions he has assumed in the Company over the course of his career. Mr.
Richey's total cash compensation has been capped by the Committee at
$2,000,000, including a specific cap on his base salary and an effective cap
on any bonus he may be awarded.
Mr. Richey's stock option award is also not directly tied to specific
measures of corporate performance. Such award is generally based on his
current compensation. To the extent that his current compensation is related
to base salary, there is no tie to specific measures of corporate performance.
To the extent that his current compensation has a bonus component, his stock
option award maybe indirectly impacted by measures of corporate performance.
COMPENSATION OF OTHER EXECUTIVES
The other executive officers listed in the Summary Compensation Table in the
Proxy Statement are compensated by salary and a bonus based upon growth in
insurance operating income and/or operating income of the various Company
subsidiaries, affiliates or areas of operation for which each is responsible.
24
<PAGE>
Mr. Tucker's bonus compensation is based upon the combined insurance
operating income of United Investors Life Insurance Company and the operating
income of the Waddell & Reed, Inc. group of companies, entities for which he
is responsible. Mr. Hudson is in charge of all insurance operations of the
Company except United Investors Life. Messrs. Tucker and Hudson were eligible
for 1996 bonuses based upon a formula providing for 5% of their Committee
approved salary for each 1% growth in insurance operating income and/or
operating income, subject to a cap of 50% of salary. Additionally, the
Committee, in its sole discretion could award Messrs. Hudson and Tucker a
bonus of up to 15% of 1996 salary. The total of the discretionary bonus and
the formula bonus generally may not exceed 60% of the current year base
salary.
Combined insurance operating income and operating income of the companies
for which Mr. Tucker is responsible increased 14% in 1996 entitling him to a
maximum formula bonus of 50% of base salary or $350,000. A discretionary bonus
of 10.7% of base salary was granted to Mr. Tucker by the Committee, resulting
in a total bonus of $425,000.
Insurance operating income before administrative expense for 1996 in Mr.
Hudson's areas of supervision grew 8% resulting in a bonus of 40% of base
salary or $280,000. A discretionary bonus of 15 % of base salary was granted
to Mr. Hudson by the Committee, resulting in a total bonus of $385,000 for
1996.
Mr. Herrmann is the Chief Investment Officer of the Waddell & Reed group of
companies. Mr. Herrmann's bonus comes from a bonus pool for Waddell & Reed
senior officers, the amount of which is determined based upon increases in
operating earnings. The exact size of the pool varies depending on a
comparison of actual growth with targeted growth objectives. Mr. Herrmann's
bonus is determined by the Committee, in its discretion. In 1996, Mr.
Herrmann's bonus was $392,000 or 49.8% of the pool.
Mr. Rapoport has served for a number of years as the Chairman of the Board
and Chief Executive Officer of American Income. Mr. Rapoport's bonus is
subjectively determined based upon a number of factors, including growth in
earnings and growth in insurance operating income of American Income.
COMPENSATION AND COMPANY PERFORMANCE
As indicated above, the annual aspect of executive compensation at Torchmark
centers on increases in insurance operating income or operating income. Over
the last three years insurance operating income has increased 35% from $283
million in 1993 to $381 million in 1996. Operating income at the non-insurance
subsidiaries rose from $101 million in 1993 to $110 million in 1996, an
increase of 9%. Insurance operating income comprised 79%, 83% and 77% of the
Company's pre-tax earnings for 1994, 1995 and 1996, respectively, while
operating income at the non-insurance subsidiaries was 20.9%, 21.6% and 22.2%,
respectively, of the Company's pre-tax earnings for the same periods.
Mr. Richey's salary and bonus compensation has been capped by the Committee
at $2 million. The above performance resulted in compensation increases to
certain of the Company's other executives shown in the Summary Compensation
Table and decreases to other listed executives. Excluding Mr. Richey, whose
compensation is capped, cash compensation paid to the other persons listed in
the Summary Compensation Table on page 18 as a group decreased 10.4% from 1995
to 1996, because of substantial bonus deferrals by Messrs. Tucker and Hudson
into the new proposed deferred compensation plan for executives.
The long-term portion of the executive compensation program centers on stock
value through the granting of stock options. Over the last three fiscal years
earnings per share from continuing operations excluding realized investment
gains and the related acquisition cost adjustment have increased 26.6% and
rose from $3.50 in 1993 to $4.43 in 1996.
Harold T. McCormick, Chairman
Joseph L. Lanier, Jr.
George J. Records
The foregoing Compensation Committee Report on Executive Compensation shall
not be deemed "filed" with the Securities and Exchange Commission or subject
to the liabilities of Section 18 of the Securities Exchange Act of 1934.
25
<PAGE>
LOGO
The line graph shown above compares the yearly percentage change in
Torchmark's cumulative total return on its common stock with the cumulative
total returns of the Standard and Poor's 500 Stock Index ("S&P 500") and the
Standard and Poor's Insurance (Life/Health) Index ("S&P Insurance
(Life/Health)"). Torchmark is one of the companies whose stock is included
within both the S&P 500 and the S&P Insurance (Life/Health). The graph
reflects $100 invested on December 31, 1991 in each of Torchmark stock and the
two indices with all dividends being reinvested.
Information for graph produced by Research
26
<PAGE>
MISCELLANEOUS INFORMATION
PROPOSALS OF STOCKHOLDERS
In order for a proposal by a stockholder of the Company to be eligible to be
included in the proxy statement and proxy form for the annual meeting of
stockholders in 1998, the proposal must be received by the Company at its home
office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before
November 26, 1997.
GENERAL
The cost of this solicitation of proxies will be borne by the Company. The
Company will request certain banking institutions, brokerage firms,
custodians, trustees, nominees, and fiduciaries to forward solicitation
material to the beneficial owners of shares of the Company held of record by
such persons, and the Company will reimburse reasonable forwarding expenses.
THE ANNUAL REPORT OF THE COMPANY FOR 1996, WHICH ACCOMPANIES THIS PROXY
STATEMENT, INCLUDES A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1996 AND THE FINANCIAL STATEMENTS AND SCHEDULES THERETO. UPON REQUEST AND
PAYMENT OF THE COST OF REPRODUCTION, THE EXHIBITS TO THE FORM 10-K WILL BE
FURNISHED. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO INVESTOR RELATIONS
DEPARTMENT, TORCHMARK CORPORATION AT ITS ADDRESS STATED HEREIN.
By Order of the Board of Directors
LOGO
Carol A. McCoy
Associate Counsel & Secretary
March 25, 1997
27
<PAGE>
TORCHMARK CORPORATION
PROXY/DIRECTION CARD FOR ANNUAL MEETING ON APRIL 24, 1997
THIS PROXY/DIRECTION IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
The undersigned hereby appoints R. K. Richey and Keith A. Tucker, jointly and
severally with full power of substitution, to vote all shares of common stock
which the undersigned holds of record and is entitled to vote at the Annual
Meeting of Shareholders to be held at the offices of the Company, 2001 Third
Avenue South, Birmingham, Alabama on the 24th day of April 1997 at 10:00 a.m.
(CDT), or any adjournment thereof. All shares votable by the undersigned in-
cluding shares held of record by agents or trustees for the undersigned as a
participant in the Dividend Reinvestment Plan (DRP), Torchmark Corporation Sav-
ings and Investment Plan (TTP), United Investors Management Company Savings and
Investment Plan (UITP), Liberty National Life Insurance Company 401K Plan (LNL
401K) and the Profit Sharing and Retirement Plan of Liberty National Life In-
surance Company (LNL PS&R) will be voted in the manner specified and in the
discretion of the persons named above or such agents or trustees on such other
matters as may properly come before the meeting.
ELECTION OF DIRECTORS:
David L. Boren, Louis T. Hagopian and
Harold T. McCormick
P R O X Y
(change of address/comments)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXY COMMITTEE
CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
SEE REVERSE
SIDE
FOLD AND DETACH HERE
TORCHMARK MAINTAINS A DIVIDEND REINVESTMENT PLAN FOR ALL HOLDERS OF ITS
COMMON STOCK. UNDER THE PLAN, SHAREHOLDERS MAY REINVEST ALL OR PART OF THEIR
DIVIDENDS IN ADDITIONAL SHARES OF COMMON STOCK AND MAY ALSO MAKE PERIODIC
ADDITIONAL CASH PAYMENTS OF UP TO $3,000 TOWARD THE PURCHASE OF TORCHMARK
STOCK. PARTICIPATION IS ENTIRELY VOLUNTARY. MORE INFORMATION ON THE PLAN CAN
BE OBTAINED BY CALLING 1-800-446-2617.
<PAGE>
4937
----
X Please mark your
votes as in this
example.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ELECTION OF DIRECTORS AND
FOR PROPOSALS 2, 3, 4 AND 5.
1. Election of Directors
FOR WITHHELD
[_] [_]
2. Amendment and Restatement of Incentive Plan
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Approval of Non-Employee Director and Executive Deferral Plans
FOR AGAINST ABSTAIN
[_] [_] [_]
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------------------------------
4. Approval of Political Contributions Program
5. Approval of Auditors
Please sign exactly as
name appears hereon. Joint
owners should each sign.
When signing as attorney,
executor, administrator,
trustee or guardian,
please give full title as
such.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) DATE
FOLD AND DETACH HERE
TORCHMARK CORPORATION
STOCKHOLDER INQUIRIES
FOR GENERAL INFORMATION CONCERNING YOUR TORCHMARK STOCK,
CALL (205) 325-4270.
<PAGE>
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
<TABLE>
<CAPTION>
STATE OF NAME UNDER WHICH
COMPANY INCORPORATION COMPANY DOES BUSINESS
- --------------------- ------------- -----------------------
<S> <C> <C>
American Income Life American Income Life
Insurance Company Indiana Insurance Company
Family Service Life Family Service Life
Insurance Company Texas Insurance Company
Globe Life and Accident Globe Life and Accident
Insurance Company Delaware Insurance Company
Liberty National Life Liberty National Life
Insurance Company Alabama Insurance Company
United American United American
Insurance Company Delaware Insurance Company
United Investors Life United Investors Life
Insurance Company Missouri Insurance Company
Waddell & Reed Waddell & Reed
Investors Management Investors Management
Company, Inc. Delaware Company, Inc.
Waddell & Reed Waddell & Reed
Services Company, Inc. Delaware Services Company, Inc.
</TABLE>
<PAGE>
EXHIBIT 23(a)-(f)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Torchmark Corporation
We consent to incorporation by reference in the Registration Statements (Nos.
2-76378, 2-76912, 2-93760, 33-23580, 33-1032, and 33-65507) on Forms S-8 of our
report dated January 31, 1997, except for Note 16 which is as of March 11, 1997,
relating to the consolidated balance sheet of Torchmark Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows and related
schedules for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996, Annual Report on Form 10-K
of Torchmark Corporation. Our report refers to changes in accounting principles
to adopt the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed Of.
/s/ KPMG Peat Marwick LLP
Birmingham, Alabama
March 24, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ David L. Boren
--------------------------
David L. Boren, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Joseph M. Farley
-----------------------------
Joseph M. Farley, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Louis T. Hagopian
-------------------------------
Louis T. Hagopian, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, and all instruments or documents submitted as
a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies
and confirms his signature as it may be signed by said attorneys and all that
said attorneys and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ C. B. Hudson
-----------------------------
C. B. Hudson, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Joseph L. Lanier, Jr.
------------------------------
Joseph L. Lanier, Jr., Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison and
Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for
him and in his name and in the capacity indicated below, with full power and
authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Gary L. Coleman
----------------------------
Gary L. Coleman, Vice President
& Chief Accounting Officer
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Harold T. McCormick
---------------------------
Harold T. McCormick, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer and Director of Torchmark Corporation does
hereby constitute and appoint Keith A. Tucker, Larry M. Hutchison, Gary L.
Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and
agents, for him and in his name and in the capacities indicated below, with full
power and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form-10, any and all amendments to the Form 10-K and any
and all instruments or documents submitted as a part of or in conjunction with
the Form 10-K. The undersigned hereby ratifies and confirms his signature as it
may be signed by said attorneys and all that said attorneys and agents shall do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ R. K. Richey
-------------------------
R. K. Richey, Director, Chairman
and Chief Executive Officer
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacity indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Yetta G. Samford, Jr.
-----------------------------
Yetta G. Samford, Jr., Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint R. K. Richey, Keith A. Tucker, Larry M. Hutchison, Gary
L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys
and agents, for him and in his name and in the capacities indicated below, with
full power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ George J. Records
--------------------------
George J. Records, Director
Date: March 3, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer and Director of Torchmark Corporation does
hereby constitute and appoint R. K. Richey, Larry M. Hutchison, Gary L. Coleman
and Carol A. McCoy, and each of them severally, his lawful attorneys and agents,
for him and in his name and in the capacity indicated below, with full power and
authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents determine may be necessary,
advisable, or required to enable the said Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in connection with the
Form 10-K for the fiscal year ended December 31, 1996. Without limiting the
generality of the foregoing, the powers granted include the power and authority
to execute and file the Form 10-K, any and all amendments to the Form 10-K and
any and all instruments or documents submitted as a part of or in conjunction
with the Form 10-K. The undersigned hereby ratifies and confirms his signature
as it may be signed by said attorneys and all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Keith A. Tucker
------------------------------
Keith A. Tucker, Vice Chairman
and Director (Principal Financial
Officer)
Date: March 3, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 5,328,276
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,858
<MORTGAGE> 64,353
<REAL-ESTATE> 150,490
<TOTAL-INVEST> 5,939,520
<CASH> 18,272
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,498,095
<TOTAL-ASSETS> 9,800,800
<POLICY-LOSSES> 4,797,738
<UNEARNED-PREMIUMS> 83,670
<POLICY-OTHER> 220,121
<POLICY-HOLDER-FUNDS> 80,812
<NOTES-PAYABLE> 832,790
193,145
0
<COMMON> 73,784
<OTHER-SE> 1,555,559
<TOTAL-LIABILITY-AND-EQUITY> 9,800,800
1,609,919
<INVESTMENT-INCOME> 404,608
<INVESTMENT-GAINS> 5,829
<OTHER-INCOME> 185,454
<BENEFITS> 1,058,084
<UNDERWRITING-AMORTIZATION> 218,826
<UNDERWRITING-OTHER> 433,768
<INCOME-PRETAX> 495,132
<INCOME-TAX> 180,622
<INCOME-CONTINUING> 318,509
<DISCONTINUED> (7,137)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,372
<EPS-PRIMARY> 4.37
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
