<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, 1997 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
INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
2001 Third Ave. South, 35233
Birmingham, AL
(ADDRESS OF PRINCIPAL (ZIP CODE)
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: $6,555,260,129
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 1998: 140,219,468
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1998,
PART III
INDEX OF EXHIBITS (PAGES 68 THROUGH 70)
TOTAL NUMBER OF PAGES INCLUDED ARE 77
<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. 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 juvenile and magazine; nationwide.
INSURANCE COMPANY senior life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- ---------------------------------------------------------------------------------------------------------
LIBERTY NATIONAL LIBERTY NATIONAL LIFE Individual life and 2,110 full-time sales repre-
EXCLUSIVE AGENCY INSURANCE COMPANY health insurance. sentatives and field manage-
Birmingham, Alabama ment; 108 district offices
in the Southeastern U.S.
- ---------------------------------------------------------------------------------------------------------
AMERICAN INCOME AMERICAN INCOME LIFE Individual life and health in- 1,360 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 2,290 Waddell & Reed
EXCLUSIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen-
Kansas institutional investment dent agents; 177 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 45,000 independent agents
INDEPENDENT AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and
AND EXCLUSIVE AGENCY McKinney, Texas Medicare Supplement Canada; 900 exclusive
coverage and long-term care. agents in 64 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's insurance subsidiaries write 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
-------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Whole life:
Traditional........... $114,934 $112,817 $107,288 $ 551,047 $521,015 $469,581
Interest-sensitive.... 14,981 16,638 29,287 163,058 167,912 174,675
Term................... 94,943 82,331 79,849 270,905 243,210 212,213
Other.................. 5,521 2,955 1,564 22,369 14,388 12,897
-------- -------- -------- ---------- -------- --------
$230,379 $214,741 $217,988 $1,007,379 $946,525 $869,366
======== ======== ======== ========== ======== ========
</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
-------------------------- -----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct response....... $ 79,412 $ 62,029 $ 63,900 $ 232,535 $202,370 $180,530
Exclusive Agents:
Liberty National..... 43,335 45,394 48,549 298,698 297,581 297,418
American Income...... 55,245 54,382 51,190 203,475 188,039 169,599
United Investors..... 10,261 10,715 10,609 88,842 84,495 78,666
United American...... 6,562 11,466 9,826 20,978 20,537 15,503
Independent Agents:
Military............. 15,781 8,165 8,268 86,209 74,150* 48,402
United American...... 15,225 18,182 16,392 42,725 40,130 34,281
Other................ 4,558 4,408 9,254 33,917 39,223 44,967
-------- -------- -------- ---------- -------- --------
$230,379 $214,741 $217,988 $1,007,379 $946,525 $869,366
======== ======== ======== ========== ======== ========
</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 insurance subsidiaries 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, 1997 was $222 million and the average
interest rate earned on these loans was 6.7% in 1997. Interest income earned
on policy loans was $14.4 million in 1997, $13.2 million in 1996, and $12.1
million in 1995. There were 196 thousand and 188 thousand policy loans
outstanding at year-end 1997 and 1996, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. 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. The ratio of aggregate face amount voluntary
terminations to the mean amount of life insurance in force was 16.5% in 1997,
17.1% in 1996, and 17.2% in 1995.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
1997 1996 1995
--------------------- --------------------- ---------------------
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,.. 9,392 $86,948,151 9,196 $80,391,376 8,913 $74,858,214
New issues.............. 1,441 20,267,520 1,320 18,718,479 1,413 19,359,923
Business acquired....... -0- -0- 38 2,573,996 -0- -0-
Other increases......... 1 96,788 1 104,490 1 64,128
Death benefits.......... (110) (307,752) (111) (289,687) (110) (271,451)
Lapses.................. (895) (13,358,973) (880) (13,008,065) (856) (12,185,540)
Surrenders.............. (149) (1,383,373) (140) (1,296,744) (135) (1,187,581)
Other decreases......... (50) (392,366) (32) (245,694) (30) (246,317)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 9,630 $91,869,995 9,392 $86,948,151 9,196 $80,391,376
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,725 $ 6,776 $ 6,854
Other.................. 10,689 10,246 9,491
</TABLE>
2
<PAGE>
HEALTH INSURANCE
Torchmark insurance subsidiaries offer 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 is an automatic
claim filing system for Medicare Part B benefits whereby policyholders do not
have to file most claims because they are paid from claim records Medicare
sends directly to the Torchmark insurers.
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, 1997 by marketing method:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct response........... 3,001 4,990 171 7,248 5,141 929
Exclusive agents:
Liberty National......... 11,541 11,258 16,701 138,179 122,305 122,147
American Income.......... 10,052 10,645 9,585 43,552 42,140 39,693
United American.......... 39,616 31,565 32,596 141,780 131,250 127,599
Independent agents:
United American.......... 42,643 42,523 44,438 431,293 447,317 468,691
-------- -------- -------- -------- -------- --------
$106,853 $100,981 $103,491 $762,052 $748,153 $759,059
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1997 by product category:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
<CAPTION>
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Medicare Supplement...... $ 65,161 $ 65,767 $ 64,638 $522,054 $523,902 $529,616
Cancer................... 10,757 10,676 11,338 137,640 119,428 114,972
Other health related pol-
icies................... 30,935 24,538 27,515 102,358 104,823 114,471
-------- -------- -------- -------- -------- --------
$106,853 $100,981 $103,491 $762,052 $748,153 $759,059
======== ======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
ANNUITIES
Annuity products offered by Torchmark insurance susidiaries 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,
-------------------------------- --------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed annuities......... $ 88,795 $ 87,133 $ 133,461 $1,010.4 $ 974.6 $ 927.9
Variable annuities...... 247,446 247,461 189,188 1,821.2 1,375.5 1,052.2
---------- ---------- ---------- -------- -------- --------
$336,241 $ 334,594 $322,649 $2,831.6 $2,350.1 $1,980.1
========== ========== ========== ======== ======== ========
</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. The investments of
Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 90% of total
investments at December 31, 1997. Approximately 20% 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 73% 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 the market value of fixed maturity investments
at December 31, 1997 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................................................ $1,939,172 33.1%
AA................................................. 715,549 12.2
A.................................................. 2,174,876 37.2
BBB................................................ 705,543 12.0
BB................................................. 181,532 3.1
B.................................................. 17,644 0.3
Less than B........................................ 2,740 0.0
Not rated.......................................... 122,612 2.1
---------- -----
$5,859,668 100.0%
========== =====
</TABLE>
4
<PAGE>
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 1997 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.. $4,913,146 84.1%
2. High quality..... 669,587 11.5
3. Medium quality... 212,952 3.6
4. Low quality...... 39,660 0.7
5. Lower quality.... 5,927 0.1
6. In or near de-
fault.............. 0 0.0
---------- -----
$5,841,272 100.0%
========== =====
</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 the experience of each insurance subsidiary,
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 each Torchmark insurance subsidiary are
established by management. Each company uses information from the application
and, in some cases, telephone interviews with applicants, 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.
For life insurance in excess of certain prescribed amounts, each insurance
company requires medical information or examinations of applicants. 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 additional medical
information is $100,000 through age 40. Additional medical information is
requested 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").
The insurance companies have 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 insurance subsidiaries
cede 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, the Torchmark insurance subsidiaries remain 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 insurance subsidiaries are 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. Various Torchmark insurance companies offer 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. Liberty National's 2,110 agents sell and service life and
health insurance, 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, individual life and fixed-benefit
accident and health insurance are sold through approximately 1,360 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 insurance companies sell life and health insurance as well as
fixed and variable annuity products through the 2,290 W&R financial planners.
It is currently contemplated that the W&R sales force will continue to market
Torchmark's insurance and variable annuity products after the proposed spin-
off of W&R (see Initial Public Offering and Planned Spin-off of Asset
Management Segment on page 30 of this report). (See Asset Management--Mutual
Funds for additional marketing information about the W&R sales force.)
United American offers life and health insurance targeted to various special
markets through approximately 900 United American exclusive agents in 64
branch offices throughout the United States.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through approximately 45,000 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>
Various Torchmark insurance subsidiaries distribute 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 superior 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. Liberty, Globe,
United American, and UILIC have ratings 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 ("W&R").
This segment's activity is mutual fund distribution, management, and
servicing.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by W&R, which markets and
manages the seventeen mutual funds in the United Group of Mutual Funds
("United Funds"), the eight mutual funds in the Waddell & Reed Fund, Inc.
("W&R Funds"), and the eleven 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, 1997 and 1996:
<TABLE>
<CAPTION>
(AMOUNTS IN
MILLIONS)
1997 1996
------- -------
<S> <C> <C>
United Funds $17,847 $15,130
W&R Funds 845 643
TMK/United Funds 1,894 1,435
------- -------
Total mutual fund assets under management 20,586 17,208
Institutional and private accounts 2,831 1,862
------- -------
Total assets under management $23,417 $19,070
======= =======
</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.
The following table indicates W&R revenues by component for the three years
ending December 31, 1997:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Asset management fees........................ $119,514 $103,127 $ 85,999
Investment product commissions*.............. 75,606 71,991 56,927
Insurance product commissions*............... 13,847 13,897 13,531
Service fees................................. 30,867 28,419 23,528
-------- -------- --------
$239,834 $217,434 $179,985
======== ======== ========
</TABLE>
*Commissions received from affiliates for variable annuities and insurance
product sales are eliminated in consolidation.
Asset management activities are conducted by an experienced and qualified
staff. As of December 31, 1997, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 13.7 years.
W&R markets its mutual funds and other financial products, including life
insurance, through a sales force of approximately 2,290 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 177 sales offices at December 31, 1997.
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, 1995; Globe, as of December 31, 1994; Liberty, as of
December 31, 1996; United American, as of December 31, 1996; and UILIC, as of
December 31, 1996.
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
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 1996 and 1995.
9
<PAGE>
<TABLE>
<CAPTION>
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- --------- --------
<S> <C> <C> <C>
1996:
United American Change in Capital and Surplus 50 to -10 -15
American Income Non-admitted to Admitted Assets 10 11
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 240
Liberty Change in Reserving Ratio 20 to -20 -20
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
</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 1996 and 1995 is brought about by its ownership of
other 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 financial condition or results. Furthermore, this intercompany
investment does not affect Liberty's ability to do business.
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. United American's ratios of minus 15%
in 1996 and minus 11% in 1995 and Globe's ratio of minus 18% in 1995 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, 1996 or 1995. Also, these transactions do not affect
these companies' ability to do business.
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 in
1995, returning to the normal range in 1996, as a result of purchasing a block
of business in late 1995. The assumption of this business caused an increase
in 1995 year-end reserves. No allowance is made for special transactions such
as this in the calculation of this ratio.
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 1996 and in 1995 was due to a
large amount of agent balances that arose from commissions 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. Agents balances due to American Income are fully recognized as assets
in Torchmark's consolidated financial statements.
Risk Based Capital. The NAIC requires a risk based capital formula be
applied to all life and health insurers. 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.
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.
10
<PAGE>
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 1997, Torchmark had 2,307 employees and 2,474 licensed
employees under sales contracts. Additionally, approximately 52,000
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 60 company-owned district office buildings used for agency sales
personnel.
United American owns and is the sole occupant of a 140,000 square foot
facility, located in the Stonebridge Ranch development in McKinney, Texas (a
North Dallas suburb).
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.
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.
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"), as a part
of a joint venture with unaffiliated entities, is developing 3,300 acres as a
planned community development known as Liberty Park, which is located along
Interstate 459 in Birmingham, Alabama.
During 1997, the income producing office buildings owned by TDC, Globe and
W&R were contributed into TMK Income Properties, L.P. ("TIP"), a partnership
which is wholly-owned by Torchmark subsidiaries. These properties include: 1.)
a 300,000 square foot office building at 204 North Robinson, Oklahoma City, of
which Globe occupies 56,000 square feet as its home office and the remaining
space is either leased or available for lease; 2.) a 330,000 square foot
office building complex at 14000 Quail Springs Parkway Plaza Boulevard,
Oklahoma City, which is 100% leased; 3.) an 80,000 square foot office building
at 120 Robert S. Kerr Avenue, Oklahoma City, which is available for lease; 4.)
three office buildings in suburban Kansas City totaling 120,000 square feet
which are 99% leased; 5.) five office buildings in Liberty Park in suburban
Birmingham, Alabama containing approximately 450,000 square feet which are 90%
leased. In addition, TIP has the following development projects underway: 1.)
6329 Glenwood in suburban Kansas City, a 64,542 square foot office building
which is 75% pre-leased and scheduled for completion in May, 1998; 2.) River
Village, a 46,000 square foot expansion to an existing
11
<PAGE>
facility in LIberty Park in Birmingham which is 100% pre-leased to an
affiliated party; 3.) Urban Center Building 1200, also in Liberty Park, a
184,000 square foot office building which is 90% pre-leased and scheduled for
completion in January, 1999.
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.
Year 2000 Compliance. Existing computer programs of many businesses were
developed with a two-digit year identification without consideration of the
upcoming change in century or millenium in the year 2000. Without addressing
this issue, many computer programs could fail or produce erroneous results,
creating considerable uncertainty and potentially adversely affecting the
operations of a business.
Torchmark has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. Torchmark is utilizing primarily internal staff for this conversion
but is also using outside consultants where necessary. The cost of this
project, which is immaterial to Torchmark, has been and will be expensed in
each period in which it incurred.
As a part of its activities, Torchmark is engaged electronically with third-
party financial institutions and other various organizations which may have
computer systems which are not year 2000 compliant. To the degree possible,
Torchmark is verifying that these third party business systems are currently
compliant or are in the process of becoming compliant. To the extent these
systems are not compliant, there is no assurance that the potential
interruptions or cost to Torchmark may not be significant.
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, 1997,
Liberty was a party to approximately 198 active lawsuits (including 28
employment related cases and excluding interpleaders and stayed cases), more
than 170 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This 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. This case remains in the
discovery proceeding status. On February 6, 1998, the defendants renewed their
motion to dismiss the class claims for failure to prosecute.
12
<PAGE>
As previously reported, a purported class action was filed in 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
approximate two month period in 1993 alleging improper payment practices
(Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634).
Liberty had discontinued the payment practices which were the subject of this
litigation after two months in 1993 and recalculated and repaid all claims in
full as it had prior to the two month period together with interest. In July,
1996, the Court entered a class certification order. Liberty subsequently
filed a petition for writ of mandamus or prohibition with the Alabama Supreme
Court asserting abuse of discretion by the trial court in certifying the
Adkins class. The Alabama Supreme Court issued the writ of mandamus on August
19, 1996. In January, 1998, Liberty filed a motion for summary judgment and a
motion to decertify the class in Adkins. On February 4, 1998, the Jefferson
County Circuit Court granted Liberty's motion for summary judgment.
It has been previously reported that Liberty was a party to 53 individual
cases filed in Chambers County, Alabama involving allegations that an
interest-sensitive life insurance policy would become paid-up or self-
sustaining after a specified number of years. Only four of these cases remain
pending with all others having been settled and dismissed by the Chambers
County Circuit Court.
Prior filings have reported that the Mobile County, Alabama Circuit Court
had ordered a reduction to $37,500 of the $5.0 million judgment against
Liberty in Strickland v. Liberty National Life Insurance Company, Case No. CV-
95-1399. This order was appealed by the plaintiffs to the Alabama Supreme
Court, which affirmed the lower court's decision on February 13, 1998.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance
policies issued by Globe and United American. In September, 1997, the U.S.
District Court entered an order granting summary judgment against the
plaintiffs on certain issues and denying national class certification,
although indicating that plaintiffs could move for certification of a state
class of Georgia policyholders. In December 1997, plaintiffs moved for the
certification of a state class of Georgia policyholders. Discovery is
proceeding on the remaining claims for breach of contract and the duty of good
faith arising from closure of the block of business and certain post claim
matters as well as fraud and conspiracy relating to pricing and delay in
implementing rate increases.
As previously reported, Liberty is a party to two lawsuits alleging that a
class of persons were insured under Liberty cancer policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
St. Clair County Circuit Court conditionally certified a class in Gentry while
the Jefferson County Circuit Court stayed the Harris case pending resolution
of the Gentry case and did not certify a class in Harris. Plaintiffs in Harris
then filed a petition for a writ of mandamus with the Alabama Supreme Court in
Gentry seeking to preserve the class claims in their action in the Jefferson
County Circuit Court. On January 30, 1998, the Alabama Supreme Court issued
the writ of mandamus to the St. Clair County Circuit Court in the Gentry case.
On February 20, 1998, Liberty filed a motion to dismiss the class claims in
the Gentry case with the St. Clair County Circuit Court.
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
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, continue to occur, 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 1997.
13
<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 7,059 shareholders of record on December 31,
1997, excluding shareholder accounts held in nominee form. On August 1, 1997,
Torchmark paid a 100% stock dividend to its common shareholders of record on
July 1, 1997. All market prices and dividends per share have been adjusted to
reflect the 100% stock dividend. 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>
1997
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- -------- -------- ---------
<S> <C> <C> <C>
1 $30.9375 $25.0000 $ .1450
2 36.7188 26.2500 .1450
3 41.6250 34.8125 .1450
4 42.8125 35.1875 .1500
</TABLE>
Year-end closing
price.................$42.1875
<TABLE>
<CAPTION>
1996
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- -------- -------- ---------
<S> <C> <C> <C>
1 $24.9375 $21.2500 $ .1450
2 22.6250 20.5000 .1450
3 23.1250 20.1250 .1450
4 26.0625 22.7500 .1450
</TABLE>
Year-end closing
price.................$25.2500
14
<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>
1997 1996 1995 1994 1993
YEAR ENDED DECEMBER 31, ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Premium Revenue:
Life................... $ 909,992 $ 854,897 $ 772,257 $ 601,633 $ 555,859
Health................. 739,485 732,618 754,983 773,375 804,605
Other ................. 28,527 22,404 19,043 13,866 132,446
Total................. 1,678,004 1,609,919 1,546,283 1,388,874 1,492,910
Net investment income... 433,617 404,608 381,865 347,637 368,494
Financial services
revenue................ 206,785 184,295 152,482 139,276 137,422
Realized investment
gains (losses)......... (36,979) 5,829 (14,323) (2,551) 8,009
Total revenue........... 2,282,450 2,205,810 2,067,482 1,875,337 2,066,846
Net income from
continuing operations.. 337,743 318,509 271,945 263,814 242,298
Net income.............. 337,743 311,372 143,235 268,946 297,979
Net income available to
common shareholders.... 337,743 311,372 143,235 268,142 294,690
Annualized premium
issued:
Life................... 230,379 214,741 217,988 149,833 128,433
Health................. 106,853 100,981 103,491 122,663 177,701
Total................. 337,232 315,722 321,479 272,496 306,134
Mutual fund collections. 1,513,797 1,497,259 1,182,594 1,180,477 1,237,747
Per common share:
Basic:
Net income............ 2.43 2.19 1.00 1.86 2.00
Net operating
income(1)............ 2.60 2.21 1.97 1.87 1.72
Net income from
continuing
operations........... 2.43 2.24 1.90 1.82 1.63
Cash dividends paid... .59 .58 .57 .56 .54
Diluted:
Net income............ 2.39 2.17 .99 1.85 1.98
Net operating
income(1)............ 2.56 2.19 1.95 1.85 1.70
Net income from
continuing
operations........... 2.39 2.22 1.89 1.81 1.61
Return on average common
equity excluding effect
of SFAS 115 and
discontinued
operations............. 21.2% 20.5% 18.5% 19.7% 21.3%
Basic average shares
outstanding............ 139,202 142,460 143,188 144,191 147,003
Diluted average shares
outstanding............ 141,431 143,783 144,228 145,192 148,706
- -------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995 1994 1993
AS OF DECEMBER 31, ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash and invested assets
(2).................... $ 6,664,566 $ 6,049,629 $ 5,874,037 $ 5,036,211 $ 5,200,588
Total assets............ 10,967,291 9,800,800 9,364,104 8,165,244 7,441,185
Short-term debt......... 347,152 40,910 189,372 250,116 107,108
Long-term debt.......... 564,298 791,880 791,988 791,518 791,090
Shareholders' equity.... 1,932,736 1,629,343 1,588,952 1,242,603 1,417,255
Per common share (3)... 13.80 11.69 11.09 8.69 9.40
Per common share
excluding effect of
SFAS 115.............. 12.90 11.42 10.16 9.65 8.65
Annualized premium in
force:
Life.................. 1,007,379 946,525 869,366 796,955(4) 612,656
Health................ 762,052 748,153 759,059 812,371(4) 828,332
Total................. 1,769,431 1,694,678 1,628,425 1,609,326 1,440,988
Assets under management
at W&R................. 23,417,200 19,069,700 18,489,200 14,497,700 14,439,800
</TABLE>
- -------------------------------------------------------------------------------
(1) Excludes realized investment gains (losses), the related adjustment to
deferred acquisition costs, and discontinued operations.
(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.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Torchmark cautions readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this document, and in
any other statements made by, or on behalf of Torchmark whether or not in
future filings with the Securities and Exchange Commission ("SEC"). Any
statement that is not a historical fact, or that might otherwise be considered
an opinion or projection concerning Torchmark or its business, whether express
or implied, is meant as and should be considered a forward-looking statement.
Such statements represent management's opinions concerning future operations,
strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to, deteriorating
general economic conditions leading to increased lapses and/or decreased sales
of Torchmark's policies, changes in governmental regulations (particularly
those impacting taxes and mandates for health insurance products), financial
markets trends that adversely affect sales of Torchmark's market-sensitive
products, interest rate changes that adversely affect product sales and/or
investment portfolio yield, increased pricing competition, adverse regulatory
developments and adverse litigation results. Readers are also directed to
consider other risks and uncertainties described in other documents filed by
Torchmark with the SEC.
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
Per share net operating income for Torchmark was $2.60 for the year 1997,
increasing 18% over 1996 per share earnings of $2.21, reflecting solid growth
in both Torchmark's insurance and asset management segments. Net operating
income is income from continuing operations excluding realized investment
gains and losses and the related adjustment to deferred acquisition costs. All
per share amounts have been restated for prior periods to reflect the two-for-
one stock split paid in the form of a dividend on Torchmark shares in the
third quarter of 1997. Net operating income rose 13% in 1996 over 1995 per-
share earnings.
Torchmark's net income from continuing operations grew 6% in the 1997
period. On a per-share basis, net income from continuing operations was $2.43
in 1997, compared with $2.24 in 1996 and $1.90 in 1995, rising 8% and 18% in
each of the years 1997 and 1996, respectively. Realized investment losses were
$37 million in 1997, compared with a gain of $6 million in 1996, resulting
primarily from the intentional sale of fixed-maturity investments at a loss to
offset current and prior year taxable gains. Realized investment losses for
1995 included a $15 million after-tax, or $.10 per share, writedown of an
investment in Southwestern Life Corporation, which filed for Chapter 11
bankruptcy protection in the third quarter of 1995.
Net income in both 1996 and 1995 were negatively affected by Torchmark's
decision to dispose of its energy segment and to exit the energy industry in
late 1995. In accordance with this decision, the net assets and results
attributable to this segment were reflected as discontinued operations in
Torchmark's financial statements. Disposition of the energy segment was
completed on September 30, 1996, and resulted in an after-tax loss of $7
million or $.05 per share. Additionally, in conjunction with Torchmark's
decision to dispose of this segment in 1995, Torchmark wrote down its
investment in a coalbed methane gas development to the investment's estimated
net realized value because increased production difficulties led to downward
revisions to engineering reserve estimates. The writedown amounted to an
after-tax charge of $130 million, or $.91 per share in 1995. For more
information on the disposition of the energy segment, see "Disposal of Energy
Segment" on page 30 of this report.
During 1997, the FASB issued Statement 128, Earnings per Share, which
requires all companies to report earnings per share on both a basic and
diluted basis. Per share net income and net operating income described herein
are reported as basic earnings per share unless specifically designated
otherwise. Diluted earnings per share takes into account Torchmark's
outstanding stock options and treats them as if they had been exercised and
converted to shares outstanding, with the proceeds from
16
<PAGE>
the exercise used by Torchmark to buy shares. Diluted net income per share was
$2.39 in 1997, increasing 10% over 1996 net income per share of $2.17. Diluted
net operating income per share was $2.56 in 1997, compared with $2.19 in 1996,
an increase of 17%. Per share net operating income on a diluted basis was
$1.95 in 1995.
Revenues in 1997 were $2.28 billion, growing 3% over 1996 revenues of $2.21
billion. After adjustment for the above-mentioned realized investment gains
and losses in both 1997 and 1996, revenues gained 5% in 1997. Total premium
increased $68 million or 4% in 1997, accounting for 57% of the $119 million
increase in total revenues excluding realized gains and losses. Life insurance
premium increased $55 million, or 6%. Life premium accounted for 46% of the
increase in adjusted total revenues. Financial services revenue climbed 12%
and net investment income increased 7%. Financial services revenue is derived
from the asset management operations and activities of W&R.
Torchmark's revenues in 1996 gained 7% over 1995 revenues of $2.07 billion.
Again, life insurance premium income was the largest contributor to revenue
growth, rising 11% and accounting for $83 million of the $138 million in
revenue growth. Financial services revenues gained 21%, comprising 23% of
Torchmark's total revenue growth in 1996. Other operating expenses as a
percentage of total revenues continue to decline. These expense ratios were
6.95% in 1997, 6.99% in 1996, and 7.04% in 1995. Lower litigation costs at
Liberty, Torchmark's Alabama insurance subsidiary, have aided this decline. In
1997, expenses include a one-time $6.8 million charge related to system
outsourcing in the asset management operations. The components of Torchmark's
revenues and operations are described in more detail in the discussion of
segments and investments found on pages 17 through 28 of this report.
The effective tax rate for Torchmark was 35.0% in 1997, compared with 36.5%
in 1996 and 36.8% in 1995. The 1997 decline was the result of a recovery of
state income taxes from a unitary filing for 1997. Without this one-time
recovery, Torchmark's effective tax rate would have been 36.1% in 1997.
The equity in earnings of affiliate represents Torchmark's approximately 27%
ownership in Vesta Insurance Group, Inc. ("Vesta"), a property-casualty
insurance carrier formerly wholly-owned by Torchmark. Torchmark's earnings
from this investment have grown in each of the years presented and in 1997
rose 22%.
INSURANCE
Insurance operating income is the pretax income of Torchmark's insurance
segment, exclusive of realized investment gains and losses and the related
adjustment to deferred acquisition costs. Insurance operating income is
comprised of underwriting income and excess investment income, which is the
income from investment operations less the interest cost attributable to net
policy liabilities. The following table is a summary of Torchmark's insurance
operating income.
SUMMARY OF INSURANCE OPERATING INCOME
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Insurance underwriting
income before other
income and administra-
tive expenses:
Life................... $ 246,688 60.5% 227,693 58.0% 210,483 56.1%
Health................. 141,540 34.7 148,097 37.8 150,385 40.1
Annuity................ 19,330 4.8 16,480 4.2 13,812 3.7
Other.................. 7 0.0 18 0.0 229 0.1
--------- --------- ---------
Total .................. 407,565 100.0% 392,288 100.0% 374,909 100.0%
===== ===== =====
Other income............ 3,141 2,936 3,111
Administrative expenses. (104,220) (110,029) (110,850)
--------- --------- ---------
Insurance underwriting
income.................. 306,486 285,195 267,170
Excess investment income:
Net investment income*.. 455,077 413,917 396,208
Required interest on net
policy liabilities..... (208,536) (202,852) (189,787)
--------- --------- ---------
246,541 211,065 206,421
--------- --------- ---------
Insurance operating in-
come.................... $ 553,027 $ 496,260 $ 473,591
========= ========= =========
</TABLE>
- --------
*Tax equivalent basis (Net investment income for insurance operations only,
before intercompany eliminations)
17
<PAGE>
Torchmark's insurance operating income rose 11% in 1997 to $553 million from
$496 million, compared with a 5% gain in 1996. The 1997 acceleration in growth
was primarily caused by a $35 million increase in excess investment income and
a $19 million gain in life insurance underwriting income. A reduction in
operating expenses in 1997 of approximately $6 million was also a factor. The
expense decline was largely a result of lower legal and litigation costs at
Liberty.
In recent years, Torchmark has emphasized the sale of life insurance
products relative to health insurance because of higher profit margins
associated with life business. Also, the greater asset base from the higher
level of reserves required on life business allows Torchmark the opportunity
to increase investment income. This emphasis is evidenced by the growth in
life underwriting income relative to that of health. In 1997, life
underwriting income (before other income and administrative expenses) was 61%
of total underwriting income before expenses, compared with 58% in 1996 and
56% in 1995. Health insurance underwriting income declined from 40% in 1995 to
38% in 1996 and 35% in 1997.
Following is a discussion of each of Torchmark's major product groups and a
discussion of Torchmark's distribution channels.
Life insurance. Life insurance premium increased 6% in 1997 to $910 million
from $855 million in 1996. Life premium rose 11% for the year 1996. Sales of
life insurance, in terms of annualized premium, were $230 million in 1997,
growing 7% over 1996 sales of $215 million. This compares with a 1% decline in
1996 sales relative to 1995. Annualized premium sold in 1995 was $218 million.
Annualized life insurance premium in force was $1.01 billion at December 31,
1997, climbing over the $1 billion milestone for the first time in its
history. Annualized premium in force grew 6% in 1997 from $947 million at
year-end 1996. Annualized life premium in force rose 9% during 1996 from $869
million. Annualized premium in force and issued data includes amounts
collected on certain interest-sensitive life products which are not recorded
as premium income but excludes single-premium income and policy account
charges.
Life insurance products are marketed through a variety of different
distribution channels. The following table presents life insurance premium by
distribution method during each of the three years ended December 31, 1997.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent
Agency........................ $ 36,810 4.0% $ 33,404 3.9% $ 28,305 3.7%
United American Exclusive
Agency........................ 18,243 2.0 15,767 1.8 10,713 1.4
Direct Response................ 195,393 21.5 171,983 20.1 149,141 19.3
Liberty National Exclusive
Agency........................ 280,519 30.8 279,637 32.7 275,089 35.6
American Income Exclusive
Agency........................ 190,681 20.9 173,700 20.3 153,914 19.9
Military Independent Agency.... 79,631 8.8 71,223 8.3 45,512 5.9
United Investors Exclusive
Agency........................ 77,986 8.6 73,836 8.6 69,498 9.0
Other.......................... 30,729 3.4 35,347 4.3 40,085 5.2
-------- ----- -------- ----- -------- -----
$909,992 100.0% $854,897 100.0% $772,257 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Direct response marketing is conducted through direct mail, co-op mailings,
television and consumer magazine advertising, and direct mail solicitations
endorsed by groups, unions and associations. The direct response operation is
a profitable distribution channel for Torchmark characterized by lower
acquisition costs than Torchmark's other agency-based marketing systems. This
operation has grown rapidly. In 1997, it had Torchmark's highest growth in
life insurance premium in both dollar amount and percentage increase, and
accounted for over 21% of Torchmark's life insurance premium. Direct response
premium was $195 million in 1997, increasing 14% over 1996 premium of $172
million. Direct response life premium in 1996 grew 15% over 1995 premium of
$149 million. Direct response annualized premium issued increased 28% in 1997
to $79 million. Annualized premium in force grew 15% in 1997 to $233 million,
after having increased 12% in 1996.
18
<PAGE>
The increase in life insurance issued by direct response in 1997 was a
result of several expanded programs, including the expansion of the program
that solicits sales from previous inquirers who did not buy. Also, co-op
mailings were expanded.
The direct response operation is also testing new markets to increase future
sales. For example, the sale of policies with higher face amounts was tested
in early 1998 with favorable results.
The Liberty National Exclusive Agency distribution system accounted for the
largest portion of life insurance premium income in each of the three years
presented, with 1997 premium of $281 million representing 31% of Torchmark's
total life premium. Liberty's annualized life premium in force was $299
million at year-end 1997, compared with $298 million and $297 million at year-
ends 1996 and 1995, respectively. Life premium sales, in terms of annualized
premium issued, declined 5% during 1997 to $43 million and 6% during 1996 to
$45 million. This agency has completed the transition from a debit-style
renewal premium collection system to a direct bill or bank-draft collection
system. As a result, the transition away from debit-style sales led to a
decline in the number of sales agents during the transition period of 1994
through 1996. New agent recruiting programs were implemented late in 1996,
resulting in the number of sales agents increasing slightly from year-end 1996
to a total of 1,750 at year-end 1997. The number of first year agents
increased from 625 at year-end 1996 to 754 at year-end 1997. During 1997 new
training programs were implemented to improve the retention of newly recruited
agents beyond their first year anniversaries which should further enhance
sales growth. Management believes that continual recruiting of new agents and
retention of productive agents are critical to the continued growth of sales
in controlled agency distribution systems.
Life insurance is distributed 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. This business is comprised of whole life products
with term insurance riders. The quality of the business produced by this
agency is outstanding, and is characterized by extremely low lapse rates. Life
premium income from this distribution system grew 12% to $80 million in 1997.
Premium in 1996 rose 56% to $71 million, up $26 million from 1995. The 1996
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, but beginning in 1997, additional sales were produced by Globe.
Production in the military distribution system almost doubled in 1997, with
sales of annualized premium of $16 million, compared with $8 million in 1996.
Annualized premium in force was $86 million at year-end 1997, an increase of
16% over 1996 annualized premium of $74 million. Premium in force for 1996
rose 53% from $48 million in 1995, largely a result of the acquired block of
business.
The American Income Agency is a distribution system that focuses on members
of labor unions, credit unions, and other associations for its life insurance
sales. At December 31, 1997, premium from this system accounted for 21% of
Torchmark's total life premium. It is a high margin business characterized by
lower policy obligation ratios. American Income's premium rose 10% in 1997 to
$191 million, after having risen 13% in 1996 to $174 million. Annualized
premium was $203 million at year-end 1997, rising 8% in 1997 and 11% in 1996.
Sales in terms of annualized premium issued were $55 million in 1997, compared
with $54 million in 1996 and $51 million in 1995.
The United Investors exclusive agency is made up of W&R sales
representatives, and accounts for approximately 9% of Torchmark's life
premium. This agency markets the life insurance products of UILIC, and will
continue to do so after the planned spin-off of W&R. (See Initial Public
Offering and Planned Spin-off of the Asset Management Segment on page 30 of
this report). Premium income rose 6% in both 1997 and 1996, and was $78
million in 1997. Annualized premium in force was $89 million at year-end 1997,
growing 5%.
The United American independent and captive agencies represent about 6% of
Torchmark's life premium on a combined basis. The exclusive agency had 16%
growth in premium in 1997 to $18 million, but had 47% growth in premium in
1996. The independent agency experienced a premium increase of 10% in 1997
with premium of $37 million. Premium from this agency rose 18% in 1996.
19
<PAGE>
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium and policy
charges................ $909,992 100.0% $854,897 100.0% $772,257 100.0%
Policy obligations...... 591,867 65.0 558,436 65.3 507,444 65.7
Required reserve
interest............... (221,668) (24.4) (209,126) (24.4) (194,733) (25.2)
-------- ----- -------- ----- -------- -----
Net policy obligations. 370,199 40.6 349,310 40.9 312,711 40.5
Amortization of
acquisition costs...... 155,797 17.1 146,164 17.1 126,695 16.4
Commissions and premium
taxes.................. 55,348 6.1 54,182 6.3 50,994 6.6
Required interest on
deferred acquisition
costs.................. 81,960 9.0 77,548 9.1 71,374 9.2
-------- ----- -------- ----- -------- -----
Total expense.......... 663,304 72.8 627,204 73.4 561,774 72.7
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative
expenses............... $246,688 27.2% $227,693 26.6% $210,483 27.3%
======== ===== ======== ===== ======== =====
</TABLE>
Torchmark's insurance underwriting income as a percentage of premium was
approximately 27% in each of the years presented, with 1997 showing a slight
improvement over 1996. Stronger persistency has contributed to Torchmark's
life insurance profitability and stability in margins. Persistency is
beneficial to margins because it lowers the rate of amortization of
acquisition costs and increases profits as the premium life is extended.
Persistency improvements have resulted over the past few years from a variety
of factors, including the previously-mentioned changes in the Liberty National
Exclusive Agency marketing system. Another contributing factor to improved
persistency in life business is a higher proportion of premium from the
military distribution system, which has a very low lapse rate.
Health Insurance. Torchmark markets its health insurance products through
several of its distribution channels. The following table indicates health
insurance premium income during each of the three years ended December 31,
1997 by distribution method.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent
Agency........................ $428,775 58.0% $440,862 60.2% $466,751 61.8%
United American Exclusive Agen-
cy............................ 132,426 17.9 124,037 16.9 123,264 16.3
Direct Response................ 6,467 0.9 3,519 0.5 956 0.1
Liberty National Exclusive
Agency........................ 125,701 17.0 120,028 16.4 122,722 16.3
American Income Exlusive Agen-
cy............................ 46,116 6.2 44,172 6.0 41,290 5.5
-------- ----- -------- ----- -------- -----
$739,485 100.0% $732,618 100.0% $754,983 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Health insurance premium rose 1% in 1997 to $739 million, giving Torchmark
its first year-over-year increase in health premium since 1993. Health premium
declined 3% in 1996 from $755 million to $733 million. Annualized premium in
force for health insurance grew 2% to $762 million at December 31, 1997, over
the prior year-end balance of $748 million. Health premium in force declined
1% in 1996. Sales of health premium, in terms of annualized premium issued,
were $107 million in 1997, gaining 6% over 1996 sales of $101 million. The
1997 gains in both annualized health premium in force and annualized premium
issued were Torchmark's first year-over-year increases in each respective
category in five years.
20
<PAGE>
Health products sold by Torchmark insurance companies 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 69%, cancer 18%, and other health products
13%. Medicare Supplement's annualized premium in force was $522 million at
December 31, 1997. Torchmark's Medicare Supplement sales and premium in force
base have stabilized from the declines experienced in the last few years.
In recent years, pressure on Medicare Supplement sales has come from federal
mandates implemented in 1992 that substantially reduced allowable first year
agents' commissions. As a result, many independent agencies that previously
accounted for most of Torchmark's sales of this product left the Medicare
Supplement market, adversely affecting sales. Torchmark has implemented
certain measures to offset the decline. Medicare Supplement products are now
primarily sold by the United American exclusive agency, which is less subject
to the financing pressures of independent agencies. Further, very cost-
efficient sales leads for this agency are provided by Torchmark's direct
response operation. This agency also benefits from the low cost, highly
service-oriented back office administration which frees agents to devote full
time to sales. In the last few years the primary competition affecting
Medicare Supplement sales has come from Medicare health maintenance
organizations ("HMOs"), the managed care alternative to traditional fee-for-
service Medicare. However, during the last year, growing public
dissatisfaction with HMO service, and increased federal regulatory pressures
on HMOs, appear to be making Medicare HMOs a less attractive alternative.
While 1997 Medicare Supplement sales were down slightly, from $66 million in
1996 to $65 million, sales in the second half of 1997 increased 6% over the
first half of the year.
Cancer insurance had the greatest percentage growth in 1997 in terms of
annualized premium in force, gaining 15% from $119 million to $138 million.
This compared with 4% growth in 1996. Annualized premium issued for this
product line was $11 million in each of the years 1995 through 1997. Cancer
business is written primarily by the Liberty National Agency, which had $116
million, or 85% of total cancer annualized premium in force at December 31,
1997. Premium growth has been attained primarily through premium rate
increases to offset increased healthcare costs.
Annualized premium in force for other health products declined 2% in 1997 to
$102 million, after declining 8% in 1996. Sales increased in 1997, however,
with annualized premium issued rising 26% to $31 million. A large factor in
the 1997 sales increase is increased issue of a limited-benefit hospital-
surgical product sold by the United American Independent Agency.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium.................. $739,485 100.0% $732,618 100.0% $754,983 100.0%
Policy obligations....... 462,967 62.6 448,346 61.2 454,107 60.2
Required reserve inter-
est..................... (21,644) (2.9) (26,137) (3.6) (26,139) (3.5)
-------- ----- -------- ----- -------- -----
Net policy obligations... 441,323 59.7 422,209 57.6 427,968 56.7
Amortization of acquisi-
tion costs.............. 58,473 7.9 63,150 8.6 69,698 9.2
Commissions and premium
taxes................... 87,069 11.8 87,687 12.0 94,624 12.5
Required interest on de-
ferred acquisition
costs................... 11,080 1.5 11,475 1.6 12,308 1.7
-------- ----- -------- ----- -------- -----
Total expense........... 597,945 80.9 584,521 79.8 604,598 80.1
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative expenses. $141,540 19.1% $148,097 20.2% $150,385 19.9%
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE>
Health insurance underwriting income before other income and administrative
expenses declined 4% in 1997, despite increased premium, due to increased net
policy obligations. As a percentage of health insurance premium, underwriting
income before other income and administrative expenses declined approximately
1% in 1997 after a slight increase in 1996. Fluctuations in health insurance
margins are common, resulting from inevitable short term timing differences
due to the periodic nature of obtaining rate increase approvals from
regulatory authorities and the pre-existing health care cost inflation that
justifies such rate increases. To the extent that management is able to obtain
timely and adequate rate increases, margin fluctuations will be minimized.
Inflationary cost increases in the cancer business negatively impacted margins
in 1997, but significant rate increases implemented during the year should
improve margins in 1998. Similarly, Medicare Supplement underwriting margins
have also experienced small declines. The Federal mandate of a 65% minimum
loss ratio on Medicare Supplement business and market competition make it
difficult to improve underwriting margins on this product. Nonetheless,
Medicare Supplement products are profitable to Torchmark because of the low
operating expenses associated with it.
Annuities. Annuity products are marketed by Torchmark to service a variety
of needs, including retirement income and 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 a variety of mutual funds managed by W&R,
which vary in degree of investment risk and return. A fixed- annuity
investment account is also available as a variable annuity investment option.
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 added to the annuity account balance 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.
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)
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed..................... $1,010.4 $ 974.6 $ 927.9 $ 88,795 $ 87,133 $133,461
Variable.................. 1,821.2 1,375.5 1,052.2 247,446 247,461 189,188
-------- -------- -------- -------- -------- --------
Total.................... $2,831.6 $2,350.1 $1,980.1 $336,241 $334,594 $322,649
======== ======== ======== ======== ======== ========
</TABLE>
Premium collections on fixed annuities were $89 million in 1997, compared
with $87 million in 1996 and $133 million in 1995. The 1996 decline in fixed
collections resulted from a $21 million decline in collections by the United
American general agency that markets to bank customers. These collections were
$76 million in 1995, a record year. Also, in 1996 Torchmark's collections on
preneed annuities declined $19 million. The sale of preneed products was
discontinued in late 1995. The fixed annuity balance rose in each of the
periods presented, primarily because of the additional collections.
Variable annuity collections were flat in 1997 when compared with 1996 at
$247 million, but grew 31% in 1996 over 1995 collections of $189 million. The
strength in financial market conditions in both 1996 and 1997 has had a
positive influence on collections. However, it is believed lower capital gains
rates implemented by Congress during 1997 may have been a negative factor in
1997 variable annuity sales. Torchmark's variable annuities are issued by
UILIC and are sold by W&R sales representatives. Under a marketing agreement,
Torchmark will continue to market its variable annuities through the W&R sales
force subsequent to the planned spin-off of W&R. (See Initial Public Offering
and Planned Spin-off of Asset Management Segment on page 30 of this report.)
Torchmark also plans to market variable annuities through its direct response
distribution system in 1998.
22
<PAGE>
The variable account balance has climbed rapidly since 1995, rising 31% in
1996 to $1.4 billion at December 31, 1996, and 32% in 1997 to $1.8 billion at
year-end 1997. A strong financial market in both 1996 and 1997 was the major
factor in the rise in variable account values in those years. Variable
accounts are valued based on the market values of the underlying securities.
The additional collections in each year also added to the balances.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
MEAN MEAN MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Policy charges.............. $28,528 1.1% $22,404 1.0% $19,049 1.1%
Investment spread........... 10,187 .4 10,957 .5 10,206 .6
------- ---- ------- ---- ------- ----
Total revenue.............. 38,715 1.5 33,361 1.5 29,255 1.7
Policy obligations.......... 54,074 2.1 51,320 2.4 48,012 2.8
Required reserve interest... (55,133) (2.1) (52,188) (2.4) (48,541) (2.8)
------- ---- ------- ---- ------- ----
Net policy obligations..... (1,059) -0- (868) -0- (529) -0-
Amortization of acquisition
costs...................... 12,326 .5 10,606 .5 9,125 .5
Commissions and premium
taxes...................... 1,062 -0- 610 -0- 699 -0-
Required interest on
deferred acquisition
costs...................... 7,056 .3 6,533 .3 6,148 .4
------- ---- ------- ---- ------- ----
Total expense.............. 19,385 .8 16,881 .8 15,443 .9
------- ---- ------- ---- ------- ----
Insurance underwriting
income before other income
and administrative
expenses................... $19,330 .7% $16,480 .7% $13,812 .8%
======= ==== ======= ==== ======= ====
</TABLE>
Insurance operating margins for annuities, as measured by the mean reserve,
have shown a modest decline throughout the three years examined. Annuity
policy charges have increased in each period. Annuity policy charges rose 27%
in 1997 to $29 million, largely as a result of growth in the variable account
balance. Policy charges grew 18% in 1996 to $22 million. Growth in policy
charges results not only from the increase in size of the annuity account
balances, but is also attributable to the increase in the number of annuity
contracts in force and the cumulative effect of the growth in sales over the
past few years on which the sales charge is based. The investment spread is
the investment income earned in excess of policy requirements on fixed annuity
contracts. As a percentage of the mean reserve, the interest spread has
declined slightly in 1997 and 1996 because of the proportional decrease in
size of the fixed account balance relative to the total account balance.
23
<PAGE>
ASSET MANAGEMENT
Torchmark's financial services operations include the marketing of 25 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. Asset management 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.
ASSET MANAGEMENT
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Asset management fees........ $119,514 49.0% $103,127 46.5% $85,999 46.9%
Distribution revenue......... 89,453 36.7 85,888 38.7 70,458 38.4
Service fees................. 30,867 12.6 28,419 12.8 23,528 12.8
-------- ----- -------- ----- ------- -----
Financial services reve-
nue*...................... 239,834 98.3 217,434 98.0 179,985 98.1
Investment income............ 4,062 1.7 4,423 2.0 3,573 1.9
-------- ----- -------- ----- ------- -----
Total revenue.............. 243,896 100.0 221,857 100.0 183,558 100.0
Commissions and selling ex-
penses...................... 80,342 32.9 78,797 35.5 63,882 34.8
Other expenses............... 41,080 16.9 30,365 13.7 26,014 14.2
-------- ----- -------- ----- ------- -----
Total expenses............. 121,422 49.8 109,162 49.2 89,896 49.0
-------- ----- -------- ----- ------- -----
Pretax income................ $122,474 50.2% $112,695 50.8% $93,662 51.0%
======== ===== ======== ===== ======= =====
</TABLE>
- --------
* Financial services revenue includes $33.0 million in 1997, $33.1 million in
1996, and $27.5 million in 1995 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Financial services revenues rose 10% to $240 million in 1997, compared with
1996 revenues of $217 million. These revenues grew 21% in 1996 from 1995
revenues of $180 million. Financial services revenues presented in Torchmark's
consolidated financial statements will not correspond to total revenues for
the financial services segment presented above in the Summary of Results table
because certain revenues as presented in the table are derived from other
Torchmark subsidiaries and are eliminated in consolidation.
Asset management fees of $120 million in 1997 were the largest component of
financial services revenues, representing 49% of 1997 segment revenues. Asset
management fees were up 16% in 1997, after having risen 20% to $103 million in
1996. Increases in these fees have occurred due to the growth in mutual fund
assets and institutional assets under management, on which asset management
fees are based. Average assets under management rose 12% in 1997 and 17% in
1996. Average mutual fund assets under management grew 19% in 1997. Growth in
average assets under management in 1997 and 1996 resulted from two factors.
First, strength in the financial markets caused increases in the values of
fund securities. Secondly, new investment product sales and reinvested
dividends in each period contributed to asset growth. Total assets under
management were $23.4 billion at December 31, 1997, an increase over the prior
year end of 23%. Total assets under management were $19.1 billion at December
31, 1996 and $18.5 billion at December 31, 1995. Mutual fund assets under
management rose 20% in 1997 to $20.6 billion at year-end 1997. They rose 14%
in 1996 to $17.2 billion at year end. The composition of the portfolios
managed has bearing on the relationship of asset management fees to assets
under management. Equity-oriented portfolios have higher fee rates than fixed-
income portfolios. Therefore, 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
1996 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.
24
<PAGE>
Distribution revenues are derived from the sales of both investment and
insurance products and accounted for 37% of total asset management revenues.
Investment product commissions represented 85% of total distribution revenues
in 1997. Investment products consist of two different mutual fund groups, the
W&R Funds and the United Funds. The United Funds have a front-load sales
charge while the W&R Funds have a contingent deferred or back-load charge. The
W&R Funds also charge a Rule 12b-1 distribution fee based on a percentage of
assets under management. The commissions from insurance products and variable
annuities are primarily received from Torchmark insurance subsidiaries, and
are eliminated in consolidation. W&R and Torchmark have agreed that W&R will
continue to market the variable annuities and insurance products of certain
Torchmark insurance companies subsequent to the announced spin-off. See
Initial Public Offering and Planned Spin-off of Asset Management Segment on
page 30 of this report. Investment product commissions rose 5% to $76 million
in 1997, after having increased 26% to $72 million in 1996. Investment product
collections increased 1% in 1997 and were $1.5 billion during both 1996 and
1997. Investment product sales in 1996 climbed 27% from $1.2 billion. In 1997,
sales of the United Funds in terms of mutual fund collections were $1.1
billion, rising 7% from 1996 sales of $1.0 billion. These sales rose 22% in
1996. The W&R Funds experienced a decline in 1997 sales of 23% to $176
million, but had a 44% increase in 1996 sales volume. Insurance product
commission revenues were level in each year 1995 through 1997 at $14 million.
Service fees are charged based on the number of accounts serviced. They
include fees for transfer agency, custody, and accounting. Service fees rose
9% in 1997 to $31 million, after having increased 21% in 1996 to $28 million.
The number of accounts serviced was 1.38 million at December 31, 1997, an
increase of 5%. Accounts serviced were 1.31 million at year-end 1996 and 1.22
million at year-end 1995.
Pretax operating income for the asset management segment rose 9% in 1997 to
$122 million. Pretax income increased 20% in 1996 from $94 million. Margins
for this segment have exceeded 50% in each of the periods considered. Margin
improvements have resulted, in large part, from the increase in the proportion
of asset management fees, which has a higher margin than other revenue
sources.
Commissions and selling expenses are the direct expenses associated with
producing distribution revenue. They consist of the commissions, bonuses, and
other compensation paid to the sales force as well as other marketing and
promotional costs. These expenses correlate closely with distribution
revenues.
Other expenses, as a percentage of revenues, grew from 14% in 1996 to 17% in
1997. This increase was due primarily to a one-time charge in 1997 in the
amount of $6.8 million which was largely related to the outsourcing of some
data processing services and the discontinuance of internally-developed
systems. Had this charge not been incurred, 1997 expenses would have been 14%
of revenues, margins would have been 53%, and pretax income would have been
$129 million.
INVESTMENTS
Torchmark's net investment income increased 7% to $434 million during the
year, which follows an increase of 6% in 1996 and an increase of 10% in 1995.
When adjusted for the acquisition of American Income in late 1994, however,
the 1995 increase was 3%. As in the past several years, the increase in 1997
investment income primarily resulted from the continued accumulation of
invested assets, which rose 8% to $6.3 billion at amortized cost by year end.
Invested assets increased by 5% in 1996 and 6% in 1995. Mean invested assets
at amortized cost, adjusted for the disposition of Torchmark's energy
operations, were $6.1 billion in 1997, $5.7 billion in 1996, and $5.4 billion
in 1995.
Subsequent to the first quarter of 1997, interest rates declined steadily
throughout the remainder of the year. Investments during 1997 of $1.66 billion
were made at a tax-equivalent yield of 7.29%. This compares with investments
of $1.08 billion in 1996 acquired at a tax-equivalent yield of 7.12%.
Acquisitions during 1995, which were increased by several sale programs,
totaled $1.87 billion. The average life of 1997 acquisitions was 13.3 years as
compared with 7.8 years in the previous year and 13.4 years in 1995. Torchmark
varies its maturity selection based on a number of factors including the
prevailing yield curve.
Holdings of mortgage-backed securities continue to decline as a percentage
of the portfolio, due to repayments of mortgage-backs and acquisitions of
other types of fixed income investments. The holdings of mortgage-backed
securities represented 24% of the fixed-income portfolio at year-end 1997, as
compared with 25% at year-end 1996 and 30% at year-end 1995.
25
<PAGE>
Torchmark considers its fixed-income portfolio available for sale.
Therefore, it is valued at market and is subject to fluctuations as interest
rates change. Falling rates during 1997 propelled the value of the fixed-
income portfolio higher during the year. At year-end 1997, the portfolio had
an unrealized gain of $213 million, compared with $63 million at year-end 1996
and $226 million at year-end 1995. During 1997, the portfolio yield declined
slightly to 7.49% at year-end 1997, compared with 7.55% at year-end 1996 and
7.66% at year-end 1995. With the purchase of longer maturities in 1997, the
average life of the portfolio increased slightly to 8.0 years at year-end
1997, compared with 7.8 years at year-end 1996 and 8.8 years at year-end 1995.
The quality of Torchmark's fixed-income portfolio remains high. The
portfolio consists of securities of which 94.5% were rated investment grade by
Standard & Poors and 95.6% were rated investment grade by NAIC classification.
With the quality and liquidity of its fixed-income investments, Torchmark
can minimize the level of its short-term investments, which totaled $123
million at year-end 1997 and $85 million at year-end 1996. The following table
presents investments by expected maturity.
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Short terms and under 1 year................................ 4.3% 5.9%
2-5 years................................................... 28.0 27.8
6-10 years.................................................. 44.3 44.5
11-15 years................................................. 11.3 10.8
16-20 years................................................. 3.7 4.2
Over 20 years............................................... 8.4 6.8
----- -----
100.0% 100.0%
===== =====
</TABLE>
Fixed income investments continue to represent 90% of invested assets, which
causes the percentage holdings of the other types of investments to vary from
the latest industry averages. The following table presents Torchmark's
components of the investment portfolio compared with industry data.
<TABLE>
<CAPTION>
TORCHMARK
--------------------
AMOUNT INDUSTRY %
(IN THOUSANDS) % (1)
-------------- ----- ----------
<S> <C> <C> <C>
Investment grade and short-term bonds.......... $5,718,802 87.3% 69.0%
Noninvestment grade bonds...................... 258,405 4.0 3.8
Preferred and common stocks.................... 17,782 0.3 5.7
Mortgage loans................................. 78,974 1.2 12.1
Real estate.................................... 167,297 2.6 2.2
Policy loans................................... 221,703 3.4 5.8
Other invested assets.......................... 75,445 1.2 1.4
---------- ----- -----
$6,538,408 100.0% 100.0%
========== ===== =====
</TABLE>
- --------
(1) Latest data available from the American Council of Life Insurance.
26
<PAGE>
Torchmark profits to the extent that its net investment income exceeds the
interest cost attributable to its net insurance policy liabilities and
financing costs. The following table presents Torchmark's excess investment
income, or tax equivalent net investment income in excess of its net policy
reserve requirements and financing costs, as well as the related assets and
liabilities.
ANALYSIS OF EXCESS INVESTMENT INCOME AND RELATED ITEMS
(Dollar amounts in millions)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net investment income............................ $ 433.6 $ 404.6 $ 381.9
Tax equivalency adjustment....................... 10.4 11.1 12.1
-------- -------- --------
Tax equivalent investment income................. 444.0 415.7 394.0
Required interest on net insurance policy liabil-
ities........................................... (208.5) (202.9) (189.8)
Financing costs.................................. (88.7) (89.8) (98.4)
-------- -------- --------
Excess investment income......................... $ 146.8 $ 123.0 $ 105.8
======== ======== ========
Average invested assets*......................... $6,109.7 $5,707.1 $5,414.0
Increase over prior year--dollars............... 402.6 293.1
- --percentage..................................... 7% 5%
Average net interest-bearing insurance policy li-
abilities....................................... $3,468.7 $3,312.6 3,168.0
Increase over prior year--dollars............... 156.1 144.6
- --percentage..................................... 5% 5%
</TABLE>
- --------
* At amortized cost
Excess investment income increased 19% in 1997 and 16% in 1996, as compared
to increases in tax equivalent investment income of 7% and 6%, respectively.
The higher growth in excess investment income relative to tax equivalent
investment income resulted from greater growth in average invested assets than
in average net interest-bearing insurance policy liabilities. In addition,
financing costs, which consist of interest on debt and dividends on the
monthly income preferred securities, were 20% of tax equivalent investment
income in 1997, down from 22% in 1996 and 25% in 1995.
Market Risk Sensitivity. Market risk is a risk that the value of a security
will change because of a change in market conditions. Torchmark's primary
exposure to market risk is interest rate risk which is the risk that a change
in a securities' value could occur from a change in interest rates. This risk
is significant to Torchmark's investment portfolio because its fixed-income
holdings amount to 90% of total investments. The effects of these interest
rate fluctuations on fixed investments are reflected on an after-tax basis in
Torchmark's shareholders' equity from marking these investments to market as
required by SFAS 115.
The actual interest rate risk to Torchmark is greatly reduced because the
effect that changes in rates have on assets are offset by the effect they have
on insurance liabilities. Torchmark's insurance liabilities, in which interest
assumptions are a factor in their computation, were $3.5 billion at December
31, 1997, compared with fixed income investments of $5.9 billion at the same
date. Because of the long-term nature of insurance liabilities, temporary
changes in value caused by rate fluctuations have little bearing on ultimate
obligations. The marking of these liabilities to market is not addressed by
SFAS 115.
Market risk is managed in a manner consistent with Torchmark's investment
objectives of maintaining a high-quality fixed-maturity portfolio. No
derivative instruments are used to manage its exposure to market risk in the
investment portfolio. A swap instrument was entered into to allow Torchmark to
participate in the downward trend in interest rates in connection with its
Monthly Income Preferred Securities as discussed in the Notes to the
Consolidated Financial Statement on page 56 of this report and in Capital
Resources of page 29 of this report. A cap instrument was also entered into to
protect Torchmark from the market risk on an increase in rates associated with
the swap on this security. Volatility in the value of Torchmark's fixed-income
holdings is reduced by maintaining a relatively short-term portfolio, of which
77% matures within ten years. Also, the portfolio and market conditions are
constantly evaluated for appropriate action.
27
<PAGE>
The liability for Torchmark's insurance policy obligations is computed using
interest assumptions, some of which are contractually guaranteed. A reduction
in market interest rates of a permanent nature could cause investment return
to fall below amounts guaranteed. Torchmark's insurance companies participate
in the cash flow testing procedures imposed by statutory insurance
regulations, the purpose of which is to insure that such liabilities are
adequate to meet the company's obligations under a variety of interest rate
scenarios. It has been determined from those procedures that Torchmark's
insurance policy liabilities, when considered in light of the assets held with
respect to such liabilities and the investment income expected to be received
on such assets, are adequate to meet the obligations and expenses of
Torchmark's insurance activities in all but the most extreme circumstances.
The following table illustrates the market risk sensitivity of Torchmark's
interest-rate sensitive fixed-maturity portfolio. This table measures the
effect of a change in interest rates (as represented by the U.S. Treasury
curve) on the fair value of Torchmark's fixed-maturity portfolio. The data is
prepared through a model that measures the change in fair value arising from
an immediate and sustained change in interest rates in increments of 100 basis
points. It takes into account the effect that special option features such as
call options, put options, and unscheduled repayments would have on the
portfolio, given the changes in rates. The valuation of these option features
is dependent upon assumptions about future interest rate volatility that are
based on past performance.
<TABLE>
<CAPTION>
CHANGE
IN
INTEREST
RATES MARKET VALUE OF
(IN FIXED-MATURITY
BASIS PORTFOLIO
POINTS) (IN $ MILLIONS)
-------- ---------------
<S> <C>
-200 $6,499
-100 6,167
0 5,860
100 5,565
200 5,282
</TABLE>
FINANCIAL CONDITION
Liquidity. Torchmark's liquidity relates to its ability to meet on demand
the cash commitments required by its business operations and financial
obligations. Torchmark's liquidity is derived 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 net cash provided from Torchmark's deposit-type insurance and
annuity products, were $568 million in 1997, rising 10% over $517 million in
1996. Operating cash flows for 1996 increased 8% over 1995 cash flows of $478
million. In addition to operating cash flows, Torchmark received $514 million
of investment maturities and repayments in 1997, further enhancing total
positive cash flow. Such repayments were $347 million in 1996 and $351 million
in 1995. 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 $149 million at December
31, 1997, compared with $103 million at year-end 1996. These liquid assets
represented over 1% of total assets at December 31, 1997, approximately the
same percentage 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 $5.9 billion at December 31, 1997.
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 and was at this level
on December 31, 1997. 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, 1997, $139 million in commercial paper was
outstanding and there were no borrowings on the line of credit. A fee is
charged on the entire $600 million facility. In accordance with the
agreements, Torchmark is subject to certain covenants regarding capitalization
and earnings. At December 31, 1997, Torchmark was in full compliance with
these covenants.
28
<PAGE>
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, excluding capital gains and losses, 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 1998,
a maximum amount of $333 million will be available to Torchmark from insurance
subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of its long and
short-term debt, its Cumulative Monthly Income Preferred Securities, Series A
("MIPS"), and its shareholders' equity. Torchmark's debt consists primarily of
its funded debt and its commercial paper facility. The carrying amount of
Torchmark's funded debt was $772 million at year-end 1997, compared with $792
million at year-end 1996. Major debt issues outstanding at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
PRINCIPAL
YEAR AMOUNT
INSTRUMENT DUE RATE ($ THOUSANDS)
---------- ---- ----- -------------
<S> <C> <C> <C>
Sinking Fund Debentures......................... 2017 8 5/8% $180,000
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
--------
Total funded debt............................... 779,450
Current maturity of long-term debt.............. (208,000)
--------
Long-term debt.................................. $571,450
========
</TABLE>
Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996
under the terms of a put provision. In 1997, Torchmark repaid $20 million
principal amount on its Sinking Fund Debentures due in 2017, of which $8
million was a mandatory redemption and $12 million was an optional repayment
under the terms of the agreement. Torchmark intends to repay another $20
million on this indebtedness in the first quarter of 1998, and has notified
its transfer agent of its intent to call the remaining $160 million principal
balance of this debt on April 1, 1998 at the prevailing call price of $103.76,
or $166 million. Additionally, Torchmark's 9 5/8% Senior Notes, principal
amount $200 million, are due on May 1, 1998. Torchmark plans to use operating
cash flow, borrowings under the line of credit, and funds from the initial
public offering of the asset management segment to repay these debt issues.
See Initial Public Offering and Planned Spin-off of the Asset Management
Segment on page 30 of this report.
The MIPS were issued in November, 1994 at a redemption amount of $200
million with 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 has 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, 1997, the variable rate was 7.36%. During 1997,
Torchmark's after-tax dividend cost for the MIPS was $9.9 million, compared
with $11.9 million that would have been incurred without the swap and cap
transactions. Torchmark's after-tax cost in 1996 was $9.7 million and in 1995
was $10.3 million, saving $2.2 million and $1.6 million, respectively.
Short-term debt consists of the current maturity of long-term debt,
amounting to $208 million at December 31, 1997, and Torchmark's commercial
paper outstanding, which was $139 million at year-end 1997. Short-term debt
was $41 million a year earlier, and consisted of commercial paper borrowings.
The additional short-term borrowings in 1997 were necessary for a pay down of
$20 million in long-term debt and for other corporate purposes. In 1996,
Torchmark paid down $148 million of this debt with internal cash flow.
29
<PAGE>
On September 25, 1997, Torchmark executed a stock option exercise and reload
program through which over 100 Torchmark directors and employees exercised
vested stock options and received replacement options at current market price.
This program resulted in the issuance of 4.8 million shares, but over 3
million of the new shares were immediately sold by the directors and employees
through the open market to cover the cost of the purchased shares and related
taxes. As a result of the reload program, management's ownership interest
increased, and Torchmark received a significant current tax benefit from the
exercise of the options.
During 1997, Torchmark acquired 5.2 million shares of its common stock on
the open market at a cost of $183 million in conjunction with its ongoing
share repurchase program. Share purchases of 4.6 million shares were made in
1996 for $107 million. No shares were acquired in 1995.
Shareholders' equity increased 19% to $1.93 billion at December 31, 1997,
over December 31, 1996 shareholders' equity of $1.63 billion. Book value per
share was $13.80 at 1997 year end, compared with $11.69 at year-end 1996.
After adjusting for the impact of interest-rate fluctuations on shareholders'
equity required by accounting rules, book value per share was $12.90 at year-
end 1997, an increase of 13% over $11.42 at year-end 1996. Return on common
shareholders' equity was 21.2% in 1997, compared with 20.5% in 1996, even
though average shareholders' equity increased. The return on equity ratios
exclude the mark up or down of shareholders' equity for changes in market
interest rates required by accounting rules. They also exclude discontinued
operations and realized investment gains and losses.
Total debt as a percentage of total capitalization continues to decline and
was 31% at December 31, 1997. 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 32% at year-end 1996 and 37%
at year-end 1995. Torchmark's ratio of earnings before interest, taxes and
discontinued operations to interest requirements also continues to improve and
was 8.1 for 1997, compared with 7.7 in 1996 and 6.3 in 1995.
OTHER ITEMS
Initial Public Offering and Planned Spin-off of Asset Management Segment: In
November 1997, Torchmark announced that W&R, its asset management subsidiary,
intended to make an initial public offering of common stock early in 1998,
subject to market conditions. It was also announced that Torchmark plans to
distribute to its shareholders its remaining W&R shares in a tax-free spin-off
late in 1998, subject to market conditions, regulatory approval, and tax-free
status. Torchmark believes that the separation of the asset management
business from the insurance businesses would allow the financial community to
more accurately value each company relative to its industry, thereby enhancing
total shareholder value.
On March 5, 1998, W&R sold 23.9 million shares of Class A Common Stock in a
public offering. Net proceeds were approximately $516 million after
underwriters' fees and expenses. W&R will use $481 million of the net proceeds
to repay existing notes owed to Torchmark and other subsidiaries. The
remaining $35 million will be used by W&R for general corporate purposes.
Torchmark will use the $481 million proceeds to pay down debt, invest in fixed
maturity investments, acquire stock, and for other corporate purposes.
W&R contributed $244 million in revenues and $122 million to Torchmark's
pretax income in 1997. At December 31, 1997, its assets were $447 million and
shareholders' equity was $250 million before giving effect to a $480 million
dividend to Torchmark. As a result of the spin-off, Torchmark's debt-to-
capitalization ratio should be improved and its interest coverage ratio
minimally affected. As more fully discussed in the notes to the financial
statements, the spin-off, if and when completed, will result in a current tax
expense of approximately $50 million.
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
30
<PAGE>
$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 $.05 per share.
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.
Year 2000 Compliance. Existing computer programs of many businesses were
developed with a two-digit year identification without consideration of the
upcoming change in century or millenium in the year 2000. Without addressing
this issue, many computer programs could fail or produce erroneous results,
creating considerable uncertainty and potentially adversely affecting the
operations of a business.
Torchmark has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. Torchmark is utilizing primarily internal staff for this conversion
but is also using outside consultants where necessary. The cost of this
project, which is immaterial to Torchmark, is expensed as incurred.
As a part of its activities, Torchmark is engaged electronically with third-
party financial institutions and other various organizations which may have
computer systems which are not year 2000 compliant. To the degree possible,
Torchmark is verifying that these third party business systems are currently
compliant or are in the process of becoming compliant. To the extent these
systems are not compliant, there is no assurance that the potential
interruptions or cost to Torchmark may not be significant.
NEW ACCOUNTING RULES
Reporting Comprehensive Income (FASB Statement No. 130) is effective for
fiscal years beginning after December 15, 1997. Reclassification of prior
periods for comparative financial statements is required.
This document establishes standards for presentation of comprehensive
income, a concept of income which, in addition to net income, includes all
changes in the equity of a company other than contributions from or
distributions to shareholders. Comprehensive income is to be categorized into
certain components, each of which is to be displayed prominently in
Torchmark's basic financial statements.
The most significant aspect of this Statement on Torchmark is the separate
disclosure of the change in the unrealized gain or loss on its fixed
investments as a component of comprehensive income, rather than as a direct
adjustment of shareholders' equity.
Disclosures about Segments of an Enterprise and Related Information (FASB
Statement No. 131) is effective for periods beginning after December 15, 1997,
with comparative information for prior periods to be restated. It establishes
new standards for reporting information about a company's operating segments,
including disclosures regarding a company's products and services, geographic
areas, and major customers. It also requires that selected information about
segments be disclosed in interim financial statements. The new segment rules
include determination of segments on the same basis used internally by a
company for evaluating the performance of its operations and the allocation of
its resources. The content of the new disclosures are similar to existing
standards and include descriptive information, revenues, other components of
earnings, and assets by segment.
The new disclosures required by this Statement will not be significantly
different from Torchmark's current segment disclosures because current
segments as reported reflect the same operating data and results utilized by
management in evaluating the performance of Torchmark's business. Torchmark
will, however, be required to report additional segment information in its
interim financial statements.
31
<PAGE>
Employers' Disclosure about Pensions and Other Postretirement Benefits (FAS
No. 132) is effective for fiscal years beginning after December 15, 1997. This
statement revises disclosures about pensions and other postretirement benefit
plans, requiring additional information on changes in benefit obligations and
the fair values of plan assets. It does not change the measurement or
recognition of these plans. Adoption of this statement by Torchmark will
result in some additional disclosures for its benefit plans.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 34
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1997 and 1996................. 35
Consolidated Statement of Operations for each of the years in the three-
year period
ended December 31, 1997................................................. 36
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year
period ended December 31, 1997.......................................... 37
Consolidated Statement of Cash Flow for each of the years in the three-
year period
ended December 31, 1997................................................. 38
Notes to Consolidated Financial Statements............................... 39
</TABLE>
33
<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. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedules as listed in Item 14(a). These consolidated
financial statements and financial statement schedules are the responsibility
of Torchmark's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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 as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1997, 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
February 2, 1998 except
for Note 16 which is
as of February 20, 1998 and
Note 6 which is as of
March 5, 1998
34
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1997--$5,646,397; 1996--$5,265,499)......... $ 5,859,668 $5,328,276
Equity securities, at fair value (cost: 1997--
$3,284; 1996--$3,799).............................. 12,404 8,858
Mortgage loans on real estate, at cost (estimated
fair value: 1997--$79,096; 1996--$61,970).......... 78,974 64,353
Investment real estate, at cost (less allowance for
depreciation: 1997--$46,329; 1996--$40,370)........ 167,297 150,490
Policy loans........................................ 221,703 206,959
Other long-term investments......................... 75,445 95,485
Short-term investments.............................. 122,917 85,099
----------- ----------
Total investments.................................. 6,538,408 5,939,520
Cash (includes restricted cash: 1997--$14,943; 1996--
$15,028)............................................ 25,766 18,272
Investment in unconsolidated subsidiaries............ 102,305 88,051
Accrued investment income............................ 100,392 91,837
Other receivables.................................... 126,599 112,291
Deferred acquisition costs........................... 1,371,131 1,253,727
Value of insurance purchased......................... 216,988 244,368
Property and equipment............................... 49,158 50,323
Goodwill............................................. 525,564 540,540
Other assets......................................... 34,541 41,846
Separate account assets.............................. 1,876,439 1,420,025
----------- ----------
Total assets....................................... $10,967,291 $9,800,800
=========== ==========
Liabilities:
Future policy benefits............................... $ 5,023,763 $4,797,738
Unearned and advance premiums........................ 83,722 83,670
Policy claims and other benefits payable............. 228,754 220,121
Other policyholders' funds........................... 82,224 80,812
----------- ----------
Total policy liabilities............................ 5,418,463 5,182,341
Accrued income taxes................................. 415,984 340,287
Other liabilities.................................... 219,020 202,869
Short-term debt...................................... 347,152 40,910
Long-term debt (estimated fair value: 1997--$600,319;
1996--$814,082)..................................... 564,298 791,880
Separate account liabilities......................... 1,876,439 1,420,025
----------- ----------
Total liabilities................................... 8,841,356 7,978,312
Commitments and contingencies
Monthly income preferred securities
(estimated fair value: 1997--$210,500; 1996--
$210,000)............................................ 193,199 193,145
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
-0- in 1997 and in 1996............................. -0- -0-
Common stock, par value $1 per share--Authorized
320,000,000 shares; outstanding: 147,848,908 issued
less 7,808,468 shares held in treasury in 1997, and
147,568,456 issued less 8,176,506 shares held in
treasury in 1996 ................................... 143,220 73,784
Additional paid-in capital........................... 187,731 141,701
Unrealized gains, net of applicable taxes............ 136,926 46,581
Retained earnings.................................... 1,699,409 1,549,391
Treasury stock....................................... (234,550) (182,114)
----------- ----------
Total shareholders' equity.......................... 1,932,736 1,629,343
----------- ----------
Total liabilities and shareholders' equity.......... $10,967,291 $9,800,800
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Revenue:
Life premium................................ $ 909,992 $ 854,897 $ 772,257
Health premium.............................. 739,485 732,618 754,983
Other premium............................... 28,527 22,404 19,043
--------- --------- ----------
Total premium............................. 1,678,004 1,609,919 1,546,283
Net investment income....................... 433,617 404,608 381,865
Financial services revenue.................. 206,785 184,295 152,482
Realized investment gains (losses).......... (36,979) 5,829 (14,323)
Other income................................ 1,023 1,159 1,175
--------- --------- ----------
Total revenue............................. 2,282,450 2,205,810 2,067,482
Benefits and expenses:
Life policyholder benefits.................. 591,867 558,436 507,444
Health policyholder benefits................ 462,967 448,346 454,107
Other policyholder benefits................. 54,066 51,302 47,785
--------- --------- ----------
Total policyholder benefits............... 1,108,900 1,058,084 1,009,336
Amortization of deferred acquisition costs.. 224,738 218,826 204,067
Commissions and premium taxes............... 141,358 140,515 144,333
Financial services selling expense.......... 52,670 50,515 40,080
Other operating expense..................... 158,550 154,150 145,520
Amortization of goodwill.................... 14,977 14,977 14,977
Interest expense............................ 71,863 73,611 80,994
--------- --------- ----------
Total benefits and expenses............... 1,773,056 1,710,678 1,639,307
Income from continuing operations before
income taxes and equity in earnings of
unconsolidated subsidiaries................. 509,394 495,132 428,175
Income taxes................................. (178,490) (180,622) (157,539)
Equity in earnings of unconsolidated
subsidiaries................................ 16,714 13,654 11,626
Monthly income preferred securities dividend
(net of tax)................................ (9,875) (9,655) (10,317)
--------- --------- ----------
Net income from continuing operations..... 337,743 318,509 271,945
Discontinued operations of energy segment:
Loss from operations (less applicable income
tax benefit of: 1995--$86,050)............. -0- -0- (128,710)
Loss on disposal
(less applicable income tax benefit of:
1996--$15,813)............................. -0- (7,137) -0-
--------- --------- ----------
Net income................................ $ 337,743 $ 311,372 $ 143,235
========= ========= ==========
Basic net income per share:
Continuing operations....................... $ 2.43 $ 2.24 $ 1.90
Discontinued operations of energy segment:
Loss from operations....................... -0- -0- (.90)
Loss on disposal........................... -0- (.05) -0-
--------- --------- ----------
Net income per share...................... $ 2.43 $ 2.19 $ 1.00
========= ========= ==========
Diluted net income per share:
Continuing operations....................... $ 2.39 $ 2.22 $ 1.89
Discontinued operations of energy segment:
Loss from operations....................... -0- -0- (.90)
Loss on disposal........................... -0- (.05) -0-
--------- --------- ----------
Net income per share...................... $ 2.39 $ 2.17 $ 0.99
========= ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<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,
1995
Balance at January 1,
1995................... -0- 73,784 139,045 $(140,756) 1,267,545 $ (97,015) $1,242,603
Net income.............. 143,235 143,235
Common dividends
declared ($0.565 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 ($0.58 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
Year Ended December 31,
1997
Net income.............. 337,743 337,743
Common dividends
declared ($0.585 a
share)................. (81,793) (81,793)
Two-for-one stock split
in the form of a
dividend............... 69,156 (69,156) -0-
Acquisition of treasury
stock--common.......... (182,903) (182,903)
Exercise of stock
options................ 280 44,011 (36,776) 130,467 137,982
Grant of discounted
options................ 372 372
Grant of deferred
options................ 1,647 1,647
Net change in unrealized
gains (losses)......... 90,345 90,345
---- -------- -------- --------- ---------- --------- ----------
Balance at December 31,
1997.................. $-0- $143,220 $187,731 $ 136,926 $1,699,409 $(234,550) $1,932,736
==== ======== ======== ========= ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income................................ $ 337,743 $ 311,372 $ 143,235
Adjustments to reconcile net income to
cash provided from operations:
Increase in future policy benefits...... 147,207 136,375 178,850
Increase in other policy benefits....... 10,096 14,319 4,877
Deferral of policy acquisition costs.... (328,086) (300,461) (362,837)
Amortization of deferred policy
acquisition costs...................... 224,738 218,826 204,067
Change in accrued income taxes.......... 69,880 61,519 42,337
Depreciation............................ 9,329 9,056 9,603
Realized (gains) losses on sale of
investments,
subsidiaries, and properties........... 36,979 (5,829) 14,323
Change in accounts payable and other
liabilities............................ 2,255 9,091 (6,623)
Change in receivables................... (13,176) (15,501) (31,670)
Change in payables and receivables of
unconsolidated affiliates.............. 1,967 (3,350) (2,348)
Other accruals and adjustments.......... (10,099) (20,158) (2,951)
Discontinued operations of energy
segment................................ -0- 7,137 128,710
---------- ---------- ----------
Cash provided from operations............. 488,833 422,396 319,573
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................... 744,839 487,070 1,177,874
Fixed maturities available for sale--
matured, called, and repaid............ 514,325 347,116 351,246
Equity securities....................... 670 2,872 16,587
Mortgage loans.......................... 3,300 7,113 1,856
Real estate............................. 7,341 5,780 2,566
Other long-term investments............. 36,611 21,099 21,666
---------- ---------- ----------
Total investments sold or matured...... 1,307,086 871,050 1,571,795
Acquisition of investments:
Fixed maturities--available for sale.... (1,668,704) (1,080,793) (1,870,445)
Equity securities....................... -0- -0- (394)
Mortgage loans.......................... (17,826) (18,360) -0-
Real estate............................. (24,452) (9,690) (17,708)
Net increase in policy loans............ (14,744) (13,082) (11,889)
Other long-term investments............. (20,537) (15,891) (67,241)
---------- ---------- ----------
Total investments acquired............. (1,746,263) (1,137,816) (1,967,677)
Net (increase) decrease in short-term
investments............................. (37,848) (12,252) 35,514
Proceeds from sale of discontinued
operations.............................. -0- 15,500 -0-
Proceeds from sale of Nuevo Energy
Company stock........................... -0- 93,160 -0-
Loans repaid by unconsolidated
affiliates.............................. -0- -0- 28,000
Dispositions of properties............... 1,686 2,093 1,198
Additions to properties.................. (9,422) (15,412) (6,510)
Dividends from unconsolidated affiliates. 770 770 684
Other.................................... 15,711 -0- -0-
---------- ---------- ----------
Cash used for investment activities....... (468,280) (182,907) (336,996)
Cash provided from (used for) financing
activities:
Issuance of common stock................. 93,973 10,145 2,953
Additions to debt........................ 98,185 -0- -0-
Cash dividends paid to shareholders...... (80,999) (82,893) (80,887)
Repayments on debt....................... (20,132) (149,144) (60,867)
Acquisition of treasury stock............ (182,903) (106,996) -0-
Net receipts from deposit product
operations.............................. 78,817 94,513 158,084
---------- ---------- ----------
Cash provided from (used for) financing
activities............................... (13,059) (234,375) 19,283
---------- ---------- ----------
Increase in cash......................... 7,494 5,114 1,860
Cash at beginning of year................ 18,272 13,158 11,298
---------- ---------- ----------
Cash at end of year...................... $ 25,766 $ 18,272 $ 13,158
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<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 are carried at fair value. 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 all other insurance
policies and products is included in Torchmark's net investment income. Net
investment income for the years ended December 31, 1997, 1996, and 1995
included $308.6 million, $298.4 million, and $279.6 million, respectively,
which was allocable to policyholder reserves or accounts. Realized investment
gains and losses are not allocable to insurance policyholders' liabilities.
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 Statement
of Financial Accounting Standards ("SFAS") No. 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 $72.3 million, $72.8 million, and $72.7 million for
the years ended December 31, 1997, 1996, and 1995,
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. Other premium includes annuity policy charges for the years
ended December 31, 1997, 1996, and 1995 of $28.2 million, $22.4 million, and
$19.0 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, are amortized with
interest over the estimated premium-paying period of the policies in a manner
which charges each year's operations in proportion to the receipt of premium
income. For limited-payment contracts, acquisition costs are amortized over
the contract period. 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 realized and 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 ten 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, 1997, 1996, and 1995.
40
<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 would be written down to the recoverable amount
and 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. Issuance of treasury stock is accounted for using the weighted-
average 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.
Stock Split: On August 1, 1997, Torchmark distributed one share for every
one share owned by shareholders of record as of July 1, 1997 in the form of a
stock dividend. The dividend was accounted for as a stock split. All prior-
year share and per share data have been restated to give effect for this
split.
Earnings Per Share: Torchmark adopted SFAS 128, "Earnings per share,"
effective year end 1997. This standard requires the dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement and
a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all
prior-period EPS data has been restated for comparability. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding for the period. Weighted average common
shares outstanding for each period are as follows: 1997--139,202,354, 1996--
142,459,783, 1995--143,187,547. Diluted EPS is calculated by adding to shares
outstanding the additional net effect of potentially dilutive securities or
contracts which could be exercised or converted into common shares. Weighted
average diluted shares outstanding for each period are as follows: 1997--
141,431,156, 1996--143,783,218, 1995--144,228,248.
41
<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,
-------------------------- ---------------------
1997 1996 1995 1997 1996
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance subsidiar-
ies...................... $369,446 $283,881 $245,552 $ 798,265 $622,326
</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,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Statutory net income.................. $ 369,446 $ 283,881 $ 245,552
Deferral of acquisition costs......... 328,087 300,461 328,598
Amortization of acquisition costs..... (224,738) (218,826) (204,067)
Differences in insurance policy lia-
bilities............................. 44,117 39,762 1,407
Deferred income taxes................. (47,541) (20,496) (40,380)
Income of noninsurance affiliates..... (142,041) (108,257) (207,848)
Other................................. 10,413 34,847 19,973
---------- ---------- ---------
GAAP net income....................... $ 337,743 $ 311,372 $ 143,235
========== ========== =========
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,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Statutory shareholders' equity........ $ 798,265 $ 622,326
Differences in insurance policy lia-
bilities............................. 543,365 440,204
Deferred acquisition costs............ 1,371,131 1,253,727
Value of insurance purchased.......... 216,988 244,368
Deferred income taxes................. (405,375) (329,609)
Debt of parent company................ (911,159) (832,367)
Monthly income preferred securities... (193,199) (193,145)
Asset valuation reserves.............. 101,057 133,118
Nonadmitted assets.................... 89,859 137,270
Goodwill.............................. 396,953 405,705
Market value adjustment on fixed matu-
rities............................... 196,369 37,679
Other................................. (271,518) (289,933)
---------- ----------
GAAP shareholders' equity............. $1,932,736 $1,629,343
========== ==========
</TABLE>
42
<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,
------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Investment income is summarized as fol-
lows:
Fixed maturities...................... $397,729 $ 373,110 $ 350,931
Equity securities..................... 367 373 818
Mortgage loans on real estate......... 7,127 6,525 4,343
Investment real estate................ 3,789 14,629 8,277
Policy loans.......................... 14,433 13,192 12,137
Other long-term investments........... 9,241 5,319 10,410
Short-term investments................ 7,882 6,397 8,890
-------- --------- ---------
440,568 419,545 395,806
Less investment expense............... (6,951) (14,937) (13,941)
-------- --------- ---------
Net investment income................. $433,617 $ 404,608 $ 381,865
======== ========= =========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities..................... $(30,122) $ 3,760 $ 1,285
Equity securities.................... 155 1,913 (15,033)
Other................................ (7,012) 156 (575)
-------- --------- ---------
(36,979) 5,829 (14,323)
Adjustment to deferred acquisition
costs ............................... (198) (749) (236)
-------- --------- ---------
(37,177) 5,080 (14,559)
Applicable tax........................ 13,012 (1,778) 5,096
-------- --------- ---------
Gains (losses) from investments, net
of tax............................... $(24,165) $ 3,302 $ (9,463)
======== ========= =========
An analysis of the net change in
unrealized investment gains (losses) is
as follows:
Equity securities..................... $ 4,061 $ (734) $ 10,125
Fixed maturities available for sale... 150,494 (163,224) 468,336
Other long-term investments and
foreign exchange translation
adjustments.......................... (1,054) 1,907 5,514
Adjustment to deferred acquisition
costs................................ (13,324) 17,837 (51,739)
Applicable tax........................ (49,832) 50,457 (151,142)
-------- --------- ---------
Change in unrealized gains (losses),
net of tax........................... $ 90,345 $ (93,757) $ 281,094
======== ========= =========
</TABLE>
43
<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, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
GROSS GROSS AMOUNT PER % OF TOTAL
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE FIXED
COST GAINS LOSSES VALUE SHEET MATURITIES
---------- ---------- ---------- ---------- ----------- ----------
1997:
- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 189,708 $ 7,190 $ (45) $ 196,853 $ 196,853 3.4%
GNMAs................. 793,335 46,908 (1,180) 839,063 839,063 14.3
Mortgage-backed
securities, GNMA
collateral........... 97,740 2,695 (13) 100,422 100,422 1.7
Other mortgage-backed
securities........... 436,457 19,663 (2,054) 454,066 454,066 7.7
State, municipalities
and political
subdivisions......... 647,028 29,031 (1,165) 674,894 674,894 11.5
Foreign governments... 77,736 3,653 (3) 81,386 81,386 1.4
Public utilities...... 341,055 12,515 (512) 353,058 353,058 6.0
Industrial and
miscellaneous........ 3,058,468 100,596 (4,516) 3,154,548 3,154,548 53.9
Redeemable preferred
stocks................ 4,870 508 0 5,378 5,378 0.1
---------- -------- -------- ---------- ---------- -----
Total fixed
maturities........... 5,646,397 222,759 (9,488) 5,859,668 5,859,668 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,014 8,703 (10) 10,707 10,707
Industrial and all
others............... 242 2 (31) 213 213
Non-redeemable
preferred stocks...... 1,028 456 0 1,484 1,484
---------- -------- -------- ---------- ----------
Total equity
securities........... 3,284 9,161 (41) 12,404 12,404
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,649,681 $231,920 $ (9,529) $5,872,072 $5,872,072
========== ======== ======== ========== ==========
<CAPTION>
1996:
- -----
<S> <C> <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 4.3%
GNMAs................. 882,036 49,647 (5,170) 926,513 926,513 17.4
Mortgage-backed
securities, GNMA
collateral........... 154,816 2,665 (134) 157,347 157,347 3.0
Other mortgage-backed
securities........... 266,776 6,931 (1,667) 272,040 272,040 5.1
State, municipalities
and political
subdivisions......... 709,980 14,721 (4,211) 720,490 720,490 13.5
Foreign governments... 76,298 3,789 (94) 79,993 79,993 1.5
Public utilities...... 265,248 5,036 (3,888) 266,396 266,396 5.0
Industrial and
miscellaneous........ 2,672,613 35,720 (39,796) 2,668,537 2,668,537 50.1
Redeemable preferred
stocks................ 6,581 596 0 7,177 7,177 0.1
---------- -------- -------- ---------- ---------- -----
Total fixed maturities
..................... 5,265,499 121,365 (58,588) 5,328,276 5,328,276 100.0%
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>
44
<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, 1997
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... $ 72,068 $ 72,681
Due from one to five
years.................... 1,029,781 1,054,445
Due from five to ten
years.................... 1,977,263 2,048,865
Due after ten years....... 1,149,394 1,196,591
---------- ----------
4,228,506 4,372,582
Redeemable preferred
stocks................... 4,870 5,378
Mortgage-backed and asset-
backed securities........ 1,413,021 1,481,708
---------- ----------
$5,646,397 $5,859,668
========== ==========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $745 million
in 1997, $487 million in 1996, and $1.18 billion in 1995. Gross gains realized
on those sales were $1.3 million in 1997, $8.7 million in 1996, and $13.4
million in 1995. Gross losses were $32.2 million in 1997, $5.3 million in
1996, and $13.5 million in 1995.
Torchmark had $30.5 million and $39.2 million in investment real estate at
December 31, 1997 and 1996, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Torchmark had $107 thousand in non-income producing
mortgages as of year end 1997. There were no fixed maturity investments, or
other long-term investments which were nonincome producing at December 31,
1997.
Derivative investments were immaterial to Torchmark at December 31, 1997.
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 $26.4 million and $26.3 million at
December 31, 1997 and 1996, respectively. Torchmark has no off-balance sheet
exposure in connection with these investments.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Company occupied real estate........ $ 64,103 $26,744 $ 68,925 $27,960
Data processing equipment........... 26,059 22,314 23,179 20,942
Transportation equipment............ 11,857 7,545 11,396 7,492
Furniture and office equipment...... 39,729 35,987 38,047 34,830
-------- ------- -------- -------
$141,748 $92,590 $141,547 $91,224
======== ======= ======== =======
</TABLE>
Depreciation expense on property used in the business was $5.9 million, $5.4
million, and $5.7 million, in each of the years 1997, 1996, and 1995,
respectively.
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>
1997 1996 1995
---------------------- ---------------------- ----------------------
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................... $1,253,727 $244,368 $1,121,325 $277,297 $1,017,467 $274,124
Additions:
Deferred during peri-
od:
Commissions........... 199,177 0 185,197 -0- 192,427 -0-
Other expenses........ 128,909 0 115,264 -0- 136,170 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 328,086 0 300,461 -0- 328,597 -0-
Value of Insurance
purchased............ 0 -0- -0- -0- 34,240
Adjustment
attributable to
unrealized investment
losses(1)............ 0 0 17,838 -0- -0- -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 328,086 0 318,299 -0- 328,597 34,240
---------- -------- ---------- -------- ---------- --------
Deductions:
Amortized during peri-
od................... (197,160) (27,380) (185,148) (32,929) (172,764) (31,067)
Adjustment
attributable to
unrealized investment
gains(1)............. (13,324) 0 -0- -0- (51,739) -0-
Adjustment
attributable to
realized investment
gains(1)............. (198) 0 (749) -0- (236) -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (210,682) (27,380) (185,897) (32,929) (224,739) (31,067)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,371,131 $216,988 $1,253,727 $244,368 $1,121,325 $277,297
========== ======== ========== ======== ========== ========
</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 $16.6 million, $18.9 million, and $20.0 million, for
the years ended December 31, 1997, 1996, and 1995, respectively. The average
interest rates used for the years ended December 31, 1997, 1996, and 1995 were
7.19%, 7.26%, and 7.26%, respectively. The estimated amount of the unamortized
balance at December 31, 1997 to be amortized during each of the next five
years is: 1998, $22.7 million; 1999, $19.9 million; 2000, $17.4 million; 2001,
$15.2 million, and 2002, $13.5 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.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 6--INITIAL PUBLIC OFFERING AND PLANNED SPIN-OFF OF ASSET MANAGEMENT
SEGMENT
In November 1997, Torchmark announced that W&R, its asset management
subsidiary, intended to make an initial public offering of common stock early
in 1998, subject to market conditions. It was also announced that Torchmark
plans to distribute to its shareholders its remaining W&R shares in a tax-free
spin-off late in 1998, subject to market conditions, regulatory approval and
tax-free status.
On March 5, 1998, W&R sold 23.9 million shares of Class A Common Stock in a
public offering. Net proceeds were approximately $516 million after
underwriters' fees and expenses. W&R will use $481 million of the net proceeds
to repay existing notes owed to Torchmark and other subsidiaries. The
remaining $35 million will be used by W&R for general corporate purposes.
Torchmark will use the $481 million proceeds to pay down debt, invest in fixed
maturity investments, acquire stock, and for other corporate purposes.
W&R contributed $244 million in revenues and $117 million to Torchmark's
pretax income in 1997. At December 31, 1997, its assets were $447 million and
shareholders' equity was $250 million before giving effect to a $480 million
dividend to Torchmark. As a result of the planned spin-off, Torchmark's debt-
to-capitalization ratio should be improved and its interest coverage ratio
minimally affected. As more fully discussed in Note 10, the spin-off, if and
when completed, will constitute the distribution of a portion of the
policyholders' surplus account resulting in the recognition of a current tax
expense of approximately $50 million.
47
<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 $.05 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.
48
<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, 1997 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1917-1997 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1997 4.00% 12
1962-1969 4.50% graded to 4.00% 2
1970-1980 5.50% graded to 4.00% 4
1970-1997 5.50% 1
1929-1997 6.00% 11
1986-1994 7.00% graded to 6.00% 11
1954-1997 8.00% graded to 6.00% 11
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
1984-1997 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.
INDIVIDUAL HEALTH INSURANCE
INTEREST ASSUMPTIONS:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1962-1997 3.00% 2%
1969-1980 5.50% graded to 4.00% 4
1982-1997 4.50% 1
1993-1997 6.00% 23
1986-1992 7.00% graded to 6.00% 48
1955-1997 8.00% graded to 6.00% 12
1951-1986 8.50% graded to 6.00% 10
---
100%
===
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
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 1997 was 6.2%.
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,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year:.................. $173,900 $170,566 $166,731
Incurred related to:
Current year.................................. 503,948 495,642 502,018
Prior year.................................... 15,280 179 (8,295)
-------- -------- --------
Total incurred................................. 519,228 495,821 493,723
Paid related to:
Current year.................................. 349,815 340,310 342,905
Prior year.................................... 164,324 152,177 146,983
-------- -------- --------
Total paid..................................... 514,139 492,487 489,888
-------- -------- --------
Balance at end of year......................... $178,989 $173,900 $170,566
======== ======== ========
</TABLE>
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
50
<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. 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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income from continuing operations............. $178,490 $180,622 $157,539
Discontinued operations....................... -0- (15,813) (86,050)
Monthly income preferred securities dividend.. (5,318) (5,199) (5,555)
Shareholders' equity:
Unrealized gains (losses).................... 49,832 (50,457) 151,142
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes.................................... (44,011) (1,947) (709)
Other......................................... 1,514 (898) (6,169)
-------- -------- --------
$180,507 $106,308 $210,198
======== ======== ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Current income tax expense...................... $ 132,976 $130,624 $110,652
Deferred income tax expense..................... 45,514 49,998 46,887
--------- -------- --------
$ 178,490 $180,622 $157,539
========= ======== ========
</TABLE>
In 1997, 1996, and 1995, deferred income tax expense was incurred because of
certain differences 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, these
differences 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,
-------------------------------------------
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes............ $178,288 35% $173,296 35% $149,861 35%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income.... (6,408) (1) (7,014) (1) (7,965) (2)
Other........................... 6,610 1 14,340 3 15,643 4
-------- --- -------- --- -------- ---
Income taxes..................... $178,490 35% $180,622 37% $157,539 37%
======== === ======== === ======== ===
</TABLE>
The reduction in Torchmark's 1997 effective tax rate was a result of a
recovery of state income taxes from a unitary filing in 1997. Without this
one-time recovery, Torchmark's effective tax rate would have been 36.1% in
1997.
51
<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,
------------------
1997 1996
-------- --------
<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..................................... $ 1,062 $ 2,996
Future policy benefits, unearned and advance premiums, and
policy claims............................................ -0- 9,264
Present value of future policy surrender charges.......... 13,925 9,636
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................. 40,104 30,025
-------- --------
Total gross deferred tax assets........................... 55,091 51,921
Less valuation allowance.................................. (2,111) (2,111)
-------- --------
Net deferred tax assets................................... 52,980 49,810
-------- --------
Deferred tax liabilities:
Unconsolidated affiliates, principally due to the use of
equity method accounting for financial reporting purposes
but not for tax purposes................................. 19,208 24,368
Deferred acquisition costs................................ 363,077 333,640
Unrealized investment gains............................... 73,784 23,952
Future policy benefits, unearned and advance premiums, and
policy claims............................................ 15,911 -0-
Other..................................................... 16,162 12,625
-------- --------
Total gross deferred tax liabilities...................... 488,142 394,585
-------- --------
Net deferred tax liability................................. $435,162 $344,775
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1996 was $2.1 million. Subsequently recognized tax benefits of $2.1 million
relating to the December 31, 1997 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.
As more fully discussed in Note 6, Torchmark plans to spin off its asset
management segment subject to market conditions, to receipt of a ruling from
the IRS that the spin-off is a tax-free transaction, and to regulatory
approval. The spin-off, if and when completed, will constitute the
distribution of a portion of the policyholders' surplus account resulting in a
tax expense of approximately $50 million.
52
<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>
1997.................... $ 2,402 $ 4,788 $ 526
1996.................... 2,595 4,804 467
1995.................... 3,208 6,820 524
</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 $8.8 million
and $6.2 million at December 31, 1997 and 1996, 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 $5.4
million and $4.8 million as of December 31, 1997 and 1996, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the
period................................... $ 6,243 $ 6,581 $ 7,190
Interest cost on projected benefit obliga-
tion..................................... 9,537 9,097 8,867
Actual return on assets................... (21,117) (17,798) (17,927)
Net amortization and deferral............. 10,651 7,391 9,214
------- -------- --------
Net periodic pension cost................. $ 5,314 $ 5,271 $ 7,344
======= ======== ========
</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,
------------------
1997 1996
-------- --------
<S> <C> <C>
Fair market value of assets available for benefits. $134,631 $123,288
Projected benefit obligation:
Vested............................................ 97,512 90,189
Nonvested......................................... 3,133 3,453
-------- --------
Accumulated benefit obligation................... 100,645 93,642
Effect of projected future salary increases....... 26,457 25,710
-------- --------
Total projected benefit obligation............... 127,102 119,352
-------- --------
Funded status...................................... 7,529 3,936
Unamortized prior service costs.................... 1,624 1,433
Unamortized transition asset....................... (487) (725)
Unrecognized (gain) or loss........................ (22,859) (15,669)
-------- --------
Accrued pension costs included in liabilities.... $(14,193) $(11,025)
======== ========
</TABLE>
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1997 and 1996. The rate of assumed
compensation increase was 4.5% in 1997 and 1996 and the expected long-term
rate of return on plan assets was 9.25% in 1997 and 1996.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
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
retired 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,
-----------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Service cost......................................... $296 $297 $ 284
Interest cost on accumulated postretirement benefit
obligation.......................................... 558 617 678
Actual return on plan assets......................... -0- -0- -0-
Net amortization and deferral........................ (396) (252) (559)
---- ---- -----
Net periodic postretirement benefit cost............. $458 $662 $ 403
==== ==== =====
</TABLE>
The following table sets forth the plans' combined benefit obligation which
is a component of other liabilities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1996
------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 3,345 $ 3,622
Fully eligible active plan participants................ 1,465 1,613
Other active plan participants......................... 2,762 2,395
------- --------
Total accumulated postretirement benefit obligation... 7,572 7,630
Plan assets at fair value............................... -0- -0-
------- --------
Accumulated postretirement benefit obligation in excess
of plan assets......................................... 7,572 7,630
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions...... 1,667 1,717
Prior service cost not yet recognized in net periodic
post retirement benefit cost........................... 754 993
------- --------
Accrued postretirement benefit cost included in
liabilities.......................................... $ 9,993 $ 10,340
======= ========
</TABLE>
For measurement purposes, a 7.0% to 9.0% annual rate of increase in per
capita cost of covered healthcare benefits was assumed for 1997. These rates
grade to ranges of 4.5% to 6.5% by the year 2006. 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, 1997 by $1.3 million and would increase the net periodic
postretirement cost for the year ended December 31, 1997 by approximately $176
thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.39% in 1997 and 7.5% in 1996.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--DEBT
An analysis of debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Sinking Fund Debentures........... $ 8,000 $170,354 $198,134
Senior Notes, due 1998............ 199,898 199,607
Senior Debentures, due 2009....... 99,450 99,450
Notes, due 2023................... 195,969 195,921
Notes, due 2013................... 98,525 98,477
Commercial paper.................. 138,963 $40,778
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ..... 291 132 291
-------- -------- ------- --------
$347,152 $564,298 $40,910 $791,880
======== ======== ======= ========
</TABLE>
The amount of debt that becomes due during each of the next five years is:
1998, $347,152; 1999, $0; 2000, $0; and 2001, $0, and 2002, $0. Also in 1998,
Torchmark intends to call $160 million principal amount of its Sinking Fund
Debentures.
The Sinking Fund Debentures, due March 1, 2017, are carried at remaining
principal amount of $180 million less unamortized issue expenses and bear
interest at 8 5/8%, payable on March 1 and September 1. A sinking fund
provides for mandatory principal repayment at par of not less than $8 million
per year each year during the twelve months preceding 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. During the third quarter
of 1997, Torchmark repaid the mandatory $8 million principal amount and the
optional $12 million principal amount. Torchmark intends to repay another $20
million, $8 million of which is mandatory, in the first quarter of 1998, and
has notified its transfer agent of its intent to call the remaining $160
million principal balance of this debt on April 1, 1998 at the prevailing call
price of 103.76% of par or $166 million.
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, remaining principal amount of $99 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.
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 a revolving credit agreement with a group of
lenders under which it may borrow on an unsecured basis up to $600 million.
The commitment matures October 22, 2002.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--NOTES PAYABLE (CONTINUED)
Borrowings 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, 1997 and December 31, 1996 there were no borrowings under the
revolving credit agreement. The revolving credit agreement is 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 $89 million during 1997, and were made at an average yield of 5.61%.
At December 31, 1997, commercial paper was outstanding in the face amount of
$139 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, 1997, and pays a facility fee based on size of the
line.
Interest in the amount of $1.7 million, $1.4 million, and $1.6 million was
capitalized during 1997, 1996, and 1995, 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 7.36% at December 31, 1997 and 6.95% at December
31, 1996. Torchmark pays a yearly fee of $860 thousand for the cap agreement.
The market value of the swap agreement was a benefit of $18.7 million December
31, 1997 and $14.7 million at December 31, 1996. The market value of the cap
agreement, net of the present value of future annual payments, was an
obligation of $.8 million at December 31, 1997 and $1.3 million at December
31, 1996. 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.
56
<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 which has been
restated to give effect for the two-for-one stock split in the form of a
dividend is as follows:
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ----------------------
TREASURY TREASURY
ISSUED STOCK ISSUED STOCK
------ -------- ----------- ----------
<S> <C> <C> <C> <C>
1995:
Balance at January 1, 1995............ -0- -0- 147,568,456 (4,500,386)
Issuance of common stock due to
exercise of stock options............ 266,204
--- --- ----------- ----------
Balance at December 31, 1995.......... -0- -0- 147,568,456 (4,234,182)
1996:
Issuance of common stock due to
exercise of stock options............ 676,376
Other treasury stock acquired......... (4,618,700)
--- --- ----------- ----------
Balance at December 31, 1996.......... -0- -0- 147,568,456 (8,176,506)
1997:
Issuance of common stock due to
exercise of stock options............ 280,452 5,539,596
Other treasury stock acquired......... (5,171,558)
--- --- ----------- ----------
-0- -0- 147,848,908 (7,808,468)
=== === =========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------- ---------------------
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.................. 5,000,000 320,000,000 5,000,000 320,000,000
</TABLE>
Acquisition of Common Shares: Torchmark shares are acquired from time to
time through open market purchases under the Torchmark stock repurchase
program when it is believed to be the best use of Torchmark's funds and for
future employee stock option exercises. Share repurchases under this program
were 5.2 million shares at a cost of $183 million in 1997, and 4.6 million
shares at a cost of $107 million in 1996.
Grant of Restricted Stock: A grant of 120,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 12,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $17.46 per share on the
grant date. On January 1, 1998, 117,500 shares were granted to four executive
officers of Torchmark or its subsidiaries. These shares vest over eight years
in accordance with the following schedule: 16% on the first anniversary, with
the vesting percentage declining one percent each year thereafter until the
eighth anniversary. The market value of Torchmark stock was $42.1875 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 1998, $333 million
will be available to Torchmark for dividends from insurance subsidiaries in
compliance with statutory regulations without prior regulatory approval.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED)
Earnings Per Share: A reconciliation of basic and diluted weighted-average
shares outstanding, in accordance with SFAS 128, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Basic weighted average shares outstanding.. 139,202,354 142,459,783 143,187,547
Weighted average dilutive options
outstanding............................... 2,228,802 1,323,435 1,040,701
----------- ----------- -----------
Diluted weighted average shares
outstanding............................... 141,431,156 143,783,218 144,228,248
=========== =========== ===========
</TABLE>
Weighted average options outstanding considered to be anti-dilutive under
SFAS 128 totaled 742,472, 598,342 and 1,637,402 as of December 31,1997, 1996
and 1995, respectively, and are excluded from the calculation of diluted
earnings per share. Income available to common shareholders for basic earnings
per share is equivalent to income available to common shareholders for diluted
earnings per share.
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 the date they vest 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. A grant in September, 1997
vested immediately. Deferred executive and director grants vest over ten
years. Torchmark generally issues shares for the exercise of stock options out
of treasury stock.
An analysis of shares available for grant in terms of shares adjusted for
the stock dividend is as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR GRANT
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1..................... 1,345,080 2,499,778 3,996,268
Amendment of 1987 Plan................... 4.800,000
Granted.................................. (3,743,972) (1,448,200) (1,522,200)
Expired.................................. 32,896 293,502 25,710
---------- ---------- ----------
Balance on December 31................... 2,434,004 1,345,080 2,499,778
========== ========== ==========
</TABLE>
Torchmark accounts for its employee stock options in accordance with SFAS
123 "Accounting for Stock-Based Compensation", which defines a "fair value
method" of measuring and 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.
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires the use of
an option valuation model, such as 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.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.1% 6.4% 5.4%
Dividend yield.................................... 1.7% 3.7% 3.7%
Volatility factor................................. 23.7 22.8 22.8
Weighted average expected life (in years)......... 3.93 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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income............................. $318,671 $309,657 $143,148
Pro forma basic net income per share............. 2.29 2.17 1.00
Pro forma diluted net income per share........... 2.25 2.15 .99
</TABLE>
On September 25, 1997, Torchmark executed a stock option exercise and
"reload" program through which over 100 Torchmark directors and employees
exercised vested stock options and received replacement options at current
market price. This program resulted in the issuance of 4.8 million shares, of
which over 3 million shares were immediately sold by the directors and
employees through the open market to cover the cost of the purchased shares
and related taxes. As a result of the "reload" program, management's ownership
interest increased, and Torchmark received a significant current tax benefit
from the exercise of the options.
A summary of Torchmark's stock option activity adjusted for the stock
dividend, and related information for the years ended December 31, 1997, 1996,
and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 9,350,022 $18.52 8,871,700 $17.31 7,641,414 $16.25
Granted................. 3,743,972 36.70 1,448,200 24.55 1,522,200 21.57
Exercised............... (5,820,048) 16.17 (676,376) 15.00 (266,204) 11.09
Expired................. (32,896) 29.69 (293,502) 19.63 (25,710) 20.12
---------- --------- ---------
Outstanding-end of year. 7,241,050 29.76 9,350,022 18.52 8,871,700 17.31
========== ========= =========
Exercisable at end of
year................... 4,189,238 32.82 6,188,622 16.47 6,487,294 16.33
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 were $8.43, $5.08, and $3.95, respectively.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
CONTRACT
EXERCISE NUMBER NUMBER TERMINATION
PRICE GRANT DATE OUTSTANDING EXERCISABLE DATE
-------- ------------------ ----------- ----------- ------------------
<C> <S> <C> <C> <C>
5.6500 October 1, 1993 6,416 6,416 October 3, 2003
6.5550 October 1, 1993 5,016 5,016 October 3, 2003
11.3000 October 1, 1993 7,080 7,080 October 3, 2003
14.2400 October 1, 1993 6,196 6,196 October 3, 2003
15.5625 January 15, 1991 12,582 12,582 January 17, 2001
16.2500 January 2, 1991 18,000 18,000 January 4, 2001
16.5625 January 25, 1990 18,000 18,000 January 27, 2000
17.0000 December 16, 1994 265,050 265,050 December 18, 2004
17.0000 December 7, 1992 9,146 9,146 December 9, 2002
17.0000 December 14, 1993 32,718 32,718 December 16, 2003
17.0000 October 1, 1993 15,074 15,074 October 3, 2003
17.1750 October 1, 1993 6,624 6,624 October 3, 2003
17.1875 December 12, 1991 29,376 29,376 December 14, 2001
17.4375 January 3, 1995 6,000 6,000 January 5, 2005
18.3050 October 1, 1993 5,190 5,190 October 3, 2003
18.6100* December 18, 1996 60,000 6,000 December 20, 2006
19.1875 January 2, 1992 36,000 36,000 January 4, 2002
21.6875 December 20, 1995 1,450,180 721,640 December 22, 2005
21.7500 December 14, 1993 54,092 54,092 December 16, 2003
22.5000 January 3, 1994 12,000 12,000 January 5, 2004
22.5000 January 2, 1996 6,000 6,000 January 4, 2006
23.2800 October 1, 1993 3,920 3,920 October 3, 2003
24.8750 December 16, 1996 1,339,800 0 December 18, 2006
25.1250 January 2, 1997 24,168 6,000 January 4, 2007
25.8750 January 31, 1997 615,504 0 February 2, 2007
26.0000 December 7, 1992 104,618 104,618 December 9, 2002
28.8750 January 4, 1993 24,000 24,000 January 6, 2003
38.8750 December 24, 1997 295,800 0 December 26, 2007
39.1250 September 25, 1997 2,772,500 2,772,500 September 27, 2007
--------- ---------
7,241,050 4,189,238
========= =========
</TABLE>
- --------
* Issued when the market price was $24.8125.
60
<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, 1997. Insurance ceded on life and accident and health products represents
.8% of premium income for 1997. 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 2.8% of life insurance in force at December 31,
1997 and reinsurance assumed on life and accident and health products
represents 1.8% of premium income for 1997.
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 $7.6 million, $7.0 million, and $6.3 million for 1997, 1996, and 1995,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1997 are as follows: 1998, $4.4 million; 1999, $3.0 million;
2000, $1.7 million; 2001, $586 thousand; 2002, $205 thousand; and in the
aggregate, $9.9 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
$14.9 million at December 31, 1997 and $15.0 million at December 31, 1996.
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, 1997, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (18%); non government-guaranteed mortgage-backed securities (7%);
short-term investments, which generally mature within one month (2%);
securities of state and municipal governments (10%); securities of foreign
governments (1%); and investment-grade corporate bonds (50%). The remainder of
the portfolio was in real estate (3%), which is not considered a financial
instrument according to GAAP; policy loans (3%), which are secured by the
underlying insurance policy values; and equity securities, mortgages,
noninvestment grade securities, and other long-term investments (6%).
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, 1997, 1% or more of the portfolio was invested in the
following industries: Financial services (18%); regulated utilities (6%);
chemicals and allied products (5%); consumer goods (5%); transportation (5%);
machinery and equipment (4%); manufacturing (3%); petroleum (2%);
media/communications (2%); services (2%); retailing (2%); and asset-backed
securities (1%). Otherwise, no individual industry represented 1% or more of
Torchmark's investments. At year-end 1997, 4% of the carrying value of fixed
maturities was rated below investment grade (BB or lower as rated by Standard
& Poor's or the equivalent NAIC designation). Par value of these investments
was $253.4 million, amortized cost was $255.3 million, and market value was
$258.4 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 is
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 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
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
punitive damage award in any given case is virtually impossible to predict. As
of December 31, 1997, Liberty was a party to approximately 198 active lawsuits
(including 28 employment related cases and excluding interpleaders and stayed
cases), more than 170 of which were Alabama proceedings in which punitive
damages were sought. Liberty faces trial settings in these cases on an on-
going basis.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This 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. This case remains in the
discovery proceeding status. On February 6, 1998, the defendants renewed their
motion to dismiss the class claims for failure to prosecute.
As previously reported, a purported class action was filed in 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
approximate two month period in 1993 alleging improper payment practices
(Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634).
Liberty had discontinued the payment practices which were the subject of this
litigation after two months in 1993 and recalculated and repaid all claims in
full as it had prior to the two month period together with interest. In July,
1996, the Court entered a class certification order. Liberty subsequently
filed a petition for writ of mandamus or prohibition with the Alabama Supreme
Court asserting abuse of discretion by the trial court in certifying the
Adkins class. The Alabama Supreme Court issued the writ of mandamus on August
19, 1996. In January, 1998, Liberty filed a motion for summary judgment and a
motion to decertify the class in Adkins. On February 4, 1998, the Jefferson
County Circuit Court granted Liberty's motion for summary judgment.
It has been previously reported that Liberty was a party to 53 individual
cases filed in Chambers County, Alabama involving allegations that an
interest-sensitive life insurance policy would become paid-up or self-
sustaining after a specified number of years. Only four of these cases remain
pending with all others having been settled and dismissed by the Chambers
County Circuit Court.
Prior filings have reported that the Mobile County, Alabama Circuit Court
had ordered a reduction to $37,500 of the $5.0 million judgment against
Liberty in Strickland v. Liberty National Life Insurance Company, Case No. CV-
95-1399. This order was appealed by the plaintiffs to the Alabama Supreme
Court, which affirmed the lower court's decision on February 13, 1998.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance
policies issued by Globe and United American. In September, 1997, the U.S.
District Court entered an order granting summary judgment against the
plaintiffs on certain issues and denying national class certification,
although indicating that plaintiffs could move for certification of a state
class of Georgia policyholders. In December 1997, plaintiffs moved for the
certification of a state class of Georgia policyholders. Discovery is
proceeding on the remaining claims for breach of contract and the duty of good
faith arising from closure of the block of business and certain post claim
matters as well as fraud and conspiracy relating to pricing and delay in
implementing rate increases.
As previously reported, Liberty is a party to two lawsuits alleging that a
class of persons were insured under Liberty cancer policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
St. Clair County Circuit Court conditionally certified a class in Gentry while
the Jefferson County Circuit Court stayed the Harris case pending resolution
of the Gentry case and did not certify a class in Harris. Plaintiffs in Harris
then filed a petition for a writ of mandamus with the Alabama Supreme Court in
Gentry seeking to preserve the class claims in their action in the Jefferson
County Circuit Court. On January 30, 1998, the Alabama Supreme Court issued
the writ of mandamus to the St. Clair County
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Circuit Court in the Gentry case. On February 20, 1998, Liberty filed a motion
to dismiss the class claims in the Gentry case with the St. Clair County
Circuit Court.
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
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, continue to occur, 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.
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>
1997:
Revenues--unaffiliated.. $ 2,123,835 $210,846 $ (44,435) $ (7,796) $ 2,282,450
Intersegment revenues... 12,387 33,050 (2,290) (43,147) $ -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 2,136,222 $243,896 $ (46,725) $ (50,943) $ 2,282,450
=========== ======== ========= =========== ===========
Pretax income........... $ 553,027 $122,474 $(146,764) $ (19,343) $ 509,394
Depreciation............ 5,045 1,308 2,976 -0- 9,329
Capital expenditures.... 7,119 3,401 23,520 -0- 34,040
Identifiable assets at
year end............... 11,071,408 273,451 879,026 (1,256,594) 10,967,291
1996:
Revenues--unaffiliated.. $ 2,019,211 $188,718 $ 6,543 $ (8,662) $ 2,205,810
Intersegment revenues... 7,561 33,139 (2,310) (38,390) -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 2,026,772 $221,857 $ 4,233 $ (47,052) $ 2,205,810
=========== ======== ========= =========== ===========
Pretax income........... $ 496,260 $112,695 $ (98,089) $ (15,734) $ 495,132
Depreciation............ 5,468 1,760 1,828 -0- 9,056
Capital expenditures.... 15,236 1,987 7,746 -0- 24,969
Identifiable assets at
year end............... 9,649,488 270,267 483,586 (602,541) 9,800,800
1995:
Revenues--unaffiliated.. $ 1,938,105 $156,052 $ (15,402) $ (11,273) $ 2,067,482
Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 1,945,602 $183,555 $ (17,576) $ (44,099) $ 2,067,482
=========== ======== ========= =========== ===========
Pretax income........... $ 473,591 $ 93,662 $(121,984) $ (17,094) $ 428,175
Depreciation............ 6,135 1,915 1,553 -0- 9,603
Capital expenditures.... 7,094 1,699 13,721 -0- 22,514
Identifiable assets at
year end............... 8,933,970 127,001 496,858 (193,725) 9,364,104
</TABLE>
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
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 $30.7 million and $30.3 million at December 31, 1997 and
1996, 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
$585 thousand, $508 thousand, and $494 thousand, for the years ended December
31, 1997, 1996 and 1995, 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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996 1995
------- ------- ----
<S> <C> <C> <C>
Paid-in capital from tax benefit for stock option
exercises........................................... $44,011 $ 1,947 $709
Discounted/deferred option grants.................... 2,019 -0- -0-
Non-cash assets received from sale of energy
operations.......................................... -0- 79,289 -0-
Non-cash liabilities assumed from sale of energy
operations.......................................... -0- 48,942 -0-
</TABLE>
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Interest paid...................................... $73,537 $ 74,433 $82,642
Income taxes paid.................................. $96,210 $108,496 $99,298
</TABLE>
64
<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, 1997. 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>
1997:
- -----
Premium and policy charges...... $415,690 $419,887 $420,227 $422,200
Financial services revenue...... 48,363 49,915 53,482 55,025
Net investment income........... 103,634 106,895 110,615 112,473
Realized investment gains
(losses)....................... (10,831) (22,948) (390) (2,810)
Total revenues.................. 557,070 554,197 584,064 587,119
Policy benefits................. 273,081 279,797 279,311 276,711
Amortization of acquisition
expenses....................... 56,523 55,128 56,736 56,351
Pretax income from continuing
operations..................... 119,691 114,285 142,025 133,393
Income (loss) from discontinued
operations..................... -0- -0- -0- -0-
Net income (loss)............... 77,328 74,590 92,974 92,851
Basic net income per common
share from continuing
operations..................... .55 .54 .67 .66
Basic net income per common
share.......................... .55 .54 .67 .66
Basic net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .60 .65 .67 .68
Diluted net income per common
share from continuing
operations..................... .55 .53 .66 .66
Diluted net income per common
share.......................... .55 .53 .66 .66
Diluted net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .60 .63 .66 .67
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
Basic net income per common
share from continuing
operations..................... .53 .55 .57 .59
Basic net income per common
share from discontinued
operations:
Loss on disposal.............. -0- -0- (.05) -0-
Basic net income per common
share.......................... .53 .55 .52 .59
Basic net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .51 .55 .56 .59
Diluted net income per common
share from continuing
operations..................... .53 .55 .56 .58
Diluted net income per common
share from discontinued
operations:
Loss on disposal.............. -0- -0- (.05) -0-
Diluted net income per common
share.......................... .53 .55 .51 .58
Diluted net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .51 .54 .56 .58
</TABLE>
65
<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 22, 1998 (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.
66
<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.................................... 34
Consolidated Balance Sheet at December 31, 1997 and 1996........ 35
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1997.................. 36
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1997......... 37
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1997...................... 38
Notes to Consolidated Financial Statements...................... 39
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1997:
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 72
III.Supplementary Insurance Information (Consolidated).......... 75
IV.Reinsurance (Consolidated)................................... 76
</TABLE>
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.
(c) Exhibits
67
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Page of
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Report
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<C> <S> <C>
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended
(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 and
Providing Retirement Benefits for Directors
(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) 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)
(h) 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)
(i) 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)
(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 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)
(k) 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)
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
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<C> <S> <C>
(l) 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)
(m) 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)
(n) 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)
(o) 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)
(p) 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)
(q) 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)
(r) 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)
(s) 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)
(t) 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)
(u) Torchmark Corporation 1996 Non-Employee Director Stock Op-
tion Plan (incorporated by reference from Exhibit 10(w) to
Form 10-K for the fiscal year ended December 31, 1996)
(v) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (incorporated by reference from Exhibit
10(x) to Form 10-K for the fiscal year ended December 31,
1996)
(11) Statement re computation of per share earnings 71
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 23, 1998
(21) Subsidiaries of the registrant 71
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except
for Note 16, which is as of February 20, 1998 and Note 6,
which is as of March 5, 1998 into Form S-8 of The Torchmark
Corporation Savings and Investment Plan (Registration No. 2-
76378)
(b) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except
for Note 16, which is as of February 20, 1998 and Note 6,
which is as of March 5, 1998 into Form S-8 of The United In-
vestors Management Company Savings and Investment Plan (Reg-
istration No. 2-76912)
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Page of
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<C> <S> <C>
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 into Form S-8 and the accompanying
Form S-3 Prospectus of the Torchmark Corporation 1996 Non-Em-
ployee Stock Option Plan (Registration No. 2-93760)
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 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 February 2, 1998,
except for Note 16, which is as of February 20, 1998 and
Note 6, which is as of March 5, 1998 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 February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 into Form S-8 of the Liberty National
Life Insurance Company 401(k) Plan (Registration No. 33-
65507)
(24) Powers of attorney
(27) Financial Data Schedule
</TABLE>
70
<PAGE>
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net income from continuing opera-
tions............................... $337,742,863 $318,508,976 $ 271,945,720
Discontinued operations of energy
segment:
Loss from operations................ -0- -0- (128,710,390)
Loss on disposal.................... -0- (7,137,124) -0-
------------ ------------ -------------
Net income........................... $337,742,863 $311,371,852 $ 143,235,330
Basic weighted average shares out-
standing............................ 139,202,354 142,459,783 143,187,547
============ ============ =============
Diluted weighted average shares out-
standing............................ 141,431,156 143,783,218 144,228,248
============ ============ =============
Basic earnings per share:
From continuing operations.......... $ 2.43 $ 2.24 $ 1.90
From discontinued operations of en-
ergy segment:
Loss from operations............... -0- -0- (.90)
Loss on disposal................... -0- (.05) -0-
------------ ------------ -------------
Net income......................... $ 2.43 $ 2.19 $ 1.00
============ ============ =============
Diluted earnings per share:
From continuing operations.......... $ 2.39 $ 2.22 $ 1.89
From discontinued operations of en-
ergy segment:
Loss from operations............... -0- -0- (.90)
Loss on disposal................... -0- (.05) -0-
------------ ------------ -------------
Net income......................... $ 2.39 $ 2.17 $ .99
============ ============ =============
</TABLE>
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.
</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 68 through 70 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
71
<PAGE>
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Assets:
Investments:
Long-term investments............................ $ 23,917 $ 11,182
Short-term investments........................... 336 5,940
---------- ----------
Total investments................................. 24,253 17,122
Cash.............................................. 7,272 156
Investment in affiliates.......................... 3,277,785 2,949,625
Due from affiliates............................... 204,775 104,146
Accrued investment income......................... 132 84
Other assets...................................... 18,961 5,154
---------- ----------
Total assets..................................... $3,533,178 $3,076,287
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt.................................. $ 346,861 $ 40,778
Long-term debt................................... 564,298 791,589
Taxes payable.................................... 11,905 -0-
Due to affiliates................................ 373,792 330,527
Other liabilities................................ 110,387 90,905
---------- ----------
Total liabilities................................ 1,407,243 1,253,799
Monthly income preferred securities............... 193,199 193,145
Shareholders' equity:
Preferred stock.................................. -0- -0-
Common stock..................................... 143,220 73,784
Additional paid-in capital....................... 187,731 141,701
Unrealized investment gains ..................... 136,926 46,581
Retained earnings................................ 1,699,409 1,549,391
Treasury stock................................... (234,550) (182,114)
---------- ----------
Total shareholders' equity....................... 1,932,736 1,629,343
---------- ----------
Total liabilities and shareholders' equity....... $3,533,178 $3,076,287
========== ==========
</TABLE>
See accompanying Independent Auditors' Report
72
<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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net investment income............................ $ 5,275 $ 931 $ 1,261
Realized investment losses....................... (19,706) (5,738) (23,516)
Other income..................................... -0- 1 11
-------- -------- --------
Total revenue.................................. (14,431) (4,806) (22,244)
General operating expenses....................... 13,880 13,958 7,823
Non-operating expenses--related to affiliates.... -0- -0- -0-
Reimbursements from affiliates................... (13,956) (13,332) (13,260)
Interest expense................................. 96,402 88,916 91,825
-------- -------- --------
Total expenses................................. 96,326 89,542 86,388
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (110,757) (94,348) (108,632)
Income taxes .................................... 38,189 23,102 37,363
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (72,568) (71,246) (71,269)
Equity in earnings of affiliates................. 420,186 420,900 326,822
Monthly income preferred securities dividend (net
of tax)......................................... (9,875) (9,655) (10,317)
-------- -------- --------
Net income from continuing operations.......... 337,743 339,999 245,236
Discontinued operations of energy segment:
Loss from operations (net of tax)............... -0- -0- (102,001)
Loss on disposal (net of tax)................... -0- (28,627) -0-
-------- -------- --------
Net income..................................... $337,743 $311,372 $143,235
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
73
<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,
-----------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Cash provided from operations before dividends
from subsidiaries.............................. $(35,284) $(77,291) $ (86,764)
Cash dividends from subsidiaries............... 370,032 265,688 185,500
-------- -------- ---------
Cash provided from operations................... 334,748 188,397 98,736
Cash provided from (used for) investing activi-
ties:
Disposition of investments..................... -0- -0- 116
Acquisition of investments..................... (2,150) (1,667) (1,556)
Investment in subsidiaries..................... (174,799) -0- (83,211)
Loans to subsidiaries.......................... (117,392) (12,508) (49,043)
Repayments on loans to subsidiaries............ 28,242 -0- -0-
Net decrease (increase) in temporary invest-
ments......................................... 5,604 (4,946) (188)
Additions to properties........................ (454) (49) (146)
Other.......................................... (7,460) -0- -0-
-------- -------- ---------
Cash used for investing activities.............. (268,409) (19,170) (134,028)
Cash provided from (used for) financing activi-
ties:
Issuance of debt............................... 98,185 -0- -0-
Issuance of monthly income preferred securi-
ties.......................................... -0- -0- -0-
Repayments of debt............................. (20,000) (149,020) (60,752)
Issuance of stock to subsidiaries.............. -0- -0- 77,766
Issuance of stock.............................. 93,973 10,145 2,808
Redemption of preferred stock.................. (2,767) -0- -0-
Acquisitions of treasury stock................. (182,904) (106,996) -0-
Borrowed from subsidiaries..................... 133,880 153,959 101,857
Repayment on borrowings from subsidiaries...... (93,060) 8,500 (5,500)
Payment of dividends........................... (86,530) (85,659) (80,887)
-------- -------- ---------
Cash provided from (used for) financing activi-
ties........................................... (59,223) (169,071) 35,292
Net increase in cash............................ 7,116 156 -0-
Cash balance at beginning of period............. 156 -0- -0-
-------- -------- ---------
Cash balance at end of period................... $ 7,272 $ 156 $ -0-
======== ======== =========
</TABLE>
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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Consolidated subsidiaries..................... $370,032 $265,688 $185,500
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
74
<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, 1997:
- ----------------------
Insurance.............. $1,678,004 $455,076 $ 3,142 $1,108,900 $226,596 $247,699
Asset management....... 4,062 239,834 121,422
Corporate.............. (9,746) (36,979) 100,039
Eliminations and ad-
justments............. (15,775) (35,168) (1,858) (29,742)
---------- -------- -------- ---------- -------- --------
Total................. $1,678,004 $433,617 $170,829 $1,108,900 $224,738 $439,418
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Insurance.............. $1,609,919 $413,917 $ 2,936 $1,058,084 $219,917 $252,511
Asset management....... 4,423 217,434 109,162
Corporate.............. (1,809) 6,042 102,322
Eliminations and ad-
justments............. (11,923) (35,129) (1,091) (30,227)
---------- -------- -------- ---------- -------- --------
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 $396,209 $ 3,110 $1,009,336 $205,509 $257,166
Asset management....... 3,570 179,985 89,893
Corporate.............. (3,267) (14,309) 104,408
Eliminations and ad-
justments............. (14,647) (29,452) (1,442) (25,563)
---------- -------- -------- ---------- -------- --------
Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904
========== ======== ======== ========== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
75
<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, 1997:
- ----------------------
Life insurance in force. $89,372,206 $728,843 $2,497,790 $91,141,153 2.7%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 813,918 $ 4,232 $ 28,363 $ 838,049 3.4%
Health insurance....... 748,375 8,889 -0- 739,486 0%
----------- -------- ---------- -----------
Total premiums........ $ 1,562,293 $ 13,121 $ 28,363 $ 1,577,535 1.8%
=========== ======== ========== =========== ====
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%
----------- -------- ---------- -----------
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%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 .6%
Health insurance....... 761,573 10,985 -0- 750,588 0%
----------- -------- ---------- -----------
Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 .3%
=========== ======== ========== =========== ====
</TABLE>
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
76
<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
/s/ C.B. Hudson
By: ________________________________
C.B. HUDSON, CHAIRMAN CHIEF EXECUTIVE
OFFICER AND DIRECTOR (PRINCIPAL
FINANCIAL OFFICER)
/s/ Gary L. Coleman
By: ________________________________
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
Date: March 13, 1998
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.
/s/ David L. Boren* /s/ Harold T. McCormick*
By: ________________________________ By: ________________________________
DAVID L. BOREN DIRECTOR HAROLD T. MCCORMICK DIRECTOR
/s/ Joseph M. Farley* /s/ George J. Records*
By: ________________________________ By: ________________________________
JOSEPH M. FARLEY DIRECTOR GEORGE J. RECORDS DIRECTOR
/s/ Louis T. Hagopian* /s/ R.K. Richey*
By: ________________________________ By: ________________________________
LOUIS T. HAGOPIAN DIRECTOR R.K. RICHEY DIRECTOR
/s/ Joseph L. Lanier, Jr.*
By: ________________________________
JOSEPH L. LANIER, JR. DIRECTOR
Date: March 13, 1998
/s/ Gary L. Coleman
*By: _______________________________
GARY L. COLEMAN ATTORNEY-IN-FACT
77
<PAGE>
[LOGO OF THE STATE OF DELAWARE APPEARS HERE]
STATE
OF
DELAWARE
----------
OFFICE OF SECRETARY OF STATE
I, Michael Harkins, Secretary of State of the State of Delaware, do hereby
certify that the attached is a true and correct copy of Restated Certificate of
Incorporation filed in this office on November 3, 1987
/s/ Michael Harkins
---------------------------------------
Michael Harkins, Secretary of State
-----------------------------------
[SEAL OF THE SECRETARY
OF STATE OF DELAWARE BY: /s/ J Rolins
APPEARS HERE] -----------------------------------
DATE: March 19, 1990
---------------------------------
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
TORCHMARK CORPORATION
Torchmark Corporation, a corporation incorporated under the name of Liberty
National Insurance Holding Company by the filing of its original Certificate of
Incorporation with the Secretary of State of the State of Delaware on November
29, 1979, desiring to integrate into a single instrument all the provisions of
its Certificate of Incorporation now in effect and operative without further
amending its Certificate of Incorporation as theretofore amended or
supplemented, does hereby certify as follows:
1. Said Certificate of Incorporation, as heretofore amended and
supplemented, is hereby restated and integrated so as to read as follows:
FIRST: The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
TORCHMARK CORPORATION
SECOND: The address of the Corporation's registered office in the State of
Delaware is 229 South State Street, in the City of Dover, County of Kent. The
name of the Corporation's registered agent at such address is United States
Corporation Company.
<PAGE>
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue shall be one hundred sixty-five
million (165,000,000), of which five million (5,000,000) shares are to be
Preferred Stock of the par value of one dollar ($1.00) each; and one hundred
sixty million (160,000,000) shares are to be Common Stock, of the par value of
one dollar ($1.00) each.
1. Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock, for such consideration and on
such terms as it may determine, as Preferred Stock of one or more series
and in connection with the creation of any such series to fix by the
resolution or resolutions providing for the issue of shares thereof the
designation, powers and relative participating, optional, or
-2-
<PAGE>
other special rights of such series, and the qualifications,
limitations, or restrictions thereof. Such authority of the Board of
Directors with respect to each such series shall include, but not be
limited to, the determination of the following:
a. the distinctive designation of, and the number of shares comprising,
such series, which number may be increased (except where otherwise
provided by the Board of Directors in creating such series) or
decreased (but not below the number of shares thereof then
outstanding) from time to time by like action of the Board of
Directors;
b. the dividend rate or amount for such series, the conditions and dates
upon which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other class or
classes or any other series of any class or classes of stock, and
whether such dividends shall be cumulative, and if so, from which
date or dates for such series;
c. whether or not the shares of such series shall be subject to
redemption by the Corporation and the times, prices, and other terms
and conditions of such redemption;
d. whether or not the shares of such series shall be subject to the
operation of a sinking fund or
-3-
<PAGE>
purchase fund to be applied to the redemption or purchase of such
shares and if such a fund be established, the amount thereof and the
terms and provisions relative to the application thereof;
e. whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes, or of any
other series of any class or classes, of stock of the Corporation and
if provision be made for conversion or exchange, the times, prices,
rates, adjustments, and other terms and conditions of such conversion
or exchange;
f. whether or not the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and if they are to
have such additional voting rights, the extent thereof;
g. the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Corporation or upon
any distribution of its assets; and
h. any other powers, preferences, and relative, participating, optional,
or other special rights of the shares of such series, and the
qualifications, limitations, or restrictions thereof, to
-4-
<PAGE>
the full extent now or hereafter permitted by law and not
inconsistent with the provisions hereof.
2. Authority is hereby expressly granted to the Board of Directors from
time to time to issue any authorized but unissued shares of Common Stock
for such consideration and on such terms as it may determine.
3. All shares of any one series Preferred Stock shall be identical in all
respects except as to the dates from which dividends thereon may be
cumulative. All series of the Preferred Stock shall rank equally and be
identical in all respects except as otherwise provided in the resolution
or resolutions providing for the issue of any series of Preferred Stock.
4. Whenever dividends upon the Preferred Stock at the time outstanding, to
the extent of the preference to which such stock is entitled, shall have
been paid in full or declared and set apart for payment for all past
dividend periods, and after the provisions for any sinking or purchase
fund or funds for any series of Preferred Stock shall have been complied
with, the Board of Directors may declare and pay dividends on the Common
Stock, payable in cash, stock or otherwise; and the holders of shares of
Preferred Stock shall not be entitled to share therein, subject to the
provisions of the resolution or resolutions creating any series of
Preferred Stock.
-5-
<PAGE>
5. In the event of any liquidation, dissolution, or winding up of the
Corporation or upon the distribution of the assets of the Corporation
remaining, after the payment to the holders of the Preferred Stock of
the full preferential amounts to which they shall be entitled as
provided in the resolution or resolutions creating any series thereof,
the remaining assets of the Corporation shall be divided and distributed
among the holders of the Common Stock ratably, except as may otherwise
be provided in any such resolution or resolutions. Neither the merger or
consolidation of the Corporation with another corporation nor the sale
or lease of all or substantially all the assets of the Corporation shall
be deemed to be a liquidation, dissolution, or winding up of the
Corporation or a distribution of its assets.
6. Except as otherwise required by law or provided by a resolution or
resolutions of the Board of Directors creating any series of Preferred
Stock, the holders of Common Stock shall have the exclusive power to
vote and shall have one vote in respect of each share of such stock held
by them; and the holders of Preferred Stock shall have no voting power
whatsoever. Except as otherwise provided in such a resolution or
resolutions, the number of authorized shares of the Preferred Stock may
be increased or decreased by the
-6-
<PAGE>
affirmative vote of the holders of a majority of the outstanding
shares of capital stock of the Corporation entitled to vote.
FIFTH: Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
SIXTH: Except as otherwise provided in this Article Sixth, the Board of
Directors is expressly authorized and empowered to make, alter and repeal the
By-Laws of the Corporation, subject to the power of the stockholders of the
Corporation to alter or repeal any Bylaws made by the Board of Directors.
The affirmative vote of the holders of at least 80% of the voting power of
all of the shares of the Corporation entitled to vote generally in the election
of directors shall be required to amend or repeal, or to adopt any provision
inconsistent with, any provision in Article II or Article III of the By-Laws as
those By-Laws read at the close of the annual meeting of stockholders on April
26, 1984.
SEVENTH: Any director or any officer of the Corporation elected or
appointed by the stockholders of the Corporation or by its Board of Directors
may be removed at any time in such manner as shall be provided in the By-Laws of
the Corporation.
EIGHTH: No holder of Preferred Stock or Common Stock of the Corporation
shall have any preemptive right as such holder (other than such right, if any,
as the Board of Directors in its discretion may by resolution determine pursuant
to this Article
-7-
<PAGE>
Eighth) to purchase, subscribe for or otherwise acquire any shares of stock of
the Corporation of any class now or hereafter authorized, or any securities
convertible into or exchangeable for any such shares, or any warrants or any
instruments evidencing rights or options to subscribe for, purchase or otherwise
acquire any such shares, whether such shares, securities, warrants or other
instruments are now, or shall hereafter be, authorized, unissued or issued and
thereafter acquired by the Corporation.
NINTH:
Section 1. Elimination of Certain Liability of Directors.
A director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
Section 2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of
-8-
<PAGE>
whom he or she is the legal representative, is or was a director of officer, of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another company or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the Delaware General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized
-9-
<PAGE>
by the Board of Directors of the Company. The right to indemnification conferred
in this Section shall be a contract right and shall include the right to be paid
by the Company the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that, if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Company of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that such director or officer is not entitled to be indemnified under this
Section or otherwise. The Company may, by action of its Board of Directors,
provide indemnification to employees and agents of the Company with the same
scope and effect as the foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section is not paid in full by the Company within thirty days after a
written claim has been received by the Company, the claimant may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be
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entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Company) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Company to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Company. Neither the failure of the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute,
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provision of the Certificate of Incorporation, By-Laws, agreement, vote of
stockholders or disinterested directors or otherwise.
(b) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another company, partnership, joint venture, trust or other enterprise against
any such expense, liability or loss, whether or not the Company would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
TENTH:
Section 1. Vote Required for Certain Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any
affirmative vote required by law or this Certificate of Incorporation,
and except as otherwise expressly provided in Section 2 of this Article
Tenth:
(i) any merger or consolidation of the Corporation or any subsidiary
(as hereinafter defined) with (a) any Interested Stockholder (as
hereinafter defined) or (b) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter defined) of an
Interested Stockholder; or
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<PAGE>
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value of $5,000,000 or
more; or
(iii) The issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder
or any Affiliate of any Interested Stockholder in exchange for
cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value of $5,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or
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into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least 80% of the
voting power of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (the
Voting Stock), voting together as a single class (it being understood that
for purposes of this Article Tenth, each share of the Voting Stock shall
have the number of votes granted to it pursuant to Article Fourth of this
Certificate of Incorporation). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
B. Definition of "Business Combination." The term "Business Combination"
as used in this Article Tenth shall mean any transaction which is
referred to in any one or more of clauses (i) through (v) of paragraph
A of this Section 1.
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Section 2. When Higher Vote is not Required.
The provisions of Section 1 of this Article Tenth shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by law
and any other provision of this Certificate of Incorporation, if all of the
conditions specified in either of the following paragraphs A and B are met:
A. Approval by Continuing Directors. The Business Combination shall have
been approved by a majority of the Continuing Directors (as hereinafter
defined).
B. Price and Procedure Requirements. All of the following conditions shall
have been met:
(i) The aggregate amount of the cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be
received per share by holders of Common Stock in such Business
Combination shall be at least equal to the higher of the
following:
(a) the higher of (1) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of
Common Stock acquired by it within the two-year period
immediately prior to an
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<PAGE>
announcement of the proposal of the Business Combination (the
Announcement Date) or (2) the highest per share price paid in
the transaction in which it became an Interested Stockholder,
and
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter
date is referred to in this Article Tenth as the
Determination Date), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders
of shares of any other class of outstanding Voting Stock (other
than Institutional Voting Stock, as hereinafter defined) shall be
at least equal to the highest of the following (it being intended
that the requirements or this paragraph B (ii) shall be required
to be met with respect to every class of outstanding Voting Stock
(other than Institutional Voting Stock), whether or not the
Interested Stockholder has
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<PAGE>
previously acquired any shares of a particular class of Voting
Stock):
(a) the highest of (1) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of
such class of Voting Stock acquired by it within the two-year
period immediately prior to the Announcement Date or (2) the
highest per share price paid in the transaction in which it
became an Interested Stockholder;
(b) the highest preferential amount per share to which the
holders of shares of such class of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(c) the Fair Market Value per share of such class of Voting Stock
on the Announcement Date or on the Determination Date,
whichever is higher.
(iii) The consideration to be received by holders of a particular class
of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has
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<PAGE>
previously paid for shares of such class of Voting Stock. If the
Interested Stockholder has paid for shares of any class of Voting
Stock with varying forms of consideration, the form of consideration
for such class of Voting Stock shall be either cash or the form used
to acquire the largest number of shares of such class of Voting Stock
previously acquired by it.
(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (a) except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on the outstanding Preferred Stock; (b) there shall
have been (1) no reduction in the annual rate of dividends paid on
the Common Stock (except as necessary to reflect any subdivision of
the Common Stock), except as approved by a majority of the Continuing
Directors, and (2) an increase in such annual rate of dividends as
necessary in such annual rate of dividends as necessary to reflect
any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has
the effect of reducing the
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<PAGE>
number of outstanding shares of the Common Stock, unless the failure
so to increase such annual rate is approved by a majority of the
Continuing Directors; and (c) such Interested Stockholder shall have
not become the beneficial owner of any additional shares of Voting
Stock except as part of the transaction which results in such
Interested Stockholder becoming an Interested Stockholder.
(v) After such Interested Stockholder has become an Interested Stockholder
such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of
any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the
Corporation, whether in anticipation of or in connection with such
Business Combination or otherwise.
(vi) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall
be mailed to public stockholders of the Corporation at least 30 days
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prior to the consummation of such Business Combination (whether or
not such proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions).
Section 3. Certain Definitions.
For the purposes of this Article Tenth:
A. A "person" shall mean any individual, firm, corporation or other entity.
B. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of more than 10%
of the voting power of the outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within the two-
year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by
any Interested Stockholder, if such assignment or succession shall
have occurred in the course of a transaction or series of
transactions not
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<PAGE>
involving a public offering within the meaning of the Securities
Act of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly;
(ii) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares
of Voting Stock.
D. For the purposes of determining whether a person is an Interested
Stockholder pursuant to paragraph B of this Section 3, the number of
shares of Voting Stock deemed to be outstanding shall include shares
deemed owned
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through application of paragraph C of this Section 3 but shall not
include any other shares of Voting Stock which may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
E. "Affiliate" or "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on March 16, 1984.
F. "Subsidiary" means any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph B of this section 3, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
G. "Continuing Director" means any member of the Board of Directors of the
Corporation (the Board) who is unaffiliated with the Interested
Stockholder and was a member of the Board prior to the time that the
Interested Stockholder became an Interested Stockholder, and any
successor of a Continuing Director who is unaffiliated with the
Interested Stockholder and is recommended to succeed a Continuing
Director by a majority of Continuing Directors then on the Board.
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<PAGE>
H. "Fair Market Value" means:
(i) in the case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of a
share of such stock on the Composite Tape for New York Stock
Exchange Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such stock
is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act
of 1934 on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation
with respect to a share of such stock during the 30-day period
preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system
then in use, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as
determined by the Board in good faith; and
(ii) in the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by
the Board in good faith.
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<PAGE>
I. "Institutional Voting Stock" shall mean any class of Voting Stock which
was issued to and continues to be held solely by one or more insurance
companies, pension funds, commercial banks, savings banks or similar
financial institutions or institutional investors.
J. In the event of any Business Combination in which the Corporation
survives, the phrase "other consideration to be received" as used in
paragraph B(i) and (ii) of Section 2 of this Article Tenth shall include
the shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
Section 4. Power of Directors.
The directors of the Corporation shall have the power and duty to
determine for the purposes of this Article Tenth, on the basis of
information known to them after reasonable inquiry, (A) whether a person is
an Interested Stockholder, (B) the number of shares of Voting Stock
beneficially owned by any person, (C) whether a person is an Affiliate or
Associate of another, (D) whether a class of Voting Stock is Institutional
Voting Stock and (E) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation
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<PAGE>
or any Subsidiary in any Business Combination has, an aggregate Fair Market
Value of $5,000,000 or more.
Section 5. No Effect on Fiduciary Obligations of Interested Stockholders.
Nothing contained in this Article Tenth shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
Section 6. Amendment, Repeal, etc.
Notwithstanding any other provisions of this Certificate of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that a lesser percentage may be specified by law, this Certificate of
Incorporation or the By-Laws of the Corporation), the affirmative vote of
the holders of 80% or more of the voting power of the shares of the then
outstanding Voting Stock, voting together as a single class, shall be
required to amend or repeal, or adopt any provisions inconsistent with,
this Article Tenth of this Certificate of Incorporation.
ELEVENTH: The Corporation reserves the right at any time from time to time
to amend, alter, change, or repeal any provision contained in this Certificate
of Incorporation, and other provisions authorized by the laws of the State of
Delaware at the time in force and not inconsistent with the provisions in this
Certificate of Incorporation or in the By-Laws may be added or inserted in the
manner now or hereafter prescribed by law. All rights, preferences, privileges
of whatsoever nature
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<PAGE>
conferred upon stockholders, directors or any other persons whosoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the rights reserved in this Article.
2. This Restated Certificate of Incorporation has been duly adopted by the
Board of Directors of the Corporation in accordance with the provisions of
Section 245, of the General Corporation Law of the State of Delaware and has
been duly adopted in accordance with the provisions of the Certificate of
Incorporation of the Corporation heretofore amended.
3. This Restated Certificate of Incorporation shall become effective at the
time it is filed in the office of the Secretary of State of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this instrument to be signed in its name by its Chairman and
attested by its Secretary.
TORCHMARK CORPORATION
/s/ R.K. Richey
------------------------
Chairman
Attest:
/s/ Samuel E. Upchurch, Jr.
- ---------------------------
Secretary
<PAGE>
[LOGO OF THE STATE OF DELAWARE APPEARS HERE]
STATE
OF
DELAWARE
----------
OFFICE OF SECRETARY OF STATE
I, Michael Harkins, Secretary of State of the State of Delaware, do hereby
certify that the attached is a true and correct copy of Designation of
Incorporation filed in this office on February 26, 1990
/s/ Michael Harkins
---------------------------------------
Michael Harkins, Secretary of State
-----------------------------------
[SEAL OF THE SECRETARY
OF STATE OF DELAWARE BY: /s/ J Rolins
APPEARS HERE] -----------------------------------
DATE: March 19, 1990
---------------------------------
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A
OF
TORCHMARK CORPORATION
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
TORCHMARK CORPORATION, a Delaware corporation (the "Corporation"), certifies
that pursuant to the authority contained in ARTICLE FOURTH of its Certificate of
Incorporation, and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, its Board of Directors duly
adopted resolutions on October 27, 1983, creating a series of its Preferred
Stock designated as Adjustable Rate Cumulative Preferred Stock, Series A:
RESOLVED, that a series of the class of authorized Preferred Stock of the
Corporation be hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount.
-----------------------
The shares of such series shall be designated as "Adjustable Rate
Cumulative Preferred Stock, Series A" (the "Preferred Stock") and shall have a
"face value" of $100.00 per share. The number of shares constituting such series
shall be 1,000,000.
Section 2. Dividends and Distributions.
----------------------------
(A) Holders of Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of the Corporation out of assets of the
Corporation legally available for payment, cumulative cash dividends at the
rate of 10.60% of the face value per share per annum from the date of
issuance to and including February 1, 1984 and at the Applicable Rate (as
defined in clause (B) of this section), which shall not be less than 7% nor
greater than 13%, from time to time in effect, for each quarterly dividend
period thereafter. Dividends on the Preferred Stock will accrue from the
date of issuance and will be payable quarterly on February 1, May 1, August
1 and November 1 of each year (or, if such day is not a business day, then
the next preceding business day) to the holders of record on such
respective dates, not exceeding 30 days preceding the payment date thereof,
as may be
<PAGE>
determined by the Board of Directors. The first dividend will be payable
February 1,1984. The dividends payable on the Preferred Stock for the
period from the date of issuance to and including February 1, 1984 and for
any period less than a full quarterly dividend period shall be computed on
the basis of a 360-day year of twelve 30-day months and the actual number
of days elapsed in the period for which the dividends are payable. The
dividends payable for each full quarterly period commencing after February
1, 1984 shall be computed by dividing the annual dividend rate for such
dividend period by four and applying the resulting rate against the face
value per share of the Preferred Stock.
No full dividends shall be declared or paid or set apart for payment on
the preferred stock of any series ranking, as to dividends, on a parity
with the Preferred Stock for any period unless full cumulative dividends
have been, or contemporaneously are, declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment on the
Preferred Stock for all dividend payment periods terminating on or prior to
the date of payment of such full cumulative dividends. When dividends are
not paid in full upon the Preferred Stock and any other preferred stock
ranking on a parity as to dividends with the Preferred Stock, all dividends
declared and paid or set aside for payment upon shares of Preferred Stock
and any other preferred stock ranking on a parity as to dividends shall be
declared and paid or set aside for payment pro rata so that the amount of
dividends declared and paid or set aside for payment per share on the
Preferred Stock and such other preferred stock shall in all cases bear to
each other the same ratio that accrued dividends per share on the shares of
Preferred Stock and such other preferred stock bear to each other.
Except as provided in Section 3 hereof, in the event that full
cumulative quarterly dividends on the Preferred Stock have not been
declared and paid or set apart for payment, the Corporation may not declare
or pay any dividend on, or make any distribution on, or payment on account
of the purchase, redemption or other retirement of, its Common Stock or any
other stock of the Corporation ranking as to dividends junior to the
Preferred Stock, except that dividends may be declared and paid, and
distributions and payments may be made, in shares of, or options, warrants
or rights to subscribe for or purchase shares of, Common Stock or other
stock ranking as to dividends and upon
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<PAGE>
distribution of assets junior to the Preferred Stock. No interest shall be
payable in respect of any dividend payment which may be in arrears.
(B) Except as provided below, the "Applicable Rate" for each
quarterly dividend period after February 1, 1984 will be (a) 1.25% less
than (b) the highest of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate or the Twenty Year Constant Maturity Rate, each as
hereinafter defined. In the event that the Corporation determines in good
faith that for any reason (i) any one of the Treasury Bill Rate, the Ten
Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate
cannot be determined for any dividend period, then the Applicable Rate for
such dividend period shall be 1.25% per annum less than the higher of
whichever two of such Rates can be so determined; (ii) only one of the
Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year
Constant Maturity Rate can be determined for any dividend period, then the
Applicable Rate for such dividend period shall be 1.25% per annum less than
whichever such Rate can be so determined; (iii) none of the Treasury Bill
Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant
Maturity Rate can be determined for any dividend period, the Applicable
Rate in effect for the preceding dividend period shall be continued for
such dividend period. However, the Applicable Rate for any dividend period
shall in no event be less than 7% per annum nor greater than 13% per annum.
Except as provided below in this paragraph, the "Treasury Bill Rate" for
each dividend period shall be the arithmetic average of the two most recent
weekly per annum market discount rates (or the one weekly per annum market
discount rate, if only one such rate shall be published during the relevant
Calendar Period (as defined below)) for three-month U.S. Treasury bills, as
published by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") during the Calendar Period immediately prior to the ten calendar
days immediately preceding the February 1, May 1, August 1, or November 1, as
the case may be, prior to the dividend period for which the dividend rate on the
Preferred Stock is being determined. If the Federal Reserve Board does not
publish such a weekly per annum market discount rate during any such Calendar
Period, then the Treasury Bill Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate shall
be published during the relevant Calendar Period) for three-month U.S. Treasury
bills, published during such Calendar Period by any Federal Reserve Bank or by
any U.S.
3
<PAGE>
Government department or agency selected by the Corporation. If a weekly per
annum market discount rate for three-month U.S. Treasury bills shall not be
published by the Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period, the Treasury
Bill Rate for such dividend period shall be the arithmetic average of the two
most recent weekly per annum market discount rates (or the one weekly per annum
market discount rate, if only one such rate shall be published during the
relevant Calendar Period) for all the U.S. Treasury bills then having
maturities of not less than 80 nor more than 100 days, published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board
shall not publish such rates, by any Federal Reserve Bank or by any U.S.
Government department or agency selected by the Corporation. If the Corporation
determines in good faith that for any reason no such U.S. Treasury bill rates
are published as provided above during such Calendar Period, then the Treasury
Bill Rate for such dividend period shall be the arithmetic average of the per
annum secondary market discount rates based upon the closing bids during such
Calendar Period for each of the issues of marketable non-interest bearing U.S.
Treasury securities with a maturity of not less than 80 nor more than 100 days
from the date of each such quotation, as chosen and quoted daily for each
business day in New York City (or less frequently if daily quotations shall not
be generally available) to the Corporation by at least three recognized dealers
in U.S. Government securities selected by the Corporation. If the Corporation
determines in good faith that for any reason the Corporation cannot determine
the Treasury Bill Rate for any dividend period as provided above in this
paragraph, the Treasury Bill Rate for such dividend period shall be the
arithmetic average of the per annum secondary market discount rates based upon
the closing bids during such Calendar Period for each of the issues of
marketable interest-bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation, as chosen
and quoted daily for each business day in New York City (or less frequently if
daily quotations shall not be generally available) to the Corporation by at
least three recognized dealers in U.S. Government securities selected by the
Corporation.
Except as provided below in this paragraph, the "Ten Year Constant Maturity
Rate" for each dividend period shall be the arithmetic average of the two most
recent weekly per annum Ten Year Average Yields, as defined below (or the one
weekly per annum Ten Year Average Yield, if only one such Yield shall be
published during the relevant Calendar Period), published by the Federal Reserve
Board during the Calendar Period immediately prior to the ten calendar days
immediately preceding the February 1, May 1, August 1 or November 1, as the case
may be, prior to the dividend period for which the dividend rate on the
Preferred Stock is being determined. If the Federal Reserve
4
<PAGE>
Board does not publish such a weekly per annum Ten Year Average Yield during any
such Calendar Period, then the Ten Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the two most recent weekly
per annum Ten Year Average Yield, if only one such Yield shall be published
during the relevant Calendar Period) published during such Calendar Period by
any Federal Reserve Bank or by any U.S. Government department or agency selected
by the Corporation. If a weekly per annum Ten Year Average Yield shall not be
published by the Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period, then the Ten
Year Constant Maturity Rate for such dividend period shall be the arithmetic
average of the two most recent weekly per annum average yields to maturity (or
the one weekly per annum average yield to maturity, if only one such yield shall
be published during the relevant Calendar Period) for all of the actively traded
marketable U.S. Treasury fixed interest rate securities, other than Special
Securities (as defined below), then having maturities of not less than eight nor
more than twelve years, published during such Calendar Period by the Federal
Reserve Board or, if the Federal Reserve Board shall not be publish such yields,
by any Federal Reserve Bank or by any U.S. Government department or agency
selected by the Corporation. If the Corporation determines in good faith that
for any reason the Corporation cannot determine the Ten Year Constant Maturity
Rate for any dividend period as provided above in this paragraph, then the Ten
Year Constant Maturity Rate for such dividend period shall be the arithmetic
average of the per annum average yields to maturity based upon the closing bids
during such Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special Securities)
with a final maturity date not less than eight or not more than twelve years
from the date of each such quotation, as chosen and quoted daily for each
business day in New York City (or less frequently if daily quotations shall not
be generally available) to the Corporation by at least three recognized dealers
in U.S. Government securities selected by the Corporation.
Except as provided below in this paragraph, the "Twenty Year Constant
Maturity Rate" for each dividend period shall be the arithmetic average of the
two most recent weekly per annum Twenty Year Average Yields, as defined below
(or the one weekly per annum Twenty Year Average Yield, if only one such Yield
shall be published during the relevant Calendar Period), published by the
Federal Reserve Board during the Calendar Period immediately prior to the ten
calendar days immediately preceding the February 1, May 1, August 1 or November
1, as the case may be, prior to the dividend period for which the dividend rate
on the Preferred Stock is being determined. If the Federal Reserve Board does
not publish such a weekly per annum Twenty Year
5
<PAGE>
Average Yield during any such Calendar Period,then the Twenty Year Constant
Maturity Rate for such dividend period shall be the arithmetic average of the
two most recent weekly per annum Twenty Year Average Yields (or the one weekly
per annum Twenty Year Average Yield, if only one such Yield shall be published
during the relevant Calendar Period), published during such Calendar Period by
any Federal Reserve Bank or by any U.S. Government department or agency selected
by the Corporation. If a weekly per annum Twenty Year Average Yield shall not be
published by the Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period, then the
Twenty Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum average yields to
maturity (or the one weekly per annum average yield to maturity, if only one
such yield shall be published during the relevant Calendar Period) for all of
the actively traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not less than eighteen
nor more than twenty-two years, published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board shall not publish such
yields, by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Corporation. If the Corporation determines in good faith
that for any reason the Corporation cannot determine the Twenty Year Constant
Maturity Rate for any dividend period as provided above in this paragraph, then
the Twenty Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the per annum average yields to maturity based upon the
closing bids during such Calendar Period for each of the issues of actively
traded marketable U.S. Treasury fixed interest rate securities (other than
Special Securities) with a final maturity date not less than eighteen nor more
than twenty-two years from the date of each such quotation, as chosen and quoted
daily for each business day in New York City (or less frequently if daily
quotations shall not be generally available) to the Corporation by at least
three recognized dealers in U.S. Government securities selected by the
Corporation.
"Ten Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years). "Twenty Year Average Yield" means the average
yield to maturity for actively traded marketable U.S. Treasury fixed interest
rate securities (adjusted to constant maturities of twenty years). In September
1983, the weekly per annum market discount rate for three month U.S. Treasury
bills,the Ten Year Average Yield and the Twenty Year Average Yield were
published weekly by the Federal Reserve Board in "Federal Reserve Statistical
Release H. 15 (519)--Selected Interest Rates." "Calendar Period" means a period
of fourteen calendar days; "Special Securities" means securities which can, at
the option of
6
<PAGE>
the holder, be surrendered at face value in payment of any Federal estate tax or
which provide tax benefits to the holder and are priced to reflect such tax
benefits or which were originally issued at a deep or substantial discount.
The Applicable Rate with respect to each dividend period after February 1,
1984 will be calculated as promptly as practicable by the Corporation according
to the appropriate method described herein. The Corporation will cause each
Applicable Rate to be published in a newspaper of general circulation in New
York City at least three days prior to the commencement of the new dividend
period to which it applies and will cause notice of such Applicable Rate to be
included with the dividend payment checks next mailed to the holders of the
Preferred Stock. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate shall each be rounded to the nearest
five-hundredths of a percentage point.
Section 3. Liquidation Preference.
-----------------------
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of all of the outstanding shares of
Preferred Stock shall have preference and priority over the Common Stock, or any
other class of stock of the Corporation ranking upon liquidation junior to the
Preferred Stock, for payment out of the assets of the Corporation or proceeds
thereof, of $100 per share plus an amount equal to all dividends accrued and
unpaid thereon to the date of final distribution to such holders, and after such
payment the holders of Preferred Stock shall be entitled to no other payments.
If, in the case of any such liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation or proceeds thereof shall be
insufficient to make the full liquidation payment of $100 per share plus an
amount equal to all accrued and unpaid dividends on the Preferred Stock and the
full liquidation payments on any other preferred stock ranking as to liquidation
on a parity with the Preferred Stock, then such assets and proceeds shall be
distributed among the holders of the Preferred Stock and any such other
preferred stock ratably in accordance with the respective amounts which would be
payable on such shares of Preferred Stock and any such other preferred stock if
all amounts thereon were to be paid in full. A consolidation or merger with, or
sale or lease of all or substantially all of the assets of the Corporation to,
one or more corporations shall not be deemed to be a liquidation, dissolution or
winding up of the Corporation.
Section 4. Redemption.
-----------
The Corporation may not redeem the Preferred Stock prior to January 1,
1989. The Corporation, at its option, may
7
<PAGE>
redeem shares of Preferred Stock, as a whole or in part, on or after January 1,
1989 through December 31, 1993 at a price of $103.00 per share and on or after
January 1, 1994 at a price of $100.00 per share plus in each case accrued and
unpaid dividends to the date fixed for redemption, upon not less than 30 nor
more than 60 days' notice. The Corporation may not redeem less than all the
outstanding shares of Preferred Stock unless full cumulative dividends have been
paid for all outstanding shares of Preferred Stock for all past dividend
periods.
In the event the Corporation shall redeem shares of Preferred Stock, notice
of such redemption shall be given by first class mail, postage prepaid, mailed
not less than 30 nor more than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at such holder's address as the
same appears on the stock register of the Corporation. Each such notice shall
state: (1) the redemption date; (2) the number of shares of Preferred Stock to
be redeemed and, if less than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (3) the
redemption price; (4) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; and (5) that dividends on
the shares to be redeemed will cease to accrue on such redemption date. Notice
having been mailed as aforesaid, from and after the redemption date (unless
default shall be made by the Corporation in providing money for the payment of
the redemption price) dividends on the shares of the Preferred Stock so called
for redemption shall cease to accrue, and said shares shall no longer be deemed
to be outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the redemption
price) shall cease. Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Corporation shall so require and the
notice of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and the notice shall so state), such shares shall be redeemed by the
Corporation at the redemption price aforesaid. If less than all the outstanding
shares of the Preferred Stock are to be redeemed, shares to be redeemed shall be
selected by the Corporation from outstanding shares of Preferred Stock not
previously called for redemption by lot or pro rata (as nearly as may be) or by
any other method determined by the Corporation in its sole discretion to be
equitable. A new certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
Notwithstanding the foregoing provisions of this Section 4, if any
dividends on the Preferred Stock are in arrears, no shares of the Preferred
Stock shall be redeemed unless all outstanding shares of the Preferred Stock are
simultaneously redeemed, and the Corporation shall not purchase or otherwise
acquire any shares of such Series; provided, however, that the foregoing shall
not prevent the purchase or
8
<PAGE>
acquisition of shares of the Preferred Stock pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of the
Preferred Stock.
All shares of the Preferred Stock redeemed by the Corporation shall be
retired and cancelled and shall be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and may
thereafter be issued.
Notwithstanding the Corporation's right to redeem the Preferred Stock, the
Corporation shall have no obligation to repurchase or retire the Preferred Stock
by sinking fund or otherwise.
Section 5. Conversion, Preemptive Rights, Exchange.
----------------------------------------
The holders of shares of the Preferred Stock shall not have any rights to
convert such shares into or exchange such shares for shares of any other class
or classes or of any other series of any class or classes of capital stock of
the Corporation. The holders of the Preferred Stock shall not have any
preemptive rights.
Section 6. Voting Rights.
--------------
Holders of the Preferred Stock will not have any voting rights except as
set forth below or as otherwise from time to time required by law. If, on the
date used to determine stockholders of record for any meeting of stockholders of
the Corporation at which directors are to be elected, dividends on the Preferred
Stock or any other series of preferred stock ranking on a parity with the
Preferred Stock as to dividends shall be in arrears in an amount equal to at
least six quarterly dividends (whether or not consecutive) the holders of the
Preferred Stock (voting separately as a class with all other affected series of
preferred stock ranking on a parity with the Preferred Stock as to dividends and
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote and elect two directors of the Corporation. Such right to elect
directors shall remain in effect until all dividends payable on the Preferred
Stock have been declared and paid or set apart for payment. Until the default in
payments of all dividends which permitted the election of said directors shall
cease to exist, any director who shall have been so elected pursuant to the next
preceding sentence may be removed at any time, either with or without cause,
only by the affirmative vote of the holders of the shares at the time entitled
to cast a majority of the votes entitled to be cast for the election of any such
director at a special meeting of such holders called for that purpose, and any
vacancy thereby created may be filled by the vote of such holders. The right of
the holders of the Preferred Stock to
9
<PAGE>
elect directors shall remain in effect until all dividends payable on the
Preferred Stock have been declared and paid or set apart for payment. The term
of office of all directors so elected shall terminate immediately upon the
termination of the right to vote for directors of the holders of the Preferred
Stock and of the holders of all other such series of preferred stock. Each
holder of Preferred Stock will have one vote for each share held.
Without the consent or affirmative vote of the holders of at least two-
thirds of the outstanding shares of Preferred Stock, voting separately as a
class with all other affected series of preferred stock ranking on a parity with
the Preferred Stock either as to dividends or upon liquidation, the Corporation
shall not authorize, create or issue, or increase the authorized amount of, any
class or series of stock ranking prior to the Preferred Stock as to dividends or
upon liquidation. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of the Preferred Stock, voting separately
as a class with all other shares of the same class, will be required for any
amendment, alteration or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Certificate of Incorporation or any certificate
supplemental thereto if the amendment, alteration or repeal adversely affects
the preferences, rights, powers or privileges of the Preferred Stock and any
other shares of the same class; provided, however, that in any case in which one
or more, but not all, series of such class would be adversely affected as to the
preferences, rights, powers or privileges thereof, the affirmative vote of the
holders of shares entitled to cast at least two-thirds of the votes entitled to
be cast by the holders of the shares of all series that would be adversely
affected, voting as a class, shall be required, and the holders of shares of any
series that would not be adversely affected shall not be entitled to vote
thereon. The Corporation's Certificate of Incorporation may be amended to
increase the number of authorized shares of common or preferred stock ranking on
a parity with or junior to the Preferred Stock as to dividends or upon
liquidation without the vote of the holders of outstanding shares of Preferred
Stock.
-10-
<PAGE>
IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate
of Designations, Preferences and Rights of Adjustable Rate Cumulative Preferred
Stock, Series A to be duly executed by its Chairman of the Board and attested to
by its Secretary and has caused its corporate seal to be affixed hereto, this
23rd day of February, 1990.
TORCHMARK CORPORATION
/s/ R. K. Richey
-------------------------------
R. K. Richey
Chairman of the Board
(Corporate Seal)
ATTEST:
/s/ Samuel E. Upchurch, Jr.
- ----------------------------
Samuel E. Upchurch, Jr.
Secretary
-11-
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
STOCK DESIGNATION OF "TORCHMARK CORPORATION" FILED IN THIS OFFICE ON THE SECOND
DAY OF DECEMBER, A.D. 1993, AT 10 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
* * * * * * * * * *
/s/ William T. Quillen
----------------------------------
William T. Quillen, Secretary of State
<PAGE>
AMENDMENT TO
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A
OF
TORCHMARK CORPORATION
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
"TORCHMARK CORPORATION, a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority set forth in ARTICLE FOURTH of its
Restated Certificate of Incorporation, and in accordance with the provisions of
Section 151(g) of the General Corporation Law of the state of Delaware, its
Board of Directors duly adopted resolutions on July 22, 1993, increasing the
number of shares of its Preferred Stock designated as Adjustable the Cumulative
Preferred Stock, Series A as follows:
RESOLVED, that the number of shares constituting the Corporation's
Adjustable Rate Cumulative Preferred Stock, Series A shall be, and it hereby is,
increased by 500,000 shares to 1,500,000 shares; and therefore,
RESOLVED FURTHER, that Section 1 of the Certificate of Designations,
Preferences and Rights of Adjustable Rate Cumulative Preferred Stock, Series A
of Torchmark Corporation previously filed on February 26, 1990, shall be, and it
hereby is, amended by increasing the number of shares constituting such series
to 1,500,000; and
RESOLVED FURTHER, that except for the increase in the number of shares
constituting such series all other provisions of such certificate shall remain
in full force and effect.
IN WITNESS WHEREOF, said Torchmark Corporation has caused the Amendment to
Certificate of Designations, Preferences and Rights of Adjustable Rate
Cumulative Preferred Stock, Series A, to be duly executed by its Chairman of the
Board and attested to by its Secretary and has caused its corporate seal to be
affixed hereto as the act and deed of such corporation and the undersigned
certify that the facts stated herein are true this 1st day of December, 1993.
TORCHMARK CORPORATION
/s/ R. K. Richey
---------------------------------
R. K. Richey
Chairman of the Board
(Corporate Seal)
ATTEST:
/s/ Samuel E. Upchurch, Jr.
- -----------------------------------
Samuel E. Upchurch, Jr.
Secretary
<PAGE>
Page 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "TORCHMARK CORPORATION", FILED IN THIS OFFICE ON THE EIGHTEENTH
DAY OF SEPTEMBER, A.D. 1995, AT 10 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
7.375% CUMULATIVE PREFERRED STOCK, SERIES A
OF
TORCHMARK CORPORATION
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
TORCHMARK CORPORATION, a Delaware corporation (the "Company"), certifies
that pursuant to the authority contained in ARTICLE FOUR of its Certificate of
Incorporation, as amended, and in accordance with the provisions of Section 151
of the General Corporation Law of the State of Delaware, its Board of Directors
duly adopted resolutions on July 27, 1995, creating a series of its Preferred
Stock designated as 7.375% Cumulative Preferred Stock, Series A:
RESOLVED, that a series of the class of authorized Preferred Stock of the
Company is hereby created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount.
----------------------
The shares of such series shall be designated as "7.375% Cumulative
Preferred Stock, Series "A" (the "Preferred Stock") and shall have a face value
of $100,000 per share. The number of shares constituting such series shall be
750.
Section 2. Dividends and Distributions.
---------------------------
Holders of Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of the Company out of assets of the Company
legally available for payment, cumulative cash dividends at the rate of 7.375%
of the face value per share per annum from the date of issuance to and including
November 15, 2004. Dividends on the Preferred Stock will accrue from the date of
issuance and will be payable semi-annually on June 30 and December 31 of each
year (or, if such day is not a business day, then the next preceding business
day) to the holders of record on such respective dates, not exceeding 30 days
preceding the payment date thereof, as may be determined by the Board of
Directors. The first dividend will be payable December 31, 1995. The dividends
payable on the Preferred Stock for the period from the date of issuance to and
including December 31, 1995 and for any period less than a full semi-annual
dividend period shall be computed on the basis of a 360-day year of twelve 30-
day months and the actual number of days elapsed in the period for which the
dividends are payable. The dividends payable for each full semi-annual period
commencing after December 31, 1995 shall be computed by dividing
1
<PAGE>
the annual dividend rate for such dividend period by four and applying the
resulting rate against the face value per share of the Preferred Stock.
No full dividends shall be declared or paid or set apart for payment on the
preferred stock of any series ranking, as to dividends, on a parity with the
Preferred Stock for any period unless full cumulative dividends have been, or
contemporaneously are, declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock for all
dividend payment periods terminating on or prior to the date of payment of such
full cumulative dividends. When dividends are not paid in full upon the
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Preferred Stock, all dividends declared and paid or set aside
for payment upon shares of Preferred Stock and any other preferred stock ranking
on a parity as to dividends shall be declared and paid or set aside for payment
pro rata so that the amount of dividends declared and paid or set aside for
payment per share on the Preferred Stock and such other preferred stock shall in
all cases bear to each other the same ratio that accrued dividends per share on
the shares of Preferred Stock and such other preferred stock bear to each other.
Except as provided in Section 3 hereof, in the event that full cumulative
semi-annual dividends on the Preferred Stock have not been declared and paid or
set apart for payment, the Company may not declare or pay any dividend on, or
make any distribution on, or payment on account of the purchase, redemption or
other retirement of, its Common Stock or any other stock of the Company ranking
as to dividends junior to the Preferred Stock, except that dividends may be
declared and paid, and distributions and payments may be made, in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other stock ranking as to dividends and upon distribution or assets junior to
the Preferred Stock. No interest shall be payable in respect of any dividend
payment which may be in arrears.
Section 3. Liquidation Preference.
----------------------
Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of all of the outstanding shares of
Preferred Stock shall have preference and priority over the Common Stock, or any
other class of stock of the Company ranking upon liquidation junior to the
Preferred Stock, for payment out of the assets of the Company or proceeds
thereof, of $100,000 per share plus an amount equal to all dividends accrued and
unpaid thereon to the date of final distribution to such holders, and after such
payment the holders of Preferred Stock shall be entitled to no other payments.
If, in the case of any such liquidation, dissolution or winding up of the
Company, the assets of the Company or proceeds thereof shall be insufficient to
make
2
<PAGE>
the full liquidation payment of $100,000 per share plus an amount equal to all
accrued and unpaid dividends on the Preferred Stock and the full liquidation
payments on any other preferred stock ranking as to liquidation on a parity with
the Preferred Stock, then such assets and proceeds shall be distributed among
the holders of the Preferred Stock and any such other preferred stock ratably in
accordance with the respective amounts which would be payable on such shares of
Preferred Stock and any such other preferred stock if all amounts thereon were
to be paid in full. A consolidation or merger with, or sale or lease of all or
substantially all of the assets of the Company to, one or more corporations
shall not be deemed to be a liquidation, dissolution or winding up of the
Company.
Section 4. Redemption.
----------
The Company, at its option, may redeem shares of Preferred Stock, as a
whole or in part in multiples of $1,000,000 on or after the date of issuance at
a price of $100,000 per share plus accrued and unpaid dividends to the date
fixed for redemption, upon not less than 30 days' notice. The Company may not
redeem less than all the outstanding shares of Preferred Stock unless full
cumulative dividends have been paid for all outstanding shares of Preferred
Stock for all past dividend periods.
In the event the Company shall redeem shares of Preferred Stock, notice of
such redemption shall be given by first class mail, postage prepaid, mailed not
less than 30 days prior to the redemption date, to each holder of record of the
shares to be redeemed, at such holder's address as the same appears on the stock
register of the Company. Each such notice shall state: (1) the redemption date;
(2) the number of shares of Preferred Stock to be redeemed and, if less than all
the shares held by such holder are to be redeemed, the number of such shares to
be redeemed from such holder; (3) the redemption price; (4) the place or places
where certificates for such shares are to be surrendered for payment of the
redemption price; and (5) that dividends on the shares to be redeemed will cease
to accrue on such redemption date. Notice having been mailed as aforesaid, from
and after the redemption date (unless default shall be made by the Company in
providing money for the payment of the redemption price) dividends on the shares
of the Preferred Stock so called for redemption shall cease to accrue, and said
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Company (except the right to receive from
the Company the redemption price) shall cease. Upon surrender in accordance with
said notice of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Company shall so require
and the notice shall so state), such shares shall be redeemed by the Company at
the redemption price aforesaid. If less than all the outstanding shares of the
Preferred Stock are to be redeemed, shares to be redeemed shall be selected by
the Company
3
<PAGE>
from outstanding shares of Preferred Stock not previously called for redemption
by lot or pro rata (as nearly as may be) or by any other method determined by
the Company in its sole discretion to be equitable. A new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
Notwithstanding the foregoing provisions of this Section 4, if any
dividends on the Preferred Stock are in arrears, no shares of the Preferred
Stock shall be redeemed unless all outstanding shares of the Preferred Stock are
simultaneously redeemed, and the Company shall not purchase or otherwise acquire
any shares of such Series; provided, however, that the foregoing shall not
prevent the purchase or however, that the foregoing shall not prevent the
purchase or acquisition of shares of the Preferred Stock pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding shares of
the Preferred Stock.
All shares of the Preferred Stock redeemed by the Company shall be retired
and cancelled and shall be restored to the status of authorized but unissued
shares of preferred stock, without designation as to series, and may thereafter
be issued.
Notwithstanding the Company's right to redeem the Preferred Stock, the
Company shall have no obligation to repurchase to retire the Preferred Stock by
sinking fund or otherwise.
Section 5. Conversion, Preemptive Rights, Exchange.
---------------------------------------
The holders of shares of the Preferred Stock shall not have any rights to
convert such shares into or exchange such shares for shares of any other class
or classes or of any other series of any class or classes of capital stock of
the Company. The holders of the Preferred Stock shall not have any preemptive
rights.
Section 6. Voting Rights.
-------------
Holders of the Preferred Stock will not have any voting rights except as
set forth below or as otherwise from time to time required by law. If, on the
date used to determine stockholders of record for any meeting of stockholders
of the Company at which directors are to be elected, dividends on the Preferred
Stock or any other series of preferred stock ranking on a parity with the
Preferred Stock as to dividends shall be in arrears in an amount equal to at
least three semi-annual dividends (whether or not consecutive) the holders of
the Preferred Stock (voting separately as a class with all other affected series
of preferred stock ranking on a parity with the Preferred Stock as to dividends
and upon which like voting rights have been conferred and are exercisable) will
be entitled to vote and elect two directors of the Company. Such right to elect
directors shall remain in effect until all dividend payments on the Preferred
Stock have been
4
<PAGE>
declared and paid or set apart for payment. Until the default in payments of all
dividends which permitted the election of said directors shall cease to exist,
any director who shall have been so elected pursuant to the next preceding
sentence may be removed at any time, either with or without cause, only by the
affirmative vote of the holders of the shares at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. The right of the
holders of the Preferred Stock to elect directors shall remain in effect until
all dividends payable on the Preferred Stock have been declared and paid or set
apart for payment. The term of office of all directors so elected shall
terminate immediately upon the termination of the right to vote for directors of
the holders of the Preferred Stock and of the holders of all other such series
of preferred stock. Each holder of Preferred Stock will have one vote for each
share held.
Without the consent or affirmative vote of the holders of at least
two-thirds of the outstanding shares of Preferred Stock, voting separately as a
class with all other affected series of preferred stock ranking on a parity with
the Preferred Stock either as to dividends or upon liquidation, the Company
shall not authorize, create or issue, or increase the authorized amount of, any
class or series of stock ranking prior to the Preferred Stock as to dividends or
upon liquidation. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of the Preferred Stock, voting separately
as a class with all other shares of the same class, will be required for any
amendment, alteration or repeal, whether by merger or consolidation or
otherwise, of the Company's Certificate of Incorporation or any certificate
supplemental thereto if the amendment, alteration or repeal adversely affects
the preferences, rights, powers or privileges of the Preferred Stock and any
other shares of the same class; provided, however, that in any case in which one
or more, but not all, series of such class would be adversely affected as to the
preferences, rights, powers or privileges thereof, the affirmative vote of the
holders of shares entitled to cast at least two-thirds of the votes entitled to
be cast by the holders of the shares of all series that would be adversely
affected, voting as a class, shall be required, and the holders of shares of any
series that would not be adversely affected shall not be entitled to vote
thereon. The Company's Certificate of Incorporation may be amended to increase
the number of authorized shares of common or preferred stock ranking on a parity
with or junior to the Preferred Stock as to dividends or upon liquidation
without the vote of the holders of outstanding shares of Preferred Stock.
5
<PAGE>
IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate
of Designations, Preferences and Rights of 7.375% Cumulative Preferred Stock,
Series A, to be duly executed by its Vice President and Associate General
Counsel and attested to by its Secretary and has caused its corporate seal to be
affixed hereto, this 15th day of September, 1995.
TORCHMARK CORPORATION
By: /s/ Stephen W. Still
---------------------------
Vice President and
Associate General Counsel
[CORPORATE SEAL
APPEARS HERE]
ATTEST:
By: /s/ Carol A. McCoy
--------------------------
Secretary
6
<PAGE>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "TORCHMARK CORPORATION", FILED IN THIS OFFICE ON THE SEVENTEENTH
DAY OF FEBRUARY, A.D. 1998, AT 3:45 O'CLOCK P.M.
[SEAL]
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
0882974 8100 AUTHENTICATION: 8924316
981060855 DATE: 02-17-98
<PAGE>
CERTIFICATE OF DESIGNATIONS PREFERENCES AND RIGHTS OF
A CUMULATIVE 6 1/2 % PREFERRED STOCK, SERIES A
OF
TORCHMARK CORPORATION
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
TORCHMARK CORPORATION, a Delaware corporation ("the Company"), certifies
that pursuant to the authority contained in ARTICLE FOUR of its Certificate of
Incorporation, as amended, and in accordance with the provisions of Section 151
of the General Corporation Law of the state of Delaware, its Board of Directors
duly adopted resolutions on Feb. 17, 1998, creating a series of its Preferred
Stock designated as 6 1/2 % Cumulative Preferred Stock, Series A :
RESOLVED, that a series of the class of authorized Preferred Stock of
the Company is hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount.
-----------------------
The shares of such series shall be designated as "6 1/2 Cumulative
Preferred Stock, Series "A"(the "Preferred Stock") and shall have a face value
of $1,000.00 per share. The number of shares constituting such series shall be
135787.
Section 2. Dividends and Distributions.
----------------------------
Holders of Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of the Company out of assets of the Company
legally available for payment, cumulative cash dividends at the rate of 6 1/2%
of the face value per share per annum from the date of issuance to and including
perpetuity. Dividends on the Preferred Stock will accrue from the date of
issuance and will be payable semi-annually on June 30 and December 31 of each
year (or, if such day is not a business day, then the next preceding business
day) to the holders of record on such respective dates, not exceeding 30 days
preceding the payment date thereof, as may be determined by the Board of
Directors. The first dividend will be payable June 30, 1998. The dividends
payable on the Preferred Stock for the period from the date of issuance to and
including perputuity and for any period less than a full semi-annual dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months
and the actual number of days elapsed in the period for which the dividends are
payable. The dividends payable for each full semi-annual period commencing
after June 30, 1996 shall be computed by dividing
1
<PAGE>
the annual dividend rate for such dividend period by four and applying the
resulting rate against the face value per share of the Preferred Stock.
No full dividends shall be declared or paid or set apart for payment
on the proferred stock of any series ranking, as to dividends, on a parity with
the Preferred Stock for any period unless full cumulative dividends have been,
or contemporaneously are, declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Preferred Stock for
all dividend payment periods terminating on or prior to the date of payment of
such full cumulative dividends. When dividends are not paid in full upon the
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Preferred Stock, all dividends declared and paid or set aside
for payment upon shares of Preferred Stock and any other preferred stock ranking
on a parity as to dividends shall be declared and paid or set aside for payment
pro rata so that the amount of dividends declared and paid or set aside for
payment per share on the Preferred Stock and such other preferred stock shall
in all cases bear to each other the same ratio that accrued dividends per share
on the shares of Preferred Stock and such other preferred stock bear to each
other.
Except as provided in Section 3 hereof, in the event that full
cumulative semi-annual dividends on the Preferred Stock have not been declared
and paid or set apart for payment, the Company may not declare or pay any
dividend on, or make any distribution on, or payment on account of the
purchase, redemption or other retirement of, its Common Stock or any other stock
of the Company ranking as to dividends junior to the Preferred Stock, except
that dividends may be declared and paid, and distributions and payments may be
made, in shares of, or options, warrants or rights to subscribe for or purchase
shares of, Common Stock or other stock ranking as to dividends and upon
distribution of assets junior to the Preferred Stock. No interest shall be
payable in respect of any dividend payment which may be in arrears.
Section 3. Liquidation Preference
----------------------
Upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of all of the outstanding shares
of Preferred Stock shall have preference and priority over the Common Stock, or
any other class of stock of the Company ranking upon liquidation junior to the
Preferred Stock, for payment out of the assets of the Company or proceeds
thereof, of $1,000.00 per share plus an amount equal to all dividends accrued
and unpaid thereon to the date of final distribution to such holders, and after
such payment the holders of Preferred Stock shall be entitled to no other
payments. If, in the case of any such liquidation, dissolution or winding up of
the Company, the assets of the Company or proceeds thereof shall be
insufficient to make
2
<PAGE>
the full liquidation payment of $1,000.00 per share plus an amount equal to all
accrued and unpaid dividends on the Preferred Stock and the full liquidation
payments on any other preferred stock ranking as to liquidation on a parity with
the Preferred Stock, then such assets and proceeds shall be distributed among
the holders of the Preferred Stock and any such other preferred stock ratably in
accordance with the respective amounts which would be payable on such shares of
Preferred Stock and any such other preferred stock if all amounts thereon were
to be paid in full. A consolidation or merger with, or sale or lease of all or
substantially all of the assets of the Company to, one or more corporations
shall not be deemed to be a liquidation, dissolution or winding up of the
Company.
Section 4. Redemption.
-----------
The Company, at is option, may redeem shares of Preferred Stock, as a
whole or in part in multiples of $1,000,000 on or after the date of issuance
at a price of $1,000.00 per share plus accrued and unpaid dividends to the date
fixed for redemption, upon not less than 30 days' notice. The Company may not
redeem less than all the outstanding shares of Preferred Stock unless full
cumulative dividends have been paid for all-outstanding shares of Preferred
Stock for all past dividend periods.
In the event the Company shall redeem shares of Preferred
Stock, notice of such redemption shall be given by first class mail, postage
prepaid, mailed not less than 30 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at such holder's address as the
same appears on the stock register of the Company. Each such notice shall state:
(1) the redemption date; (2) the number of shares of Preferred Stock to be
redeemed and, if less than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (3) the
redemption price; (4) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; and (5) that dividends on
the shares to be redeemed will cease to accrue on such redemption date. Notice
having been mailed as aforesaid, from and after the redemption date (unless
default shall be made by the Company in providing money for the payment of the
redemption price) dividends on the shares of the Preferred Stock so called for
redemption shall cease to accrue, and said shares shall no longer be deemed to
be outstanding, and all rights of the holders thereof as stockholders of the
Company (except the right to receive from the Company the redemption price)
shall cease. Upon surrender in accordance with said notice of the certificates
for any shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors of the Company shall so require and the notice shall so
state), such shares shall be redeemed by the Company at the redemption price
aforesaid. If less than all the outstanding shares of the Preferred Stock are
to be redeemed, shares to be redeemed shall be selected by the Company
3
<PAGE>
from outstanding shares of Preferred Stock not previously called for redemption
by lot or pro rata (as nearly as may be) or by any other method determined by
the Company in its sole discretion to be equitable. A new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
Notwithstanding the foregoing provisions of this Section 4, if any
dividends on the Preferred Stock are in arrears, no shares of the Preferred
Stock shall be redeemed unless all outstanding shares of the Preferred Stock are
simultaneously redeemed, and the company shall not purchase or otherwise acquire
any shares of such Series; provided, however, that the foregoing shall not
prevent the purchase or however, that the foregoing shall not prevent the
purchase or acquisition of shares of the Preferred Stock pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding shares
of the Preferred Stock.
All shares of the Preferred Stock redeemed by the Company shall be
retired and cancelled and shall be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and may
thereafter be issued.
Notwithstanding the Company's right to redeem the Preferred Stock, the
Company shall have no obligation to repurchase or retire the Preferred Stock by
sinking fund or otherwise.
Section 5. Conversion, Preemptive Rights, Exchange.
----------------------------------------
The holders of shares of the Preferred Stock shall not have any rights
to convert such shares into or exchange such shares for shares of any other
class or classes or of any other series of any class or classes of capital stock
of the Company. The holders of the Preferred Stock shall not have any preemptive
rights.
Section 6. Voting Rights.
--------------
Holders of the Preferred stock will not have any voting rights except
as set forth below or as otherwise from time to time required by law. If, on the
date used to determine stockholders of record for any meeting of stockholders
of the Company at which directors are to be elected, dividends on the Preferred
Stock or any other series of preferred stock ranking on a parity with the
Preferred Stock as to dividends shall be in arrears in an amount equal to at
least three semi-annual dividends (whether or not consecutive) the holders of
the Preferred Stock (voting separately as a class with all other affected series
of preferred stock ranking on a parity with the Preferred Stock as to dividends
and upon which like voting rights have been conferred and are exercisable) will
be entitled to vote and elect two directors of the Company. Such right to elect
directors shall remain in effect until all dividend payments on the Preferred
Stock have been
4
<PAGE>
declared and paid or set apart for payment. Until the default in payments of all
dividends which permitted the election of said directors shall cease to exist,
any director who shall have been so elected pursuant to the next preceding
sentence may be removed at any time, either with or without cause, only by the
affirmative vote of the holders of the shares at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. The right of the
holders of the Preferred Stock to elect directors shall remain in effect until
all dividends payable on the Preferred Stock have been declared and paid or set
apart for payment. The term of office of all directors so elected shall
terminate immediately upon the termination of the right to vote for directors of
the holders of the Preferred Stock and of the holders of all other such series
of preferred stock. Each holder of Preferred Stock will have one vote for each
share held.
Without the consent or affirmative vote of the holders of at least
two-thirds of the outstanding shares of Preferred Stock, voting separately as a
class with all other affected series of preferred stock ranking on a parity with
the Preferred Stock either as to dividends or upon liquidation, the Company
shall not authorize, create or issue, or increase the authorized amount of, any
class or series of stock ranking prior to the Preferred Stock as to dividends or
upon liquidation. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of the Preferred Stock, voting separately
as a class with all other shares of the same class, will be required for any
amendment, alteration or repeal, whether by merger or consolidation or
otherwise, of the Company's Certificate of Incorporation or any certificate
supplemental thereto if the amendment, alteration or repeal adversely affects
the preferences, rights, powers or privileges of the Preferred Stock and any
other shares of the same class; provided, however, that in any case in which one
or more, but not all, series of such class would be adversely affected as to
the preferences, rights, powers or privileges thereof, the affirmative vote
of the holders of shares entitled to cast at least two-thirds of the votes
entitled to be cast by the holders of the shares of all series that would be
adversely affected, voting as a class, shall be required, and the holders of
shares of any series that would not be adversely affected shall not be entitled
to vote thereon. The Company's Certificate of Incorporation may be amended to
increase the number of authorized shares of common or preferred stock ranking on
a parity with or junior to the Preferred Stock as to dividends or upon
liquidation without the vote of the holders of outstanding shares of Preferred
Stock.
5
<PAGE>
IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate
of Designations, Preferences and Rights of 6% Cumulative Preferred Stock, Series
A, to be duly executed by its Vice President and General Counsel and attested to
by its Secretary and has caused its corporate seal to be affixed hereto, this
17th day of February, 1998.
TORCHMARK CORPORATION
By: /s/ Larry M. Hutchison
----------------------
Vice President and
(Corporate Seal) General Counsel
ATTEST:
By: Carol A. McCoy
--------------
Secretary
<PAGE>
Page 1
State of Delaware
Office of the Secretary of State
--------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "TORCHMARK CORPORATION", FILED IN THIS OFFICE ON THE
TWENTY-SEVENTH DAY OF FEBRUARY, A.D. 1998, AT 4:30 O'CLOCK P.M.
/s/ Edward J. Freel
---------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 8947109
DATE: 03-02-98
(DELAWARE SECRETARY'S OFFICE SEAL)
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
6 1/2% CUMULATIVE PREFERRED STOCK, SERIES A
OF
TORCHMARK CORPORATION
Pursuant to Section 151 of the General Corporation
Law of the State of Delaware
TORCHMARK CORPORATION, a Delaware corporation (the "Company"),
certifies that pursuant to the authority contained in ARTICLE FOUR of its
Certificate of Incorporation, as amended, and in accordance with the provisions
of Section 151 of the General Corporation Law of the State of Delaware, its
Board of Directors duly adopted resolutions on February 27, 1998, creating a
series of its Preferred Stock designated as 6 1/2% Cumulative Preferred Stock,
Series A:
RESOLVED, that a series of the class of authorized Preferred Stock of
the Company is hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative , participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
Section 1. Designation and Amount
----------------------
The shares of such series shall be designated as "6 1/2% Cumulative
Preferred Stock, Series "A" (the "Preferred Stock") and shall have a face value
of $1,000.00 per share. The number of shares constituting such series shall be
194,213.
Section 2. Dividends and Distributions
---------------------------
Holders of Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of the Company out of assets of the Company
legally available for payment, cumulative cash dividends at the rate of 6 1/2%
of the face value per share per annum from the date of issuance to and including
perpetuity. Dividends on the Preferred Stock will accrue from the date of
issuance and will be payable semi-annually on June 30 and December 31 of each
year (or, if such day is not a business day, then the next preceding business
day) to the holders of record on such respective dates, not exceeding 30 days
preceding the payment date thereof, as may be determined by the Board of
Directors. The first dividend will be payable June 30, 1998. The dividends
payable on the Preferred Stock for the period from the date of issuance to and
including perpetuity and for any period less than a full semi-annual dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months
and the actual number of days elapsed in the period for which the dividends are
payable. The dividends payable for each full semi-annual period commencing after
June 30, 1996 shall be computed by dividing
<PAGE>
the annual dividend rate for such dividend period by four and applying the
resulting rate against the face value per share of the Preferred Stock.
No full dividends shall be declared or paid or set apart for payment
on the preferred stock of any series ranking, as to dividends, on a parity with
the Preferred Stock for any period unless full cumulative dividends have been,
or contemporaneously are, declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock for all
dividend payment periods terminating on or prior to the date of payment of such
full cumulative dividends. When dividends are not paid in full upon the
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Preferred Stock, all dividends declared and paid or sat aside
for payment upon shares of Preferred Stock and any other preferred stock ranking
on a parity as to dividends shall be declared and paid or set aside for payment
pro rata so that the amount of dividends declared and paid or set aside for
payment per share on the Preferred Stock and such other preferred stock shall in
all cases bear to each other the same ratio that accrued dividends per share on
the shares of Preferred Stock and such other preferred stock bear to each other.
Except as provided in Section 3 hereof, in the event that full
cumulative semi-annual dividends an the Preferred Stock have not been
declared and paid or set apart for payment, the Company may not declare or pay
any dividend on, or make any distribution on, or payment on account of the
purchase, redemption or other retirement of, its Common Stock or any other stock
of the Company ranking as to dividends junior to the Preferred Stock, except
that dividends may be declared and paid, and distributions and payments may be
made, in shares of, or options, warrants or rights to subscribe for or purchase
shares off Common Stock or other stock ranking as to dividends and upon
distribution of assets junior to the Preferred Stock. No interest shall be
payable in respect of any dividend payment which may be in arrears.
Section 3. Liquidation Preference.
-----------------------
Upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of all of the outstanding shares
of Preferred Stock shall have preference and priority over the Common Stock,
or any other class of stock of the Company ranking upon liquidation junior to
the Preferred Stock, for payment out of the assets of the Company or proceeds
thereof, of $1,000.00 per share plus an amount equal to all dividends accrued
and unpaid thereon to the date of final distribution to such holders, and after
such payment the holders of Preferred Stock shall be entitled to no other
payments. If, in the case of any such liquidation, dissolution or winding up of
the Company, the assets of the Company or proceeds thereof shall be insufficient
to make
2
<PAGE>
the full liquidation payment of $1,000.00 per share plus an amount equal to all
accrued and unpaid dividends on the Preferred Stock and the full liquidation
payments on any other preferred stock ranking as to liquidation on a parity with
the Preferred Stock, then such assets and proceeds shall be distributed among
the holders of the Preferred Stock and any such other preferred stock ratably in
accordance with the respective amounts which would be payable on such shares of
Preferred Stock and any such other preferred stock if all amounts thereon were
to be paid in full. A consolidation or merger with, or sale or lease of all or
substantially all of the assets of the Company to, one or more corporations
shall not be deemed to be a liquidation, dissolution or winding up of the
Company.
Section 4. Redemption
----------
The Company, at is option, may redeem shares of Preferred Stock, as a
whole or in part in Multiples of $10000,000 on or after the data of issuance at
a price of $1,000.00 per share plus accrued and unpaid dividends to the date
fixed for redemption, upon not less than 30 days' notice. The Company may not
redeem less than all the outstanding shares of Preferred Stock unless full
cumulative dividends have been paid for all-outstanding shares of Preferred
Stock for all past dividend periods.
In the event the Company shall redeem shares of Preferred Stock,
notice of such redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 days prior to the redemption date, to each holder of
record of the shares to be redeemed, at such holder's address as the same
appears on the stock register of the Company. Each such notice shall state: (1)
the redemption date; (2) the number of shares of Preferred Stock to be redeemed
and, if less than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from such holder; (3) the redemption price;
(4) the place or places where certificates for such shares are to be surrendered
for payment of the redemption price; and (5) that dividends an the shares to be
redeemed will cease to accrue on such redemption date. Notice having been mailed
as aforesaid, from and after the redemption date (unless default shall be made
by the Company in providing money for the payment of the redemption price)
dividends on the shares of the Preferred Stock so called for redemption shall
cease to accrue, and said shares shall no longer be deemed to be outstanding,
and all rights of the holders thereof as stockholders of the Company (except the
right to receive from the Company the redemption price) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
of the Company shall so require and the notice shall so state), such shares
shall be redeemed by the Company at the redemption price aforesaid. If less than
all the outstanding shares of the Preferred Stock are to be redeemed, shares to
be redeemed shall be selected by the Company
3
<PAGE>
from outstanding shares of Preferred stock not previously called for
redemption by lot or pro rata (as nearly as may be) or by any other method
determined by the Company in its sole discretion to be equitable. A new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
Notwithstanding the foregoing provisions of this Section 4, if any
dividends on the Preferred Stock are in arrears, no shares of the Preferred
Stock shall be redeemed unless all outstanding shares of the Preferred Stock are
simultaneously redeemed, and the Company shall not purchase or otherwise acquire
any shares of such Series; provided, however, that the foregoing shall not
prevent the purchase or however, that the foregoing shall not prevent the
purchase or acquisition of shares of the Preferred Stock pursuant to a purchase
or exchange offer made an the same term to holders of all outstanding shares of
the Preferred Stock.
All shares of the Preferred stock redeemed by the Company shall be
retired and cancelled and shall be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and may
thereafter be issued.
Notwithstanding the Company's right to redeem the Preferred Stock, the
Company shall have no obligation to repurchase or retire the Preferred Stock by
sinking fund or otherwise.
Section 5. Conversion, Preemptive Rights, Exchange
---------------------------------------
The holders of shares of the preferred Stock shall not have any rights
to convert such shares into or exchange such shares for shares of any other
class or classes or of any other series of any class or classes of capital stock
of the Company. The holders of the Preferred Stock shall not have any
preemptive rights.
Section 6. Voting Rights
-------------
Holders of the Preferred Stock will not have any voting
rights except as set forth below or all otherwise from time to time required by
law. If, on the date used to determine stockholders of record for any meeting of
stockholders of the Company at which directors are to be elected, dividends on
the Preferred Stock or any other series of preferred stock ranking on a parity
with the Preferred Stock as to dividends shall be in arrears in an amount equal
to at least three semi-annual dividends (whether or not consecutive) the holders
of the Preferred Stock (voting separately as a class with all other affected
series of ranking on a parity with the Preferred Stock as to dividends and upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote and elect two directors of the Company. Such right to elect
directors shall remain in effect until all dividend payments on the Preferred
stock have been
4
<PAGE>
declared and paid or set apart for payment. Until the default in payments of all
dividends which permitted the election of said directors shall cease to exist,
any director who shall have been so elected pursuant to the next preceding
sentence may be removed at any time, either with or without cause, only by the
affirmative vote of the holders of the shares at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. The right of the
holders of the Preferred Stock to elect directors shall remain in effect until
all dividends payable on the Preferred Stock have been declared and paid or set
apart for payment. The term of office of all directors so elected shall
terminate immediately upon the termination of the right to vote for directors of
the holders of the Preferred Stock and of the holders of all other such series
of preferred stock. Each holder of Preferred Stock will have one vote for each
share held.
Without the consent or affirmative vote of the holders of at least
two-thirds of the outstanding shares of Preferred Stock, voting separately as a
class with all other affected series of preferred stock ranking on a parity with
the Preferred Stock either as to dividends or upon liquidation, the Company
shall not authorize, create or issue, or increase the authorized amount of, any
class or series of stock ranking prior to the Preferred Stock as to dividends or
upon liquidation. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of the Preferred Stock, voting separately
as a class with all other shares of the same class, will be required for any
amendment, alteration or repeal, whether by merger or consolidation or
otherwise, of the Company's Certificate of Incorporation or any certificate
supplemental thereto if the amendment, alteration or repeal adversely affects
the preferences, rights, powers or privileges of the Preferred Stock and any
other shares of the same class; provided, however, that in any case in which one
or more, but not all, series of such class would be adversely affected as to
the preferences, rights, powers or privileges thereof, the affirmative vote
of the holders of shares entitled to cast at least two-thirds of the votes
entitled to be cast by the holders of the shares of all series that would be
adversely affected, voting as a class, shall be required, and the holders of
shares of any series that would not be adversely affected shall not be entitled
to vote thereon. The Company's Certificate of Incorporation may be amended to
increase the number of authorized shares of common or preferred stock ranking on
a parity with or junior to the Preferred Stock as to dividends or upon
liquidation without the vote of the holders of outstanding shares of Preferred
Stock.
5
<PAGE>
IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate
of Designations, Preferences and Rights of 6% Cumulative Preferred Stock, Series
A, to be duly executed by its Vice President and Assistant Treasurer and
attested to by its Secretary and has caused its corporate seal to be affixed
hereto, this 27th day of February, 1998.
TORCHMARK CORPORATION
By: T. Randolph Fox
-----------------
Vice President and
Assistant Treasurer
(Corporate Seal)
ATTEST:
By: /s/ Carol A. McCoy
-------------------
Secretary
<PAGE>
CERTIFIED RESOLUTIONS
OF THE BOARD OF DIRECTORS OF
TORCHMARK CORPORATION
The undersigned, Secretary of Torchmark Corporation hereby certifies
that the following are resolutions duly adopted by the Board of Directors of the
Company:
RESOLVED, that directors of the Company who do not serve as
employees or officers of the Company, its subsidiaries or affiliates
("outside directors") shall retire from the Board of Directors at the
Annual Meeting of Shareholders of the Company immediately following
their 75th birthday.
RESOLVED FURTHER, that directors of the Company who are
employees or officers of the Company, its subsidiaries or affiliates
("inside directors") shall retire from the Board of Directors at the
Annual Meeting of Shareholders of the Company immediately following
their 65th birthday; provided, however, that the outside directors may
recommend to shareholders on an annual basis an inside director for
election to the Board of Directors for a one year term or series of one
year terms not to continue beyond the Annual Meeting of Shareholders
immediately following the director's 75th birthday.
RESOLVED FURTHER, that the director named as Chairman of the
Executive Committee of the Board of Directors of the Company shall serve
at the pleasure of the Board of Directors on an annual basis until the
Annual Meeting of Shareholders following his 75th birthday.
RESOLVED FINALLY, that each person who has retired as a director
may receive a retirement benefit payable annually in an amount equal to
$200 a year for each year of service as a director up to 25 years, but
not less than $1,200 for year; provided that, in determining the
retirement 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.
I, Carol A. McCoy, Secretary of Torchmark Corporation, do hereby certify
that the foregoing is a true and correct copy of a resolution adopted at a
meeting held on March 3, 1998 of the Board of Directors of said Company and that
said resolution is and remains in full force and unrevoked on the date hereof.
Dated this 23rd day of March, 1997.
/s/ Carol A. McCoy
---------------------------------
Secretary
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EXHIBIT 10.(f)
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.
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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;
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(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.
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(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
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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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<PAGE>
(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.
A-10
<PAGE>
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.
A-11
<PAGE>
(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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<PAGE>
(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.
A-13
<PAGE>
[LOGO OF TORCHMARK CORPORATION APPEARS HERE]
March 27, 1998
To the Stockholders of
Torchmark Corporation:
Torchmark's 1998 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
23, 1998.
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 1997.
Sincerely,
/s/ R.K. Richey
R. K. Richey
Chairman
/s/ C. B. Hudson
C. B. Hudson
Chief Operating Officer
<PAGE>
--------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1998
--------------------------------------------
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 23, 1998 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 the Torchmark Corporation 1998 Stock Incentive Plan.
(3) To consider the appointment of independent auditors.
(4) 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 Thursday, March 5, 1998 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 27, 1998
<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 23, 1998, and at any
adjournment of such meeting. R. K. Richey and C.B. Hudson 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 Waddell
& Reed Financial, Inc. 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, 1998 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, 1998, there were 140,286,468 shares of common capital
stock of the Company outstanding (not including 142,088,564 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, 1997.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES(1) CLASS
---------------- ------------------- ----------
<S> <C> <C>
AMVESCAP PLC 9,225,730 6.6%
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- --------
(1) All stock reported is held by holding companies (AVZ Inc., AIM Management
Group Inc., AMVESCAP Group Services, Inc., INVESCO, Inc. and INVESCO North
American Holdings, Inc.) and investment advisers (INVESCO Capital
Management, Inc. and INVESCO Funds Group, Inc.), which are subsidiaries of
AMVESCAP 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, 1998, upon the completion of the initial pubic
offering of Waddell & Reed Financial, Inc., Keith A. Tucker resigned as a
director of the Company. No one has been named by the Board of Directors to
serve for the remaining of Mr. Tucker's term and this director's position
currently remains vacant.
The Board of Directors proposes the election of Joseph M. Farley, C.B.
Hudson and Joseph L. Lanier, Jr. 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 2001 or until their successors are elected and qualified. The current
terms of office of Messrs. Farley, Hudson and Lanier expire in 1998. The term
of office of each of the other five 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 75th 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 such a director may be elected annually to additional
one year terms not to continue beyond the annual meeting of stockholders
following his 75th birthday. The Chairman of the Executive Committee serves at
the pleasure of the Board on an annual basis until the annual meeting
following his 75th 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 57) has been a director of the Company since April,
1996. His term expires in 2000. He is a director of Waddell & Reed, 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 70) has been a director of the Company since 1980. He
is director of Waddell & Reed. Principal occupation: Of Counsel at Balch &
Bingham, Attorneys and Counselors, Birmingham, Alabama since November, 1992.
2
<PAGE>
Louis T. Hagopian (age 72) has been a director of the Company since 1988.
His term expires in 2000. He is a director of Waddell & Reed. 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 52) has been a director since 1986. He is a director of
Vesta Insurance Group, Inc. Principal occupation: Chairman and Chief Executive
Officer of the Company since March, 1998; 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. (Chairman of Insurance Operations of the Company, January,
1993-March, 1998; President of Liberty, January, 1993-December, 1994).
Joseph L. Lanier, Jr. (age 66) has been a director of the Company since
1980. He is a director of Waddell & Reed, Dan River Incorporated, 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 69) has been a director since April, 1992. His term
expires in 2000. He is a director of Waddell & Reed. 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.,
Abbeyleix, Ireland, since February, 1996.
George J. Records (age 63) has been a director of the Company since April,
1993. His term expires in 1999. He is a director of Waddell & Reed. 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 71) 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., Waddell & Reed, 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 the Executive Committee of the Board
of Directors of the Company since March, 1998. (Chairman of Company, August,
1986-March, 1998 and Chief Executive Officer of the Company, December, 1984-
March, 1998).
- --------
(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. "Waddell & Reed" as used in this proxy
statement refers to Waddell & Reed Financial, Inc., in which the Company
owns an approximate 64% interest.
3
<PAGE>
PROPOSAL NUMBER 2
DESCRIPTION OF THE 1998 TMK INCENTIVE PLAN
On March 2, 1998, the Board of Directors of the Company adopted the
Torchmark Corporation 1998 Stock Incentive Plan (the "1998 TMK Incentive
Plan"), subject to approval by the stockholders of the Company. The 1998 TMK
Incentive Plan replaces the restated Torchmark Corporation 1987 Stock
Incentive Plan, the Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan, and the 1996 Torchmark Non-Employee Director Stock Option
Plan, each of which will be frozen as of the effective date of the 1998 TMK
Incentive Plan. The full text of the 1998 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 Exhibit 1. Unless otherwise defined,
capitalized terms used herein shall have the same meaning as set forth in the
1998 TMK Incentive Plan.
The following is a description of the 1998 TMK Incentive Plan as submitted
for stockholder approval. Shareholder approval of the Plan is being sought in
order to comply with the requirements of the New York Stock Exchange and the
Internal Revenue Code Section 162(m) performance based compensation
requirements to insure the Company receives the maximum Federal income tax
deduction.
The 1998 TMK Incentive Plan authorizes the Compensation Committee to grant
Stock Options, Stock Appreciation Rights, Restricted Stock and/or Deferred
Stock awards to officers, other key employees and consultants of the Company
and its Subsidiaries and Affiliates through April 23, 2008. Each Non-Employee
Director of the Company is automatically granted a Non-Employee Director Stock
Option for 6,000 shares on the first day of each calendar year on which the
Company's common stock is traded on the New York Stock Exchange. Non-Employee
Directors may from time to time be awarded, in the sole discretion of the
Board, nonformula-based Non-Employee Director Stock Options in such amounts
and upon such terms as are determined by the Board.
A maximum of 14,000,000 shares of common stock of the Company are available
for awards under the terms of the 1998 TMK Incentive Plan, subject to
adjustment for future stock splits, stock dividends, mergers, reorganizations
and similar events. However, no person shall be granted Stock Options and/or
Stock Appreciation Rights on more than 800,000 shares in any calendar year.
Options, awards and other grants under the 1998 TMK Incentive Plan that expire
unexercised or are forfeited are generally not counted against the maximum
shares authorization. Presently, all of the shares remain available for awards
pursuant to the 1998 TMK Incentive Plan. The closing price of Company common
stock on the New York Stock Exchange on March 5, 1998 was $45.50 per share.
The 1998 TMK Incentive Plan permits the granting of Incentive Stock Options
and nonqualified stock Options. However, Incentive Stock Options may only be
granted to employees of the Company and its Subsidiaries. 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 Non-Employee Director
Stock Options are nonqualified stock Options with a ten year and two day term.
Nonformula-based Non-Employee Director Stock Options are nonqualified Options
with the term specified by the Board at the time of grant. The exercise price
for any Stock Option and formula-based Non-Employee 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 nonformula-based Non-
Employee 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 Non-Employee Director
Stock Options (both formula-based and discretionary) may not be 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.
4
<PAGE>
All shares purchased upon the exercise of a Stock Option or either type of
Non-Employee 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 or the exercise and simultaneous
sale ("cashless exercise") of Stock Options and Non-Employee Director Stock
Options through a program operated in conjunction with local brokerages.
Stock Options, in the case of termination of employment or consulting status
by death or Normal Retirement, and Non-Employee Director Stock Options, in all
situations where Non-Employee Director status terminates, become immediately
exercisable upon the termination date and may thereafter be exercised during
the period that 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.
The Compensation Committee is authorized to grant Non-Qualified Stock
Options that may be transferred during the optionee's lifetime in limited
circumstances with the express written consent of the Compensation Committee.
For Stock Options granted to employees and consultants, 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 nonqualified 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 1998 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.
Stock Appreciation Rights ("SARs") may be granted in conjunction with Stock
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 other than Normal Retirement or death prior to the lapse or waiver of
the restrictions, the participant will forfeit the shares in exchange for the
amount, if any, that the participant paid for them.
Deferred stock awards may be made by the Compensation Committee under the
1998 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
5
<PAGE>
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 1998 TMK Incentive Plan also permits Eligible Executives and Non-
Employee Directors to defer compensation into an interest-bearing account,
subject to a one-time opportunity to convert that year's 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 six current Non-
Employee Directors, any subsequently elected Non-Employee Directors and
Eligible Executives will be eligible to participate in this aspect of the 1998
TMK Incentive Plan. Each year, the Chairman of the Board or the Compensation
Committee or other designee will designate the Eligible Executives.
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 1998 TMK Incentive
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. 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. 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.
The determination to defer, if made, shall be indicated upon a Primary
Election Form by Non-Employee Directors, which shall specify the percentage of
compensation deferred and the method for payment of the interest-bearing
account balance (a lump sum or up to 120 monthly payments) to the participant
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 the participant's death or (c) termination as a Non-
Employee Director or employee, for any reason other than by death.
At any time, but only once, during the calendar year immediately following
the end of the calendar year in which the Non-Employee Director filed 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 1998 deferring Annual Compensation to be earned in 1999, the
Non-Employee Director may elect at any time during 1999 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
Compensation 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.
6
<PAGE>
At any time, but only once, during the calendar year immediately following
the end of the calendar year with respect to which an Eligible Executive
deferred Salary into this plan, such Eligible Executive will have the right to
convert all of some of 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 period following the end of a calendar year with respect to which
an Eligible Executive has deferred Annual Bonus into the plan, such executive
shall have the right to convert all or some of 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 the balance of the
Interest Account to convert into Options, 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 Eligible 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 provisions relating to deferred compensation
will be Non-Qualified Stock Options. Based upon the participant'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 that the participant 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. 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 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, 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, normal retirement, a Change in Control of the
Company, as defined in the plan, or the unanimous decision of the Compensation
Committee to accelerate. Upon acceleration, an Option remains exercisable for
the remainder of its original term.
Deferred compensation 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
Compensation 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.
Deferred compensation options will not be assignable or transferable other
than by will or by the laws of descent and distribution; however, the
Compensation Committee may permit transfers that 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 participant 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 participant 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 participant recognizes income subject to any applicable
deductibility limitations of the Internal Revenue Code.
7
<PAGE>
The 1998 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 1998 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 1998 TMK Incentive Plan provides that (1) in the event of a Change of
Control, 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, (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 a Non-Employee 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 postmerger combined operations has
occurred, and (iii) the expiration of the stated term of such Stock Option or
Non-Employee Director Stock Option.
The Company will not be obligated to pay any amount that would be an Excess
Parachute Payment. If an Excess Parachute Payment would result from full
vesting upon a Change of Control or a Potential Change of Control, the Company
will reduce its payment to the minimum extent necessary to avoid an Excess
Parachute Payment. Subject to certain exceptions, the Company will pay the
participant a Gross-Up Payment if a court or an Internal Revenue Service
administrative hearing finally determines that any such payment (or portion
thereof) is an Excess Parachute Payment.
The table below reflects the options awarded in 1997 pursuant to the three
predecessor plans, the TMK Incentive Plan, the TMK Executive Deferral Plan and
the TMK Director Deferral Plan. No Stock Options have been awarded pursuant to
the proposed 1998 TMK Incentive Plan as of March 27, 1998. It is within the
sole discretion of the Compensation Committee whether Stock Options will be
granted to officers, consultants and key employees under this plan. It is
within the sole discretion of Non-Employee Directors and Eligible Executives
(if any executives have been so designated) whether to defer compensation and
convert such deferred compensation balances into Stock Options. Furthermore,
the Compensation Committee authorized a substantial restoration option program
in 1997 and may not determine to authorize comparable restoration option
programs in the future. Thus, the 1997 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 and Stock Options awarded in 1997 upon the
conversion of 1996 deferred compensation interest account balances of Eligible
Executives and Non-Employee Directors may not be indicative of future
decisions to defer compensation and the making of elections to convert any
such deferred compensation to Stock Options. Non-Employee Directors annually
receive formula-based Non-Employee Director Stock Options for a fixed number
of shares pursuant to the provisions of the 1998 TMK Incentive Plan. Such
formula-based Non-Employee Director Stock Options are reflective of the number
of shares to be awarded in the future years. No nonformula-based Non-Employee
Director Stock Options were awarded in 1997.
8
<PAGE>
TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
R. K. Richey......................................................... 627,962
Chairman and CEO
Keith A. Tucker...................................................... 386,892
Vice Chairman
C. B. Hudson......................................................... 476,936
Chairman & CEO of Liberty, Globe and United American
Henry J. Hermann..................................................... 124,600
Vice President and Chief Investment Officer of W&R Financial
Bernard Rapoport..................................................... 36,500
Chairman and CEO of American Income
Executive Group...................................................... 1,652,890
Non-Executive Director Group......................................... 358,172
Non-Executive Officer Employee Group................................. 1,474,200
</TABLE>
The Board recommends that stockholders vote FOR the adoption of the 1998 TMK
Incentive Plan.
9
<PAGE>
PROPOSAL NUMBER 3
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, 1998 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 C.B. Hudson will vote in
accordance with their judgment on such matters.
10
<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 during 1997, 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>
Keith A. Tucker............. 53 Vice Chairman of Company May, 1991-March 10,
1998.
Henry J. Herrmann........... 55 Vice President and Chief Investment Officer
of W&R Financial since April, 1993; Senior
Vice President and Chief Investment Officer
of Waddell & Reed since March, 1987;
President and Chief Investment Officer of
WRAMCO since September, 1987.
Bernard Rapoport............ 80 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"), Waddell & Reed
Asset Management Company ("WRAMCO") were wholly-owned subsidiaries of the
Company until March 10, 1998. American Income Life Insurance Company
("American Income") is a wholly-owned subsidiary of the Company.
11
<PAGE>
STOCK OWNERSHIP
The following table shows certain information about stock ownership of the
directors, director nominees and executive officers of the Company as of
December 31, 1997.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK
OR OPTIONS BENEFICIALLY
OWNED AS OF
DECEMBER 31, 1997(1)
-------------------------
NAME DIRECTLY(2) INDIRECTLY(3)
---- ----------- -------------
<S> <C> <C>
David L. Boren....................................... 3,300 0
Norman, OK
Joseph M. Farley..................................... 123,810 4,800
Birmingham, AL
Louis T. Hagopian.................................... 121,008 0
Darien, CT
C. B. Hudson......................................... 1,557,329 23,539
Plano, TX
Joseph L. Lanier, Jr. ............................... 118,517 18,912
Lanett, AL
Harold T. McCormick ................................. 25,127 7,200
Panama City, FL
George J. Records.................................... 30,727 0
Oklahoma City, OK
R. K. Richey......................................... 1,385,341 1,003,169
Birmingham, AL
Keith A. Tucker...................................... 547,549 68,231
Kansas City, MO
Henry J. Herrmann.................................... 228,400 0
Overland Park, KS
Bernard Rapoport..................................... 58,200 0
Waco, TX
All Directors, Nominees and Executive Officers as a
group:(4)............................................ 4,199,308 1,125,851
</TABLE>
- --------
(1) No directors, director nominees or executive officers other than R. K.
Richey (1.65%) and C.B. Hudson (1.09%) beneficially own 1% or more of the
common stock of the Company.
(2) Includes: for David L. Boren, 2,000 shares; for Joseph Farley, 54,400
shares; for Joseph Lanier, 65,417 shares; for Louis Hagopian, 70,408
shares; for Harold McCormick, 25,127 shares; for George Records, 21,027
shares; for R. K. Richey, 613,198 shares; for C. B. Hudson, 597,949
shares; for Keith Tucker, 404,749 shares; for Henry Herrmann, 166,100
shares; for Bernard Rapoport, 51,500 shares and for all directors,
executive officers and nominees as a group, 2,071,975 shares, that are
subject to presently exercisable Company stock options.
(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 11,539 Company shares, 23,848 Company shares, and 4,481 Company
shares held in the accounts of Messrs. Hudson, Richey, and Tucker,
respectively, in the Company or Waddell & Reed Savings and Investment
Plans.
Mr. Lanier disclaims beneficial ownership of 16,512 shares owned by his
spouse and 2,400 shares owned by his children. Mr. Farley disclaims 4,800
shares held as trustee of a church endowment fund.
(4) All directors, nominees and executive officers as a group, beneficially
own 3.68% of the common stock of the Company.
12
<PAGE>
During 1997, the Board of Directors met seven times. In 1997, 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
1997 of Messrs. Farley, Hagopian and McCormick; compensation, comprised in
1997 of Messrs. Farley, Lanier, Hagopian and Records; finance, comprised in
1997 of Messrs. Farley, Lanier, McCormick and Records; and nominating,
comprised in 1997 of Messrs. Boren, Farley, Hagopian, Lanier, McCormick and
Records
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 1997.
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 plans of the Company.
The compensation committee met three times in 1997.
The finance committee serves as the pricing committee in connection with
capital financing by the Company. The finance committee did not meet in 1997.
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 once in 1997.
13
<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(4) COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(2) ($) (3) (#) ($)(5)
------------------ ---- --------- ------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
R.K. Richey 1997 1,000,008 0 187,526 627,962 26,872
Chairman and CEO 1996 1,166,688 0 315,592 200,000 25,058
1995 1,166,688 500,000 181,716 300,000 24,401
Keith A. Tucker 1997 800,016 0 386,892 6,619
Vice Chairman(1) 1996 700,008 0 130,000 6,114
1995 700,008 350,000 200,000 6,062
C.B. Hudson 1997 800,000 400,000 476,936 5,806
Chairman and Chief 1996 650,000 185,000 130,000 5,442
Executive Officer of 1995 650,000 250,000 200,000 5,412
Liberty, Globe and
United American
Henry J. Herrmann 1997 420,000 715,000 124,600 4,800
Vice President and 1996 420,000 392,000 36,000 4,500
Chief Investment 1995 320,000 357,000 44,000 4,500
Officer of W&R Financial
Bernard Rapoport 1997 525,000 100,000 10,351 36,500 9,600
Chairman and CEO of 1996 480,000 115,000 9,405 80,000 9,000
American Income 1995 480,000 175,269 7,695 40,000 9,000
</TABLE>
- --------
(1) At year end 1997, Mr. Tucker held 48,000 restricted shares valued at
$2,025,000 (based on a year end closing price of $42.1875 per share).
Restrictions on the 120,000 share award made pursuant to the Capital
Accumulation and Bonus Plan expire over a ten year period and 12,000
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. Mr. Tucker's restricted stock has been adjusted to
reflect the 100% stock dividend effected as a stock split in August, 1997.
(2) 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"). Messrs. Richey, Tucker and Herrmann elected to defer
$1,000,000, $400,000 and $100,000, respectively, of their 1997 bonuses to
the TMK Executive Deferral Plan.
(3) Includes perquisites for Mr. Richey--$121,102 in each of 1997 and 1996 as
premium equivalent for group term life insurance; $89,265 as additional
premiums paid for group term life insurance in 1995; and $57,728 in 1996
for 1996, $57,728 in 1996 for 1997 and $57,728 for 1995 as premiums for
personal life insurance. Includes for Mr. Rapoport--$10,351, $9,405 and
$7,695 paid to him from the American Income Life Insurance Company Exempt
Employees 401K Profit Sharing Plan ("American Income Profit Sharing Plan")
in 1997, 1996 and 1995, respectively.
(4) 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. In
1996, Messrs. Richey, Tucker, Hudson, Herrmann and Rapoport received stock
option grants of 200,000, 130,000, 130,000, 36,000 and 80,000 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 314,162, 163,492 and 76,936 shares, respectively. In
1997, Messrs. Richey, Tucker, Hudson, Herrmann and Rapoport elected to
participate in a program under the TMK Incentive Plan whereby they
exercised existing stock options and received restoration options for
14
<PAGE>
313,800 shares, 223,400 shares, 399,900 shares, 124,600 shares and 11,500
shares, respectively. Mr. Rapoport also was awarded options pursuant to the
TMK Incentive Plan on an additional 25,000 shares in 1997. Mr. Hudson also
was awarded options on 100 additional shares in 1997 and on 99,900 shares
on January 2, 1998 under the TMK Incentive Plan. All shares reflected as
securities underlying options in 1996 and 1995 have been adjusted to
reflect the 100% stock dividend effected as a stock split in August 1997.
(5) 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 $4,800.00 in 1997 and $4,500.00 in
1996 and 1995. Includes in 1997, 1996 and 1995, 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 $21,951.86, $20,557.75 and $19,901.08, for Mr. Tucker of
$1,723.24, $1,613.82 and $1,562.26 and for Mr. Hudson of $1,006.00,
$942.11 and $912.03, respectively. Includes in 1997 for Messrs. Richey and
Tucker, interest on deferred compensation in the Restated Deferred
Compensation Plan for Directors, Advisory Directors, Directors Emeritus,
and Officers, as amended, of $120.00 and $96.00, respectively. Includes
for Mr. Herrmann, employer company contributions to the Savings and
Investment Plan, a funded, qualified defined contribution plan, of
$4,800.00 in 1996 and of $4,500 in 1996 and 1995. Includes for Mr.
Rapoport, employer company contributions to the American Income Profit
Sharing Plan, a funded, qualified defined contribution plan, of $9,600.00
in 1997 and $9,000.00 in 1996 and 1995, respectively.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ---------------------------------------------------------------------- -----------------------------------
NUMBER OF
SECURITIES % OF EXERCISE
UNDERLYING TOTAL OPTIONS OR
OPTIONS GRANTED TO BASE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
(A) (B) (C) (2) (D) (E) 0% ($) (F) (G)
- ----------------------- ---------- ------------- --------- ---------- ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
All Company Common
Shareholders(3) N/A N/A N/A N/A 0 3,722,011,521 9,432,299,643
R.K. Richey 314,162 56.65% 25.875 1-31-08 0 5,112,251 12,955,436
313,800 11.04% 39.125 9-27-07 0 7,721,211 19,567,048
CEO gain on 1997 grants
as % of All Company
Common Shareholders
gain N/A N/A N/A N/A N/A 34.5% 34.5%
Keith A. Tucker 163,492 29.48% 25.875 1-31-08 0 2,660,449 6,742,095
223,400 7.86% 39.125 9-27-07 0 5,496,872 13,930,142
C.B. Hudson 76,936 13.87% 25.875 1-31-08 0 1,251,953 3,172,692
399,900 14.07% 39.125 9-27-07 0 9,839,746 24,935,827
100 .004% 38.875 12-26-07 0 2,448 6,196
Henry J. Herrmann 124,600 4.38% 39.125 9-27-07 0 3,065,847 7,769,452
Bernard Rapoport 11,500 .40% 39.125 9-27-07 0 282,963 717,084
25,000 .88% 38.875 12-26-07 0 611,207 1,548,918
</TABLE>
- --------
(1) Options expiring 1-31-08 are non-qualified stock options acquired pursuant
to elections to convert 1996 interest bearing deferred compensation
accounts in the TMK Executive Deferral Plan to options in Company common
stock. These options are granted with an eleven year term, an exercise
price equal to the closing price of Company common stock on the date of
the conversion election (the grant date) and vest 1/10 per year commencing
on the first anniversary of the grant date. Options expiring 9-27-07 are
non-qualified stock options granted in a restoration option program under
the TMK Incentive Plan with a ten year and two day term at an exercise
price equal to the closing price of Company common stock on the grant
date. As restoration options issued in connection with the exercise of
fully vested options, they are fully exercisable as of their 9-25-97 grant
date. Options expiring 12-26-07 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. Such options 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.
15
<PAGE>
(2) Percentages shown for Messrs. Richey, Tucker and Hudson are shown
separately for grants under the TMK Executive Deferral Plan (314,162
shares, 163,492 shares and 76,936 shares, respectively) and for grants
under the TMK Incentive Plan (313,800 shares, 223,400 shares and totaling
400,000 shares, respectively. Messrs Herrmann and Rapoport only received
grants pursuant to the TMK Incentive Plan.
(3) Calculated based upon 140,286,468 publicly-held Torchmark common shares
outstanding as of December 31, 1997 (excluding treasury shares and stock
held by subsidiaries which is treated as treasury stock) and the December
31, 1997 stock price of $42.1875.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- -----------------------------------------------------------------------------------------------------
(C) (D) (E)
(B) VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
(A) SHARES ACQUIRED REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME ON EXERCISE (#)(1) ($) OPTIONS AT FY-END (#) AT FY-END ($)
----- ------------------ ---------- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richey, R.K. 524,460 11,571,332 581,782 664,162 6,575,846 11,662,278
Tucker, Keith A. 357,224 7,068,164 388,400 393,492 4,371,350 6,967,588
Hudson, C.B. 774,132 19,235,630 590,256 307,036 5,164,107 5,555,974
Herrmann, Henry J. 198,200 4,204,512 166,100 58,000 1,323,744 1,074,250
Rapoport, Bernard 20,000 442,500 51,500 125,000 948,969 1,877,813
</TABLE>
- --------
(1) Of the shares shown as acquired on exercise, Messrs. Richey, Tucker,
Hudson, Herrman, and Rapoport retained 166,400, 106,500, 289,900, 57,000
and 6,700 shares, respectively, after cashless option exercises.
PENSION PLANS
Torchmark Corporation Pension Plan; Waddell & Reed 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 Waddell & Reed
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
$160,000 (as adjusted). Earnings for purposes of the Waddell & Reed 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 $160,000 per year (as adjusted).
Benefits under the Torchmark Pension Plan and the Waddell & Reed 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 1997,
covered compensation was $160,000 for Messrs. Richey, Tucker, and Hudson under
the Torchmark Pension Plan and for Mr. Herrmann under the Waddell & Reed
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 34 years, 23 years and six years of
credited service under the Torchmark Pension Plan, respectively. Mr. Herrmann
is covered under the Waddell & Reed Retirement Income Plan and has 24 years of
credited service thereunder. Mr. Rapoport is not covered by any pension plan.
16
<PAGE>
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 Waddell & Reed 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
1997 to $125,000 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 three years less of credited
service under the Supplemental Retirement Plan than under the Torchmark
Pension Plan.
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 1997 to $125,000 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
17
<PAGE>
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 is automatically awarded annually non-qualified
stock options on 6,000 shares of Company common stock on the first day of
each calendar year in which stock is traded on the New York Stock Exchange.
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.
Commencing with 1997 retainer and meeting and committee fees (assuming
attendance at all scheduled meetings), Outside Directors may annually elect
to make deferrals of such compensation for the following year 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 1997, Messrs. Hagopian, Lanier,
McCormick, and Records chose to make such deferrals of 1998 compensation,
which were converted into options on 10,319, 9,751, 11,114, and 9,721
shares, respectively, in 1998.
(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.
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 1997 of $125,699.
In 1997, the Company paid Cavendish Services, Ltd. $252,317 for services
relating to foreign currency trading and data services. Director Harold
McCormick holds a limited partnership interest in Cavendish Services, Ltd.
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, 1997, 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 James L. Sedgwick filed Form 3 after its due date and Mark S.
McAndrew, Michael K. Fagin, Spencer H. Stone and Carol A. McCoy reported on
Form 5 share balances in Company employee benefit plans inadvertently omitted
from Forms 3 of 5,069 shares, 263 shares, 1,241 shares and 59 shares,
respectively.
18
<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, to grant stock options
pursuant to the 1987 TMK Incentive Plan and to determine senior executives
eligible to participate in the TMK Executive Deferral 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 1997, the
Committee utilized an unaffiliated executive compensation consultant from KPMG
Peat Marwick LLP to review certain of its executive compensation policies and
practices. The Committee met on several occasions in 1997 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.
19
<PAGE>
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
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
1997, for the five most highly compensated executive officers, the options
granted were in proportion to current compensation adjusted by a subjective
factor ranging from 6% to 63%.
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.
DEFERRED COMPENSATION OPTION PROGRAM
The Company implemented, upon receiving shareholder approval in 1997, a
executive deferred compensation stock option plan. Pursuant to their authority
under this plan, the Committee designated Messrs. Richey, Tucker and Hudson
eligible to participate in the plan in 1997. The plan permits eligible
executives to defer salary and/or bonus on an annual basis into an interest-
bearing account and subsequently on a one time basis within a limited time
period to elect to convert all or a portion of their deferred compensation
into Company stock options granted at Market Value or at a discount not to
exceed 25%.
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 15 times, at over $5.9 billion, and the number of outstanding
shares has been reduced by 38%. The market price per share of Company stock
has increased 24.7 times since 1980. Cash dividends during the same period
increased at a 10.9% compound growth rate and the market capitalization of the
Company has compounded at 17.4%.
The Committee, in determining Mr. Richey's bonus for 1997, focused primarily
on operating 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.
In 1997, there was 18% growth in operating earnings per share resulting in
an earnings per share bonus component of 50% 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. The
Committee thus awarded him a bonus of $1,000,000 for 1997.
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.
20
<PAGE>
Mr. Richey's base salary and any stock option award to him 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.
Any stock options awarded to Mr. Richey are 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, any stock option award to him maybe indirectly impacted by measures
of corporate performance.
In 1997, all directors and active employees of the Company and its
subsidiaries who held of exercisable Company stock options were offered the
opportunity to participate in a program where such options were exercised and
the optionee received Company shares and a restoration option. Mr. Richey
participated in this program and received such a restoration option.
In 1996, Mr. Richey elected to defer all of his 1996 bonus into the TMK
Executive Deferral Plan. In 1997, Mr. Richey elected to convert his entire
interest account balance in that plan into Company stock options granted at
market value. In 1997, Mr. Richey also elected to defer all of any 1997 bonus
he received into the TMK Executive Deferral Plan.
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.
Mr. Tucker's 1997 bonus compensation was 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 1997 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 20% of 1997 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 10% in 1997 entitling him to a
maximum formula bonus of 50% of base salary or $400,000, which was the bonus
granted to Mr. Tucker by the Committee.
Insurance operating income before administrative expense for 1997 in Mr.
Hudson's areas of supervision grew 6% resulting in a bonus of 30% of base
salary or $240,000. A discretionary bonus of 20% of base salary was granted to
Mr. Hudson by the Committee, resulting in a total bonus of $400,000 for 1997.
Mr. Herrmann is the Chief Investment Officer of the Waddell & Reed group of
companies. Mr. Herrmann's bonus is based on meeting earnings and asset
retention targets set by the Committee. In 1997, Mr. Herrmann's bonus was
$815,000.
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
21
<PAGE>
increased 30.5% from $312 million in 1994 to $407 million in 1997. Operating
income at the non-insurance subsidiaries rose from $92 million in 1994 to $121
million in 1997, an increase of 31.8%. Insurance operating income comprised
83.4%, 76.9% and 79.8% of the Company's pre-tax earnings for 1995, 1996 and
1997, respectively, while operating income at the non-insurance subsidiaries
was 25.9%, 22.2% and 23.7%, 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. Excluding Mr. Richey, cash compensation paid to the other persons
listed in the Summary Compensation Table on page 14 as a group increased 28%
from 1996 to 1997, because of salary increases to Messrs. Tucker and Rapoport
and bonus increases to Messrs. Hudson and Herrmann.
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 32% and rose
from $274 million in 1994 to $362 million in 1997.
George J. Records, Chairman
Joseph M. Farley
Louis T. Hagopian
Joseph L. Lanier, Jr.
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.
22
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG TORCHMARK CORPORATION, THE S&P 500 INDEX
AND THE S&P INSURANCE (LIFE/HEALTH) INDEX
[GRAPH APPEARS HERE]
TORCHMARK CORPORATION S&P 500 S&P INSURANCE (LIFE/HEALTH)
12/92 $100 $100 $100
12/93 80 110 101
12/94 64 112 84
12/95 85 153 121
12/96 98 189 147
12/97 167 252 184
*$100 INVESTED ON 12/31/92 IN STOCK OR INDEX-INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
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, 1992 in each of Torchmark stock and the
two indices with all dividends being reinvested.
Information for graph produced by Research Data Group.
23
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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 1999, the proposal must be received by the Company at its home
office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before
November 25, 1998.
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 1997, 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,
1997 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
/s/ Carol A. McCoy
Carol A. McCoy
Associate Counsel & Secretary
March 27, 1998
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TORCHMARK CORPORATION
1998 STOCK INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Torchmark Corporation 1998 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, consultants
and directors who contribute to the Company's success by their ability,
ingenuity and industry, and to enable such employees, consultants and
directors to participate in the long-term success and growth of the Company
through an equity interest in the Company. This Plan replaces the Company's
prior stock plans: The Restated Torchmark Corporation 1987 Stock Incentive
Plan, The Torchmark Corporation 1996 Executive Deferred Compensation Stock
Option Plan, and the 1996 Torchmark Corporation Non-Employee Director Stock
Option Plan (the "Prior Plans"), which have been frozen as of the effective
date of this Plan. Options, stock appreciation rights, restricted stock, or
other stock rights granted under the Prior Plans before the effective date of
this Plan shall continue to be governed by the terms of the Prior Plans,
except to the extent specifically provided otherwise hereinafter, but no
additional options, stock appreciation rights, restricted stock, or other
stock rights shall be granted under the Prior Plans after the effective date
of this Plan.
For purposes of the Plan, the following terms shall be defined as set forth
below:
"Affiliate" means (i) 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,
and (ii) the Company's former Subsidiary, Waddell & Reed Financial, Inc., at
such time as it ceases to be a Subsidiary.
"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.
"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.
"Bonus Deferral Election Date" means the date established by the Plan as the
date by which an Eligible Executive 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.
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"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 Stock is
traded is open for business.
"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.
"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
(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 thereof through the purchase of assets, by merger, or otherwise.
"Code" means the Internal Revenue Code of 1986, as amended, or any successor
thereto.
"Commission" means the Securities and Exchange Commission.
"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.
"Company" means Torchmark Corporation, a corporation organized under the
laws of the State of Delaware (or any successor corporation).
"Covered Employee" means an individual who the Committee determines is, or
is expected to be as of the relevant date for determining the Company's tax
deduction, a covered employee as defined in Section 162(m)(3) of the Internal
Revenue Code of 1986, as amended, with respect to the Company.
"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.
"Director Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 6 or 10.
"Election Date" means the date by which a Non-Employee Director must submit
a valid Primary Election Form to the Plan Administrator in order to
participate under Section 10 of 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.
"Eligible Executive" means an executive officer of the Company or any of its
Subsidiaries or 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,
to be eligible for Executive Deferred Compensation Stock Options pursuant to
Section 10 below.
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<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any successor thereto.
"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.
"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.
"Immediate Family" means the children, grandchildren or spouse of any
Optionee.
"Interest Account" means the Interest Account for Bonus and/or the Interest
Account for Salary or the Interest Account for Annual Compensation, 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 Eligible Executive 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 Annual Compensation" means the account established by
the Company for each Non-Employee Director 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 Plan
Administrator).
"Interest Account for Salary" means the account established by the Company
for each Eligible Executive 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).
"Non-Employee Director" means a director of the Company who is not an
employee of the Company or of any Subsidiary or Affiliate (as determined by
the Committee).
"Non-Qualified Stock Option" means any Stock Option that is not an Incentive
Stock Option.
"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 tax-qualified company pension plan.
"Option Grant Date" means the date upon which a Stock Option is granted to
an Eligible Executive pursuant to Article 6.
"Optionee" means a director, consultant, officer or key employee to whom a
Stock Option has been granted or, in the event of such individual's death
prior to the expiration of a Stock Option, such individual's Beneficiary.
"Participant" means any director, consultant, officer or key employee who
has been awarded a Stock Option, Restricted Stock, Stock Appreciation Right,
or Deferred Stock Right under the Plan.
"Plan" means this 1998 Stock Incentive Plan.
"Plan Administrator" means one or more agents to whom the Committee shall
have delegated administrative duties under the Plan.
"Primary Election Form" means a Primary Election Form for Salary and/or a
Primary Election Form for Bonus, or a form, substantially in the form attached
hereto as Exhibit E, pursuant to which a Non-Employee Director elects to defer
Annual Compensation under the Plan 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.
"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.
3
<PAGE>
"Restricted Stock" means an award of shares of Stock that are subject to
restrictions under Section 8.
"Salary" means the salary payable by the Company to an Eligible Executive
for services to the Company, any of its Subsidiaries 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 an Eligible Executive 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, or a form, substantially in the form
attached hereto as Exhibit F, pursuant to which a Non-Employee Director elects
to convert previously deferred compensation to Options pursuant to Section 10
of the Plan, 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 10(m) 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 10(m) of
the Plan.
"Stock Option Award Notice" means a written award notice to an Eligible
Executive or a Non-Employee Director from the Company evidencing an Option.
"Stock" means the Common Stock of the Company.
"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.
"Stock Option" or "Option" means any option to purchase shares of Stock
granted pursuant to Section 5, 6 or 10.
"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. 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
persons, 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 consultants, 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;
4
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(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;
(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 granted pursuant to Section 6(a)), 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, any vesting
acceleration features based on performance and/or such other factors as the
Committee may determine, in its sole discretion, reload features,
transferability features, and other features not inconsistent with the
Plan;
(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 discretionary 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 construe and 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.
The Committee may delegate administrative duties under the Plan to one or
more agents as it shall deem necessary or advisable. 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.
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 14,000,000, which may consist, in whole or in part, of
authorized and unissued shares or treasury shares.
In the event of any sale of assets, merger, reorganization, consolidation,
recapitalization, Stock dividend, or other change in corporate structure
affecting the Stock, an equitable 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
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 Non-Employee 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. 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, other key employees and consultants of the Company, its
Subsidiaries or its Affiliates (but, except as provided in Sections 6 and 10,
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.
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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 person shall be granted Stock Options and/or Stock
Appreciation Rights on more than 800,000 shares in any calendar year.
(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 Non-Employee Director Stock Options pursuant to Sections 6 and 10 of
the Plan.
(c) Consultants who provide services to the Company, a Subsidiary or an
Affiliate are eligible to receive Non-Qualified Stock Options pursuant to
Section 5 of the Plan.
SECTION 5. STOCK OPTIONS.
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 only be granted to employees of the Company or a Subsidiary. 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 14, 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.
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(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
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.
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 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 Normal 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.
In the event of termination of employment by reason of Normal 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.
(h) Termination for Cause. Notwithstanding Section 5(g), if the Optionee's
employment or consulting relationship with the Company, any Subsidiary and any
Affiliate is terminated for Cause, or the Committee determines that the
Optionee has engaged in conduct that would be grounds for termination with
Cause, the Stock Option shall immediately be forfeited to the Company upon the
giving of notice of termination of employment or on the event constituting
Cause.
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(i) Committee Discretion. Notwithstanding the other provisions of this
Section 5 to the contrary, upon the request of an Optionee whose employment
has terminated or is expected to terminate in the near future, the Committee
may, in its sole and absolute discretion, agree to allow the Optionee's Stock
Option to terminate on a date following the date that it would otherwise
terminate pursuant to the provisions of this Section 5.
(j) Other Termination. If the Optionee's employment or consulting
relationship with the Company, any Subsidiary and any Affiliate is terminated
for any reason other than what is specified in Section 5(f), 5(g) or (5(h)
(including, without limitation, early retirement, voluntary termination,
termination without Cause, or for any other reason), the Stock Option shall
immediately be forfeited to the Company upon such termination of employment.
(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, 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 14, in which case Stock Options which exceed such
$100,000 limit shall be treated as Non-Qualified Stock Options. For this
purpose, options granted earliest shall be applied first to the $100,000
limit. In the event that only a portion of the options granted at the same
time can be applied to the $100,000 limit, the Company shall issue separate
share certificates for such number of shares as does not exceed the $100,000
limit, and shall designate such shares as ISO stock in its share transfer
records.
SECTION 6. NON-EMPLOYEE DIRECTOR STOCK OPTIONS.
Non-Employee Director Stock Options granted under the Plan shall be Non-
Qualified Stock Options. Such Non-Employee Director Stock Options may be
granted pursuant to the pre-established formula contained herein 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.
Non-Employee 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, 6,000 Non-
Employee 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 a Non-
Employee Director.
The option price per share of Stock purchasable under such Non-Employee
Director Stock Option shall be 100% of the Fair Market Value of the Stock on
the date of the grant of the Option. Except as provided in Section 14, said
Non-Employee Director Stock Options 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 Non-Employee Director
Stock Option is granted.
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(b) Non-Formula Based Options. Within its sole discretion, the entire Board
may award Non-Employee Director Stock Options on a non-formula basis to all or
such individual Non-Employee Directors as it shall select. Such Non-Employee
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 Non-Employee 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 Non-Employee 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 14 and
in paragraph (e) of this section, no such Option shall be first exercisable
until six months from the date of grant. All other terms and conditions of
such Non-Employee Director Stock Options shall be as established by the Board
in its sole discretion.
(c) Method of Exercise. Any Non-Employee 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 Non-Employee 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 a
Non-Employee 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 Non-Employee Director Stock Options or the first
anniversary of the Optionee's death, whichever is later. Notwithstanding the
foregoing sentence, if the Optionee's status as an Non-Employee 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
14 of this Plan, the Non-Employee 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 Non-Employee Director Stock Option.
(f) Deferred Compensation Stock Options. Non-Employee Directors are also
eligible to elect Deferred Compensation Stock Options pursuant to Section 10
below.
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 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.
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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
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 14 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 14 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 14 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.
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(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 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 1998 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 other than
Normal Retirement or death 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. EXECUTIVE AND NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION STOCK
OPTIONS.
(a) 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 under
this Section 10 of 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. In addition, each Non-Employee
Director is automatically eligible to participate under this Section 10 of the
Plan. A Non-Employee Director may participate under this Section 10 of 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. 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 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 the appropriate type of Primary
Election Form and deferred the receipt of his or her Annual Bonus and/or
Salary, or Annual Compensation, in the case of a Non-Employee Director.
(b) 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 Stock Options in accordance with Subsection (m) below.
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(c) [Reserved]
(d) 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 Stock
Options in accordance with the terms of the Plan. 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 and/or by conversion to
Stock Options in accordance with the terms of the Plan. For bookkeeping
purposes, the amount of the Annual Compensation, Annual Bonus and/or Salary
which Participant 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 Stock Options, if applicable,
pursuant to subsection (m) below.
(e) 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 or amount 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. 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 or amount of Annual
Compensation to be deferred, and (2) the form and timing of payout of deferred
amounts.
(f) 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 Stock 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 1998
Interest Account for Bonus, a 1998 Interest Account for Salary, a 1999
Interest Account for Bonus, a 1999 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.
(g) Responsibility for Investment Choices. Each Participant is solely
responsible for any decision to defer Annual Bonus and/or Salary or Annual
Compensation into his or her Interest Account or convert Annual Bonus and/or
Salary or Annual Compensation to Stock 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.
(h) Form of Payment.
(i) 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 or Non-Employee Director
of the Company or any of its Subsidiaries or Affiliates, other than by reason
of death.
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(ii) 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 or about 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
Participant 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 Subsection (f) above. 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) 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.
(vii) 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 or about the first Business Day of the fourth
month following the Participant's death.
(i) 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.
(j) 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:
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(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.
(k) 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.
(l) 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.
(m) Election to Receive Stock Options. Each Eligible Executive or Non-
Employee Director shall be granted Stock Options subject to the following
terms and conditions:
(i) Stock 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 Stock Options pursuant to this Article 10.
To make such election, the Participant must file with the Plan Administrator a
written irrevocable Secondary Election Form for Salary to receive Stock
Options as of the date of the filing of such Secondary Election Form (the
"Option Grant Date").
(ii) Stock 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 Stock Options pursuant to this
Article 10. To make such election, the Participant must file with the Plan
Administrator a written irrevocable Secondary Election Form for Bonus to
receive Stock Options as of the date of the filing of such Secondary Election
Form (the "Option Grant Date").
(iii) Stock Options Converted from Annual Compensation. At any time, but
only one time, during the calendar year immediately following the filing of a
Primary Election Form, a Non-Employee Director shall have the right to convert
into Stock Options the then-current balance (as of the date of such election
to receive Stock 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 1998 to defer Annual Compensation to be earned in
1999, the director may elect at any time in 1999 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").
(iv) Exercise Price of Stock Options. The exercise price per Share under
each Stock Option granted pursuant to this Article 10 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 Stock Options to be granted at each Exercise Price, which choice may
affect the number of Stock Options to be received pursuant to this Section
10(m).
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(n) Number and Terms of Options. The number of Shares subject to a Stock
Option granted pursuant to this Article 10 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 Stock Options; and
B = the per share value of a Stock Option on the Option Grant Date, as
determined by the Committee using any 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 a Stock 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.
(o) Exercise of Stock Options. Each Stock 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 Stock
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, retirement or other
termination of employment shall not shorten the term of any outstanding Stock
Option. In no event shall the period of time over which the Stock 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. A Stock 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 a Stock 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 Stock Option or portion thereof being exercised.
(p) 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 Optionee obtaining Normal Retirement Age, (iii) the
occurrence of a Change in Control, or (iv) the unanimous determination by the
Committee that a particular Stock Option or Options shall become fully
exercisable. Upon acceleration, an Option will remain exercisable for the
remainder of its original term.
(q) Stock Option Award Notice. Each Stock Option granted under this Section
10 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 Stock Option, (b) the exercise price per Share of the Option and the
means of payment therefor, (c) the term of the Stock Option, and (d) such
other terms and conditions not inconsistent with the Plan as may be determined
from time to time by the Committee.
(r) Transferability of Options. No Stock Option granted under this Section
10 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 Stock Options.
SECTION 11. 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.
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SECTION 12. 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, stock
exchange listing requirements, or other regulatory requirements.
The Committee may amend the terms of any award or option (other than
Director Stock Options granted pursuant to Section 6(a)) 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.
SECTION 13. 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 14. 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:
(a) In the event of a "Change of Control," 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:
(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) 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.
17
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(b) [Reserved]
(c) For purposes of paragraph (a) of this Section, 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; 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, "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 15. LIMITATIONS ON PAYMENTS.
(a) Notwithstanding Section 14 above or any other provision of this Plan or
any other agreement, arrangement or plan, in no event shall the Company pay or
be obligated to pay any Plan Participant an amount which would be an Excess
Parachute Payment except as provided in Section 15(f) below and except as the
Committee specifically provides otherwise in the Participant's grant
agreement. For purposes of this Plan, the term "Excess Parachute Payment"
shall mean any payment or any portion thereof which would be an "excess
parachute payment" within the meaning of Section 280G(b)(1) of the Code, and
would result in the imposition of an excise tax under Section 4999 of the
Code, in the opinion of tax counsel selected by the Company, ("Tax Counsel").
In the event it is determined that an Excess Parachute Payment would result if
the full acceleration of vesting and exercisability provided in Section 14
above were made (when added to any other payments or benefits contingent on a
change of control under any other agreement, arrangement or plan), the
payments due under Section 14(a) shall be reduced to the minimum extent
necessary to prevent an Excess Parachute Payment; then, if necessary to
prevent an Excess Parachute Payment, benefits or payments under any other
plan, agreement or arrangement shall be reduced. If it is established pursuant
to a final determination of a court or an Internal Revenue Service
administrative appeals proceeding that, notwithstanding the good faith of the
Participant and the Company in applying the terms of this Section 15(a), a
payment (or portion thereof) made is an Excess Parachute Payment, then, the
Company shall pay to the Participant an additional amount in cash (a "Gross-Up
Payment") equal to the amount necessary to cause the amount of the aggregate
after-tax compensation and benefits received by the Participant hereunder
(after payment of the excise tax under Section 4999 of the Code with respect
to any Excess Parachute Payment, and any state and federal income taxes with
respect to the Gross-Up Payment) to be equal to the aggregate after-tax
compensation and benefits he or she would have received as if Sections 280G
and 4999 of the Code had not been enacted.
(b) Subject to the provisions of Section 15(c), the amount of any Gross-Up
Payment and the assumptions to be utilized in arriving at such amount, shall
be determined by a nationally recognized certified public accounting firm
designated by the Company (the "Accounting Firm"). All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up
Payment, as determined pursuant to Section 15(a), shall be paid by the Company
to the participant within five (5) days after the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be
binding upon the Company and participant.
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<PAGE>
(c) Participant shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
Company of a Gross-Up Payment. Such notification shall be given no later than
ten (10) business days after Participant is informed in writing of such claim
and shall apprise the Company of the nature of the claim and the date of
requested payment. Participant shall not pay the claim prior to the expiration
of the thirty (30) day period following the date on which it gives notice to
the Company. If the Company notifies Participant in writing prior to the
expiration of the period that it desires to contest such claim, Participant
shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney selected by the Company and reasonably acceptable to
participant;
(iii) cooperate with the Company in good faith in order to effectively
contest such claim; and
(iv) permit the Company to participate in any proceedings relating to such
claim.
Without limitation on the foregoing provisions of this Section 15(c), the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct Participant
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Participant agrees to prosecute such contest to a
determination before any administration tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold Participant
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of the
contest; provided, further, that if the Company directs Participant to pay any
claim and sue for a refund, the Company shall advance the amount of the
payment to Participant, on an interest-free basis, and shall indemnify and
hold Participant harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto) imposed with
respect to the advance or with respect to any imputed income with respect to
the advance.
(d) In the event that the Company exhausts its remedies pursuant to Section
15(c) and Participant thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the Gross-Up Payment
required and such payment shall be promptly paid by the Company to or for the
benefit of Participant.
(e) If, after the receipt of Participant of an amount advanced by the
Company pursuant to Section 15(c), Participant becomes entitled to receive any
refund with respect to such claim, Participant shall promptly after receiving
such refund pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by Participant of an amount advanced by the Company pursuant to
Section 15(c), a determination is made that Participant shall not be entitled
to any refund with respect to such claim and the Company does not notify
Participant in writing of its intent to contest such denial of refund prior to
the expiration of thirty (30) days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
(f) Notwithstanding the foregoing, the limitation set forth in Section 15(a)
shall not apply to a Participant if in the opinion of Tax Counsel or the
Accounting Firm (i) the total amounts payable to the Participant hereunder and
under any other agreement, arrangement or plan as a result of a change of
control (calculated without regard to the limitation of Section 15(a)),
reduced by the amount of excise tax imposed on the Participant under Code
Section 4999 with respect to all such amounts and reduced by the state and
federal income taxes on amounts paid in excess of the limitation set forth in
Section 15(a), would exceed (ii) such total amounts payable after application
of the limitation of Section 15(a). No Gross-Up Payment shall be made in such
case.
19
<PAGE>
SECTION 16. 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 consultant, employee or director of the Company, any
Subsidiary or any Affiliate, any right to continued employment (or, in the
case of a consultant or director, continued retention as a consultant or
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 14 hereof and to such other terms and conditions as the Committee
may specify at the time of grant.
(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.
(f) 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.
(g) 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.
(h) Titles are provided herein for convenience only and are not to serve as
a basis for interpretation or construction of the Plan.
20
<PAGE>
(i) 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.
SECTION 17. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is approved by a majority vote of
the Company's stockholders.
SECTION 18. 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 23, 2008, but awards theretofore granted may extend beyond that
date.
21
<PAGE>
EXHIBIT A
PRIMARY ELECTION FORM FOR SALARY
FOR THE [SECOND QUARTER OF 1998]
ELECTION TO DEFER SALARY PURSUANT TO SECTION 10 OF THE
TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1998 Stock Incentive 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 , 1998.
---------------------------------------
(Name)
<PAGE>
EXHIBIT B
PRIMARY ELECTION FORM FOR BONUS
FOR [CALENDAR YEAR 1998]
ELECTION TO DEFER BONUS PURSUANT TO THE
TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
Section 10 of the Torchmark Corporation 1998 Stock Incentive 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 , 1998.
---------------------------------------
(Name)
<PAGE>
EXHIBIT C
SECONDARY ELECTION FORM FOR SALARY
[FOR CALENDAR YEAR 1998]
ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE
TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1998 Stock Incentive 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 , 1999.
---------------------------------------
(Name)
<PAGE>
EXHIBIT D
SECONDARY ELECTION FORM FOR BONUS
[FOR CALENDAR YEAR 1998]
ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE
TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1998 Stock Incentive 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 , 1999.
---------------------------------------
(Name)
<PAGE>
EXHIBIT E
PRIMARY ELECTION FORM
[FOR CALENDAR YEAR 1998]
ELECTION TO DEFER NON-EMPLOYEE DIRECTOR COMPENSATION PURSUANT TO
SECTION 10 OF THE TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1998 Stock Incentive 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, 1998.
---------------------------------------
(Name)
<PAGE>
EXHIBIT F
SECONDARY ELECTION FORM
[FOR CALENDAR YEAR 1998]
ELECTION BY NON-EMPLOYEE DIRECTOR TO RECEIVE STOCK OPTIONS PURSUANT TO
SECTION 10 OF THE TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN
The following constitutes the irrevocable election of the undersigned under
the Torchmark Corporation 1998 Stock Incentive 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 , 1999.
----------------------------------------
(Name)
<PAGE>
TORCHMARK CORPORATION
PROXY/DIRECTION CARD FOR ANNUAL MEETING ON APRIL 23, 1998
P THIS PROXY/DIRECTION IS SOLICITED BY THE BOARD OF DIRECTORS OF THE
COMPANY. The undersigned hereby appoints R. K. Richey and C. B. Hudson,
R jointly and sev-erally with full power of substitution, to vote all
shares of common stock which the undersigned holds of record and is
O entitled to vote at the Annual Meeting of Shareholders to be held at
the offices of the Company, 2001 Third Avenue South, Birmingham,
X Alabama on the 23rd day of April 1998 at 10:00 a.m. (CDT), or any
adjournment thereof. All shares votable by the undersigned in-cluding
Y 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), Waddell & Reed
Financial, Inc. Savings and In-vestment Plan (WRTP), 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: (change of address/comments)
Joseph M. Farley, C. B. Hudson and
Joseph L. Lanier, Jr.
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
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>
[ X ] Please mark your 4937
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 AND 3.
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [_] [_] 2. Approval of 1998 [_] [_] [_]
Directors Incentive Plan
FOR AGAINST ABSTAIN
3. Approval of Auditors [_] [_] [_]
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------
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 23(a)(b)(c)(d)(e) and (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 February 2, 1998, except for Note 16 which is as of February 20,
1998 and Note 6 which is as of March 5, 1998, relating to the consolidated
balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1997
and 1996, 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, 1997, which report appears in the December 31,
1997 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.
KPMG Peat Marwick LLP
Birmingham, Alabama
March 27, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ David L. Boren
--------------------
David L. Boren, Director
Date: 3-2-98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ Joseph M. Farley
--------------------
Joseph M. Farley, Director
Date: March 2, 1998
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ Louis T. Hagopian
---------------------
Louis T. Hagopian, Director
Date: 3-2-98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer and Director of Torchmark Corporation does
hereby constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ C.B. Hudson
--------------------
C. B. Hudson, Chairman-Insurance
Operations and Director (Principal
Financial Officer) Chief Executive
Officer
Date: 3-2-98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ Joseph L. Lanier, Jr.
-------------------------
Joseph L. Lanier, Jr., Director
Date: 3-2-98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ Harold T. McCormick
----------------------
Harold T. McCormick, Director
Date: 3 March 1998
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ George J. Records
----------------------
George J. Records, Director
Date: 2 Mar '98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer and Director of Torchmark Corporation does
hereby constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ R. K. Richey
--------------------
R. K. Richey, Director, Chairman
and Chief Executive Officer
Date: 3-2-98
--------------
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchinson, 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 Security 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
foregoing, the powers granted include the power and authority to execute and
file the Form 10-K, any and all amendments to the part of or in conjunction with
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 in his name.
/s/ Gary L. Coleman
--------------------
Gary L. Coleman, Vice President
& Chief Accounting Officer
Date: 3-2-98
--------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 5,859,668
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,404
<MORTGAGE> 78,974
<REAL-ESTATE> 167,297
<TOTAL-INVEST> 6,538,408
<CASH> 25,766
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,588,119
<TOTAL-ASSETS> 10,967,291
<POLICY-LOSSES> 5,023,763
<UNEARNED-PREMIUMS> 83,722
<POLICY-OTHER> 228,754
<POLICY-HOLDER-FUNDS> 82,224
<NOTES-PAYABLE> 911,450
193,199
0
<COMMON> 143,220
<OTHER-SE> 1,789,516
<TOTAL-LIABILITY-AND-EQUITY> 10,967,291
1,678,004
<INVESTMENT-INCOME> 433,617
<INVESTMENT-GAINS> (36,979)
<OTHER-INCOME> 207,808
<BENEFITS> 1,108,900
<UNDERWRITING-AMORTIZATION> 224,738
<UNDERWRITING-OTHER> 439,418
<INCOME-PRETAX> 509,394
<INCOME-TAX> 178,490
<INCOME-CONTINUING> 337,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337,743
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.39
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
