<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, 1999 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 CLASS: CUSIP NUMBER:
8 1/4% Senior Debentures due 2009 891027 AE 4
7 7/8% Notes due 2023 891027 AF 1
7 3/8% Notes due 2013 891027 AG 9
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 $2,571,835,000
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 29, 2000: 129,808,697
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 2000,
PART III
INDEX OF EXHIBITS (PAGES 83 through 85)
TOTAL NUMBER OF PAGES INCLUDED ARE 92
<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. ("Waddell & Reed")
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 ("Family
Service") was purchased in July, 1990, and American Income Life Insurance
Company ("American Income") was purchased in November, 1994. Torchmark
disposed of Family Service and Waddell & Reed during 1998.
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 supplemental health Direct response, television,
Accident insurance 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 1,902 full-time sales repre-
Exclusive Agency Insurance Company supplemental health insurance. sentatives; 108 district
Birmingham, Alabama offices in the Southeastern
U.S.
- ------------------------------------------------------------------------------------------------------------------
American Income American Income Life Individual life and supplemental health 1,197 agents in the U.S.,
Exclusive Agency Insurance Company insurance to union and credit Canada, and New Zealand.
Waco, Texas union members and other
associations.
- ------------------------------------------------------------------------------------------------------------------
United Investors United Investors Life Individual life insurance 2,611 Waddell & Reed
Agency Insurance Company and annuities. representatives; indepen-
Birmingham, Alabama dent agents; 212 offices
nationwide.
- ------------------------------------------------------------------------------------------------------------------
Military Liberty National Life Individual life insurance Independent Agency
Insurance Company through career agents
Birmingham, Alabama nationwide.
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
- ------------------------------------------------------------------------------------------------------------------
United American United American Senior life and supplemental health 42,600 independent agents
Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and
and Exclusive Agency McKinney, Texas Medicare Supplement Canada; 2,354 exclusive
coverage and long-term care. agents in 78 branch offices.
</TABLE>
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 19--Business 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
-------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Whole life:
Traditional............ $119,799 $115,154 $114,934 $ 612,964 $ 575,888 $ 551,047
Interest-sensitive..... 18,348 17,131 14,981 168,805 162,046 163,058
Term.................... 115,592 108,469 94,943 330,533 306,785 270,905
Other................... 3,468 3,713 5,521 18,307 17,928 22,369
-------- -------- -------- ---------- ---------- ----------
$257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379
======== ======== ======== ========== ========== ==========
</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 distribution method:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct response.... $ 96,091 $ 93,500 $ 79,412 $ 283,406 $ 260,320 $ 232,535
Exclusive Agents:
Liberty National.. 51,467 45,532 43,335 307,495 298,082 298,698
American Income... 54,045 53,576 55,245 231,490 216,291 203,475
United American... 5,315 5,481 6,562 21,800 21,390 20,978
Independent Agents:
Military.......... 17,110 16,891 15,781 111,318 98,902 86,209
United American... 13,319 9,401 15,225 43,394 41,078 42,725
United Investors.. 15,616 15,386 10,261 105,523 99,775 88,842
Other............. 4,244 4,700 4,558 26,183 26,809 33,917
-------- -------- -------- ---------- ---------- ----------
$257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379
======== ======== ======== ========== ========== ==========
</TABLE>
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, 1999 was $245 million and the average
interest rate earned on these loans was 6.8% in 1999. Interest income earned
on policy loans was $16.3 million in 1999, $15.3 million in 1998, and $14.4
million in 1997. There were 200 thousand and 198 thousand policy loans
outstanding at year-end 1999 and 1998, 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 17.0% in 1999,
17.0% in 1998, and 16.5% in 1997.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
<TABLE>
<CAPTION>
(Amounts in thousands)
1999 1998 1997
---------------------- ---------------------- ----------------------
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,.. 9,622 $ 96,339,059 9,630 $ 91,869,995 9,392 $ 86,948,151
New issues.............. 1,332 22,846,100 1,452 21,448,243 1,441 20,267,520
Business acquired....... -0- -0- -0- -0- -0- -0-
Other increases......... -0- 105,271 1 75,849 1 96,788
Death benefits.......... (105) (327,733) (107) (323,393) (110) (307,752)
Lapses.................. (1,023) (15,352,225) (1,006) (14,589,649) (895) (13,358,973)
Surrenders.............. (145) (1,505,248) (151) (1,438,085) (149) (1,383,373)
Other decreases......... (27) (258,763) (197) (703,901) (50) (392,366)
------ ------------ ------ ------------ ----- ------------
In force at December
31,.................... 9,654 $101,846,461 9,622 $ 96,339,059 9,630 $ 91,869,995
====== ============ ====== ============ ===== ============
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,690 $ 6,688 $ 6,725
Other.................. 12,146 11,411 10,689
</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 sent
directly to the Torchmark insurers by Medicare.
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, 1999 by marketing method:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct response........... $ 4,323 $ 3,884 $ 3,001 $ 12,785 $ 9,617 $ 7,248
Exclusive agents:
Liberty National......... 9,859 11,124 11,541 149,447 143,668 138,179
American Income.......... 8,039 9,138 10,052 46,691 44,300 43,552
United American.......... 102,583 64,245 39,616 231,034 172,927 141,780
Independent agents:
United American.......... 68,022 50,508 42,643 444,401 426,351 431,293
-------- -------- -------- -------- -------- --------
$192,826 $138,899 $106,853 $884,358 $796,863 $762,052
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1999 by product category:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Medicare Supplement...... $152,518 $102,421 $ 65,161 $630,915 $553,737 $522,054
Cancer................... 10,637 10,248 10,757 153,777 144,900 137,640
Other health related
policies................ 29,671 26,230 30,935 99,666 98,226 102,358
-------- -------- -------- -------- -------- --------
$192,826 $138,899 $106,853 $884,358 $796,863 $762,052
</TABLE>
The number of individual health policies in force were 1.09 million, 1.09
million and 1.16 million at December 31, 1999, 1998, and 1997, respectively.
3
<PAGE>
Annuities
Annuity products offered by Torchmark insurance subsidiaries 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 Waddell & Reed 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 excluding Family Service:
<TABLE>
<CAPTION>
(Amounts in thousands)
Collections (Amounts in millions)
For the year ended Deposit Balance
December 31, At December 31,
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed annuities........... $ 71,696 $ 64,687 $ 76,930 $ 677.5 $ 647.3 $ 611.0
Variable annuities........ 392,769 299,005 247,446 3,274.9 2,343.5 1,821.2
-------- -------- -------- -------- -------- --------
$464,465 $363,692 $324,376 $3,952.4 $2,990.8 $2,432.2
======== ======== ======== ======== ======== ========
</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 92% of total
investments at December 31, 1999. Approximately 9% 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. Approximately 79% 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--Investments 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, 1999 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................................................ $1,038,734 18.3%
AA................................................. 484,439 8.5
A.................................................. 2,690,891 47.5
BBB................................................ 1,113,956 19.6
BB................................................. 251,400 4.4
B.................................................. 13,279 0.2
Less than B........................................ 766 0.0
Not rated.......................................... 86,330 1.5
---------- -----
$5,679,795 100.0%
========== =====
</TABLE>
4
<PAGE>
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 1999 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*... $4,251,595 76.3%
2. High quality....... 1,038,060 18.6
3. Medium quality..... 236,016 4.2
4. Low quality........ 47,828 0.9
5. Lower quality...... 1,997 0.0
6. In or near default. 0 0.0
---------- -----
$5,575,496 100.0%
========== =====
</TABLE>
* Includes $463 million of exempt securities or 8.3% of the portfolio. Exempt
securities are exempt for valuation reserve purposes, and consist of U.S.
Government guaranteed securities.
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 $200,000 through age 35. 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 18--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 premiums to be received
in the future 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 9--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,
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 1,902 agents sell 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 1,197 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.
United American offers life and health insurance targeted to various special
markets through 2,354 United American exclusive agents in 78 branch offices
throughout the United States.
The Waddell & Reed sales force, consisting of 2,611 sales representatives,
markets the life insurance products, fixed annuities, and variable annuities
of United Investors Life. This sales force continues to market Torchmark's
insurance products subsequent to the spin-off of Waddell & Reed under a
general agents' contract.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through approximately 42,600 independent agents,
brokers, and licensed sales representatives.
6
<PAGE>
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.
Various Torchmark insurance subsidiaries distribute life insurance through a
nationwide independent agency whose sales force is comprised of former
commissioned and noncommissioned military officers who sell exclusively to
commissioned and noncommissioned 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.
Competition
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales efforts. In addition to competition with other insurance companies,
Torchmark faces competition from other financial services organizations. While
there are insurance companies competing with Torchmark, no individual company
dominates 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 underwriting 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 the direct response business are
a valuable asset in designing direct response products.
7
<PAGE>
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: American Income as of December 31, 1995; Globe,
as of December 31, 1997; 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 1998 and 1997.
<TABLE>
<CAPTION>
Usual Reported
Company Ratio Name Range Value
- --------- ---------------------------------------------- --------- --------
<S> <C> <C> <C>
1998:
American Income Nonadmitted to Admitted Assets 0 to 10 10
Globe Life and Accident Net change in Capital and Surplus 50 to -10 -10
Gross change in Capital and Surplus 50 to -10 60
1997:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 199
American Income Nonadmitted to Admitted Assets 0 to 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 1997 was the result of its ownership of other
Torchmark insurance companies and the ownership of 81% of the stock of Waddell
& Reed. Liberty disposed of its investment in Waddell & Reed during 1998 in
connection with Torchmark's spin-off of that company to its shareholders. All
intercompany investment is eliminated in consolidation, and the internal
organizational structure has no bearing on Torchmark's consolidated financial
condition or results. Furthermore, this intercompany investment did not affect
Liberty's ability to do business.
Nonadmitted 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 10% in 1998 and 11% in 1997 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 recognized as
assets in Torchmark's consolidated financial statements. A significant amount
of these balances was sold to an unaffiliated financial institution during
1999.
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 or
equal to minus 10% and greater than or equal to 50% to be unusual. Globe's
ratio of 60% in 1998 was caused by the establishment of American Income as a
subsidiary of Globe.
8
<PAGE>
Previously, American Income was a direct subsidiary of Torchmark. This
transaction did not affect the consolidated equity of Torchmark at December
31, 1998. Also, this transaction did not affect Globe's ability to do
business.
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.
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.
Personnel
At the end of 1999, Torchmark had 1,915 employees and 2,345 licensed
employees under sales contracts. Additionally, approximately 49,000
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. Approximately 160,000 square
feet of this building is available for lease to unrelated tenants by Liberty.
Liberty also operates from 58 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).
Globe owns a 300,000 square foot office building at 204 N. 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. Globe also
owns an 80,000 square foot office building at 120 Robert S. Kerr Avenue,
Oklahoma City, which is available for lease. Further, Globe owns a 112,000
square foot facility located at 133 NW 122 Street in Oklahoma City which
houses the Direct Response operation.
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.
Liberty and Globe also lease district office space for their agency sales
personnel.
9
<PAGE>
During 1999, Torchmark sold the majority of its investment real estate
holdings for total consideration of $123 million. These sold investments
included its TMK Income Properties limited partnership and its joint venture
investment in Liberty Park, a planned community in Birmingham, Alabama. As of
December 31, 1999, Torchmark retained $16 million of investment real estate,
which included $8 million of properties that were partially occupied by
Torchmark subsidiaries, $7 million of undeveloped land in Liberty Park, and $1
million of undeveloped land in north Texas.
Information Technology Computing Equipment
Torchmark, and its primary subsidiaries, have significant information
technology capabilities at their disposal. The corporation uses centralized
mainframe computer systems, company-specific local-area networks,
workstations, and personal computers to meet its ongoing information
processing requirements. Torchmark and its primary subsidiaries also use data
communications hardware and software to support their remote data
communications networks, intranets, and internet-related telecommunications
capabilities.
Torchmark's computer hardware, data communications equipment, and associated
software programs are managed by information technology staff. All of the
corporation's computer hardware and software support, information processing
schedules, and computer-readable data-management requirements are met through
company-specific policies and procedures. These company-specific policies and
procedures also provide for the off-site storage and retention of backup
computer software, financial, and business data files.
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.
In 1999, Alabama enacted legislation limiting punitive damages in non-physical
injury cases to the greater of $500,000 or three times compensatory damages.
Since this legislation has not undergone scrutiny by appellate courts
regarding its constitutionality and a jury's discretion regarding the amount
of compensatory damages (including mental anguish) awarded in any given case
is not precisely defined, the effect of this legislation on Torchmark's
litigation remains unclear. Thus, the likelihood or extent of a punitive
damage award in any given case is currently impossible to predict. As of
December 31, 1999, Liberty was a party to approximately 135 active lawsuits
(including 17 employment related cases and excluding interpleaders and stayed
cases), 126 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
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.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a
10
<PAGE>
motion to decertify the presently defined class in Smith. On March 23, 1999,
the District Court granted defendants' motion to decertify the Smith class in
part and decertified all but the ERISA claims of a more narrowly defined Smith
class. In May 1999, the defendants filed motions to dismiss the claims
certified by the Court's March 23, 1999 order. On December 14, 1999, the
District Court granted defendants' motion for summary judgment. That Court
denied a motion for reconsideration on January 21, 2000.
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 the certification of a
state class of Georgia policyholders. Discovery then proceeded 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. On June 17, 1998, the U.S. District Court entered an order which
denied the plaintiffs' motion to certify a Georgia policyholders class, denied
reconsideration of the previously entered motion for summary judgment on
certain issues, denied reconsideration of the denial of national certification
of a class of policyholders and severed and transferred claims of Mississippi
policyholders to the U.S. District Court for the Northern District of
Mississippi (Greco v. Torchmark Corporation, Case No. 1:98CV196-D-D). The U.S.
District Court granted defendants' motion for summary judgment on all
remaining issues in Crichlow on February 4, 1999. Plaintiffs in Greco then
moved to certify a class of persons purchasing Globe hospital and surgical
insurance policies in Mississippi. On February 1, 1999, defendants filed a
motion for summary judgment in Greco.
Defendants' motion for summary judgment on all remaining issues in Crichlow
was granted by the District Court on February 4, 1999. The Crichlow plaintiffs
have appealed and Crichlow defendants have cross-appealed various orders of
the District Court to the United States Court of Appeals for the Eleventh
Circuit.
On October 29, 1999, the District Court dismissed all of the plaintiffs'
claims in Greco in their entirety and entered a final judgment dismissing
Greco with prejudice. This October 29, 1999 order in Greco has been appealed
by plaintiffs to the Fifth Circuit Court of Appeals.
As previously reported, Liberty has been a party to two lawsuits alleging
that a class of persons were insured under Liberty 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
Gentry case was dismissed by the St. Clair County Circuit Court on June 16,
1998 and subsequently the Harris case was amended to add former plaintiff
Gentry as an additional class representative in that case. On December 28,
1999, the Jefferson County Circuit Court entered an order in Harris granting
summary judgment for Liberty on all plaintiffs' claims except unjust
enrichment. The only remaining claim in the Harris plaintiffs' motion for
class certification, one of unjust enrichment, was denied by the Circuit Court
in an order denying the motion for class certification entered February 10,
2000.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al (Case No. CV-70-H-752-S), class action litigation involving
Liberty, a class composed of all owners of funeral homes in Alabama and a
class composed of all insureds (Alabama residents only) under burial or vault
policies issued, assumed or reinsured by Liberty. The final judgment fixed the
rights and obligations of Liberty and the funeral directors authorized to
handle Liberty burial and vault policies as well as reforming the benefits
available to the policyholders under the policies. Although class actions are
inherently subject to subsequent collateral attack by absent class members,
the Battle decree remains in effect to date. A motion filed in February 1990
to challenge the final judgment under Federal Rule of Civil Procedure 60(b)
was rejected by both the District Court in 1991 and the Eleventh Circuit Court
of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme
Court in 1993.
11
<PAGE>
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. All parties made extensive
submissions to the District Court and a hearing on the opposing petitions was
held by the District Court on February 9, 1999. On March 8, 1999, the District
Court entered an order granting Liberty's petition to enforce the obligations
of contract funeral directors under their funeral service contracts and
denying the funeral directors' petition for review of the Battle Final
Judgment and alternative relief. On July 29, 1999, the funeral director class
filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking
to have the March 8, 1999 order vacated on the merits. Liberty filed a joint
motion in the Eleventh Circuit Court seeking remand to the District Court for
purposes of appointment of class counsel for burial policyholders, who are
currently not formally represented in these preceedings. The Circuit Court
issued an order denying Liberty's joint motion on September 15, 1999 and the
funeral director class' appeal remains pending. On January 24, 2000, Liberty
and the funeral director class filed a joint motion for remand in order to
allow the District Court to evaluate a proposed settlement of the funeral
directors' appeal.
On October 28, 1999, Liberty was served with a subpoena from the Florida
Department of Insurance in connection with that Department's investigation
into Liberty's sales practices and disclosures in the State of Florida
regarding industrial life insurance and low coverage life insurance policies.
Subsequently, on December 8, 1999, purported class action litigation was filed
against Liberty in the United States District Court for the Northern District
of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-
BU-3262-S), on behalf of all African-Americans who have or have had at the
time of policy termination an ownership interest in certain life insurance
policies ($25,000 face amount or less) marketed by Liberty and certain of its
former subsidiaries. Plaintiffs allege racial discrimination in Liberty's
premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in
sales and administrative practices, receipt of excessive and unreasonable
premium payments by Liberty, improper hiring, supervision, retention and
failure to monitor actions of officers, agents and employees, breach of
contract in dismantling the debit premium collection system, fraudulent
inducement and negligent misrepresentation. Unspecified compensatory and
punitive damages are sought together with a declaratory judgment and equitable
and/or injunctive relief, including establishment of a constructive trust for
the benefit of class members. Defendants filed a motion for judgment on the
pleadings or in the alternative for summary judgment on January 27, 2000.
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 1999.
12
<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 6,378 shareholders of record on December 31,
1999, excluding shareholder accounts held in nominee form. On November 6,
1998, Torchmark distributed its approximately 64% ownership of Waddell & Reed
to its shareholders at a ratio of .3018 Waddell & Reed shares to one share of
Torchmark. All market prices and dividends per share have been adjusted to
reflect the Waddell & Reed distribution. 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 16--Shareholders' Equity in
the Notes to the Consolidated Financial Statements. The market prices and cash
dividends paid by calendar quarter for the past two years are as follows:
<TABLE>
<CAPTION>
1999
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
<S> <C> <C> <C>
1 $36.6250 $30.6875 $ .0900
2 37.1875 31.2500 .0900
3 36.1250 24.6250 .0900
4 35.9375 25.5625 .0900
</TABLE>
Year-end closing
price.................$29.0625
<TABLE>
<CAPTION>
1998
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
<S> <C> <C> <C>
1 $41.2813 $33.0156 $ .1500
2 43.0000 34.5781 .1500
3 40.7344 30.5313 .1500
4 40.2500 27.4688 .1300
</TABLE>
Year-end closing
price.................$35.3125
13
<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>
1999 1998 1997 1996 1995
Year ended December 31, ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Premium revenue:
Life................... $ 1,018,301 $ 959,766 $ 909,992 $ 854,897 $ 772,257
Health................. 824,816 759,910 739,485 732,618 750,588
Other ................. 40,969 33,954 28,527 22,404 23,438
Total................. 1,884,086 1,753,630 1,678,004 1,609,919 1,546,283
Net investment income... 447,337 459,558 429,116 399,551 377,338
Realized investment
gains (losses)......... (110,971) (57,637) (36,979) 5,830 (14,323)
Total revenue........... 2,226,895 2,157,876 2,071,103 2,016,416 1,910,454
Net operating income(1). 341,167 324,315 273,730 240,637 219,864
Net income from
continuing operations.. 258,930 255,776 260,429 252,815 217,958
Net income.............. 273,956 244,441 337,743 311,372 143,235
Annualized premium
issued:
Life................... 257,207 244,467 230,379 214,741 217,988
Health................. 192,826 138,899 106,853 100,981 103,491
Total................. 450,033 383,366 337,232 315,722 321,479
Per common share:
Basic earnings:
Net operating
income(1)............ 2.56 2.32 1.97 1.69 1.54
Net income from
continuing
operations........... 1.95 1.83 1.87 1.78 1.52
Net income............ 2.06 1.75 2.43 2.19 1.00
Diluted earnings:
Net operating
income(1)............ 2.55 2.29 1.94 1.67 1.52
Net income from
continuing
operations........... 1.93 1.81 1.84 1.76 1.51
Net income............ 2.04 1.73 2.39 2.17 0.99
Cash dividends paid.... 0.36 0.58 0.59 0.58 0.57
Return on average common
equity, excluding
effect of SFAS 115,
Vesta earnings,
discontinued
operations, and
nonrecurring charge.... 16.2% 15.1% 18.2% 18.4% 18.3%
Basic average shares
outstanding............ 133,197 139,999 139,202 142,460 143,188
Diluted average shares
outstanding............ 133,986 141,352 141,431 143,783 144,228
- -------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
As of December 31, ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash and invested
assets................. $ 6,202,251 $ 6,417,511 $ 6,473,096 $5,863,163 $5,724,180
Total assets............ 12,131,664 11,249,028 11,127,648 9,893,964 9,445,623
Short-term debt......... 418,394 355,392 347,152 40,910 189,372
Long-term debt.......... 371,555 383,422 564,298 791,880 791,988
Shareholders' equity.... 1,993,337 2,259,528 1,932,736 1,629,343 1,588,952
Per common share (2)... 15.10 16.51 13.80 11.69 11.09
Per common share
excluding effect of
SFAS 115.............. 16.32 15.43 12.90 11.42 10.16
Annualized premium in
force:
Life................... 1,130,609 1,062,647(3) 1,007,379 946,525 869,366
Health................. 884,358 796,863 762,052 748,153 759,059
Total................. 2,014,967 1,859,510(3) 1,769,431 1,694,678 1,628,425
</TABLE>
- -------------------------------------------------------------------------------
(1) Net income from continuing operations, excluding realized investment gains
(losses), the related adjustment to deferred acquisition costs, equity in
Vesta earnings for periods prior to 1999, a one-time gain on the sale of
equipment, and the nonrecurring charge.
(2) Computed after deduction of preferred shareholders' equity.
(3) Annualized life premium in force excludes $5.3 million representing the
Family Service business sold in 1998.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statements. 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.
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:
1) Deteriorating general economic conditions leading to increased lapses
and/or decreased sales of Torchmark's policies;
2) Changes in governmental regulations (particularly those impacting
taxes and changes to the federal Medicare program that would affect
Medicare Supplement insurance);
3) Financial markets trends that adversely affect sales of Torchmark's
market-sensitive products;
4) Increased pricing competition;
5) Adverse levels of mortality, morbidity, and utilization of healthcare
services relative to Torchmark's assumptions;
6) The inability of Torchmark to obtain timely and appropriate premium
rate increases;
7) Adverse regulatory developments;
8) Interest rate changes that adversely affect product sales and/or
investment portfolio yield;
9) Adverse litigation results;
10) Developments involving Vesta Insurance Group, Inc., ("Vesta")
described more fully elsewhere in this document under the caption
"Transactions involving Vesta Insurance Group" on page of this report;
11) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies; and
12) The customer response to new products and marketing initiatives.
Readers are also directed to consider other risks and uncertainties described
in other documents filed by Torchmark with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with the Selected
Financial Data and Torchmark's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report.
15
<PAGE>
RESULTS OF OPERATIONS
The following is a discussion of Torchmark's operations for the three years
ended December 31, 1999. In the analysis and comparison of Torchmark's
operating results with 1998 and 1997, two divestitures that occurred in 1998
should be taken into account:
a) the divestiture of Waddell & Reed
b) the sale of Family Service
Divestiture of Waddell & Reed. In March, 1998, Waddell & Reed, Torchmark's
asset management subsidiary, completed an initial public offering of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. (See the discussion on Investments on page
28, Liquidity on page 32, and Capital Resources on page 32 of this report.)
The initial public offering resulted in a $426 million gain which was added to
Torchmark's additional paid-in capital. Torchmark retained the remaining 64%
of the Waddell & Reed stock.
On November 6, 1998, Torchmark distributed its remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expenses related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of
a segment. Accordingly, Torchmark's financial statements for 1998 and all
prior periods were modified to present the net assets and operating results of
Waddell & Reed as discontinued operations of the disposed segment. The $54
million expense of the spin-off is included in discontinued operations under
the caption "Loss on Disposal." The distribution of the Waddell & Reed shares
resulted in a reduction in Torchmark's shareholders' equity in the approximate
amount of $174 million, consisting of the equity in Waddell & Reed, net of the
36% minority interest.
Torchmark's share of Waddell & Reed's earnings for 1998 was $48 million
after reduction for the minority interest during the period subsequent to the
initial public offering but before the spin-off. This compares with $77
million for 1997, when Torchmark owned 100% of Waddell & Reed for the entire
period.
Sale of Family Service. On June 1, 1998, Torchmark sold Family Service to an
unaffiliated insurance carrier. Family Service, which was acquired in 1990, is
a preneed funeral insurer but has not issued any new policies since 1995.
Consideration for the sale was $140 million in cash. Torchmark recorded a
pretax realized loss on the sale of approximately $14 million, but incurred a
tax expense on the transaction of $9 million for a total after-tax loss of $23
million. In connection with the sale, Torchmark agreed to continue to service
the policies in force of Family Service for five years from the sale date for
a fee of $2 million per year plus certain variable processing costs. During
1997, Family Service accounted for $57 million in revenues and $7.7 million in
pretax income. Through May, 1998, Family Service contributed $25 million in
revenues and $5.8 million in pretax income. Invested assets were $778 million
and total assets were $828 million at the date of the sale.
Summary of Operating Results. Torchmark's management computes a
classification of income called "net operating income." Net operating income
is the measure of income Torchmark's management focuses on to evaluate the
performance of the operations of the company. It differs from net income as
reported in the financial statements in that it excludes unusual and
nonrecurring income or loss items which distort operating trends. It also
excludes discontinued operations.
16
<PAGE>
The following items were excluded from net income as reported in Torchmark's
financial statements in order to compute net operating income:
1) Realized investment gains and losses and the related adjustment to
deferred acquisition costs, net of tax;
2) Net income or loss from the discontinued operations of Waddell & Reed,
including the $54 million nonrecurring expenses of the spin-off;
3) Torchmark's pro rata share of the income or losses related to Vesta;
4) The nonrecurring loss from the redemption by Torchmark of its debt in
the second quarter of 1998 in the amount of $5 million net of tax;
5) A one-time gain on the sale of equipment (included in other income) in
the after-tax amount of $3.3 million; and
6) The effect of a change in accounting principle which modified the
accounting for an interest rate swap instrument, increasing net income
in the after-tax amount of $16.1 million.
Additionally, in 1999, Torchmark entered into a life insurance marketing
arrangement with a third party, discussed more fully under the caption Life
Insurance on page 20 of this report. This agreement contained certain cash
guarantees to the third party which would not be recoverable by Torchmark
based on test marketing results. Accordingly, Torchmark recorded a
nonrecurring after-tax operating charge of $13 million, or $.10 per diluted
share in 1999. Because this was an unusual one-time charge, net operating
income has been presented before the charge for comparability.
A reconciliation of net operating income to net income on a per diluted
share basis is as follows:
Reconciliation of Per Share Net Operating
Income to Reported Net Income*
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net operating income before nonrecurring charge........ $2.55 $2.29 $1.94
Nonrecurring charge.................................... (.10) -- --
----- ----- -----
Net operating income.................................. 2.45 2.29 1.94
Realized investment losses, net of tax................. (.54) (.36) (.17)
Gain on sale of equipment, net of tax.................. .02 -- --
Equity in Vesta earnings (losses), net of tax.......... -- (.12) .07
Discontinued operations of Waddell & Reed, net of tax.. (.01) (.04) .55
Loss on redemption of debt, net of tax................. -- (.04) --
Change in accounting principle, net of tax............. .12 -- --
----- ----- -----
Net income............................................ $2.04 $1.73 $2.39
===== ===== =====
</TABLE>
- --------
* Diluted share basis
Realized investment losses in 1999 in the after-tax amount of $72 million
included a $41 million after- tax loss from the sale of real estate and a $19
million after-tax loss from the sale of fixed maturities, which are discussed
on page 29 of this report under the caption Investments. Realized losses in
1999 also included a $12 million after-tax loss from the reduction in value of
Torchmark's interest rate swap relating to its MIPS, as discussed under the
caption Capital Resources on page 32 of this report.
Realized investment losses in 1998, which were $51 million net of tax,
included a $23 million after-tax loss from the sale of Family Service, a $24
million after-tax loss on the writedown of Torchmark's Vesta holdings, and a
$3 million after-tax loss from the sale of a portion of the Vesta holdings.
Losses in 1997, in the after-tax amount of $24 million, were primarily a
result of intentional sales of fixed-maturity investments at a loss to offset
current and prior-year taxable gains.
The Vesta transactions are discussed on page 35 and the redemption of
Torchmark debt is discussed under the caption Capital Resources on page 32 of
this report. The change in accounting principle is discussed in Note 15--
Change in Accounting Principle to the Consolidated Financial Statements on
page 64 of this report.
17
<PAGE>
Torchmark reports earnings per share data as basic and diluted. Basic
earnings per share are based on average shares outstanding during the period.
Diluted earnings per share assume the exercise of Torchmark's employee stock
options for which the exercise price was lower than the market price during
the year and their impact on shares outstanding. Diluted earnings per share
differ from basic earnings per share in that they are influenced by changes in
the market price of Torchmark stock and the number of options as well as the
number of shares outstanding. Unless otherwise indicated, all references to
per share data in this report are on the basis of diluted shares.
A comparison of Torchmark's basic and diluted earnings per share is as
follows:
Earnings and Earnings Per Share
(Dollar amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net operating income before nonrecurring charge:
Amount.......................................... $341,167 $324,315 $273,730
Per Share:
Basic........................................... 2.56 2.32 1.97
Diluted......................................... 2.55 2.29 1.94
Net operating income:
Amount.......................................... 327,744 324,315 273,730
Per Share:
Basic........................................... 2.46 2.32 1.97
Diluted......................................... 2.45 2.29 1.94
Net income:
Amount.......................................... 273,956 244,441 337,743
Per Share:
Basic........................................... 2.06 1.75 2.43
Diluted......................................... 2.04 1.73 2.39
</TABLE>
Torchmark's revenues were $2.23 billion in 1999, an increase of 3% over 1998
revenues of $2.16 billion. Revenues rose 4% in 1998 over 1997 revenues of
$2.07 million. After adjustment for realized investment gains and losses in
each year, revenues grew 5% in 1999 from $2.22 billion in 1998 to $2.33
billion. They also rose 5% in 1998 over the prior year. Total premium rose
$130 million, or 7%, to $1.88 billion in 1999. Total premium increased 5% in
1998 to $1.75 billion. Life insurance premium rose 6% in 1999 to $1.02
billion, an increase of $59 million. Health premium in 1999 rose 9%, an
increase of $65 million to $825 million. Net investment income declined $12
million, or 3%, in 1999 due primarily to the sale of Family Service. Life
premium increased 5% to $960 million and health premium grew 3% to $760
million in 1998. Net investment income increased 7% in 1998 to $460 million.
Other operating expenses have declined in each of the years 1997 through
1999. They declined from $120 million in 1997 to $117 million in 1998 and to
$115 million in 1999. Other operating expenses as a percentage of revenues,
excluding realized gains and losses, declined in each period and were 4.9% in
1999, 5.3% in 1998, and 5.7% in 1997. Other operating expenses consist of
insurance administrative expenses and expenses of the parent company. The
components of Torchmark's revenues and operations are described in more detail
in the discussion of Insurance and Investment segments found on pages 20
through 31 of this report.
18
<PAGE>
The following table is a summary of Torchmark's continuing net operating
income. Insurance underwriting income is defined by Torchmark management as
premium income less net policy obligations, commissions, acquisition expenses,
and insurance administrative expenses plus other income. Excess investment
income is defined as tax-equivalent net investment income reduced by the
interest credited to net policy liabilities and financing costs. Financing
costs include the interest on Torchmark's debt and the net cost of the Monthly
Income Preferred Securities ("MIPS").
Summary of Net Operating Income
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
% 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................... $ 263,269 60.5% $ 252,556 60.8% $ 241,038 60.0%
Health................. 144,632 33.3 139,445 33.6 141,540 35.3
Annuity................ 26,831 6.2 23,423 5.6 19,025 4.7
Other.................. -0- -0- 7
--------- ----- --------- ----- --------- -----
Total .................. 434,732 100.0% 415,424 100.0% 401,610 100.0%
===== ===== =====
Other income............ 3,348 4,488 3,141
Administrative expenses. (104,903) (102,559) (101,950)
--------- --------- ---------
Insurance underwriting
income excluding
Family Service.......... 333,177 317,353 302,801
Insurance underwriting
income--Family Service.. -0- 1,393 3,685
Excess investment income
(tax equivalent basis).. 215,387 206,119 143,476
Corporate expense........ (10,166) (12,061) (13,953)
Goodwill amortization.... (12,075) (12,075) (12,074)
Tax equivalency adjust-
ment.................... (11,487) (11,143) (9,951)
--------- --------- ---------
Pretax net operating in-
come................... 514,836 489,586 413,984
Income tax............... (173,669) (165,271) (140,254)
--------- --------- ---------
Net operating income be-
fore nonrecurring
charge................. 341,167 324,315 273,730
Nonrecurring charge, net
of tax.................. (13,423) -0- -0-
--------- --------- ---------
Net operating income.... $ 327,744 $ 324,315 $ 273,730
========= ========= =========
Net operating income be-
fore nonrecurring
charge per diluted
share.................. $ 2.55 $ 2.29 $ 1.94
========= ========= =========
Net operating income per
diluted share.......... $ 2.45 $ 2.29 $ 1.94
========= ========= =========
</TABLE>
On a per share basis, Torchmark's net operating income before nonrecurring
charge grew 11% in 1999 and 18% in 1998. Excluding the proceeds from the
public offering of Waddell & Reed, the increase for 1998 would have been 10%.
In total dollars, Torchmark's net operating income before nonrecurring
charge rose 5% in 1999 after an 18% increase in 1998. Contributing to the
growth in net operating income were gains in insurance underwriting income and
excess investment income. Excluding Family Service, insurance underwriting
income rose 5% in 1999 to $333 million and 5% in 1998 to $317 million. Excess
investment income also rose in both 1998 and 1999 as a result of lower policy
requirements in 1999, increased investment income in 1998, and lower financing
costs in both years. Torchmark's core operations are segmented into insurance
underwriting operations and investment operations. Insurance underwriting
activities are further segmented into life insurance, health insurance, and
annuity product groups. A detailed discussion of each of Torchmark's segments
follows.
19
<PAGE>
Life insurance. Life insurance is Torchmark's largest segment, with life
premium representing 54% of total premium and with life underwriting income
before other income, administrative expense, and nonrecurring charge,
representing 61% of the total. Life insurance products provide higher
underwriting margins and a larger asset base resulting from higher reserve
levels. A larger asset base provides Torchmark the opportunity to increase
investment income.
Family Service was sold on June 1, 1998. Comparisons of 1997 through 1999 in
the following discussions of Torchmark's life insurance operations exclude
Family Service.
Life insurance premium rose 6% in 1999 to $1.02 billion from $957 million in
1998. Life premium increased 6% in 1998. Sales of life insurance, in terms of
annualized premium, were $257 million in 1999, increasing 5% over 1998 sales
of $244 million. This compares with 6% growth in 1998 sales over 1997.
Annualized life premium in force was $1.13 billion at December 31, 1999,
compared with $1.06 billion at 1998 year end, an increase of 6%. Annualized
premium in force grew 6% in 1998 from $1.00 billion at year-end 1997.
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 distribution
channels. The following table presents life insurance premium by distribution
method during each of the three years ended December 31, 1999.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Liberty National Exclusive
Agency...................... $ 288,330 28.3% $282,389 29.5% $280,519 31.1%
Direct Response.............. 245,824 24.1 221,371 23.1 195,393 21.7
American Income Exclusive
Agency...................... 217,367 21.3 204,310 21.3 190,681 21.2
Military Independent Agency.. 104,590 10.3 92,204 9.6 79,631 8.8
United Investors Agency...... 84,098 8.3 80,376 8.4 77,986 8.7
United American Independent
Agency...................... 37,375 3.7 36,925 3.9 36,810 4.1
United American Exclusive
Agency...................... 19,318 1.9 18,798 2.0 18,243 2.0
Other........................ 21,399 2.1 20,901 2.2 21,924 2.4
---------- ----- -------- ----- -------- -----
$1,018,301 100.0% $957,274 100.0% $901,187 100.0%
========== ===== ======== ===== ======== =====
</TABLE>
20
<PAGE>
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. It markets a line of life
products primarily to juveniles and adults with face amounts of less than
$10 thousand on average. The Direct Response operation is characterized by
lower acquisition costs than Torchmark's agency-based marketing systems. In
each of the three years 1997 through 1999, this distribution center had
Torchmark's highest growth in life insurance premium in dollar amount. It
accounted for over 24% of Torchmark's life insurance premium during 1999.
Direct Response premium was $246 million in 1999, increasing 11% over 1998
premium of $221 million. Direct Response life premium in 1998 grew 13% over
1997 premium of $195 million.
Annualized premium sold by the Direct Response operation was $96 million in
1999, increasing 3% over 1998 sales of $94 million. Sales in 1998 rose 18%
over 1997 sales of $79 million. Sales growth declined as compared with
previous years due in part to the withdrawal from the under-age 40 adult
direct mail market because of unfavorable financial results from that segment.
Direct mail sales to ages 40 to 50 were interrupted for part of the year while
those products were repriced to improve their financial results. The
annualized life premium issued by the Direct Response group represented over
37% of Torchmark's total life sales in 1999. Direct Response annualized life
premium in force rose 9% to $283 million at December 31, 1999 from $260
million a year earlier. At December 31, 1999, Direct Response life annualized
premium in force was second only to that of the Liberty National Exclusive
Agency. Direct Response life insurance annualized premium in force grew 12% in
1998.
In addition to growth in life insurance sales and premium, the Direct
Response operation has promoted growth in some of Torchmark's agent-based
distribution channels through marketing support. This support includes
providing sales leads and assisting in agent recruiting. This assistance has
contributed indirectly to the growth in premium in other Torchmark
distribution agencies. For example, Direct Response marketing support
indirectly contributed to the increase in health sales by the United American
Exclusive Agency through its assistance in the agent recruiting process and by
providing leads to the agents.
The Liberty National Exclusive Agency distribution system represented
Torchmark's largest contribution to life insurance premium income in each of
the three years presented, with 1999 premium of $288 million representing 28%
of total life premium. The annualized life premium in force of the Liberty
Agency was $307 million at year-end 1999, compared with $298 million and $299
million at year-end 1998 and 1997, respectively. Life premium sales, in terms
of annualized premium issued, grew 13% during 1999 to $51 million. This $6
million increase in annualized life premium sales by the Liberty National
Agency was Torchmark's largest in dollar amount, accounting for 47% of the
growth in annualized life premium issued. Life sales in this agency rose 5% in
1998 to $46 million, representing a turnaround in sales growth from a 5%
decline in sales in 1997. The turnaround in sales growth in the Liberty Agency
was largely attributable to growth in the number of agents. Liberty's agents
rose from a count of 1,750 agents at year-end 1997 to 1,829 agents at year-end
1998, an increase of 5%. They further increased 4% to 1,902 at year-end 1999.
Improved agent recruitment efforts and training programs which help improve
agent retention have been responsible for the new agent growth. Additionally,
training programs have been employed to improve the retention of recruited
agents. Agency productivity has also increased in 1999, as average sales per
agent rose 9% over the prior year. Management believes that the continued
recruiting of new agents and the retention of productive agents are critical
to the continued growth of sales in controlled agency distribution systems.
21
<PAGE>
The American Income Exclusive Agency is a distribution system that focuses
on members of labor unions, credit unions, and other associations for its life
insurance sales. It is a high margin business characterized by lower policy
obligation ratios. At December 31, 1999, premium from this system accounted
for 21% of Torchmark's total life premium. In 1999, American Income's premium
increased 6% to $217 million, after having risen 7% in 1998 to $204 million.
Annualized life premium in force was $231 million at year-end 1999, an
increase of 7% over 1998 premium in force of $216 million. Annualized life
premium in force rose 6% in 1998 and 8% in 1997. Sales, in terms of annualized
premium issued, were $54 million in 1999, $54 million in 1998, and $55 million
in 1997, declining 3% in 1998 but increasing 1% in 1999. Growth in sales of
this agency is dependent on the growth in the number of agents. An 8% decline
in agent count was experienced in 1998 to 1,222 agents at December 31, 1998,
and a further decline in the first half of 1999 resulted in 1,160 agents at
June 30, 1999. However, changes in American Income's marketing organization
were implemented in 1999 to reverse the decline in the number of agents. As a
result, the American Income agency had 1,197 agents at year-end 1999, an
increase of 3% in agents over June, 1999. Management continues to make changes
to American Income's marketing organization to improve agent recruiting,
retention, and productivity in order to increase the size of this agency.
Another of Torchmark's distribution channels for life insurance is a
nationwide independent agency whose sales force is comprised of former
commissioned and noncommissioned military officers who sell exclusively to
commissioned and noncommissioned military officers and their families. This
business consists of whole life products with term insurance riders and is
characterized by extremely low lapse rates. Life premium income from this
distribution system grew 13% to $105 million in 1999. Premium for this agency
rose 16% to $92 million in 1998. These premium increases represented the
largest percentage growth in life premium of any Torchmark distribution
channel in 1999 or 1998. Annualized life premium in force for the Military
distribution system grew 13% in 1999 to $111 million, after having increased
15% to $99 million in 1998. In both years this distribution system produced
the greatest amount of growth in annualized life premium in force on a
percentage basis. A major factor in this growth of in-force premium relates to
the very high persistency associated with this business. Annualized premium
sold during 1999 by this agency was $17 million, flat with 1998 sales of $17
million. Sales in 1998 gained 7% over sales of $16 million in 1997.
The United Investors Agency is made up of Waddell & Reed sales
representatives, who market the life insurance products of United Investors
Life under a marketing agreement with Waddell & Reed. This agency accounted
for 8% of Torchmark's life premium in 1999. Premium income rose 5% in 1999 to
$84 million, following a 3% increase in 1998 to $80 million. Sales, in terms
of annualized premium issued, were $16 million in 1999, increasing 1% over
1998 sales. However, 1998 sales of $15 million rose 50% over 1997 sales of $10
million. Annualized life premium in force increased 6% to $106 million at
December 31, 1999, representing 9% of Torchmark's total life premium in force.
In addition to the growth in life insurance sales, this agency has also
increased production of variable life collections in 1999 from $18 million in
1998 to $32 million in 1999, an increase of 77%. Variable life collections
rose almost fourfold in 1998. Although variable life collections are not
included in premium in force data, they are indicative of growth in the
variable life account balance. Indirectly, they add to premium revenue through
the policy account charges for insurance coverage and administration as the
account balance grows.
The United American Independent and Exclusive Agencies represented about 6%
of total life premium in 1999. On a combined basis, life premium rose 2% to
$57 million in 1999 after a 1% increase in 1998. Premium for these agencies
increased 12% in 1997 to $55 million. Annualized life premium issued in 1999
was $19 million, increasing 25% over 1998 issues of $15 million.
22
<PAGE>
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
% of % of % of
Amount Premium Amount Premium Amount Premium
---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium and policy
charges................ $1,018,301 100.0% $ 957,274 100.0% $ 901,187 100.0%
Policy obligations...... 666,122 65.4 618,867 64.7 574,139 63.7
Required reserve
interest............... (229,287) (22.5) (215,185) (22.5) (199,339) (22.1)
---------- ----- --------- ----- --------- -----
Net policy obligations. 436,835 42.9 403,682 42.2 374,800 41.6
Commissions and premium
taxes.................. 56,341 5.5 57,364 6.0 55,019 6.1
Amortization of
acquisition costs...... 170,444 16.7 158,298 16.5 149,358 16.6
Required interest on
deferred acquisition
costs.................. 91,412 9.0 85,374 8.9 80,972 9.0
---------- ----- --------- ----- --------- -----
Total expense.......... 755,032 74.1 704,718 73.6 660,149 73.3
---------- ----- --------- ----- --------- -----
Insurance underwriting
income before other
income and
administrative
expenses, excluding
Family Service and
nonrecurring charge.... 263,269 25.9% 252,556 26.4% 241,038 26.7%
===== ===== =====
Family Service insurance
underwriting income
before other income and
administrative
expenses............... -0- 2,187 5,650
---------- --------- ---------
Nonrecurring charge..... (20,650) -0- -0-
Insurance underwriting
income before other
income and
administrative
expenses............... $ 242,619 $ 254,743 $ 246,688
========== ========= =========
</TABLE>
In the third quarter of 1999, Reader's Digest Association and Torchmark
entered into an agreement to market Torchmark life insurance products to
certain Reader's Digest customers. These products were marketed through
Torchmark's Direct Response operation, and required Torchmark to guarantee
specified compensation to Reader's Digest, regardless of marketing success.
Test marketing began in the fourth quarter of 1999. The less than favorable
results from these tests indicated that it would be unlikely that Torchmark
would recover the full amount of compensation guaranteed to Reader's Digest
under the terms of the agreement. As a result, Torchmark recorded a
nonrecurring operating charge of $21 million in the fourth quarter of 1999.
This charge represented $13 million after tax or $.10 per diluted share.
Torchmark intends to maintain its relationship with Reader's Digest and to use
its subscriber lists in selective marketing of Torchmark insurance products.
Because of the nonrecurring charge, Torchmark will only incur its normal
solicitation costs on future business and will have no further costs related
to the guaranteed compensation.
Life insurance gross margins have been presented in the above table to
remove the effect of Family Service underwriting income and the nonrecurring
charge, which distort comparisons. Excluding these items, gross margins, as
indicated by insurance underwriting income before other income and
administrative expense, increased 4% in 1999 to $263 million after having
risen 5% in 1998 to $253 million. As a percentage of life insurance premium,
life insurance gross margins were 26% in both 1999 and 1998, as compared with
27% in 1997. Slight increases in mortality have been experienced in both 1999
and 1998 over the prior year, resulting in increased obligation ratios.
Fluctuations in mortality are normal in the life insurance industry and are
not indicative of a trend.
23
<PAGE>
Health Insurance. Torchmark markets its supplemental health insurance
products through a number of distribution channels. The following table
indicates health insurance premium income during each of the three years ended
December 31, 1999 by distribution method.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent
Agency....................... $ 427,023 51.8% $417,556 54.9% $428,775 58.0%
United American Exclusive
Agency....................... 194,594 23.6 150,602 19.8 132,426 17.9
Liberty National Exclusive
Agency....................... 143,857 17.4 135,861 17.9 125,701 17.0
American Income Exclusive
Agency....................... 47,564 5.8 47,074 6.2 46,116 6.2
Direct Response............... 11,778 1.4 8,817 1.2 6,467 0.9
--------- ----- -------- ----- -------- -----
$ 824,816 100.0% $759,910 100.0% $739,485 100.0%
========= ===== ======== ===== ======== =====
</TABLE>
Premium for the health insurance segment increased 9% to $825 million in
1999 over 1998 premium of $760 million. In 1998, health premium rose 3%.
Annualized health premium in force grew 11% to $884 million at December 31,
1999 over the previous year-end balance of $797 million. Health premium in
force rose 5% during 1998. Sales of health insurance, in terms of annualized
premium issued, were $193 million in 1999, increasing 39% over 1998 sales of
$139 million. Sales in 1998 grew 30% over the prior year. Sales of health
insurance have accelerated greatly in the past three years due to increases in
sales of Medicare Supplement policies. Prior to 1997, Torchmark had not
experienced year-over-year sales growth in health insurance for five years.
Health products sold by Torchmark insurance companies include Medicare
Supplement, cancer, 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, 1999, Medicare Supplement
accounted for 71%, cancer 17%, and other health products 11%. The table below
presents Torchmark's health insurance annualized premium in force by major
product category at December 31, 1999 and for the two preceding years.
HEALTH INSURANCE
Annualized Premium in Force by Product
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998 1997
--------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Medicare Supplement............ $ 630,915 71.3% $553,737 69.5% $522,054 68.5%
Cancer......................... 153,777 17.4 144,900 18.2 137,640 18.1
Other.......................... 99,666 11.3 98,226 12.3 102,358 13.4
--------- ----- -------- ----- -------- -----
Total........................ $ 884,358 100.0% $796,863 100.0% $762,052 100.0%
========= ===== ======== ===== ======== =====
</TABLE>
24
<PAGE>
Medicare Supplement insurance is sold primarily by the United American
Exclusive Agency and the United American Independent Agency. Health sales in
both agencies have grown significantly in the past three years. The Exclusive
Agency sold $103 million in annualized health premium in 1999, a 60% increase
over the prior year. Health sales for this agency rose 62% in 1998 to $64
million. This agency accounted for $44 million of the $65 million in health
premium growth in 1999. It also was instrumental in health annualized premium
growth in both 1999 and 1998, accounting for $58 million of the $87 million
growth during 1999 in in-force premium and adding $31 million to annualized
health premium in force in 1998. The United American Exclusive Agency
represented 26% of Torchmark's annualized health premium in force at December
31, 1999, compared with 22% a year earlier. One factor in the growth in
Medicare Supplement sales in the United American Exclusive Agency is the
targeted marketing support provided by the Direct Response operation.
The United American Independent Agency continues to represent the largest
amount of Torchmark's health premium in force. The agency's $444 million of
annualized health premium in force at December 31, 1999, of which $418 million
was Medicare Supplement premium in force, was 50% of Torchmark's total health
premium in force. This agency increased annualized health premium in force
over the previous year for the first time at year-end 1999 since 1992. Health
sales by the United American Independent Agency, in terms of annualized
premium issued, were $68 million in 1999, a 35% increase over 1998. Sales rose
18% to $51 million in 1998.
Medicare Supplement policies are highly regulated at both the federal and
state levels with standardized benefit plans, limits on first year agent
compensation, and mandated minimum loss ratios. However, they remain a popular
supplemental health policy with the country's large and growing group of
Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare
Supplements to cover at least some of the deductibles and coinsurance for
which the federal Medicare program does not pay. During the last few years,
Torchmark has focused on developing its United American Exclusive Agency to
serve this market. Using the Direct Response operation, targeted marketing
support and increased agent recruiting have led to increased sales. Because of
loss ratio regulation, underwriting margins on Medicare Supplements are less
than on Torchmark's life business. However, due to United American's low cost,
service-oriented customer service and claims administration, as well as its
economies of scale, it is a profitable line of business.
Until recently the primary competition for Medicare Supplement sales had
come from Medicare health maintenance organizations (HMO's), the managed care
alternative to traditional fee-for-service Medicare which eliminated the need
for a supplemental policy. However, in the last few years, growing public
dissatisfaction with managed care, increased medical cost inflation and
increased Federal Government regulatory pressures on Medicare HMO's have
caused an increasing number of HMO's to withdraw from the market, reducing
that competition. Other regulatory issues continue to affect the Medicare
Supplement market. Medical cost inflation and changes to the Medicare program
cause the need for annual rate increases, which generally require state
insurance department approval. In addition, Congress and the Federal
Administration have begun studying ways to restructure the Medicare program in
the future as it is anticipated that the program could be insolvent within the
next decade. This would occur because of the growth in the number of "baby
boomers" becoming eligible for Medicare during that period and increasing
medical cost inflation generally due to increased utilization. Therefore, it
is likely that changes will be made to the Medicare program at sometime in the
future. However, regardless of proposed changes, it appears that there will
continue to be an important role for private insurers in helping senior
citizens cover their healthcare costs. As a result, Medicare Supplements
should continue as a popular product for senior-age consumers.
25
<PAGE>
Cancer insurance premium in force grew 6% in 1999 to $154 million, compared
with 5% growth in 1998. Sales of this product rose 4% in 1999 to $11 million
from $10 million. Sales in 1997 were also $11 million. Growth in cancer
annualized premium in force has been partially attributable to premium rate
increases to offset increased health care costs. Cancer insurance products are
sold primarily by the Liberty National Exclusive Agency. This agency
represented 85% of Torchmark's total cancer annualized premium in force at
December 31, 1999.
Annualized premium in force for other health products gained 1% in 1999 to
$100 million, after declining 4% in 1998. Other health sales rose 13% in 1999
to $30 million, after having declined 15% in 1998.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
% of % of % of
Amount Premium Amount Premium Amount Premium
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Premium.................. $824,816 100.0% $759,910 100.0% $739,485 100.0%
Policy obligations....... 535,901 65.0 482,496 63.5 462,967 62.6
Required reserve inter-
est..................... (17,383) (2.1) (20,440) (2.7) (21,644) (2.9)
-------- ----- -------- ----- -------- -----
Net policy obligations... 518,518 62.9 462,056 60.8 441,323 59.7
Commissions and premium
taxes................... 84,913 10.3 87,828 11.5 87,069 11.8
Amortization of acquisi-
tion costs.............. 64,046 7.8 59,208 7.8 58,473 7.9
Required interest on de-
ferred acquisition
costs................... 12,707 1.5 11,373 1.5 11,080 1.5
-------- ----- -------- ----- -------- -----
Total expense........... 680,184 82.5 620,465 81.6 597,945 80.9
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative expenses. $144,632 17.5% $139,445 18.4% $141,540 19.1%
======== ===== ======== ===== ======== =====
</TABLE>
Health insurance underwriting income before other income and administrative
expense rose 4% in 1999 to $145 million, after having declined 1% in 1998. As
a percentage of premium, underwriting income before other income and
administrative expense declined 1% in both of the years 1999 and 1998 from the
prior year, respectively. Margins have lagged premium growth because of higher
obligation costs. Medicare Supplement margins are restrained by the federally
mandated minimum loss ratio of 65% and by competition. Cancer obligation
ratios have increased in each year because of healthcare inflationary
pressures. To the extent management is able to obtain timely and adequate
premium rate increases from regulatory authorities to offset these cost
increases, margins may be stabilized on cancer business. Torchmark continues
to seek such rate increases.
26
<PAGE>
Annuities. Annuity products are marketed by Torchmark to service a variety
of needs, including retirement income and long-term, tax-deferred growth
opportunities. Torchmark's annuities are sold almost entirely by the United
Investors Agency. This Agency consists of the Waddell & Reed sales force which
markets United Investors annuities and other products under a marketing
agreement. In 1999, this Agency collected $403 million of Torchmark's total
$464 million in annuity collections, or 87%. The United Investors Agency
accounted for almost 99% of total annuity policy charges in 1999. Annuities
are also marketed by the United American Independent Agency, which collected
$56 million in annuity deposits in 1999.
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 Waddell &
Reed, 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 fixed annuity 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, excluding Family Service.
<TABLE>
<CAPTION>
Annuity Deposit Balances Annuity Collections
-------------------------- --------------------------
(Dollar amounts in (Dollar amounts in
millions) thousands)
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed..................... $ 677.5 $ 647.3 $ 611.0 $ 71,696 $ 64,687 $ 76,930
Variable.................. 3,274.9 2,343.5 1,821.2 392,769 299,005 247,446
-------- -------- -------- -------- -------- --------
Total.................... $3,952.4 $2,990.8 $2,432.2 $464,465 $363,692 $324,376
======== ======== ======== ======== ======== ========
</TABLE>
Collections of fixed annuity premium were $72 million in 1999, compared with
$65 million in 1998, an increase of 11%. Fixed annuity premium collections
declined 16% in 1998 from $77 million in 1997. Management believes that the
interest-rate environment is a primary factor in the sales of fixed annuities.
The low-interest rate environment of 1998 contributed to the lower sales as
alternative investments grew more attractive. In 1999, as interest rates
increased, fixed annuities became more desirable relative to alternative
investments. The fixed annuity deposit balance increased 5% in 1999 to $677
million at year end. It rose 6% in the prior year from $611 million at year-
end 1997 to $647 million at the end of 1998.
During 1998, Torchmark sold Family Service, a wholly-owned provider of
funeral preneed annuities. While the sale of these preneed annuities had been
discontinued in 1995, this block of fixed annuities remained on deposit until
Family was sold. At the date of sale, this deposit balance was approximately
$396 million.
Variable annuity collections were $393 million in 1999, increasing 31% over
the prior year. Variable collections rose 21% to $299 million in 1998. The
strength in financial markets has had a positive influence on sales of
variable annuities in all of the years 1997 through 1999.
The variable annuity account balance continues to experience rapid growth.
The variable account balance rose 40% in 1999 from $2.3 billion at December
31, 1998 to $3.3 billion at year-end 1999. This balance had previously
increased 29% in 1998 and 32% in 1997. Strong financial markets in all of
these periods contributed greatly to the growth. Variable accounts are valued
based on the market values of the underlying securities. The additional
collections in each year also added to the balances.
27
<PAGE>
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Policy charges................................ $ 40,969 $ 33,594 $ 27,426
Policy obligations............................ 34,524 34,662 34,631
Required reserve interest..................... (40,991) (42,171) (41,551)
-------- -------- --------
Net policy obligations...................... (6,467) (7,509) (6,920)
Commissions and premium taxes................. 759 510 710
Amortization of acquisition costs............. 13,310 11,561 9,660
Required interest on deferred acquisition
costs........................................ 6,536 5,609 4,951
-------- -------- --------
Total expense............................... 14,138 10,171 8,401
-------- -------- --------
Insurance underwriting income before other
income
and administrative expenses, excluding Family
Service...................................... 26,831 23,423 19,025
Family Service insurance underwriting income
before
other income and administrative expenses..... -0- 98 305
-------- -------- --------
Insurance underwriting income before other
income
and administrative expenses.................. $ 26,831 $ 23,521 $ 19,330
======== ======== ========
</TABLE>
Annuity underwriting income excluding Family Service and before other income
and administrative expense has grown steadily throughout each of the years
1997 through 1999, increasing 15% to $27 million in 1999 and 23% to
$23 million in 1998 over the respective prior year. Policy charges have also
grown in each period, rising 22% in both 1999 and 1998. Growth in policy
charges is primarily related to the growth in the size of the account balance,
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
upon which the sales charge is based.
Investments. The following table summarizes Torchmark's investment income
and excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net investment income.................. $ 447,337 $ 459,558 $ 429,116
Tax equivalency adjustment............. 11,487 11,143 9,951
---------- ---------- ----------
Tax equivalent investment income...... 458,824 470,701 439,067
Required interest on net insurance
policy liabilities:
Interest on reserves.................. (287,661) (296,696) (308,632)
Interest on deferred acquisition
costs................................ 110,655 103,481 100,096
---------- ---------- ----------
Net required........................ (177,006) (193,215) (208,536)
Financing costs........................ (66,431) (71,367) (87,055)
---------- ---------- ----------
Excess investment income............... $ 215,387 $ 206,119 $ 143,476
========== ========== ==========
Mean invested assets (at amortized
cost)................................. $6,319,465 $6,353,279 $6,058,037
Average net insurance policy
liabilities........................... 3,066,351 3,261,982 3,468,702
Average debt (including MIPS).......... 965,728 1,000,063 1,062,543
</TABLE>
28
<PAGE>
Excess investment income represents the profit margin attributable to
investment operations and cash flow management. It is defined as tax-
equivalent investment income reduced by the interest cost credited to net
policy liabilities and the interest cost associated with capital funding or
"financing costs." Excess investment income is increased in a number of ways:
an increase in investment yields over the rates credited to policyholders'
liabilities or in relationship to the rates applicable to Torchmark debt,
growth in invested assets in relation to policy liabilities and debt, and the
efficient use of capital resources and cash flow.
Net investment income declined 3% in 1999 to $447 million after rising 7% to
$460 million in 1998 and 7% to $429 million in 1997. On a tax-equivalent
basis, in which the yield on tax-exempt securities is adjusted to produce a
yield equivalent to the pretax yield on taxable securities, investment income
declined 3% in 1999 after rising 7% in both 1998 and 1997. The 1999 decline in
investment income was a result of the sale of Family Service in the second
quarter of 1998 and repurchases of Torchmark Stock since late 1998. The Family
Service sale resulted in the investment of approximately $140 million
proceeds, producing an additional $10 million of investment income in 1999,
compared with incremental investment income of $6 million in 1998. However,
the 1998 tax-equivalent net investment income also included $22 million earned
on Family Service assets which were not includable in 1999. The Family Service
sale also negatively impacted 1998 net investment income as 1997 tax-
equivalent net investment income included $54 million on Family Service assets
held for the entire year.
Mean invested assets, computed based on book values, were flat in 1999,
compared with the year 1998. The growth in 1999 invested assets from
reinvested cash flows were essentially offset by the loss of Family Service's
$778 million in invested assets when compared with the prior year. In spite of
the loss of Family Service's invested assets in 1998, mean invested assets
increased 5% during 1998 over the prior year. This increase was largely due to
the receipt of $481 million in proceeds from the Waddell & Reed stock offering
in early 1998, offset to some extent by the sale of investments to repay debt
and to acquire Torchmark stock.
Excess investment income increased 5% in 1999 and 44% in 1998 because the
increases in excess investment income were greater than the growth in net
investment income. While the 1998 sale of Family Service caused a reduction in
1998 and 1999 investment income, it had little effect on excess investment
income comparisons in either 1999 or 1998. The reduction in required interest
on Family Service's policy liabilities offset the loss in investment income.
The 1999 increase in excess investment income resulted primarily from
decreased financing costs. The $63 million increase in 1998 excess investment
income resulted primarily from the proceeds of the Waddell & Reed offering
which provided Torchmark with additional funds to invest or to apply to
outstanding debt. Additionally, there was $7 million of interest income on an
internal financing with Waddell & Reed included in 1998 income. Also in 1998,
Torchmark essentially refinanced $380 million principal amount of its long-
term debt with either short-term debt or with sales of lower-yielding
investments, saving an average of 350 basis points in 1998 financing costs.
During 1999, Torchmark entered into two transactions to dispose of the
majority of its investment real estate. The first transaction closed in July,
1999 and the other closed in October, 1999. Total consideration for the
combined transactions was $123 million of which $111 million was cash. The
real estate dispositions resulted in an after-tax loss of $41 million. After
the sales, Torchmark retained $16 million in investment real estate, of which
$8 million was represented by properties partially occupied by Torchmark
subsidiaries.
In addition to the real estate capital losses, Torchmark has also generated
$19 million in after-tax losses during 1999 from the planned sale of fixed
maturities. These losses allowed Torchmark to carry back and recover capital
gains taxes paid in prior years. Realized losses also included a $12 million
after-tax loss from the decline in market value on the interest-rate swap
associated with Torchmark's MIPS, discussed in more depth under the caption
Capital Resources found on page 33 of this discussion.
With the steady increase in interest rates during 1999, new investments of
corporate bonds afforded higher returns each successive quarter, and the 1999
average yield on fixed maturity purchases was the highest it had been since
1992. Acquisitions in fixed maturity securities totaled $2.1 billion in 1999
and $1.8 billion in 1998. The 1999 acquisitions were made at an effective
compounded yield of 7.54%, compared with an effective compounded yield of
7.26% for the prior year. The yields equate to nominal yields on acquisitions
of 7.38% and 7.13% for 1999 and 1998, respectively.
29
<PAGE>
During 1999, the yield curve "flattened" with short-term yields approaching
long-term yields. In fact, the yield curve "inverted" in early 2000, with
short-term yields exceeding long-term yields. This flattening allowed the
purchase of new investments at higher yields with shorter maturities as
compared with 1998. The average life of acquired securities was 14.9 years in
1999, compared with 20.7 years in 1998 and 13.3 years in 1997. In the fourth
quarter of 1999, the average life of acquired securities was 8.8 years.
Although 1999 acquisitions were made at a higher average yield than in the
past six years, the new investment yield was slightly below the average yield
of the portfolio, resulting in a 3 basis point decline in the nominal
portfolio yield at year-end 1999. At December 31, 1999, the fixed-maturity
portfolio had an estimated nominal yield of 7.39%, compared with 7.42% in 1998
and 7.49% in 1997. The average life of the portfolio was 12.7 years at year-
end 1999, increasing from 8.8 years at year-end 1998 and 8.0 years at the
year-end 1997. Duration also rose at 1999 year end to 6.2 years from the 5.7
year level at the end of 1998 and 5.1 year level at the end of 1997. The
increase in average life and duration was impacted primarily by the purchase
of securities with longer maturities than the prior year average maturity.
Emphasis continues to be on marketable, high and medium quality investments.
Approximately 92% of invested assets are fixed-maturity securities, and 94% of
these holdings are rated investment grade by Standard & Poor's. The NAIC
considers 95% of the portfolio investment grade. While the portfolio is highly
marketable, its value fluctuates with changes in interest rates. The
portfolio's unrealized loss of $275 million at year-end 1999 compares with
unrealized gains of $249 million and $213 million at year ends 1998 and 1997,
respectively. A considerable portion of the portfolio is expected to repay or
mature within the next several years, as indicated by the following table.
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Short terms and under 1 year................................ 4.2% 7.8%
2-5 years................................................... 13.6 23.8
6-10 years.................................................. 39.7 31.8
11-15 years................................................. 11.0 9.0
16-20 years................................................. 5.8 3.8
Over 20 years............................................... 25.7 23.8
----- -----
100.0% 100.0%
===== =====
</TABLE>
Because Torchmark emphasizes fixed-maturity investments, the percentage
holdings of Torchmark's investments by type vary considerably from industry
averages. The following table presents Torchmark's components of invested
assets compared with the latest industry data:
<TABLE>
<CAPTION>
Torchmark
--------------------
Amount Industry %
(in thousands) % (1)
-------------- ----- ----------
<S> <C> <C> <C>
Bonds & short terms......................... $5,779,982 93.3% 74.5%
Equities.................................... 29,189 .5 5.0
Mortgage loans.............................. 94,599 1.5 11.5
Real estate................................. 16,379 .3 1.5
Policy loans................................ 244,607 4.0 5.6
Other invested assets....................... 23,054 .4 1.9
---------- ----- -----
$6,187,810 100.0% 100.0%
========== ===== =====
</TABLE>
- --------
(1) Latest data available from the American Council of Life Insurance.
30
<PAGE>
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 security's value could occur because of a change in interest rates. This
risk is significant to Torchmark's investment portfolio because its fixed-
income holdings amount to 92% 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 because these investments are marked
to market.
The actual interest rate risk to Torchmark is reduced because the effect
that changes in rates have on assets is offset by the effect they have on
insurance liabilities and on debt. Interest assumptions are used to compute
the majority of Torchmark's insurance liabilities. These liabilities, net of
deferred acquisition costs, were $3.4 billion at December 31, 1999, compared
with fixed-income investments of $6.0 billion at amortized cost 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. These liabilities are not marked to market.
Market risk is managed in a manner consistent with Torchmark's investment
objectives. Torchmark seeks to maintain a portfolio of high-quality fixed-
maturity assets that may be sold in response to changing market conditions. A
significant change in the level of interest rates, changes in credit quality
of individual securities, or changes in the relative values of a security or
asset sector are the primary factors that influence such sales. Occasionally,
the need to raise cash for various operating commitments may also necessitate
the sale of a security. Volatility in the value of Torchmark's fixed-income
holdings is reduced by maintaining a relatively short-term portfolio, of which
18% matures within five years and 58% matures within ten years. Also, the
portfolio and market conditions are constantly evaluated for appropriate
action.
No derivative instruments are used to manage Torchmark's exposure to market
risk in the investment portfolio. An interest-rate swap instrument was entered
into to allow Torchmark to participate in the downward trend in interest rates
in connection with its MIPS as discussed in the Notes to the Consolidated
Financial Statements on page 64 of this report and in Capital Resources on
page 33 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. This cap expired during 1999.
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. Those procedures indicate 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 at December 31, 1999 and
December 31, 1998. 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>
Market Value of
Fixed-Maturity Portfolio
($ millions)
-------------------------
Change
in
Interest
Rates
(in At At
basis December 31, December 31,
points) 1999 1998
-------- ------------ ------------
<S> <C> <C>
-200 $6,455 $6,476
-100 6,055 6,108
0 5,680 5,768
100 5,332 5,450
200 5,012 5,147
</TABLE>
31
<PAGE>
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 very strong, as evidenced by its three
sources of liquidity: its positive cash flow from operations, its portfolio of
marketable securities, and its line of credit facility.
Torchmark's insurance operations generate positive cash flows in excess of
its immediate needs. Cash flows provided from operations were $512 million in
1999, compared with $389 million in 1998 and $410 million in 1997. In addition
to operating cash flows, Torchmark received $413 million in investment
maturities and repayments during 1999, adding to available cash flows. Such
repayments were $474 million in 1998 and $513 million in 1997. 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 $115 million at December
31, 1999, compared with $81 million at year-end 1998. In addition to these
highly 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 $5.7 billion at December 31, 1999.
Torchmark has a line of credit facility with a group of lenders which allows
unsecured borrowings up to a specified maximum amount. The maximum amount on
this facility was $600 million at December 31, 1999. 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, 1999, $420 million in face amount of
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, 1999, Torchmark was in full
compliance with these covenants.
Liquidity of the parent company is affected by the ability of the
subsidiaries to pay dividends. Dividends are paid by subsidiaries to the
parent in order to meet its dividend payments on common and preferred stock,
interest and principal repayment requirements on parent-company debt, and
operating expenses of the parent company. These requirements have declined in
both 1999 and 1998 from the respective prior year. 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.
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 the
year 2000, a maximum amount of $192 million will be available to Torchmark
from insurance subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of long and short-
term debt, MIPS, and shareholders' equity. Torchmark's debt consists primarily
of its funded debt and its commercial paper facility. An analysis of
Torchmark's funded debt outstanding at year-ends 1999 and 1998 on the basis of
par value was as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
Principal Principal
Year Amount Amount
Instrument Due Rate ($ thousands) ($ thousands)
---------- ---- ----- ------------- -------------
<S> <C> <C> <C> <C>
Senior Debentures..................... 2009 8 1/4 $ 99,450 $ 99,450
Notes................................. 2023 7 7/8 200,000 200,000
Notes................................. 2013 7 3/8 100,000 100,000
-------- --------
Total funded debt..................... 399,450 399,450
Debt held by subsidiaries............. (22,318) (10,828)
-------- --------
Long-term debt........................ $377,132 $388,622
======== ========
</TABLE>
32
<PAGE>
The carrying value of the funded debt was $372 million at December 31, 1999,
compared with $383 million a year earlier.
Through its insurance subsidiaries, Torchmark has reacquired a portion of
its funded debt in the open market. In 1999, $7.5 million principal amount of
its 7 7/8% Notes due 2023 were acquired at a cost of $7.9 million. Also in
1999, $4.0 million principal amount of its 7 3/8% Notes due 2013 were
purchased for $4.1 million. In 1998, Torchmark bought $10.8 million of its 7
7/8% Notes at a price of $10.6 million. Insurance company holdings in the
funded debt reduce consolidated debt outstanding.
During 1998, Torchmark received approximately $481 million in intercompany
note repayments from Waddell & Reed as a result of their initial public
offering. Torchmark utilized a portion of these funds to pay down funded debt.
It also took advantage of the lower interest rate environment in 1998 to
refinance existing funded debt at lower short-term rates. In early 1998,
Torchmark repaid $20 million principal amount on its 8 5/8% 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. On April
1, 1998, Torchmark called the remaining $160 million principal balance of this
debt at the prevailing call price of 103.76, or $166 million. A loss on the
redemption of debt was recorded in the second quarter of 1998 in the after-tax
amount of $5 million, representing the difference between the total call price
and the carrying value of $158 million. In addition to the call, Torchmark's 9
5/8% Senior Notes, principal amount $200 million, matured on May 1, 1998.
Torchmark borrowed on its commercial paper facility to repay the Sinking Fund
Debentures that were called and to repay its Senior Notes upon maturity with
accrued interest, in the combined amount of $377 million.
During 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.
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 currently redeemable at Torchmark's option at any time. While
Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark
has in place a ten-year interest-rate swap agreement with an unaffiliated
party. 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 by the
other party. The swap expires in 2004. Torchmark is at risk on this instrument
for higher financing costs to the extent interest rates rise during the
remaining term. At December 31, 1999, the variable rate was 7.0%. During 1999,
Torchmark's after-tax dividend cost for the MIPS was $9.2 million, compared
with $11.9 million that would have been incurred without the swap. Torchmark's
after-tax cost in 1998 was $9.8 million and in 1997 was $9.9 million, saving
$2.1 million and $2.0 million in each of those years, respectively.
Effective January 1, 1999, Torchmark changed its method of accounting for
the swap agreement to recognize changes in its fair value, net of tax, as
realized investment gains or losses. This method of accounting for such
instruments was believed to be preferable under the guidance established by
Statement of Financial Accounting Standards No. 80, Accounting for Futures
Contracts ("SFAS 80") and the Securities and Exchange Commission. Previously,
Torchmark accounted for the swap using hedge accounting under SFAS 80. The
after-tax cumulative effect of the change at January 1, 1999 was $16.1 million
(net of income taxes of $8.7 million). The effect of the change on the twelve
months ended December 31, 1999 was to increase realized losses by $11.7
million ($.09 per diluted share), excluding the cumulative effect of the
change in accounting principal. Market value of the swap at December 31, 1999
was $6.7 million.
During July, 1999, Torchmark filed with the Securities and Exchange
Commission a Form S-3 Registration Statement for the shelf registration of
capital securities in an aggregate face amount of $300 million. Proceeds from
the issuance of any such capital securities could be used for the possible
purchase of Torchmark securities, for working capital, for the repayment of
debt, for acquisitions, or for any other general corporate purpose or business
opportunity.
33
<PAGE>
Short-term debt consists primarily of Torchmark's commercial paper
outstanding. The commercial paper balance outstanding at December 31, 1999 was
$418 million at carrying value, compared with a balance of $355 million a year
earlier. The commercial paper borrowing balance fluctuates based on
Torchmark's current cash needs. As previously noted, Torchmark essentially
refinanced $360 million face amount of funded debt in 1998 with additional
short-term borrowings. These borrowings were offset somewhat by the use of $82
million in Waddell & Reed offering proceeds for repayment.
Total debt as a percentage of total capitalization was 25% at December 31,
1999. In the computation of this ratio, the MIPS are counted as equity and the
effect of fluctuations in security values based on changes in interest rates
in financial markets are excluded. This debt-to-capitalization ratio was 24%
at year-end 1998 and 31% at year-end 1997. The increase in the debt-to-
capitalization ratio at year-end 1999 was caused by the increase in short-term
borrowings. The 1998 decline in this ratio resulted primarily from the funded
debt paydowns, net of the increase in short-term debt. The debt-to-
capitalization ratio was also favorably impacted by the net increase in
Torchmark's shareholders' equity resulting from the Waddell & Reed offering
and spin-off. Torchmark's ratio of earnings before interest, taxes and
discontinued operations to interest requirements was 8.7 in 1999, compared
with 8.9 in 1998 and 6.5 in 1997. Torchmark's interest expense declined 7% to
$52 million in 1999, largely as a result of lower average debt than in 1998.
There was also a larger proportion of short-term debt in 1999 compared with
the prior year, resulting in lower borrowing costs. In 1998, interest expense
declined 22% to $56 million primarily because of the funded debt paydowns.
Torchmark resumed its share buyback program in November, 1998 after
completion of the Waddell & Reed spin-off. Torchmark purchased 6.7 million
shares on the open market at a cost of $222 million in 1999. Purchases of 3.4
million shares were made in late 1998 at a cost of $126 million. During 1997,
Torchmark acquired 5.2 million shares at a cost of $183 million. Torchmark
will continue to make share purchases under its share repurchase program on
the open market when prices are attractive. Share purchases could have a
favorable impact on earnings per share and return on equity, but negatively
affect book value per share.
On November 15, 1999, Torchmark executed a stock option exercise and
restoration program through which 80 Torchmark directors and employees
exercised vested stock options and received a reduced number of replacement
options at the current market price. This program resulted in the issuance of
1.8 million shares, but over 1.3 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 the related taxes. As a result of the restoration
program, management's ownership interest increased, and Torchmark received a
significant current tax benefit from the exercise of the options.
Shareholders' equity declined 12% to $1.99 billion at December 31, 1999.
Shareholders' equity rose 17% in 1998, from $1.93 billion at year-end 1997 to
$2.26 billion at year-end 1998. The 1999 decrease was impacted by the decrease
in the value of the fixed-maturity portfolio due to increases in interest
rates in the financial markets. The 1998 growth in shareholders' equity was
greatly impacted by the Waddell & Reed offering and spin-off in that year.
Proceeds from the March, 1998 offering added $516 million to Torchmark's
shareholders' equity, but equity was reduced by $90 million of minority
interest at the time of the offering representing the 36% of Waddell & Reed
that Torchmark no longer owned. Additionally, the November, 1998 spin-off
caused a reduction in Torchmark's equity of $174 million, representing its
carrying value of Waddell & Reed at the time of the spin. Book value per share
was $15.10 at 1999 year end, compared with $16.51 at year-end 1998. After
adjusting for the impact on shareholders' equity for security value
fluctuations due to changes in interest rates in financial markets,
shareholders' equity rose from $2.11 billion at year-end 1998 to $2.15 billion
at year-end 1999. Book value per share was $16.32 at year-end 1999, an
increase of 6% over $15.43 at year-end 1998. Return on common shareholders'
equity was 16.2% in 1999, compared with 15.1% in 1998. The return-on-equity
ratios exclude the mark up or down of shareholders' equity for changes in
security values caused by fluctuations in market interest rates. They are also
computed on a basis of net operating income before nonrecurring charge, as
defined on page 16 through 17 of this report.
34
<PAGE>
OTHER ITEMS
Transactions Regarding Vesta Insurance Group. Since 1993, Torchmark has held
a passive investment in Vesta, a property insurance carrier. Torchmark held
5.1 million shares of Vesta stock, or approximately 28% of the outstanding
shares of Vesta, until December, 1998. Torchmark carried its investment in
Vesta during this period on the equity method of accounting. In June, 1998,
Vesta announced that (a) an investigation of accounting irregularities that
occurred during the fourth quarter of 1997 and the first quarter of 1998 would
result in an aggregate $14 million net after-tax reduction in previously
reported net income, and, in addition, that (b) it would restate its
historical financial statements for the period of 1993 through the first
quarter of 1998, reflecting reductions in reported net after-tax earnings of
$49 million for the period of 1993 through 1997 and $10 million for the first
quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported
financial corrections, Torchmark recorded a pre-tax charge of $20 million ($13
million after tax) or $.09 per diluted share in the second quarter of 1998. As
a result of the announcements relating to Vesta and the decline in value of
Vesta stock, Vesta is currently subject to numerous class action lawsuits in
state and Federal courts filed subsequent to such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark reacquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Litigation. Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involves punitive damage
claims based upon allegations of agent misconduct at Liberty National in
Alabama. Such punitive damage claims are tried in Alabama state courts where
any punitive damage litigation may have 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 punitive damages in
Alabama are based upon the compensatory damages (including mental anguish)
awarded and the discretion of the jury in awarding compensatory damages is not
precisely defined. 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. 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.
35
<PAGE>
NEW ACCOUNTING RULES
Accounting for Derivative Instruments and Hedging Activities (FASB Statement
No. 133), as amended by FASB Statement No. 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application of all of the provisions of this statement encouraged. Early
adoption of selective provisions is prohibited. Prior periods may not be
restated for comparability.
This statement establishes standards for the accounting and reporting of
derivative instruments. It requires that all derivatives be recognized as
assets or liabilities on the balance sheet and be measured at fair value.
Changes in the values of derivatives for the reporting period are reflected as
adjustments to earnings through realized gains and losses. If certain
conditions are met, a derivative may be designated as a hedge against exposure
to market risks of other instruments or commitments, cash flow risks, or
foreign currency risks. If a derivative is classified as a hedge, the
adjustment to earnings is offset by a corresponding change in the value of the
item hedged. Hedging relationships may be designated anew upon adoption of
this statement.
Management believes that Statement 133 will have an immaterial impact on
Torchmark's financial statements. Other than the interest rate swap on its
MIPs, which is carried at fair market value, Torchmark's use of derivatives is
limited.
36
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports............................................. 38
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1999 and 1998................. 40
Consolidated Statement of Operations for each of the years in the three-
year period ended December 31, 1999..................................... 41
Consolidated Statement of Comprehensive Income for each of the years in
the three-year period ended December 31, 1999........................... 43
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year period ended December 31, 1999........................... 44
Consolidated Statement of Cash Flow for each of the years in the three-
year period ended December 31, 1999..................................... 45
Notes to Consolidated Financial Statements............................... 47
</TABLE>
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Torchmark Corporation
Birmingham, Alabama
We have audited the accompanying consolidated balance sheet of Torchmark
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flow for the year then ended. Our audit also included the
financial statement schedules listed in the Index at Item 14 as of and for the
year ended December 31, 1999. These financial statements and financial
statement schedules are the responsibility of Torchmark's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1999 consolidated financial statements present fairly,
in all material respects, the financial position of Torchmark Corporation and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, such 1999 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.
DELOITTE & TOUCHE LLP
Dallas, Texas
January 28, 2000
38
<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 as of and for the years ended
December 31, 1998 and December 31, 1997. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedules as listed in Item 14(a) as of and for the years ended
December 31, 1998 and December 31, 1997. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Birmingham, Alabama
January 29, 1999 except
for Note 18 which is
as of February 10, 1999
39
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1999--$5,954,697; 1998--$5,519,772) ....... $ 5,679,795 $ 5,768,447
Equity securities, at fair value (cost: 1999--
$37,121; 1998--$2,256)............................ 29,189 9,843
Mortgage loans on real estate, at cost (estimated
fair value: 1999--$94,716; 1998--$124,191)........ 94,599 124,072
Investment real estate, at cost (less allowance for
depreciation: 1999--$19,490; 1998--$40,828)....... 16,379 164,644
Policy loans....................................... 244,607 233,765
Other long-term investments........................ 23,054 35,976
Short-term investments............................. 100,187 75,844
----------- -----------
Total investments................................. 6,187,810 6,412,591
Cash ............................................... 14,441 4,920
Investment in unconsolidated subsidiaries........... -0- 31,510
Accrued investment income........................... 112,475 99,279
Other receivables................................... 53,458 130,279
Deferred acquisition costs.......................... 1,741,570 1,502,511
Value of insurance purchased........................ 151,752 170,640
Property and equipment, net of accumulated
depreciation....................................... 38,761 39,080
Goodwill............................................ 402,584 414,658
Other assets........................................ 15,138 18,298
Separate account assets............................. 3,413,675 2,425,262
----------- -----------
Total assets...................................... $12,131,664 $11,249,028
=========== ===========
Liabilities:
Future policy benefits.............................. $ 4,869,241 $ 4,595,567
Unearned and advance premiums....................... 85,344 85,923
Policy claims and other benefits payable............ 215,923 194,965
Other policyholders' funds.......................... 81,919 81,568
----------- -----------
Total policy liabilities.......................... 5,252,427 4,958,023
Accrued income taxes................................ 309,271 511,311
Other liabilities................................... 179,681 162,831
Short-term debt..................................... 418,394 355,392
Long-term debt (estimated fair value: 1999--
$378,046; 1998--$430,431).......................... 371,555 383,422
Separate account liabilities........................ 3,413,675 2,425,262
----------- -----------
Total liabilities................................. 9,945,003 8,796,241
Monthly income preferred securities
(estimated fair value: 1999--$193,040; 1998--
$205,040)........................................... 193,324 193,259
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding: -0- in 1999 and in
1998............................................... -0- -0-
Common stock, par value $1 per share--Authorized
320,000,000 shares; outstanding: 147,800,908
issued, less 15,804,640 held in treasury in 1999
and 10,951,933 held in treasury in 1998 ........... 147,801 147,801
Additional paid-in capital.......................... 622,318 610,925
Accumulated other comprehensive income (loss)....... (174,222) 144,501
Retained earnings................................... 1,910,487 1,707,933
Treasury stock...................................... (513,047) (351,632)
----------- -----------
Total shareholders' equity........................ 1,993,337 2,259,528
----------- -----------
Total liabilities and shareholders' equity........ $12,131,664 $11,249,028
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Life premium.............................. $1,018,301 $ 959,766 $ 909,992
Health premium............................ 824,816 759,910 739,485
Other premium............................. 40,969 33,954 28,527
---------- ---------- ----------
Total premium........................... 1,884,086 1,753,630 1,678,004
Net investment income..................... 447,337 459,558 429,116
Realized investment losses................ (110,971) (57,637) (36,979)
Other income.............................. 6,443 2,325 962
---------- ---------- ----------
Total revenue........................... 2,226,895 2,157,876 2,071,103
Benefits and expenses:
Life policyholder benefits................ 666,122 625,272 591,867
Health policyholder benefits.............. 535,901 482,496 462,967
Other policyholder benefits............... 34,524 42,508 54,066
---------- ---------- ----------
Total policyholder benefits............. 1,236,547 1,150,276 1,108,900
Amortization of deferred acquisition
costs.................................... 247,800 231,024 224,738
Commissions and premium taxes............. 160,655 143,747 141,296
Other operating expense................... 115,069 117,438 120,233
Amortization of goodwill.................. 12,075 12,075 12,074
Interest expense.......................... 52,341 56,325 71,863
---------- ---------- ----------
Total benefits and expenses............. 1,824,487 1,710,885 1,679,104
Income from continuing operations before
income taxes, equity in earnings of Vesta,
extraordinary item, and cumulative effect
of change in accounting principle......... 402,408 446,991 391,999
Income taxes............................... (134,320) (154,338) (138,409)
Equity in earnings (losses) of Vesta....... -0- (6,866) 16,714
Adjustment to carrying value of Vesta...... -0- (20,234) -0-
Monthly income preferred securities
dividend (net of tax)..................... (9,158) (9,777) (9,875)
---------- ---------- ----------
Net income from continuing operations... 258,930 255,776 260,429
Discontinued operations of Waddell & Reed:
Income from operations (less applicable
income tax expense of $42,932 in 1998 and
$40,081 in 1997)......................... -0- 47,868 77,314
Loss on disposal (less applicable income
tax benefit of $571 in 1999 and including
income tax of $49,840 in 1998)........... (1,060) (54,241) -0-
---------- ---------- ----------
Net income before extraordinary item and
cumulative effect of change in
accounting principle................... 257,870 249,403 337,743
Loss on redemption of debt (less applicable
income tax benefit of $2,672)............. -0- (4,962) -0-
---------- ---------- ----------
Net income before cumulative effect of
change in accounting principle......... 257,870 244,441 337,743
Cumulative effect of change in accounting
principle (less applicable income tax
expense of $8,661)........................ 16,086 -0- -0-
---------- ---------- ----------
Net income.............................. $ 273,956 $ 244,441 $ 337,743
========== ========== ==========
</TABLE>
(Continued)
See accompanying Notes to Consolidated Financial Statements.
41
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Basic net income per share:
Continuing operations..................................... $1.95 $1.83 $1.87
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- .34 .56
Loss on disposal......................................... (.01) (.39) -0-
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 1.94 1.78 2.43
Loss on redemption of debt............................... -0- (.03) -0-
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 1.94 1.75 2.43
Cumulative effect of change in accounting principle...... .12 -0- -0-
----- ----- -----
Net income.............................................. $2.06 $1.75 $2.43
===== ===== =====
Diluted net income per share:
Continuing operations..................................... $1.93 $1.81 $1.84
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- .34 .55
Loss on disposal......................................... (.01) (.38) -0-
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 1.92 1.77 2.39
Loss on redemption of debt............................... -0- (.04) -0-
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 1.92 1.73 2.39
Cumulative effect of change in accounting principle...... .12 -0- -0-
----- ----- -----
Net income.............................................. $2.04 $1.73 $2.39
===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
42
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income...................................... $ 273,956 $244,441 $337,743
Other comprehensive income:
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period.............................. (568,398) 54,217 125,820
Reclassification adjustment for (gains)
losses on securities included in net
income..................................... 29,930 8,519 29,967
Reclassification adjustment for amortization
of (discount) and premium.................. (1,266) (2,999) (2,751)
Foreign exchange adjustment on securities
marked to market........................... (1,159) 1,958 1,373
--------- -------- --------
Unrealized gains (losses) on securities...... (540,893) 61,695 154,409
Unrealized gains (losses) on other
investments................................. 81 (7,551) (398)
Unrealized gains (losses) on deferred
acquisition costs........................... 48,380 (3,092) (13,324)
--------- -------- --------
Total unrealized investment gains (losses).. (492,432) 51,052 140,687
Applicable tax.............................. 171,760 (17,524) (49,447)
--------- -------- --------
Unrealized investment gains (losses), net of
tax.......................................... (320,672) 33,528 91,240
Foreign exchange translation adjustments,
other than securities........................ 1,949 (2,081) (1,585)
Applicable tax.............................. -0- -0- -0-
--------- -------- --------
Foreign exchange translation adjustments, net
of tax....................................... 1,949 (2,081) (1,585)
Unrealized gains (losses) on discontinued
operations................................... -0- (12,100) 1,062
Applicable tax.............................. -0- 4,235 (372)
--------- -------- --------
Unrealized gains (losses) on discontinued
operations, net of tax....................... -0- (7,865) 690
--------- -------- --------
Other comprehensive income (loss)............... (318,723) 23,582 90,345
--------- -------- --------
Comprehensive income (loss)................. $ (44,767) $268,023 $428,088
========= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Retained Treasury Shareholders'
Stock Stock Capital Income (Loss) Earnings Stock Equity
--------- -------- ---------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Balance at January 1, 1997..... $ -0- $ 73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343
Comprehensive income........... 90,345 337,743 428,088
Common dividends declared
($0.585 a share).............. (81,793) (81,793)
Two-for-one stock split in the
form of a dividend............ 73,784 (73,784) -0-
Acquisition of treasury stock--
common........................ (182,903) (182,903)
Exercise of stock options...... 281 44,011 (36,776) 130,466 137,982
Grant of discounted options.... 372 372
Grant of deferred options...... 1,647 1,647
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1997.. -0- 147,849 187,731 136,926 1,694,781 (234,551) 1,932,736
Year Ended December 31, 1998
Comprehensive income........... 23,582 244,441 268,023
Common dividends declared
($0.58 a share)............... (73,304) (73,304)
Proceeds from Waddell & Reed
initial public offering....... 516,138 516,138
Distribution of Waddell & Reed. (174,113) (174,113)
Minority interest--Waddell
& Reed initial public
offering...................... (90,484) (90,484)
Sale of Family Service......... (16,007) 16,007 -0-
Acquisition of treasury stock--
common........................ (125,875) (125,875)
Grant of deferred stock
options....................... 319 319
Grant of restricted stock...... (4,958) 1,428 3,530 -0-
Conversion of restricted stock
to Waddell & Reed shares...... (48) 48 -0-
Expense of restricted stock
grants and options............ 865 865
Exercise of stock options...... 1,266 (1,307) 5,264 5,223
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1998.. -0- 147,801 610,925 144,501 1,707,933 (351,632) 2,259,528
Year Ended December 31, 1999
Comprehensive loss............. (318,723) 273,956 (44,767)
Common dividends declared
($0.36 a share)............... (47,739) (47,739)
Acquisition of treasury stock--
common........................ (221,878) (221,878)
Grant of deferred stock
options....................... 482 482
Lapse of restricted stock
grant......................... 364 (364) -0-
Expense of restricted stock
grants and options............ 797 797
Exercise of stock options...... 9,750 (23,663) 60,827 46,914
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1999.. $ -0- $147,801 $622,318 $(174,222) $1,910,487 $(513,047) $1,993,337
===== ======== ======== ========= ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Net income..................................... $273,956 $ 244,441 $ 337,743
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits........... 206,724 173,593 147,207
Increase (decrease) in other policy benefits. 20,730 (30,593) 10,096
Deferral of policy acquisition costs......... (419,590) (356,493) (328,086)
Amortization of deferred policy acquisition
costs....................................... 247,800 231,024 224,738
Change in accrued income taxes............... (30,434) 86,670 87,590
Depreciation................................. 8,840 7,934 8,038
Realized (gains) losses on sale of
investments,
subsidiaries, and properties................ 110,971 57,637 36,979
Change in accounts payable and other
liabilities................................. 43,930 3,753 (6,119)
Change in receivables........................ 70,119 (20,331) (14,368)
Change in payables and receivables of
unconsolidated affiliates................... (5,931) 2,021 1,385
Other accruals and adjustments............... 9,245 17,452 (17,825)
Adjustment to carrying value of Vesta........ -0- 20,234 -0-
Minority interest in income of Waddell &
Reed........................................ -0- 20,869 -0-
Discontinued operations of Waddell & Reed.... -0- (68,737) (77,314)
Change in accounting principle............... (24,747) -0- -0-
-------- --------- ---------
Cash provided from operations................ $511,613 $ 389,474 $ 410,064
======== ========= =========
</TABLE>
(Continued)
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW--(Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash provided from operations........... $ 511,613 $ 389,474 $ 410,064
Cash provided from (used for) investment
activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................. 1,240,652 757,649 744,839
Fixed maturities available for sale--
matured, called, and repaid.......... 413,264 474,386 512,512
Equity securities..................... 260 3,056 670
Mortgage loans........................ 26,496 8,589 3,300
Real estate........................... 124,173 12,220 7,341
Other long-term investments........... 11,338 51,903 28,082
----------- ----------- -----------
Total investments sold or matured... 1,816,183 1,307,803 1,296,744
Acquisition of investments:
Fixed maturities--available for sale.. (2,118,362) (1,872,040) (1,668,301)
Equity securities..................... (3,400) -0- -0-
Mortgage loans........................ (5,421) (52,921) (17,826)
Real estate........................... (29,639) (35,944) (24,452)
Net increase in policy loans.......... (10,842) (13,445) (14,744)
Other long-term investments........... (10,949) (20,298) (6,082)
----------- ----------- -----------
Total investments acquired.......... (2,178,613) (1,994,648) (1,731,405)
Net (increase) decrease in short-term
investments........................... (24,343) (19,168) (18,067)
Funds borrowed from affiliates......... -0- -0- 42,210
Repayment of loans to affiliates....... -0- (1,390) -0-
Sale of Family Service................. -0- 140,388 -0-
Dispositions of properties............. 8,091 1,033 1,407
Additions to properties................ (8,494) (6,170) (6,204)
Dividends from Waddell & Reed.......... -0- 16,814 52,977
----------- ----------- -----------
Cash used for investment activities..... (387,176) (555,338) (362,338)
Cash provided from (used for) financing
activities:
Issuance of common stock............... 37,164 3,957 93,973
Additions to debt...................... 63,152 216,429 98,185
Cash dividends paid to shareholders.... (48,175) (82,601) (107,097)
Repayments of debt..................... (12,129) (390,917) (20,132)
Acquisition of treasury stock.......... (221,878) (125,875) (182,903)
Proceeds from Waddell & Reed offering.. -0- 516,138 -0-
Offering proceeds retained by Waddell
& Reed................................ -0- (35,251) -0-
Net receipts from deposit product
operations............................ 66,950 57,819 78,817
----------- ----------- -----------
Cash provided from (used for) financing
activities............................. (114,916) 159,699 (39,157)
Increase (decrease) in cash............ 9,521 (6,165) 8,569
Cash at beginning of year.............. 4,920 11,085 2,516
----------- ----------- -----------
Cash at end of year.................... $ 14,441 $ 4,920 $ 11,085
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars amounts in thousands except per share data)
Note 1--Significant Accounting Policies
Business: Torchmark Corporation ("Torchmark") through its subsidiaries
provides a variety of life and health insurance products and annuities to a
broad base of customers.
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
other comprehensive income. 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
other comprehensive income. 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. 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, 1999, 1998, and 1997,
included $287.6 million, $296.7 million, and $308.6 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 $71.9 million, $71.7 million, and $72.3 million for
the years ended December 31, 1999, 1998, and 1997,
47
<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, 1999, 1998 and 1997, of $40.5 million, $33.5 million, and
$28.2 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 five to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark accounts for impairments in accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This standard requires that certain
long-lived assets used in Torchmark's business as well as certain intangible
assets, including goodwill, 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 Torchmark's
writedown of real estate in 1999, as discussed in Note 3--Investments on page
53 of this report, and Torchmark's writedown of its investment in Vesta
Insurance Group ("Vesta") in 1998, as discussed in Note 20--Related Party
Transactions on page 79 of this report, there were no significant impairments
in the three years ending 1999.
48
<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.
Reclassifications: 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 large 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.
Earnings Per Share: Torchmark presents basic and diluted earnings per share
("EPS") on the face of the income statement and a reconciliation of basic EPS
to diluted EPS. 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:
1999--133,197,023, 1998--139,998,671, 1997--139,202,354. 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: 1999--133,985,943, 1998--141,351,912, 1997--
141,431,156.
Comprehensive Income: Torchmark adopted SFAS 130, Reporting Comprehensive
Income, effective January 1, 1998. This standard defines comprehensive income
as the change in equity of a business enterprise during a period from
transactions from all nonowner sources. It requires the company to display
comprehensive income for the period, consisting of net income and other
comprehensive income. In compliance with SFAS 130, a Consolidated Statement of
Comprehensive Income is included as an integral part of the financial
statements.
49
<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,
-------------------------- ---------------------
1999 1998 1997 1999 1998
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance subsidiar-
ies...................... $193,253 $260,847 $369,446 $667,168 $640,034
</TABLE>
During 1998, Liberty National Life Insurance Company paid an extraordinary
dividend to Torchmark in the amount of $213 million. In 1999, Liberty paid $61
million and Globe Life And Accident Insurance Company paid $34.5 million in
extraordinary dividends.
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,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory net income.................... $ 193,253 $ 260,847 $ 369,446
Deferral of acquisition costs........... 419,590 356,493 328,086
Amortization of acquisition costs....... (247,800) (231,024) (224,738)
Differences in insurance policy liabili-
ties................................... 80,088 96,412 44,117
Deferred income taxes................... (63,576) (107,384) (47,541)
Income of noninsurance affiliates....... (62,711) (100,758) (142,041)
Other................................... (44,888) (30,145) 10,414
--------- --------- ---------
GAAP net income....................... $ 273,956 $ 244,441 $ 337,743
========= ========= =========
</TABLE>
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Statutory shareholders' equity.................... $ 667,168 $ 640,034
Differences in insurance policy liabilities....... 587,619 585,680
Deferred acquisition costs........................ 1,741,570 1,502,511
Value of insurance purchased...................... 151,752 170,640
Deferred income taxes............................. (367,994) (467,023)
Debt of parent company............................ (789,949) (749,290)
Monthly income preferred securities............... (193,324) (193,259)
Asset valuation reserves.......................... 53,364 68,674
Nonadmitted assets................................ 15,983 84,826
Goodwill.......................................... 402,584 414,658
Market value adjustment on fixed maturities....... (268,598) 200,087
Other............................................. (6,838) 1,990
---------- ----------
GAAP shareholders' equity........................ $1,993,337 $2,259,528
========== ==========
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Investment income is summarized as fol-
lows:
Fixed maturities....................... $ 409,695 $410,528 $396,489
Equity securities...................... 488 301 367
Mortgage loans on real estate.......... 7,720 9,247 7,127
Investment real estate................. 7,889 8,332 3,379
Policy loans........................... 16,308 15,301 14,433
Other long-term investments............ 11,245 19,755 9,279
Short-term investments................. 4,066 6,089 5,762
--------- -------- --------
457,411 469,553 436,836
Less investment expense................ (10,074) (9,995) (7,720)
--------- -------- --------
Net investment income.................. $ 447,337 $459,558 $429,116
========= ======== ========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities...................... $ (30,145) $ (8,519) $(30,122)
Equity securities..................... 215 -0- 155
Other................................. (81,041) (49,118) (7,012)
--------- -------- --------
(110,971) (57,637) (36,979)
Adjustment to deferred acquisition
costs ................................ -0- -0- (198)
--------- -------- --------
(110,971) (57,637) (37,177)
Applicable tax......................... 38,840 20,173 13,012
--------- -------- --------
Gains (losses) from investments, net of
tax................................... $ (72,131) $(37,464) $(24,165)
========= ======== ========
An analysis of the net change in
unrealized investment gains (losses) is
as follows:
Equity securities...................... $ (15,519) $ (1,080) $ 4,061
Fixed maturities available for sale.... (525,374) 66,526 150,494
Other long-term investments and foreign
exchange translation adjustments...... 2,028 (46,018) (1,054)
Adjustment to deferred acquisition
costs................................. 48,382 (3,091) (13,324)
--------- -------- --------
(490,483) 16,337 140,177
Applicable tax......................... 171,760 (8,762) (49,832)
--------- -------- --------
Change in unrealized gains (losses),
net of tax............................ $(318,723) $ 7,575 $ 90,345
========= ======== ========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated market value at December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Cost or Gross Gross Amount per % of Total
Amortized Unrealized Unrealized Fair the Balance Fixed
Cost Gains Losses Value Sheet Maturities
---------- ---------- ---------- ---------- ----------- ----------
1999:
- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
available for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 82,550 $ 228 $ (1,885) $ 80,893 $ 80,893 1.4%
GNMAs................. 371,374 13,325 (4,027) 380,672 380,672 6.7
Mortgage-backed
securities, GNMA
collateral........... 20,617 99 (41) 20,675 20,675 0.4
Other mortgage-backed
securities........... 322,092 1,773 (6,320) 317,545 317,545 5.6
State, municipalities
and political
subdivisions......... 557,250 8,947 (4,972) 561,225 561,225 9.9
Foreign governments... 57,495 1,338 (317) 58,516 58,516 1.0
Public utilities...... 613,494 1,421 (31,828) 583,087 583,087 10.3
Industrial and
miscellaneous........ 3,927,294 6,633 (259,339) 3,674,588 3,674,588 64.7
Redeemable preferred
stocks................ 2,531 63 -0- 2,594 2,594 0.0
---------- -------- --------- ---------- ---------- -----
Total fixed
maturities........... 5,954,697 33,827 (308,729) 5,679,795 5,679,795 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 36,879 7,289 (15,042) 29,126 29,126
Industrial and all
others............... 242 -0- (179) 63 63
Non-redeemable
preferred stocks...... -0- -0- -0- -0- -0-
---------- -------- --------- ---------- ----------
Total equity
securities........... 37,121 7,289 (15,221) 29,189 29,189
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,991,818 $ 41,116 $(323,950) $5,708,984 $5,708,984
========== ======== ========= ========== ==========
<CAPTION>
1998:
- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 145,902 $ 9,527 $ (13) $ 155,416 $ 155,416 2.7%
GNMAs................. 494,859 29,205 (481) 523,583 523,583 9.1
Mortgage-backed
securities, GNMA
collateral........... 60,724 566 (15) 61,275 61,275 1.1
Other mortgage-backed
securities........... 355,419 14,968 (837) 369,550 369,550 6.4
State, municipalities
and political
subdivisions......... 615,125 36,730 (233) 651,622 651,622 11.3
Foreign governments... 50,882 2,744 (296) 53,330 53,330 .9
Public utilities...... 411,624 24,972 (11) 436,585 436,585 7.6
Industrial and
miscellaneous........ 3,382,689 152,510 (20,844) 3,514,355 3,514,355 60.9
Redeemable preferred
stocks................ 2,548 183 -0- 2,731 2,731 -0-
---------- -------- --------- ---------- ---------- -----
Total fixed maturities
..................... 5,519,772 271,405 (22,730) 5,768,447 5,768,447 100%
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,013 7,756 (8) 9,761 9,761
Industrial and all
others............... 243 -0- (161) 82 82
---------- -------- --------- ---------- ----------
Total equity
securities........... 2,256 7,756 (169) 9,843 9,843
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,522,028 $279,161 $ (22,899) $5,778,290 $5,778,290
========== ======== ========= ========== ==========
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A schedule of fixed maturities by contractual maturity at December 31, 1999
is shown below on an amortized cost basis and on a fair value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Fixed maturities avail-
able for sale:
Due in one year or less. $ 64,588 $ 65,172
Due from one to five
years.................. 618,342 622,551
Due from five to ten
years.................. 1,998,061 1,947,724
Due after ten years..... 2,391,480 2,179,271
----------- -----------
5,072,471 4,814,718
Redeemable preferred
stocks................. 2,530 2,594
Mortgage-backed and
asset-
backed securities...... 879,696 862,483
----------- -----------
$ 5,954,697 $ 5,679,795
=========== ===========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $1.24
billion in 1999, $758 million in 1998, and $745 million in 1997. Gross gains
realized on those sales were $4.3 million in 1999, $6.1 million in 1998, and
$1.3 million in 1997. Gross losses were $36.5 million in 1999, $20.1 million
in 1998, and $32.2 million in 1997.
Torchmark had $7.0 million and $24.7 million in investment real estate at
December 31, 1999 and 1998, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Torchmark had $118 thousand in nonincome producing
mortgages as of year end 1999. There were no fixed maturity investments, or
other long-term investments which were nonincome producing at December 31,
1999.
During 1999, Torchmark determined to dispose of most of its investment real
estate. In the second quarter of 1999, efforts to dispose of these properties
revealed that the carrying value of the real estate exceeded its estimated
realizable value. For this reason Torchmark wrote down its investment real
estate portfolio to its estimated realizable value as of June 30, 1999. This
write down resulted in a pretax loss of $64 million, or $41 million after tax.
The majority of the investment real estate was sold in two transactions in the
latter half of 1999 for total consideration of $123 million, of which $111
million was in cash and the remainder in a ten-year collaterized note. After
the sales, Torchmark retained $16 million in investment real estate, of which
$8 million was included with properties partially occupied by Torchmark
subsidiaries.
Note 4--Property and Equipment
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ---------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Company occupied real estate........ $ 58,042 $28,440 $ 59,417 $28,697
Data processing equipment........... 20,823 19,185 19,915 18,743
Transportation equipment............ 7,128 2,525 11,157 7,551
Furniture and office equipment...... 17,083 14,165 35,777 32,195
-------- ------- -------- -------
$103,076 $64,315 $126,266 $87,186
======== ======= ======== =======
</TABLE>
Depreciation expense on property used in the business was $5.6 million, $4.2
million, and $4.6 million in each of the years 1999, 1998, and 1997,
respectively.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5--Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
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................... $1,502,512 $170,640 $1,371,131 $216,988 $1,253,727 $244,368
Additions:
Deferred during peri-
od:
Commissions........... 246,174 -0- 207,864 -0- 199,177 -0-
Other expenses........ 173,416 -0- 148,629 -0- 128,909 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 419,590 -0- 356,493 -0- 328,086 -0-
Adjustment attributable
to unrealized invest-
ment losses(1)........ 48,380 -0- -0- -0- -0- -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 467,970 -0- 356,493 -0- 328,086 -0-
Deductions:
Amortized during peri-
od................... (228,912) (18,888) (210,287) (20,737) (197,160) (27,380)
Adjustment
attributable to
unrealized investment
gains(1)............. -0- -0- (3,092) -0- (13,324) -0-
Adjustment
attributable to
realized investment
gains(1)............. -0- -0- -0- -0- (198) -0-
Business disposed..... -0- -0- (11,734) (25,611) -0- -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (228,912) (18,888) (225,113) (46,348) (210,682) (27,380)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,741,570 $151,752 $1,502,511 $170,640 $1,371,131 $216,988
========== ======== ========== ======== ========== ========
</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 $10.5 million, $13.2 million, and $16.6 million, for
the years ended December 31, 1999, 1998, and 1997, respectively. The average
interest rates used for the years ended December 31, 1999, 1998, and 1997 were
6.5%, 6.8%, and 7.19%, respectively. The estimated amortization, net of
interest accrued, on the unamortized balance at December 31, 1999 during each
of the next five years is: 2000, $16.7 million; 2001, $14.1 million; 2002,
$12.5 million; 2003, $11.0 million; and 2004, $9.7 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
Note 6--Initial Public Offering and Divestiture of Asset Management Segment
Divestiture of Waddell & Reed. Waddell & Reed, Torchmark's asset management
subsidiary, completed an initial public offering in March, 1998 of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. The initial public offering resulted in a
$426 million gain which was added to Torchmark's additional paid-in capital in
accordance with Staff Accounting Bulletin 51. Torchmark retained the remaining
64% of the Waddell & Reed stock.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6--Initial Public Offering and Divestiture of Asset Management Segment
(continued)
On November 6, 1998, Torchmark distributed the remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expense related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of
a segment. Accordingly, Torchmark's financial statements for 1998 and all
prior periods have been modified to present the net assets and operating
results of Waddell & Reed as discontinued operations of the disposed segment.
The $54 million expense of the spin-off is included in discontinued operations
under the caption "Loss on Disposal." The distribution of the Waddell & Reed
shares resulted in a reduction in Torchmark's shareholders' equity in the
approximate amount of $174 million, consisting of the equity in Waddell & Reed
net of the 36% minority Interest.
Note 7--Sale of Family Service
On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance
carrier. Family Service, which was acquired in 1990, is a preneed funeral
insurer but has not issued any new policies since 1995. Consideration for the
sale was $140 million in cash. Torchmark recorded a pretax realized loss on
the sale of approximately $14 million, but incurred a tax expense on the
transaction of $9 million. In connection with the sale, Torchmark will
continue to service the policies in force of Family Service for the next five
years for a fee of $2 million per year plus certain variable processing costs.
During 1997, Family Service accounted for $57 million in revenues and $7.7
million in pretax income. Through May, 1998, Family Service contributed $25
million in revenues and $5.8 million in pretax income. Invested assets were
$778 million and total assets were $828 million at the date of the sale.
Note 8--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,
-----------------------
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Paid-in capital from tax benefit for stock option
exercises........................................ $9,750 $ 933 $39,873
Discounted/deferred option grants................. 482 582 2,020
Distribution of Waddell & Reed stock.............. -0- 174,113 -0-
</TABLE>
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Interest paid..................................... $ 52,704 $ 66,911 $73,537
Income taxes paid................................. 148,223 102,753 31,422
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--Future Policy Benefit Reserves
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1999 is as follows:
Individual Life Insurance
Interest assumptions:
<TABLE>
<CAPTION>
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
<S> <C> <C>
1917-1999 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1999 4.00% 11
1962-1969 4.50% graded to 4.00% 2
1970-1980 5.50% graded to 4.00% 3
1970-1999 5.50% 1
1929-1999 6.00% 17
1986-1994 7.00% graded to 6.00% 12
1954-1999 8.00% graded to 6.00% 12
1951-1985 8.50% graded to 6.00% 9
1980-1987 8.50% graded to 7.00% 1
1984-1999 Interest Sensitive 26
---
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
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>
1962-1999 3.00% 2%
1982-1999 4.50% 3
1993-1999 6.00% 23
1986-1992 7.00% graded to 6.00% 47
1955-1999 8.00% graded to 6.00% 18
1951-1986 8.50% graded to 6.00% 7
---
100%
===
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--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 1999 was 6.1%.
Note 10--Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year:................. $145,802 $178,989 $173,900
Incurred related to:
Current year................................. 555,595 518,993 503,948
Prior year................................... 8,297 (2,670) 15,280
-------- -------- --------
Total incurred................................ 563,892 516,323 519,228
Paid related to:
Current year................................. 364,623 342,084 349,815
Prior year................................... 182,934 207,426 164,324
-------- -------- --------
Total paid.................................... 547,557 549,510 514,139
-------- -------- --------
Balance at end of year........................ $162,137 $145,802 $178,989
======== ======== ========
</TABLE>
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--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,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Income from continuing operations............ $ 134,320 $154,338 $138,409
Discontinued operations...................... (571) 92,772 40,081
Monthly income preferred securities dividend. (4,932) (5,265) (5,318)
Shareholders' equity:
Unrealized gains (losses)................... (171,757) 8,540 49,832
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes................................... (9,751) (933) (44,011)
Other........................................ (1,274) (1,964) 1,514
--------- -------- --------
$ (53,965) $247,488 $180,507
========= ======== ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current income tax expense....................... $ 85,917 $118,827 $ 92,989
Deferred income tax expense...................... 48,403 35,511 45,420
-------- -------- --------
$134,320 $154,338 $138,409
======== ======== ========
</TABLE>
In 1999, 1998, and 1997, 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,
-------------------------------------------
1999 % 1998 % 1997 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes............ $140,843 35% $156,447 35% $137,200 35%
Increase (reduction) in income
taxes resulting from:
Tax-exempt investment income.... (8,798) (2) (7,111) (2) (6,165) (2)
Equity in earnings of Vesta..... -0- (9,485) (2) 5,850 1
Sale of Family Service.......... -0- 13,460 3 -0-
Other........................... 2,275 1 1,027 1 1,524 1
-------- --- -------- --- -------- ---
Income taxes..................... $134,320 34% $154,338 35% $138,409 35%
======== === ======== === ======== ===
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--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,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Unrealized investment losses................................ $ 89,433 $ -0-
Present value of future policy surrender charges............ 28,534 20,153
Carryover of nonlife net operating losses and life-nonlife
capital losses............................................. 18,044 8,364
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................... 42,458 22,241
-------- --------
Total gross deferred tax assets............................. 178,469 50,758
Deferred tax liabilities:
Deferred acquisition costs.................................. 445,266 381,415
Unrealized investment gains................................. -0- 82,324
Future policy benefits, unearned and advance premiums, and
policy claims.............................................. 69,314 46,621
Other....................................................... 12,553 17,060
-------- --------
Total gross deferred tax liabilities........................ 527,133 527,420
-------- --------
Net deferred tax liability................................... $348,664 $476,662
======== ========
</TABLE>
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 $10 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 completed the spin-off of its
asset management segment in 1998, which resulted in a distribution of the
policyholder surplus account of a Torchmark life insurance subsidiary. This
caused a current tax expense of $50 million.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and
contributory savings plans which cover substantially all employees. There is
also a nonqualified noncontributory excess benefit pension 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>
1999.................... $2,775 $2,889 $480
1998.................... 1,530 2,875 399
1997.................... 2,123 3,244 526
</TABLE>
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. Plan contributions are both mandatory and discretionary,
depending on the terms of the plan.
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 $7.5 million
and $7.2 million at December 31, 1999 and 1998, respectively. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $4.7
million at both December 31, 1999 and 1998.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the
period................................... $ 5,133 $ 4,555 $ 4,732
Interest cost on projected benefit obliga-
tion..................................... 8,260 7,595 7,389
Actual return on assets................... (20,381) (21,572) (17,014)
Net amortization and deferral............. 10,357 12,696 8,663
-------- -------- --------
Net periodic pension cost................ $ 3,369 $ 3,274 $ 3,770
======== ======== ========
</TABLE>
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
Torchmark adopted FASB Statement No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, effective for year-end 1998 with
comparative periods restated. In accordance with this Standard, the following
table presents a reconciliation from the beginning to the end of the year of
the benefit obligation and plan assets. This table also presents a
reconciliation of the plans' funded status with the amounts recognized on
Torchmark's balance sheet.
<TABLE>
<CAPTION>
Pension Benefits
For the year
ended
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Changes in benefit obligation:
Obligation at beginning of year..................... $109,720 $ 98,078
Service cost........................................ 5,133 4,555
Interest cost....................................... 8,260 7,595
Amendments.......................................... 74 -0-
Actuarial loss (gain)............................... (5,430) 7,823
Benefits paid....................................... (13,176) (8,331)
-------- --------
Obligation at end of year........................... 104,581 109,720
Changes in plan assets:
Fair value at beginning of year..................... 123,289 108,942
Return on assets.................................... 20,381 21,572
Contributions....................................... 2,285 1,106
Benefits paid....................................... (13,176) (8,331)
-------- --------
Fair value at end of year........................... 132,779 123,289
-------- --------
Funded status at year end........................... 28,198 13,569
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain).................. (40,764) (25,016)
Unrecognized prior service cost..................... 865 851
Unrecognized transition obligation.................. (115) (356)
-------- --------
Net amount recognized at year end................... $(11,816) $(10,952)
======== ========
Amounts recognized consist of:
Prepaid benefit cost................................ $ 243 $ 212
Accrued benefit liability........................... (12,418) (12,083)
Intangible asset.................................... 359 919
-------- --------
Net amount recognized at year end................... $(11,816) $(10,952)
======== ========
</TABLE>
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1999 and 7.0% in 1998. The rate of
assumed compensation increase was 4.5% in 1999 and 4.0% in 1998 while the
expected long-term rate of return on plan assets was 9.2% in both 1999 and
1998.
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.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
The components of net periodic postretirement benefit cost for plans other
than pensions are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost....................................... $ 239 $ 249 $ 248
Interest cost on accumulated postretirement benefit
obligation........................................ 380 493 490
Actual return on plan assets....................... -0- -0- -0-
Net amortization and deferral...................... (450) (281) (377)
----- ----- -----
Net periodic postretirement benefit cost........... $ 169 $ 461 $ 361
===== ===== =====
</TABLE>
The following table presents a reconciliation of the benefit obligation and
plan assets from the beginning to the end of the year and a reconciliation of
the funded status to the accrued benefit liability:
<TABLE>
<CAPTION>
Benefits Other Than Pensions
For the year ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Changes in benefit obligation:
Obligation at beginning of year....... $ 6,849 $ 6,431
Service cost.......................... 239 249
Interest cost......................... 380 493
Amendments............................ -0- (149)
Actuarial loss (gain)................. (1,324) 435
Benefits paid......................... (529) (610)
--------------- ---------------
Obligation at end of year............. 5,615 6,849
Changes in plan assets:
Fair value at beginning of year....... -0- -0-
Return on assets...................... -0- -0-
Contributions......................... 529 610
Benefits paid......................... (529) (610)
--------------- ---------------
Fair value at end of year............. -0- -0-
--------------- ---------------
Funded status at year end............ (5,615) (6,849)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain).... (2,349) (1,259)
Unrecognized prior service cost....... (290) (506)
--------------- ---------------
Net amount recognized at year end as
accrued benefit liability........... $ (8,254) $ (8,614)
=============== ===============
</TABLE>
For measurement purposes, an 8.0% annual rate of increase in per capita cost
of covered healthcare benefits was assumed for 1999. These rates grade to
ranges of 4.5% to 5.5% by the year 2010. The health care cost trend rate
assumption has a significant effect on the amounts reported, as illustrated in
the following table which presents the effect of a one percentage point
increase and decrease on the service and interest cost components and the
benefit obligation:
<TABLE>
<CAPTION>
Change in Trend Rate
-----------------------
1% 1%
Effect on: Increase Decrease
---------- ---------- ----------
<S> <C> <C>
Service and interest cost components............... $ 62 $ 54
Benefit obligation................................. 431 386
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.15% in 1999 and 7.38% in 1998.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt
An analysis of debt at carrying value is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998
-------------------- --------------------
Short-term Long-term Short-term Long-term
Debt Debt Debt Debt
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Senior Debentures, due 2009........ $ 99,450 $ 99,450
Notes, due 2023.................... 177,540 185,394
Notes, due 2013.................... 94,565 98,578
Commercial paper................... $418,394 $355,242
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ...... 150
-------- -------- -------- --------
$418,394 $371,555 $355,392 $383,422
======== ======== ======== ========
</TABLE>
The amount of debt that becomes due during each of the next five years is:
2000, $418,394, and 2001-2004, $0.
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 are not
redeemable at the option of Torchmark prior to maturity and 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%. In 1998 and 1999, $10.8 million and $7.5 million principal amount
were purchased in the open market at a cost of $10.6 million and $7.9 million
respectively. 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%. In March, 1999, $4.0
million principal amount were purchased in the open market at a cost of
$4.1 million. 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. Borrowings are at interest rates
selected by Torchmark based on either the corporate base rate or the
Eurodollar rate at the time of borrowing. At December 31, 1999 and December
31, 1998 there were no borrowings under the revolving credit agreement. The
revolving credit agreement is also designed to back up a commercial paper
program. The short-term borrowings under the revolving credit agreements and
in the commercial paper market averaged $411 million during 1999, and were
made at an average yield of 5.43%. At December 31, 1999, commercial paper was
outstanding in the face amount of $420 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, 1999, and pays a
facility fee based on size of the line. Including fees, the average borrowing
cost during 1999 was 5.61%.
In the first quarter of 1998, Torchmark repaid $20 million principal amount
of its 8 5/8% Sinking Fund Debentures due March 1, 2017, through a sinking
fund payment of which $8 million was mandatory and $12 million was elective
under the terms of the issue. An identical payment was made in the third
quarter of 1997. The remaining $160 million principal amount was called on
April 1, 1998, at a prevailing call price of 103.76, or $166 million. An
after-tax loss on the redemption of debt of $5 million was recorded in the
second quarter of 1998. These payments were made from additional commercial
paper borrowings.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt (continued)
The 9 5/8% Senior Notes Torchmark previously had outstanding matured on May
1, 1998. The principal amount of $200 million with accrued interest was repaid
from additional commercial paper borrowings.
Interest in the amount of $284 thousand, $2.4 million, and $1.7 million was
capitalized during 1999, 1998, and 1997, respectively.
Note 14--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 have been redeemable at Torchmark's option since
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 expired on September 30, 1999. The interest rate
was 7.00% at December 31, 1999 and 6.44% at December 31, 1998. The market
value of the swap agreement was a benefit of $6.7 million at December 31, 1999
and $24.7 million at December 31, 1998. Torchmark changed its method of
accounting for this swap agreement during 1999. Refer to Note 15--Change in
Accounting Principle below for more information on this change in accounting
principle.
Note 15--Change in Accounting Principle
Torchmark has in place a swap agreement with an unaffiliated party whereby
Torchmark pays a variable dividend rate on its $200 million face amount
outstanding MIPS in exchange for payment of a 9.18% fixed dividend. Effective
January 1, 1999, Torchmark changed its method of accounting for this swap
agreement to recognize changes in its fair value, net of tax, as realized
investment gains or losses. This method of accounting for such instruments is
believed to be preferable under the guidance established by Statement of
Financial Accounting Standards No. 80, "Accounting for Futures Contracts
("SFAS 80") and the Securities and Exchange Commission. Previously, Torchmark
accounted for the swap using hedge accounting under SFAS 80. The after-tax
cumulative effect of the change at January 1, 1999 of $16.1 million (net of
income taxes of $8.7 million) is included in income for the twelve months
ended December 31, 1999. The effect of the change on the twelve months ended
December 31, 1999 was to increase realized losses by $11.7 million ($.09 per
diluted share) excluding the cumulative effect of the change in accounting
principle. The pro forma effect of the retroactive application of the new
accounting method to the twelve month period ended December 31, 1998 would be
to increase net income by $4.4 million ($.03 per diluted share).
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--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>
1997:
Balance at January 1, 1997.......... -0- -0- 147,568,456 (8,176,506)
Issuance of common stock due to
exercise of stock options.......... 280,452 5,539,596
Other treasury stock acquired....... (5,171,558)
--- --- ----------- -----------
Balance at December 31, 1997........ -0- -0- 147,848,908 (7,808,468)
1998:
Issuance of common stock due to
exercise of stock options.......... 175,240
Issuance of common stock due to
restricted stock grant............. 117,500
Other treasury stock acquired....... (3,436,205)
Restricted shares converted to
Waddell & Reed shares.............. (48,000)
--- --- ----------- -----------
Balance at December 31, 1998........ -0- -0- 147,800,908 (10,951,933)
1999:
Issuance of common stock due to
exercise of stock options.......... 1,898,524
Other treasury stock acquired....... (6,742,606)
Lapse of unvested stock grant....... (8,625)
--- --- ----------- -----------
Balance at December 31, 1999........ -0- -0- 147,800,908 (15,804,640)
=== === =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
--------------------- ---------------------
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 6.7 million shares at a cost of $222 million in 1999, 3.4 million shares
at a cost of $126 million in 1998, and 5.2 million shares at a cost of
$183 million in 1997.
Grant of Restricted Stock: 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. In the fourth quarter of 1999, 8,625
restricted shares lapsed under the terms of the grant and were returned to the
company.
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 from operations before realized capital
gains or losses 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 2000, 192 million will be available to
Torchmark for dividends from insurance subsidiaries in compliance with
statutory regulations without prior regulatory approval.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--Shareholders' Equity (continued)
Earnings Per Share: A reconciliation of basic and diluted weighted-average
shares outstanding is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic weighted average shares outstanding.. 133,197,023 139,998,671 139,202,354
Weighted average dilutive options
outstanding............................... 788,920 1,353,241 2,228,802
----------- ----------- -----------
Diluted weighted average shares
outstanding............................... 133,985,943 141,351,912 141,431,156
=========== =========== ===========
</TABLE>
Options outstanding considered to be anti-dilutive totaled 5,013,990, 0, and
0 as of December 31, 1999, 1998 and 1997, 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 17--Employee Stock Options
Certain employees, directors, and consultants 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 various Torchmark stock option
plans. The options are exercisable during the period commencing from the date
they vest until expiring ten years and two days or eleven years after grant.
Employee and consultant stock options generally vest one-half in two years and
one-half in three years. Formula-based director grants generally vest in six
months. Grants in September, 1997 and November, 1999 vested immediately. Stock
options awarded in connection with compensation deferrals by certain directors
and executives 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
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1.................... 13,192,506 2,434,004 1,345,080
Amendment of 1987 Plan.................. 4,800,000
1998 Stock Incentive Plan............... 14,000,000
Approval of Executive Deferred and
Director Plan grants................... (216,481) (633,672)
Grant of restricted stock(1)............ (117,500)
Lapse of restricted stock grants(1)..... 8,625
Expired................................. 70,760 13,700 32,896
Closure of option plans(2).............. (2,113,723)
Other grants............................ (2,402,671) (807,494) (3,110,300)
---------- ---------- ----------
Balance at December 31.................. 10,869,220 13,192,506 2,434,004
========== ========== ==========
</TABLE>
- --------
(1) This stock grant was made from the 1987 Stock Incentive Plan. The
retirement of an employee during 1999 resulted in the lapse of unvested
grants.
(2) The 1987 Stock Incentive Plan, the 1998 Directors' Stock Option Plan, and
the 1998 Executive Deferred Compensation Stock Option Plan were closed in
1998.
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.
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
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.
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 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.0% 4.8% 6.1%
Dividend yield.................................... 1.2% 1.1% 1.7%
Volatility factor................................. 25.6 22.8 23.7
Weighted average expected life (in years)......... 4.66 4.71 3.93
</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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income............................. $262,433 $245,383 $318,671
Pro forma basic net income per share............. 1.97 1.75 2.29
Pro forma diluted net income per share........... 1.96 1.74 2.25
</TABLE>
On September 25, 1997, Torchmark executed a stock option exercise and
restoration program through which over 100 Torchmark directors and employees
exercised vested stock options and received a reduced number of 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. Another restoration program was effected
on November 15, 1999. The 1999 program involved 80 directors and employees who
exercised vested options for 1.8 million shares, resulting in the net issuance
to employees of 523 thousand shares and 1.2 million replacement options for
the shares sold by the employee to pay the exercise price and minimum
withholding taxes. As a result of these restoration programs, management's
ownership interest increased, and Torchmark received a significant current tax
benefit from the exercise of the options.
On November 6, 1998, in connection with its spin-off of Waddell & Reed,
Torchmark adjusted the number and exercise price of its employee stock options
so that the options' value after the spin would be equivalent to its value
before the spin. Additionally, every eligible optionee was given the
opportunity to elect to convert a portion of their Torchmark options into
equivalent Waddell & Reed options in accordance with the same spin ratio that
was applicable to all Torchmark shareholders. Also, employees of Waddell &
Reed and directors were allowed to convert all of their Torchmark options into
equivalent Waddell & Reed options. In every case, the employee or director
maintained the same value after the spin-off as was held prior to the
transaction.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
As a result of the adjustment and conversion of these options, 7.2 million
outstanding Torchmark options with an aggregate exercise price of $219 million
on November 6, 1998 were replaced with 6.4 million adjusted Torchmark options
with an aggregate exercise price of $167 million. Also 3.7 million Waddell &
Reed options were granted with an aggregate exercise price of $51.6 million.
A summary of Torchmark's stock option activity and related information for
the years ended December 31, 1999, 1998, and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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................ 7,228,400 $27.04 7,241,050 $29.76 9,350,022 $18.52
Granted................. 2,402,671 31.36 1,023,975 34.97 3,743,972 36.70
Exercised............... (1,898,524) 19.80 (175,240) 22.58 (5,820,048) 16.17
Expired................. (70,760) 32.98 (13,700) 29.19 (32,896) 29.81
Reduction due to Waddell
& Reed spinoff......... (7,249,129) 30.20
Addition due to Waddell
& Reed spinoff......... 6,401,444 26.16
---------- ---------- ----------
Outstanding-end of year. 7,661,787 30.14 7,228,400 27.04 7,241,050 29.76
========== ========== ==========
Exercisable at end of
year................... 4,243,254 29.37 5,038,081 26.24 4,189,238 32.82
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998, and 1997 were $9.29, $8.88, and $8.43, respectively.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Contract
Exercise Number Number Termination
Price Grant Date Outstanding Exercisable Date
-------- ---------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
4.86419 October 1, 1993 6,416 6,416 October 3, 2003
5.63977 October 1, 1993 5,016 5,016 October 3, 2003
13.91029 January 2, 1991 21,029 21,029 January 4, 2001
14.17778 January 25, 1990 21,029 21,029 January 27, 2000
14.55172-14.58579 December 16, 1994 65,969 65,969 December 18, 2004
14.55222 December 7, 1992 1,694 1,694 December 9, 2002
14.55659-14.57130 December 14, 1993 6,337 6,337 December 16, 2003
14.57232-14.57573 October 1, 1993 6,552 6,552 October 3, 2003
14.7127 December 12, 1991 13,802 13,802 December 14, 2001
14.92781 January 3, 1995 7,010 7,010 January 5, 2005
15.94885* December 18, 1996 48,000 6,000 December 18, 2007
16.42468 January 2, 1992 21,029 21,029 January 4, 2002
18.56413-18.5922 December 20, 1995 394,519 394,519 December 22, 2005
18.61765-18.618 December 14, 1993 56,427 56,427 December 16, 2003
19.26091 January 2, 1996 7,010 7,010 January 4, 2006
19.26091-19.276 January 3, 1994 13,010 13,010 January 5, 2004
21.29257-21.30859 December 16, 1996 528,913 528,913 December 18, 2006
21.50657-21.52056 January 2, 1997 79,956 7,010 January 4, 2007
22.14864-22.16198 January 31, 1997 140,927 19,444 January 31, 2008
22.25559-22.25570 December 7, 1992 48,429 48,429 December 9, 2002
24.7174-24.72794 January 4, 1993 19,010 19,010 January 6, 2003
27.8125 December 21, 1999 1,135,713 0 December 23, 2009
33.27631-33.28237 December 24, 1997 315,243 158,241 December 26, 2007
33.4375 December 16, 1998 648,800 500 December 18, 2008
33.4375 December 16, 1998 115,590 11,559 December 16, 2009
33.4903-33.497 September 25, 1997 2,427,422 2,427,422 September 27, 2007
33.54382 January 9, 1998 12,984 1,298 January 9, 2009
33.9375 January 11, 1999 51,025 0 January 11, 2010
34.50 November 15, 1999 1,173,733 283,130 November 17, 2009
34.75 December 30, 1998 39,659 3,966 December 30, 2009
35.63037 February 16, 1998 12,056 1,206 February 16, 2009
36.11175-36.11284 January 2, 1998 152,709 36,000 January 4, 2008
36.37928 February 10, 1998 11,357 1,136 February 10, 2009
36.43278 February 4, 1998 11,412 1,141 February 4, 2009
36.50 January 4, 1999 42,000 42,000 January 4, 2010
--------- ---------
7,661,787 4,243,254
========= =========
</TABLE>
- --------
* Issued when the market price was $24.8125. Option price at that time (prior
to the Waddell & Reed spin-off adjustment) was $18.61.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--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, 1999. Insurance ceded on life and accident and health products represents
.7% of premium income for 1999. 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 2.3% of life insurance in force at December 31,
1999 and reinsurance assumed on life and accident and health products
represents 1.9% of premium income for 1999.
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 $3.4 million in 1999 and $3.2 million in 1998 and 1997. Future minimum
rental commitments required under operating leases having remaining
noncancelable lease terms in excess of one year at December 31, 1999 are as
follows: 2000, $2.0 million; 2001, $1.2 million; 2002, $845 thousand; 2003,
$438 thousand; 2004, $189 thousand and in the aggregate, $4.9 million.
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, 1999, the investment portfolio
consisted of the following:
<TABLE>
<CAPTION>
Percent of
Type of Investment Portfolio
------------------ ----------
<S> <C>
Investment-grade corporate bonds 64%
Securities of state and municipal governments 9
Securities of the U.S. government or U.S. government-backed
securities 8
Nongovernment-guaranteed mortgage-backed securities 5
Noninvestment-grade securities 5
Policy loans, which are secured by the underlying insurance
policy values 4
Short-term investments, which generally mature within one
month 2
Mortgages 1
Securities of foreign governments 1
Equity securities, real estate, and other long-term
investments 1
</TABLE>
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 debt and equity investments are made in a wide range of industries.
At December 31, 1999, 4% or more of the portfolio was invested in the
following industries:
<TABLE>
<CAPTION>
Percent of
Industry Portfolio
-------- ----------
<S> <C>
Depository institutions 10%
Electric, gas, and sanitary services 10
Insurance carriers 5
Chemicals and allied products 4
Communications 4
Food and kindred products 4
Nondepository credit institutions 4
</TABLE>
Otherwise, no individual industry represented 4% or more of Torchmark's
investments. At year-end 1999, 5% 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 $313
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
million, amortized cost was $314 million, and market value was $295 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.
Guarantees: In the fourth quarter of 1999, Torchmark issued a full financial
guaranty of all obligations, receivables, and recovery of capital on behalf of
its subsidiaries American Income and AILIC Receivable Corporation up to $100
million. The guarantee was made to an unaffiliated third party as agent for
the purchasers of certain agent receivables of American Income.
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. In 1999, Alabama enacted legislation limiting
punitive damages in non-physical injury cases to the greater of $500,000 or
three times compensatory damages. Since this legislation has not undergone
scrutiny by appellate courts regarding its constitutionality and a jury's
discretion regarding the amount of compensatory damages (including mental
anguish) awarded in any given case is not precisely defined, the effect of
this legislation on Torchmark's litigation remains unclear. Thus, the
likelihood or extent of a punitive damage award in any given case is currently
impossible to predict. As of December 31, 1999, Liberty was a party to
approximately 135 active lawsuits (including 17 employment related cases and
excluding interpleaders and stayed cases), 126 of which were Alabama
proceedings in which punitive damages were sought. Liberty faces trial
settings in these cases on an on-going basis.
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.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a motion to decertify the presently defined class in Smith.
On March 23, 1999, the District Court granted defendants' motion to decertify
the Smith class in part and decertified all but the ERISA claims of a more
narrowly defined Smith class. In May 1999, the defendants filed motions to
dismiss the claims certified by the Court's March 23, 1999 order. On December
14, 1999, the District Court granted defendants' motion for summary judgment.
That Court denied a motion for reconsideration on January 21, 2000.
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
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
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 the
certification of a state class of Georgia policyholders. Discovery then
proceeded 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. On June 17, 1998, the U.S. District Court entered
an order which denied the plaintiffs' motion to certify a Georgia
policyholders class, denied reconsideration of the previously entered motion
for summary judgment on certain issues, denied reconsideration of the denial
of national certification of a class of policyholders and severed and
transferred claims of Mississippi policyholders to the U.S. District Court for
the Northern District of Mississippi (Greco v. Torchmark Corporation, Case No.
1:98CV196-D-D). The U.S. District Court granted defendants' motion for summary
judgment on all remaining issues in Crichlow on February 4, 1999. Plaintiffs
in Greco then moved to certify a class of persons purchasing Globe hospital
and surgical insurance policies in Mississippi. On February 1, 1999,
defendants filed a motion for summary judgment in Greco.
Defendants' motion for summary judgment on all remaining issues in Crichlow
was granted by the District Court on February 4, 1999. The Crichlow plaintiffs
have appealed and Crichlow defendants have cross-appealed various orders of
the District Court to the United States Court of Appeals for the Eleventh
Circuit.
On October 29, 1999, the District Court dismissed all of the plaintiffs'
claims in Greco in their entirety and entered a final judgment dismissing
Greco with prejudice. This October 29, 1999 order in Greco has been appealed
by plaintiffs to the Fifth Circuit Court of Appeals.
As previously reported, Liberty has been a party to two lawsuits alleging
that a class of persons were insured under Liberty 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
Gentry case was dismissed by the St. Clair County Circuit Court on June 16,
1998 and subsequently the Harris case was amended to add former plaintiff
Gentry as an additional class representative in that case. On December 28,
1999, the Jefferson County Circuit Court entered an order in Harris granting
summary judgment for Liberty on all plaintiffs' claims except unjust
enrichment. The only remaining claim in the Harris plaintiffs' motion for
class certification, one of unjust enrichment, was denied by the Circuit Court
in an order denying the motion for class certification entered February 10,
2000.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al (Case No. CV-70-H-752-S), class action litigation involving
Liberty, a class composed of all owners of funeral homes in Alabama and a
class composed of all insureds (Alabama residents only) under burial or vault
policies issued, assumed or reinsured by Liberty. The final judgment fixed the
rights and obligations of Liberty and the funeral directors authorized to
handle Liberty burial and vault policies as well as reforming the benefits
available to the policyholders under the policies. Although class actions are
inherently subject to subsequent collateral attack by absent class members,
the Battle decree remains in effect to date. A motion filed in February 1990
to challenge the final judgment under Federal Rule of Civil Procedure 60(b)
was rejected by both the District Court in 1991 and the Eleventh Circuit Court
of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme
Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with
the
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
District Court requesting that it order certain contract funeral directors to
comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. All parties made extensive
submissions to the District Court and a hearing on the opposing petitions was
held by the District Court on February 9, 1999. On March 8, 1999, the District
Court entered an order granting Liberty's petition to enforce the obligations
of contract funeral directors under their funeral service contracts and
denying the funeral directors' petition for review of the Battle Final
Judgment and alternative relief. On July 29, 1999, the funeral director class
filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking
to have the March 8, 1999 order vacated on the merits. Liberty filed a joint
motion in the Eleventh Circuit Court seeking remand to the District Court for
purposes of appointment of class counsel for burial policyholders, who are
currently not formally represented in these proceedings. The Circuit Court
issued an order denying Liberty's joint motion on September 15, 1999 and the
funeral director class' appeal remains pending. On January 24, 2000, Liberty
and the funeral director class filed a joint motion for remand in order to
allow the District Court to evaluate a proposed settlement of the funeral
directors' appeal.
On October 28, 1999, Liberty was served with a subpoena from the Florida
Department of Insurance in connection with that Department's investigation
into Liberty's sales practices and disclosures in the State of Florida
regarding industrial life insurance and low value life insurance policies.
Subsequently, on December 8, 1999, purported class action litigation was filed
against Liberty in the United States District Court for the Northern District
of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-
BU-3262-S), on behalf of all African-Americans who have or have had at the
time of policy termination an ownership interest in certain life insurance
policies ($25,000 face amount or less) marketed by Liberty and certain of its
former subsidiaries. Plaintiffs allege racial discrimination in Liberty's
premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in
sales and administrative practices, receipt of excessive and unreasonable
premium payments by Liberty, improper hiring, supervision, retention and
failure to monitor actions of officers, agents and employees, breach of
contract in dismantling the debit premium collection system, fraudulent
inducement and negligent misrepresentation. Unspecified compensatory and
punitive damages are sought together with a declaratory judgment and equitable
and/or injunctive relief, including establishment of a constructive trust for
the benefit of class members. Defendants filed a motion for judgment on the
pleadings or in the alternative for summary judgment on January 27, 2000.
Note 19--Business Segments
Torchmark's segments are based on the insurance product lines it markets and
administers, life insurance, health insurance, and annuities. These major
product lines are set out as segments because of the common characteristics of
products within these categories, comparability of margins, and the similarity
in regulatory environment and management techniques. There is also an
investment segment which manages the investment portfolio, debt, and cash flow
for the insurance segments and the corporate function. Torchmark's management
evaluates the overall performance of the operations of the company in
accordance with these segments.
Life insurance products include traditional and interest-sensitive whole
life insurance as well as term life insurance. Health products are generally
guaranteed-renewable and include Medicare Supplement, cancer, accident, long-
term care, and limited hospital and surgical coverages. Annuities include both
fixed-benefit and variable contracts. Variable contracts allow policyholders
to choose from a variety of mutual funds in which to direct their deposits.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Torchmark markets its insurance products through a number of distribution
channels, each of which sells the products of one or more of Torchmark's
insurance segments. The tables below present segment premium revenue by each
of Torchmark's marketing groups.
<TABLE>
<CAPTION>
For the Year 1999
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United American
Independent............ $ 37,375 3.7% $427,023 51.8% $ 508 1.2% $ 464,906 24.7%
Liberty National
Exclusive.............. 288,330 28.3 143,857 17.4 60 0.2 432,247 22.9
American Income
Exclusive.............. 217,367 21.3 47,564 5.8 264,931 14.1
Direct Response......... 245,824 24.1 11,778 1.4 257,602 13.7
United American
Exclusive.............. 19,318 1.9 194,594 23.6 213,912 11.4
United Investors
Exclusive.............. 84,098 8.3 40,401 98.6 124,499 6.6
Military Independent.... 104,590 10.3 104,590 5.5
Other................... 21,399 2.1 21,399 1.1
---------- ----- -------- ----- ------- ----- ---------- -----
$1,018,301 100.0% $824,816 100.0% $40,969 100.0% $1,884,086 100.0%
========== ===== ======== ===== ======= ===== ========== =====
<CAPTION>
For the Year 1998
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United American
Independent............ $ 36,925 3.8% $417,556 54.9% $ 445 1.3% $ 454,926 25.9%
Liberty National
Exclusive.............. 282,389 29.4 135,861 17.9 $ 84 0.2 418,334 23.9
American Income
Exclusive.............. 204,310 21.3 47,074 6.2 251,384 14.3
Direct Response......... 221,371 23.1 8,817 1.2 230,188 13.1
United American
Exclusive.............. 18,798 2.0 150,602 19.8 169,400 9.7
United Investors
Exclusive.............. 80,376 8.4 33,065 97.4 113,441 6.4
Military Independent.... 92,204 9.6 92,204 5.3
Other................... 23,393 2.4 360 1.1 23,753 1.4
---------- ----- -------- ----- ------- ----- ---------- -----
$ 959,766 100.0% $759,910 100.0% $33,954 100.0% $1,753,630 100.0%
========== ===== ======== ===== ======= ===== ========== =====
<CAPTION>
For the Year 1997
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United American
Independent............ $ 36,810 4.0% $428,775 58.0% $ 333 1.2% $ 465,918 27.8%
Liberty National
Exclusive.............. 280,519 30.8 125,701 17.0 84 0.3 406,304 24.2
American Income
Exclusive.............. 190,681 20.9 46,116 6.2 236,797 14.1
Direct Response......... 195,393 21.5 6,467 0.9 201,860 12.0
United American
Exclusive.............. 18,243 2.0 132,426 17.9 150,669 9.0
United Investors
Exclusive.............. 77,986 8.6 27,009 94.7 104,995 6.3
Military Independent.... 79,631 8.8 79,631 4.7
Other................... 30,729 3.4 1,101 3.8 31,830 1.9
---------- ----- -------- ----- ------- ----- ---------- -----
$ 909,992 100.0% $739,485 100.0% $28,527 100.0% $1,678,004 100.0%
========== ===== ======== ===== ======= ===== ========== =====
</TABLE>
Because of the nature of the insurance industry, Torchmark has no individual
or group which would be considered a major customer. Substantially all of
Torchmark's business is conducted in the United States, primarily in the
Southeastern and Southwestern regions.
The measure of profitability established by management for insurance
segments is underwriting income before other income and administrative
expenses, in accordance with the manner the segments are managed. It
essentially represents gross profit margin on insurance products before
insurance administrative expenses and consists of premium, less net policy
obligations, acquisition expenses, and commissions. It differs from GAAP
pretax operating income before other income and administrative expense for two
primary reasons. First, there is a reduction to policy obligations for
interest credited by
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
contract to policyholders because this interest is earned and credited by the
investment segment. Second, interest is also added to acquisition expense
which represents the implied interest cost of deferred acquisition costs,
which is funded by and is attributed to the investment segment.
The measure of profitability for the investment segment is excess investment
income, which represents the income earned on the investment portfolio in
excess of net policy requirements and financing costs associated with debt and
Torchmark's MIPS. The investment segment is measured on a tax-equivalent
basis, equating the return on tax-exempt investments to the pretax return on
taxable investments. Other than the above-mentioned interest allocations,
there are no other intersegment revenues or expenses. Expenses directly
attributable to corporate operations are included in the "Corporate" category.
All other unallocated revenues and expenses on a pretax basis, including
insurance administrative expense, are included in the "Other" segment
category. The table below sets forth a reconciliation of Torchmark's revenues
and operations by segment to its major income statement line items.
<TABLE>
<CAPTION>
For the year 1999
-----------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- -------- ---------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium................ $1,018,301 $824,816 $ 40,969 $1,884,086
Net Investment income.. $458,824 $(11,487) 447,337
Other income........... $ 3,348 (2,008) 1,340
---------- -------- -------- -------- --------- -------- -------- ----------
Total revenue........ 1,018,301 824,816 40,969 458,824 3,348 (13,495) 2,332,763
Expenses:
Policy benefits........ 666,122 535,901 34,524 1,236,547
Required reserve
interest.............. (229,287) (17,383) (40,991) 287,661 -0-
Amortization of
acquisition costs..... 170,444 64,046 13,310 247,800
Commissions and premium
tax................... 56,341 84,913 759 18,642 160,655
Required interest on
acquisition costs..... 91,412 12,707 6,536 (110,655) -0-
Financing costs*....... 66,431 (14,090) 52,341
---------- -------- -------- -------- --------- -------- -------- ----------
Total expenses....... 755,032 680,184 14,138 243,437 4,552 1,697,343
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income and
administrative expense
and nonrecurring
charge................. 263,269 144,632 26,831 434,732
Nonrecurring charge..... (20,650) 20,650 -0-
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income
and administrative
expense**............. 242,619 144,632 26,831 20,650 434,732
Excess investment
income................. 215,387 215,387
Subtotal adjustments.... 3,348 (18,047) (14,699)
---------- -------- -------- -------- --------- -------- -------- ----------
Subtotal............. 242,619 144,632 26,831 215,387 3,348 2,603 635,420
Administrative expense.. (104,903) (104,903)
Parent expense.......... $(10,166) (10,166)
Goodwill amortization... (12,075) (12,075)
---------- -------- -------- -------- --------- -------- -------- ----------
Pretax operating
income.............. $ 242,619 $144,632 $ 26,831 $215,387 $(101,555) $(22,241) $ 2,603 508,276
========== ======== ======== ======== ========= ======== ========
Deduct realized investment losses, deferred acquisition cost adjustment, and gain on sale of
equipment...................................................................................... (105,868)
----------
Pretax income................................................................................ $ 402,408
==========
</TABLE>
- --------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
<TABLE>
<CAPTION>
For the year 1998
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium........... $ 957,274 $759,910 $ 33,594 $ 2,852 $1,753,630
Net investment
income........... $ 470,701 $(11,143) 459,558
Other income...... $ 4,488 (2,163) 2,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total revenue... 957,274 759,910 33,594 470,701 4,488 2,852 (13,306) 2,215,513
Expenses:
Policy benefits... 618,867 482,496 34,662 14,251 1,150,276
Required reserve
interest......... (215,185) (20,440) (42,171) 296,696 (18,900) -0-
Amortization of
acquisition
costs............ 158,298 59,208 11,561 3,883 (1,926) 231,024
Commissions and
premium tax...... 57,364 87,828 510 208 (2,163) 143,747
Required interest
on acquisition
costs............ 85,374 11,373 5,609 (103,481) 1,125 -0-
Financing costs*.. 71,367 (15,042) 56,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total expenses.. 704,718 620,465 10,171 264,582 567 (19,131) 1,581,372
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense**......... 252,556 139,445 23,423 2,285 417,709
Reclass of Family
Service........... 2,187 98 (2,285) -0-
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense........... 254,743 139,445 23,521 417,709
Excess investment
income............ 206,119 206,119
Subtotal
adjustments....... 4,488 5,825 10,313
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Subtotal........ 254,743 139,445 23,521 206,119 4,488 5,825 634,141
Administrative
expense........... (103,451) (103,451)
Parent expense..... $(10,406) (3,581) (13,987)
Goodwill
amortization...... (12,075) (12,075)
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Pretax operating
income......... $ 254,743 $139,445 $ 23,521 $ 206,119 $ (98,963) $(22,481) $ -0- $ 2,244 504,628
========= ======== ======== ========= ========= ======== ======== ========
Deduct realized investment losses and deferred acquisition cost adjustment............................. (57,637)
----------
Pretax income....................................................................................... $ 446,991
==========
</TABLE>
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
<TABLE>
<CAPTION>
For the year 1997
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium........... $ 901,187 $739,485 $ 27,426 $ 9,906 $1,678,004
Net investment
income........... $ 439,067 $(9,951) 429,116
Other income...... $ 3,141 (2,179) 962
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Total revenue... 901,187 739,485 27,426 439,067 3,141 9,906 (12,130) 2,108,082
Expenses:
Policy benefits... 574,139 462,967 34,631 (7) 37,170 1,108,900
Required reserve
interest......... (199,339) (21,644) (41,551) 308,632 (46,098) -0-
Amortization of
acquisition
costs............ 149,358 58,473 9,660 9,105 (1,858) 224,738
Commissions and
premium tax...... 55,019 87,069 710 681 (2,183) 141,296
Required interest
on acquisition
costs............ 80,972 11,080 4,951 (100,096) 3,093 -0-
Financing costs*.. 87,055 (15,192) 71,863
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Total expenses.. 660,149 597,945 8,401 295,591 (7) 3,951 (19,233) 1,546,797
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Underwriting income
before other
income and
administrative
expense**......... 241,038 141,540 19,025 7 5,955 407,565
Reclass of Family
Service........... 5,650 305 (5,955) -0-
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Underwriting income
before other
income and
administrative
expense........... 246,688 141,540 19,330 7 407,565
Excess investment
income............ 143,476 143,476
Subtotal
adjustments....... 3,141 7,103 10,244
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Subtotal........... 246,688 141,540 19,330 143,476 3,148 7,103 561,285
Administrative
expense........... (104,220) (104,220)
Parent expense..... $(13,879) (2,134) (16,013)
Goodwill
amortization...... (12,074) (12,074)
Deferred
acquisition cost
adjustment for
realized gains.... 198 198
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Pretax operating
income............ $ 246,688 $141,540 $ 19,330 $ 143,476 $(101,072) $(25,953) $ 0 $ 5,167 429,176
========= ======== ======== ========= ========= ======== ======= =======
Deduct realized investment losses and deferred acquisition cost adjustment............................. (37,177)
----------
Pretax income.......................................................................................... $ 391,999
==========
</TABLE>
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets contain deferred acquisition costs,
value of insurance purchased, and separate account assets. The investment
segment includes the investment portfolio, cash, and accrued investment
income. Goodwill is assigned to corporate operations. All other assets,
representing less than 2% of total assets, are included in the other category.
The table below reconciles segment assets to total assets as reported in the
consolidated financial statements.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and invested
assets................. $6,202,251 $ 6,202,251
Accrued investment
income................. 112,475 112,475
Deferred acquisition
costs.................. $1,547,934 $225,637 $ 119,751 1,893,322
Goodwill................ $402,584 402,584
Separate account assets. 3,413,675 3,413,675
Other assets............ $107,357 107,357
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,547,934 $225,637 $3,533,426 $6,314,726 $107,357 $402,584 $12,131,664
========== ======== ========== ========== ======== ======== ===========
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and invested
assets................. $6,449,021 $ 6,449,021
Accrued investment
income................. 99,279 99,279
Deferred acquisition
costs.................. $1,390,030 $190,285 $ 92,836 1,673,151
Goodwill................ $414,658 414,658
Separate account assets. 2,425,262 2,425,262
Other assets............ $187,657 187,657
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,390,030 $190,285 $2,518,098 $6,548,300 $187,657 $414,658 $11,249,028
========== ======== ========== ========== ======== ======== ===========
</TABLE>
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 20--Related Party Transactions
Transactions Regarding Vesta: Since 1993, Torchmark has held a passive
investment in Vesta, a property insurance carrier. Torchmark held 5.1 million
shares of Vesta stock, or approximately 28% of the outstanding shares of
Vesta, until December, 1998. Torchmark carried its investment in Vesta during
this period on the equity method of accounting. In June, 1998, Vesta announced
that (a) an investigation of accounting irregularities that occurred during
the fourth quarter of 1997 and the first quarter of 1998 would result in an
aggregate $14 million net after-tax reduction in previously reported net
income, and, in addition, that (b) it would restate its historical financial
statements for the period of 1993 through the first quarter of 1998,
reflecting reductions in reported net after-tax earnings of $49 million for
the period of 1993 through 1997 and $10 million for the first quarter of 1998.
To reflect its pro rata share of Vesta's cumulative reported financial
corrections, Torchmark recorded a pre-tax charge of $20 million ($13 million
after tax) or $.09 per diluted share in the second quarter of 1998. As a
result of the announcements relating to Vesta and the decline in value of
Vesta stock, Vesta is currently subject to numerous class action lawsuits in
state and Federal courts filed subsequent to such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark reacquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Transactions with Directors and Officers: Lamar C. Smith, elected a director
of Torchmark in October 1999, is an officer, director and 15% owner of
Independent Research Agency for Life Insurance, Inc. (IRA), which receives
commissions as the Military Agency distribution system for selling certain
life insurance products offered by Torchmark's insurance subsidiaries.
On October 1, 1999, Torchmark sold the majority of its investment real
estate in two transactions. One transaction involved sales to Elgin
Development Company and other investors for total consideration of
$97.4 million. The Chairman of the Executive Committee of Torchmark is a one-
third investor in Elgin Development Company. His investment in Elgin
Development was approximately $1.5 million.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 21--Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended
December 31, 1999. 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>
1999:
- -----
Premium and policy charges...... $462,764 $470,010 $471,850 $479,462
Net investment income........... 111,396 110,538 111,758 113,645
Realized investment losses...... (7,116) (78,803) (18,128) (6,924)
Total revenues.................. 567,510 507,228 565,779 586,378
Policy benefits................. 303,446 308,718 309,113 315,270
Amortization of acquisition
expenses....................... 59,570 62,082 62,921 63,227
Pretax income from continuing
operations..................... 125,042 57,171 113,688 106,507
Income (Loss) from discontinued
operations..................... -0- (1,060) -0- -0-
Net income...................... 96,434 35,246 73,312 68,964
Basic net income per common
share from continuing
operations..................... .59 .27 .55 .52
Basic net income per common
share.......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations..................... .59 .27 .55 .52
Diluted net income per common
share.......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations excluding realized
losses, related acquisition
cost adjustment, and equity in
earnings of Vesta.............. .62 .63 .64 .56
1998:
- -----
Premium and policy charges...... $433,017 $439,364 $437,964 $443,285
Net investment income........... 119,800 117,881 112,165 109,712
Realized investment losses...... (3,173) (1,854) (39,750) (12,860)
Total revenues.................. 550,032 556,048 511,271 540,525
Policy benefits................. 287,024 291,826 285,217 286,209
Amortization of acquisition
expenses....................... 57,334 57,755 57,248 58,687
Pretax income from continuing
operations..................... 117,799 123,856 87,054 118,282
Income (Loss) from discontinued
operations..................... 14,766 15,222 (38,607) 2,246
Net income...................... 92,918 63,142 14,546 73,835
Basic net income per common
share from continuing
operations..................... .56 .34 .38 .51
Basic net income per common
share.......................... .66 .45 .10 .53
Diluted net income per common
share from continuing
operations..................... .55 .34 .38 .51
Diluted net income per common
share.......................... .66 .45 .10 .53
Diluted net income per common
share from continuing
operations excluding realized
losses, related acquisition
cost adjustment, and equity in
earnings of Vesta.............. .55 .57 .58 .60
</TABLE>
80
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
On October 21, 1998, with the approval of the Audit Committee of the Board
of Directors of Torchmark, Torchmark engaged Deloitte & Touche LLP as its
principal accountants as of January 1, 1999, effective upon the issuance of
KPMG Peat Marwick LLP's ("KPMG") reports on the consolidated financial
statements of Torchmark and subsidiaries and the separately issued financial
statements of Torchmark's subsidiaries, unit investment trust accounts and
benefit plans as of and for the year ending December 31, 1998. (KPMG completed
its engagement as Torchmark's principal accountants on October 14, 1999, the
date upon which the last of the audit reports as of and for the year ended
December 31, 1998 for the entities noted above were issued.) The reports of
KPMG on the financial statements of Torchmark for either of the two most
recent fiscal years did not contain any adverse opinion or disclaimer of
opinion. Such reports were not qualified or modified as to uncertainty, audit
scope or accounting principles. During such years and during the period
between December 31, 1998 and the date of the completion of KPMG's engagement,
there was no disagreement between KPMG and Torchmark on any matter of
accounting principals or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of KPMG, would have caused that firm to make reference to the
subject matter of such disagreement in connection with its report on
Torchmark's 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 27, 2000 (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.
81
<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' Reports................................... 38
Consolidated Balance Sheet at December 31, 1999 and 1998........ 40
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1999.................. 41
Consolidated Statement of Comprehensive Income for each of the
years in the three-year period ended December 31, 1999......... 43
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1999......... 44
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1999...................... 45
Notes to Consolidated Financial Statements...................... 47
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1999:
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 88
IV.Reinsurance (Consolidated)................................... 91
</TABLE>
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(b) Reports on Form 8-K.
The following Form 8-K was filed by the registrant during the fourth
quarter of 1999:
(1) Form 8-K dated October 21, 1999, reporting completion of the change
of Registrant's certifying accountant.
No financial statements were required in the Form 8-K.
(c) Exhibits
82
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended (incorporated by reference from Exhibit
3(i) to Form 10-K for the fiscal year ended December 31,
1998)
(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 (incorporated by
reference from Exhibit 10(d) to Form 10-K for the fiscal
year ended December 31, 1998)
(e) Certified Copy of Resolution Regarding Director Retirement
Benefit Program
(f) 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)
(g) The Torchmark Corporation 1987 Stock Incentive Plan (incor-
porated by reference from Exhibit 10(f) to Form 10-K for the
fiscal year ended December 31, 1998)
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and to Retire Prior to December 31, 1986 (incorporated by
reference from Exhibit 10(k) to Form 10-K for the fiscal
year ended December 31, 1991)
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(k) Form of Deferred Compensation Agreement between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and Not Eligible to Retire Prior to December 31, 1986 (in-
corporated by reference from Exhibit 10(l) to Form 10-K for
the fiscal year ended December 31, 1991)
(l) Torchmark Corporation Supplemental Savings and Investment
Plan (incorporated by reference from Exhibit 10(m) to Form
10-K for the fiscal year ended December 31, 1992)
(m) Service Agreement, dated as of January 1, 1991, between
Torchmark Corporation and Liberty National Life Insurance
Company (prototype for agreements between Torchmark Corpora-
tion and other principal operating subsidiaries) (incorpo-
rated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1992)
(n) The Torchmark Corporation Pension Plan (incorporated by ref-
erence from Exhibit 10(o) to Form 10-K for the fiscal year
ended December 31, 1992)
(o) The Torchmark Corporation 1998 Stock Incentive Plan (incor-
porated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1998)
(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) 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) (incorpo-
rated by reference from Exhibit 10(t) to Form 10-K for the
fiscal year ended December 31, 1996)
(r) 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)
(s) 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)
(t) 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)
(u) 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)
(v) The Liberty National Life Insurance Company Pension Plan for
Non-Commissioned Employees
(x) Receivables Purchase Agreement dated as of December 21, 1999
among AILIC Receivables Corporation, American Income Life
Insurance Company, Preferred Receivables Funding Corporation
and BankOne, NA
(11) Statement re computation of per share earnings 86
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 27, 2000
(21) Subsidiaries of the registrant 87
<CAPTION>
(23)(a) Consent of Deloitte & Touche LLP to incorporation by refer-
ence of their audit report dated January 28, 2000, into
Form S-8 of The Torchmark Corporation Savings and Investment
Plan (Registration No. 2-76378)
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(b) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Non-Employee Director Stock Option
Plan (Registration No. 2-93760)
(c) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1987 Stock Incentive Plan (Registration
No. 33-23580)
(d) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, 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)
(e) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 of the Liberty National Life Insurance Company
401(k) Plan (Registration No. 33-65507)
(f) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (Registration No. 333-27111)
(g) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and The
Torchmark Corporation Savings and Investment Plan
(Registration No. 2-76378)
(h) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Non-Employee Stock Option Plan (Registration No. 2-
93760)
(i) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1987 Stock Incentive Plan (Registration No. 33-23580)
(j) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, 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)
(k) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
Liberty National Life Insurance Company 401(k) Plan
(Registration No. 33-65507)
(l) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Executive Deferred Compensation Stock Plan (Registration
No. 333-27111)
(24) Powers of attorney
(27) Financial Data Schedule
</TABLE>
85
<PAGE>
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Twelve months ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income from continuing operations. $258,930,000 $255,776,000 $260,429,000
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- 47,868,000 77,314,000
Loss on disposal..................... (1,060,000) (54,241,000) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 257,870,000 249,403,000 337,743,000
Loss on redemption of debt ........... -0- (4,962,000) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 257,870,000 244,441,000 337,743,000
Cumulative effect of change in ac-
counting principle................... 16,086,000 -0- -0-
------------ ------------ ------------
Net income............................ $273,956,000 $244,441,000 $337,743,000
============ ============ ============
Basic weighted average shares out-
standing............................. 133,197,023 139,998,671 139,202,354
Diluted weighted average shares out-
standing............................. 133,985,943 141,351,912 141,431,156
Basic earnings per share:
Net income from continuing operations. $ 1.95 $ 1.83 $ 1.87
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- .34 .56
Loss on disposal..................... (.01) (.39) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 1.94 1.78 2.43
Loss on redemption of debt............ -0- (.03) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 1.94 1.75 2.43
Cumulative effect of change in ac-
counting principle................... .12 -0- -0-
------------ ------------ ------------
Net income............................ $ 2.06 $ 1.75 $ 2.43
============ ============ ============
Diluted earnings per share:
Net income from continuing operations. $ 1.93 $ 1.81 $ 1.84
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- .34 .55
Loss on disposal..................... (.01) (.38) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 1.92 1.77 2.39
Loss on redemption of debt............ -0- (.04) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 1.92 1.73 2.39
Cumulative effect of change in ac-
counting principle................... .12 -0- -0-
------------ ------------ ------------
Net income............................ $ 2.04 $ 1.73 $ 2.39
============ ============ ============
</TABLE>
86
<PAGE>
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
<TABLE>
<CAPTION>
State of Name Under Which
Company Incorporation Company Does Business
----------------------- ------------- ---------------------
<S> <C> <C>
American Income Life American Income Life
Insurance Company Indiana Insurance Company
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
</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 83 through 85 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
87
<PAGE>
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets:
Investments:
Long-term investments................................ $ 200,843 $ 105,703
Short-term investments............................... 2,899 1,714
---------- ----------
Total investments..................................... 203,742 107,417
Cash.................................................. 1,059 7,724
Investment in affiliates.............................. 2,851,913 3,156,322
Due from affiliates................................... -0- 53,207
Accrued investment income............................. 2,360 1,731
Other assets.......................................... 44,404 35,377
---------- ----------
Total assets........................................ $3,103,478 $3,361,778
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt...................................... $ 418,394 $ 355,242
Long-term debt....................................... 394,160 394,048
Taxes payable........................................ -0- 8,683
Due to affiliates.................................... 51,724 61,542
Other liabilities.................................... 52,539 89,476
---------- ----------
Total liabilities.................................... 916,817 908,991
Monthly income preferred securities................... 193,324 193,259
Shareholders' equity:
Preferred stock...................................... 279 299
Common stock......................................... 147,801 147,801
Additional paid-in capital........................... 901,532 910,119
Accumulated other comprehensive income .............. (174,222) 144,501
Retained earnings.................................... 1,910,487 1,707,933
Treasury stock....................................... (792,540) (651,125)
---------- ----------
Total shareholders' equity........................... 1,993,337 2,259,528
---------- ----------
Total liabilities and shareholders' equity........... $3,103,478 $3,361,778
========== ==========
</TABLE>
See accompanying Independent Auditors' Report.
88
<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,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net investment income............................ $ 17,747 $ 20,024 $ 5,275
Realized investment losses....................... (24,179) (54,855) (19,706)
-------- -------- --------
Total revenue.................................. (6,432) (34,831) (14,431)
General operating expenses....................... 10,169 10,406 13,880
Reimbursements from affiliates................... (10,800) (13,653) (13,956)
Interest expense................................. 58,119 65,871 96,402
-------- -------- --------
Total expenses................................. 57,488 62,624 96,326
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (63,920) (97,455) (110,757)
Income taxes .................................... 22,834 44,132 38,189
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (41,086) (53,323) (72,568)
Equity in earnings of affiliates................. 308,114 327,984 420,186
Adjustment to carrying value of Vesta............ -0- (20,234) -0-
Monthly income preferred securities dividend (net
of tax)......................................... (9,158) (9,777) (9,875)
-------- -------- --------
Net income from continuing operations.......... 257,870 244,650 337,743
Discontinued operations of Waddell & Reed:
Income from operations.......................... -0- 9,154 -0-
Loss on disposal................................ -0- (4,401) -0-
-------- -------- --------
Net income before extraordinary item and
cumulative effect of change in accounting
principle....................................... 257,870 249,403 337,743
Loss on redemption of debt (net of tax).......... -0- (4,962) -0-
-------- -------- --------
Net income before cumulative effect of change in
accounting principle............................ 257,870 244,441 337,743
Cumulative effect of change in accounting princi-
ple............................................. 16,086 -0- -0-
-------- -------- --------
Net Income..................................... $273,956 $244,441 $337,743
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
89
<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,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash provided from operations before dividends
from subsidiaries............................ $ (60,364) $ (46,825) $ (35,284)
Cash dividends from subsidiaries............. 284,881 462,267 370,032
--------- --------- ---------
Cash provided from operations................. 224,517 415,442 334,748
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 43,436 217,323 -0-
Acquisition of investments................... (49,260) (311,784) (2,150)
Investment in subsidiaries................... (172) (710) (174,799)
Loans to subsidiaries........................ (77,476) (48,723) (117,392)
Repayments on loans to subsidiaries.......... 75,400 120,079 28,242
Net decrease (increase) in temporary invest-
ments....................................... (1,185) (1,378) 5,604
Additions to properties...................... (1,298) (48) (454)
Other........................................ 13 -0- (7,460)
--------- --------- ---------
Cash used for investing activities............ (10,542) (25,241) (268,409)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. 63,152 216,279 98,185
Sale of Vesta shares......................... -0- 3,056 -0-
Repayments of debt........................... -0- (380,000) (20,000)
Issuance of stock............................ 37,163 3,957 93,973
Redemption of preferred stock................ (20,000) -0- (2,767)
Acquisitions of treasury stock............... (221,878) (125,875) (182,904)
Borrowed from subsidiaries................... 138,800 -0- 133,880
Repayment on borrowings from subsidiaries.... (150,885) -0- (93,060)
Payment of dividends......................... (66,992) (107,166) (86,530)
--------- --------- ---------
Cash provided from (used for) financing activ-
ities........................................ (220,640) (389,749) (59,223)
Net increase in cash.......................... (6,665) 452 7,116
Cash balance at beginning of period........... 7,724 7,272 156
--------- --------- ---------
Cash balance at end of period................. $ 1,059 $ 7,724 $ 7,272
========= ========= =========
</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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated subsidiaries..................... $284,881 $462,267 $370,032
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
90
<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
December 31, 1999:
- -------------------
Life insurance in force. $99,741,126 $872,720 $2,377,705 $101,246,111 2.3 %
=========== ======== ========== ============ ===
Premiums:*
Life insurance......... $ 919,779 $ 5,622 $ 32,713 $ 946,870 3.5 %
Health insurance....... 831,984 7,180 12 824,816 0 %
----------- -------- ---------- ------------
Total premiums........ $ 1,751,763 $ 12,802 $ 32,725 $ 1,771,686 1.8 %
=========== ======== ========== ============ ===
For the Year Ended De-
cember 31, 1998:
- ----------------------
Life insurance in force. $93,904,622 $718,777 $2,434,438 $ 95,620,283 2.5 %
=========== ======== ========== ============ ===
Premiums:*
Life insurance......... $ 862,101 $ 5,090 $ 31,503 $ 888,514 3.5 %
Health insurance....... 768,874 7,873 (1,092) 759,909 (.1)%
----------- -------- ---------- ------------
Total premiums........ $ 1,630,975 $ 12,963 $ 30,411 $ 1,648,423 1.8 %
=========== ======== ========== ============ ===
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 %
=========== ======== ========== ============ ===
</TABLE>
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
91
<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, President, Chief
Executive Officer and Director
/s/ Gary L. Coleman
By: ________________________________
Gary L. Coleman, Executive Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
Date: March 9, 2000
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/ Mark S. McAndrew *
By: ________________________________ By: ________________________________
David L. Boren Director Mark S. McAndrew Director
/s/ Joseph M. Farley *
By: ________________________________ /s/ Harold T. McCormick *
Joseph M. Farley Director By: ________________________________
Harold T. McCormick Director
/s/ Louis T. Hagopian *
By: ________________________________ /s/ George J. Records *
Louis T. Hagopian Director By: ________________________________
George J. Records Director
/s/ Joseph L. Lanier, Jr. *
By: ________________________________ /s/ R.K. Richey *
Joseph L. Lanier, Jr. Director By: ________________________________
R.K. Richey Director
/s/ Lamar C. Smith *
By: ________________________________
Lamar C. Smith Director
Date: March 9, 2000
/s/ Gary L. Coleman
*By: _______________________________
Gary L. Coleman Attorney-in-fact
92
<PAGE>
EXHIBIT 10.E
CERTIFIED COPY OF RESOLUTION
THE BOARD OF DIRECTORS OF
TORCHMARK CORPORATION
The undersigned Secretary of Torchmark Corporation (the "Company"), hereby
certifies that the following resolution was duly adopted by the Board of
Directors of the Company on February 29, 2000:
RESOLVED, that the director retirement benefit program
be discontinued effective February 29, 2000 and directors
with accrued but unpaid benefits under such program be
allowed the opportunity to convert the present value of
their expected retirement benefit thereunder to options in
Company common stock; provided, however, that retired
directors and advisory directors receiving payments pursuant
to such program on February 29, 2000 shall continue to
receive such retirement benefit payments in cash.
The foregoing action of the Board of Directors of the Company is still in
full force and effect this 6/th/ day of March, 2000.
/s/ Carol A. McCoy
----------------------------------
Carol A. McCoy
Secretary
<PAGE>
EXHIBIT 10.V
THE
LIBERTY NATIONAL LIFE INSURANCE COMPANY
PENSION PLAN FOR NON-COMMISSIONED EMPLOYEES
(Amended and Restated as of January 1, 1989)
(Including Amendments Effective as of January 1, 1991, January 1, 1993 and
January 1, 1994)
(Conformed Copy Including all
Amendments Through Amendment Four)
<PAGE>
BACKGROUND
----------
Effective as of January 1, 1986, The Liberty National Life Insurance
Company (the "Company") established a defined benefit pension plan ("Plan")
intended to be qualified pursuant to the provisions of the Internal Revenue Code
of 1986, as amended. The Plan is intended to provide eligible non-commissioned
employees of the Company, and those of any affiliate which adopts the Plan, with
a supplemental source of retirement income.
Effective as of January 1, l989, the Plan was amended and restated to
comply with the Tax Reform Act of l986. The Plan was further amended effective
January 1, 1991, January 1, 1993 and January 1, 1994.
The benefit under the Plan of any participant who terminates
employment or becomes disabled shall be determined in accordance with the
provisions of the Plan as in effect on the date of such termination of
employment or disability.
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TABLE OF CONTENTS
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BACKGROUND.............................................................. i
TABLE OF CONTENTS....................................................... ii
ARTICLE I: DEFINITIONS................................................. I-1
"Accrued Retirement Benefit"....................................... I-1
"Actuarial Equivalent"............................................. I-1
"Administrative Committee"......................................... I-1
"Administrator".................................................... I-1
"Affiliate"........................................................ I-1
"Beneficiary"...................................................... I-2
"Benefit Commencement Date"........................................ I-2
"Board of Directors" or "Board".................................... I-2
"Code"............................................................. I-2
"Company".......................................................... I-2
"Comparable Plan".................................................. I-2
"Compensation"..................................................... I-2
"Covered Compensation"............................................. I-2
"Credited Service"................................................. I-3
"Deferred Retirement".............................................. I-3
"Defined Benefit Plan"............................................. I-3
"Defined Contribution Plan"........................................ I-3
"Disability"....................................................... I-3
"Early Retirement"................................................. I-3
"Effective Date"................................................... I-3
"Eligible Employee"................................................ I-3
"Employee"......................................................... I-3
"Employer"......................................................... I-3
"Employment"....................................................... I-4
"Employment Commencement Date"..................................... I-4
"Entry Date"....................................................... I-4
"ERISA"............................................................ I-4
"Final Average Compensation"....................................... I-4
"Hour of Service".................................................. I-4
"Investment Manager"............................................... I-5
"Non-Vested Separation"............................................ I-5
"Normal Retirement"................................................ I-5
"Normal Retirement Age"............................................ I-6
"Normal Retirement Date"........................................... I-6
"One Year Break in Service"........................................ I-6
"Participant"...................................................... I-6
"Participating Affiliates"......................................... I-6
"Plan"............................................................. I-6
"Plan Year"........................................................ I-6
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"Profit Sharing and Retirement Plan Annuity".................... I-6
"Qualified Joint and Survivor Annuity".......................... I-7
"Qualified Plan"................................................ I-7
"Qualified Pre-Retirement Survivor Annuity"..................... I-7
"Retirement Benefit"............................................ I-7
"Social Security Offset Percentage"............................. I-7
"Social Security Retirement Age"................................ I-8
"Special Average Earnings"...................................... I-8
"Spouse"........................................................ I-8
"Surviving Spouse".............................................. I-8
"Trust" or "Trust Fund"......................................... I-8
"Trust Agreement"............................................... I-8
"Trustee"....................................................... I-8
"Vested Separation"............................................. I-8
"Vesting Service"............................................... I-9
"Year of Service"............................................... I-9
ARTICLE II: PARTICIPATION........................................... II-1
2.1 Admission as a Participant............................ II-1
2.2 Reemployment.......................................... II-1
2.3 Termination of Participation.......................... II-1
ARTICLE III: RETIREMENT BENEFIT..................................... III-1
3.1 Retirement Benefit Formula............................ III-1
3.2 Rules for Determining Years of Credited Service....... III-2
3.3 Limitation on Benefits................................ III-3
ARTICLE IV: VESTING................................................. IV-1
4.1 Determination of Vesting.............................. IV-1
4.2 Rules for Crediting Vesting Service................... IV-1
4.3 Retirement Benefit Forfeitures........................ IV-2
4.4 Vesta Insurance Group, Inc............................ IV-2
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ARTICLE V: AMOUNT AND COMMENCEMENT OF RETIREMENT BENEFITS................ VI-1
5.1 Determination of Amount of Retirement Benefits.............. V-1
5.2 Suspension of Payments on Resumption of Employment.......... V-3
5.3 Limitation on Commencement of Benefits...................... V-3
ARTICLE VI: FORMS OF PAYMENT OF RETIREMENT BENEFIT........................ VI-1
6.1 Methods of Distribution..................................... VI-1
6.2 Election of Optional Forms.................................. VI-2
6.3 Direct Rollovers............................................ VI-3
ARTICLE VII: DEATH BENEFITS............................................... VII-1
7.1 Eligibility for Pre-Retirement Death Benefit................ VII-1
7.2 Form of Pre-Retirement Death Benefit........................ VII-2
7.3 Election to Waive........................................... VII-2
7.4 Beneficiaries............................................... VII-3
7.5 After-Death Distribution Rules.............................. VII-3
ARTICLE VIII: CONTRIBUTIONS AND FORFEITURES............................... VIII-1
8.1 Contribution by the Company................................. VIII-1
8.2 Contributions by Employees.................................. VIII-1
8.3 Forfeitures................................................. VIII-1
8.4 Return of Employer Contributions under Special
Circumstances............................................... VIII-1
ARTICLE IX: FIDUCIARIES................................................... IX-1
9.1 Named Fiduciaries........................................... IX-1
9.2 Employment of Advisers...................................... IX-1
9.3 Multiple Fiduciary Capacities............................... IX-1
9.4 Reliance.................................................... IX-1
9.5 Scope of Authority and Responsibility....................... IX-2
ARTICLE X: TRUSTEE........................................................ X-1
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10.1 Trust Agreement............................................. X-1
10.2 Assets in Trust............................................. X-1
ARTICLE XI: ADMINISTRATIVE COMMITTEE...................................... XI-1
11.1 Appointment and Removal of Administrative Committee......... XI-1
11.2 Officers of Administrative Committee........................ XI-1
11.3 Action by Administrative Committee.......................... XI-1
11.4 Rules and Regulations....................................... XI-1
11.5 Powers...................................................... XI-1
11.6 Information from Participants............................... XI-2
11.7 Reports..................................................... XI-2
11.8 Authority to Act............................................ XI-2
11.9 Liability for Acts.......................................... XI-3
11.10 Compensation and Expenses................................... XI-3
11.11 Indemnity................................................... XI-3
11.12 Denied Claims............................................... XI-3
ARTICLE XII: PLAN AMENDMENT OR TERMINATION................................ XII-1
12.1 Plan Amendment.............................................. XII-1
12.2 Limitations on Plan Amendment............................... XII-1
12.3 Right of the Employer to Terminate Plan..................... XII-1
12.4 Effect of Partial or Complete Termination................... XII-1
12.5 Allocation of Assets........................................ XII-2
12.6 Residual Assets............................................. XII-2
12.7 Limitations Applicable to Certain Highly Paid Participants.. XII-3
ARTICLE XIII: MISCELLANEOUS PROVISIONS.................................... XIII-1
13.1 Exclusive Benefit of Participants........................... XIII-1
13.2 Plan Not a Contract of Employment........................... XIII-1
13.3 Source of Benefits.......................................... XIII-1
13.4 Benefits Not Assignable..................................... XIII-1
13.5 Domestic Relations Orders................................... XIII-1
13.6 Benefits Payable to Minors, Incompetents and Others......... XIII-2
13.7 Merger or Transfer of Assets................................ XIII-2
13.8 Participation in the Plan by an Affiliate................... XIII-2
13.9 Action by Employer.......................................... XIII-3
13.10 Provision of Information.................................... XIII-3
13.11 Controlling Law............................................. XIII-3
13.12 Conditional Restatement..................................... XIII-3
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13.13 Rules of Construction....................................... XIII-3
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APPENDIX A - TOP-HEAVY PROVISIONS
-vi-
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Each of the following terms shall have the meaning set forth in this
Article I for purposes of this Plan:
Accrued Retirement Benefit: As of any date, the Retirement Benefit of
--------------------------
a Participant calculated pursuant to the provisions of Article III as if the
Participant's Employment terminated on such date, but in no event less than the
Accrued Retirement Benefit to which the Participant would have been entitled had
he terminated employment on December 31, 1988 under the provisions of the Plan
as then in effect.
Actuarial Equivalent: An amount or a benefit of equivalent current
--------------------
value to the Retirement Benefit which would otherwise be provided a Participant,
determined on the basis of the following actuarial assumptions:
(a) Mortality - for both sexes, the male 1971 Individual Annuity
Mortality Table, with an age set back of one year.
(b) Interest - the applicable interest rate utilized by the Pension
Benefit Guaranty Corporation to value immediate and deferred annuities,
whichever is applicable, at the time the payment of such benefit commences
or such amount is distributed.
Administrative Committee: The committee appointed by the Board
------------------------
pursuant to, and having the responsibilities specified in, Article XI of the
Plan.
Administrator: The Company or Committee appointed by the Board of
-------------
Directors pursuant to, and having the responsibilities specified in, Article XI
of the Plan.
Affiliate: Any corporation or unincorporated trade or business (other
---------
than the Company) while it is:
(a) a member of a "controlled group of corporations" (within the
meaning of Code (S) 414(b)) of which the Company is a member;
(b) a trade or business under "common control" (within the meaning of
Code (S) 414(c)) with the Company;
(c) a member of an "affiliated service group" (within the meaning of
Code (S) 414(m)) which includes the Company; or
(d) any other entity required to be aggregated with the Company under
Code (S) 4l4(o).
I-1
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Beneficiary: A person other than a Participant entitled to receive
-----------
any payment of benefits pursuant to the terms of this Plan.
Benefit Commencement Date: The date, determined under Article V, as
-------------------------
of which a Participant or a Beneficiary receives or begins to receive, as the
case may be, payment of his benefits under the Plan.
Board of Directors or Board: The Board of Directors of the Company.
---------------------------
Code: The Internal Revenue Code of 1986, as now in effect or as
----
amended from time to time. A reference to a specific provision of the Code
shall include such provision and any applicable regulation pertaining thereto.
Company: Liberty National Life Insurance Company, or any successor
-------
thereto by consolidation, merger, transfer of assets or otherwise.
Comparable Plan: A plan of the same type as described in Treasury
---------------
Regulation (S) 1.381(c)(11)-1(d)(4).
Compensation: The total cash compensation paid to an Employee during
------------
a calendar year by his Employer, including salary, wages, bonuses, any amounts
not paid directly and currently in cash to an Employee but paid for the benefit
of an Employee through a "salary reduction" agreement in conjunction with one or
more welfare plans of the Employer and the total amount deferred pursuant to an
Employee's election under a "cash or deferred arrangement" in conjunction with
one or more qualified retirement plans of the Employer, but excluding:
1) any reimbursement of or allowances for expenses;
2) Employer contributions to any form of employee retirement,
pension, profit sharing or thrift plan;
3) director's fees;
4) annual service awards;
5) deferred compensation accrued under any nonqualified deferred
compensation agreement or contract or any amendment or replacement thereof;
6) commissions; and
7) payments made to any Employee after such Employee's separation
from service, in the form of severance benefits.
The determination of Compensation will be in accordance with records
maintained by the Employer and shall be conclusive. Anything in this definition
to the contrary notwithstanding, the Compensation taken into account for a
Participant for Plan purposes for any Plan Year beginning after December 31,
1993 shall not exceed $150,000 (or such adjusted amount as may be prescribed for
such Plan Year pursuant to Code (S) 401(a)(17)).
Covered Compensation: The average of the annual contribution and
--------------------
benefits base
I-2
<PAGE>
under Section 230 of the Social Security Act for each year for the thirty-five
year period ending in the year the Participant reaches Social Security
Retirement Age (SSRA), except for a Participant who separates before attainment
of SSRA the base for the year of separation will be assumed to be the base for
all future years to SSRA without increases or adjustments.
Credited Service: The Years of Service for computation of the amount
----------------
of a Participant's Retirement Benefit as defined in Article III.
Deferred Retirement: Termination of Employment of a Participant after
-------------------
his Normal Retirement Date.
Defined Benefit Plan: A plan of the type defined in Code (S) 414(j)
--------------------
maintained by the Company or an Affiliate, as applicable.
Defined Contribution Plan: A plan of the type defined in Code (S)
-------------------------
414(i) maintained by the Company or an Affiliate, as applicable.
Disability: Total and permanent disability for a period of at least
----------
six months as defined by the group disability benefit plan maintained by the
Participant's Employer.
Early Retirement: Termination of Employment, other than by reason of
----------------
Disability or death, of a Participant prior to Normal Retirement Age who has
completed at least 15 full years of Vesting Service and has attained the age of
55.
Effective Date: The Effective Date of this Amended and Restated Plan
--------------
shall be January 1, 1989. The original effective date of the Plan was January
1, 1986.
Eligible Employee: All Employees of an Employer other than (a) any
-----------------
individual whose duties include selling products of the Company or an Affiliate
on a commissioned basis; (b) Employees included in a unit of employees covered
by a collective bargaining agreement between the Employer and the employee
representatives in the negotiation of which retirement benefits were the subject
of good faith bargaining, unless such bargaining agreement provides for
participation in the Plan; and (c) leased employees within the meaning of Code
(S) 414(n)(2); and (d) any Employee of the Company whose Employment Commencement
Date occurred on or after January 1, 1995.
Employee: Any individual who, under the usual common law rules
--------
applicable in determining the employer-employee relationship, has the status of
an employee of the Company or an Affiliate including leased employees within the
meaning of Code (S) 414(n)(2). Notwithstanding the foregoing, if such leased
employees do not constitute more than twenty percent of the Employer's nonhighly
compensated work force within the meaning of Code (S) 414(n)(5)(C)(ii), the term
"Employee" shall not include those leased employees covered by a plan described
in Code (S) 414(n)(5) unless otherwise provided by the terms of this Plan.
I-3
<PAGE>
Employer: The Company and each Affiliate participating in the Plan
--------
pursuant to Section 13.8.
Employment: An Employee's employment with the Company or an Affiliate
----------
or, to the extent determined by the Administrator, any predecessor of any of
them.
Employment Commencement Date: The date on which an Employee was first
----------------------------
credited with an Hour of Service.
Entry Date: The first day of the payroll period following the date
----------
the Eligible Employee has satisfied the requirements of Section 2.1.1.
ERISA: The Employee Retirement Income Security Act of 1974, as
-----
amended from time to time. Reference to a specific provision of ERISA shall
include such provision and any applicable regulation pertaining thereto.
Final Average Compensation: The highest average of the Participant's
--------------------------
annual Compensation for any five consecutive full calendar years of Employment
during the 10 consecutive calendar years of Employment immediately preceding the
Participant's termination of Employment, provided that any service credited for
a period of Disability shall be disregarded in determining such 10 consecutive
years. In the event the Participant does not have at least five full calendar
years of Employment, Final Average Compensation shall mean the average annual
Compensation for the Participant's total number of full years of Employment. A
Participant's annual Compensation, without annualization, during the part of the
calendar year immediately preceding his termination of Employment will be
treated as his annual Compensation for a full calendar year for the purpose of
this Section if that produces a higher average. If a Participant is rehired and
is entitled to the reinstatement of prior Credited Service and Vesting Service
and does not have at least five full consecutive years of annual Compensation
after he is rehired, then his Final Average Compensation shall mean the average
of the annual Compensation for the Participant's last five complete calendar
years of Employment.
Hour of Service:
---------------
(a) Each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for an Employer (or an Affiliate in the case
of an Employee who has transferred his Employment to the Employer from such
Affiliate) during the applicable computation period.
(b) Each hour for which an Employee is paid, or entitled to payment,
by an Employer (or an Affiliate in the case of an Employee who has
transferred his Employment to the Employer from such Affiliate) on account
of a period of time during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to vacation,
holiday, illness, incapacity (including Disability), lay-off, jury duty,
military duty or leave of absence. An hour for which an Employee is
directly or indirectly
I-4
<PAGE>
paid or entitled to payment on account of a period during which no duties
are performed is not credited to the Employee if such payment is made or
due under a plan maintained solely for the purpose of providing severance
benefits or complying with the applicable unemployment compensation laws.
Hours of Service are not credited for a payment which solely reimburses an
Employee for medical or medically related expenses incurred by the
Employee.
(c) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by an Employer (or an Affiliate in
the case of an Employee who has transferred his Employment to the Employer
from such Affiliate). The same Hours of Service shall not be credited both
under paragraph (a) or paragraph (b), as the case may be, and under this
paragraph (c).
(d) If, in accordance with standard personnel policies applied in a
non-discriminatory manner to all Employees similarly situated, an Employer
determines in writing that an Employee's approved, unpaid leave of absence
furthers the interest of the Employer, each hour for which the Employee on
the approved unpaid leave of absence would normally have received credit
under this Plan if he had been working in his regular employment for the
Employer (or an Affiliate in the case of an Employee who has transferred
his Employment to the Employer from such Affiliate).
(e) An Employee of the Employer (or an Affiliate in the case of an
Employee who has transferred his Employment to the Employer from such
Affiliate) who is regularly employed by such Employer (or Affiliate) for at
least 35 hours a week shall be credited with forty-five Hours of Service if
under this Plan he would be credited with at least one Hour of Service
during the week.
(f) An Employee of the Employer (or an Affiliate in the case of an
Employee who has transferred his Employment to the Employer from such
Affiliate) who is not regularly employed by such Employer (or Affiliate)
for at least 35 hours a week shall be credited with the actual Hours of
Service for which he is paid or entitled to credit under this Plan.
(g) Hours of Service shall be calculated and credited pursuant to
section 2530-200b-2 of the Department of Labor Regulations which are
incorporated herein by this reference.
Investment Manager: Any person appointed pursuant to Section 9.1
------------------
having the power to direct the investment of assets in accordance with that
Section.
Non-Vested Separation: Termination of Employment (other than by
---------------------
reason of death or Disability) of a Participant whose vested percentage in his
Retirement Benefit is zero percent.
I-5
<PAGE>
Normal Retirement: Termination of Employment of a Participant at
-----------------
Normal Retirement Age.
Normal Retirement Age: Age sixty-five.
---------------------
Normal Retirement Date: The last day of the payroll period of the
----------------------
Employer coinciding with or next following the date on which the Participant
attains age 65.
One Year Break in Service: Any period of twelve consecutive months,
-------------------------
beginning with the date of an Employee's Employment or any anniversary of the
date of such Employment, during which the Employee has not completed more than
500 Hours of Service; except that effective January 1, 1985, for absences
beginning on or after January 1, 1985, a Participant who is absent from work due
to such Participant's pregnancy, the birth of the Participant's child or by
reason of the adoption of a minor child by the Participant for the purpose of
caring for such child immediately following its birth or adoption and who
provides timely information establishing to the satisfaction of the
Administrator the reasons for the absence and the number of days of such absence
will be treated as performing a normal schedule (or eight hours per day) up to a
maximum of 501 Hours of Service in either the year in which the absence begins
or the year immediately following the year in which the absence begins as
necessary to prevent such Participant from incurring a One Year Break in Service
in either (but not both) the year in which the absence begins or the year
immediately following the year in which the absence begins.
Participant: An Employee who has commenced, but not terminated,
-----------
participation in the Plan as provided in Article II.
Participating Affiliates: Any Affiliate which in accordance with
------------------------
Section 13.8 by duly authorized action has adopted the Plan and not withdrawn
therefrom.
Plan: The Liberty National Life Insurance Company Pension Plan for
----
Non-Commissioned Employees.
Plan Year: Each twelve consecutive month period ending on December
---------
31, during any part of which the Plan is in effect.
Profit Sharing and Retirement Plan Annuity: The annual single life
------------------------------------------
annuity, without death benefit, which can be provided by that portion of the
Participant's account under the Profit Sharing and Retirement Plan attributable
to Company contributions and earnings thereon. In determining the amount
attributable to Company contributions and earnings thereon for this purpose no
deduction shall be made for the amount of any loans outstanding. There shall be
added to the amount attributable to Company contributions and earnings thereon:
(1) the amount of any withdrawal(s) by, and prior distribution(s)
to, the Participant to the extent such withdrawals and prior
distributions exceed the amount of the Participant's contributions and
earnings thereon and
I-6
<PAGE>
(2) the amount of the earnings of the Plan which would have been
allocated to the amount(s) described in the preceding paragraph from
the date of such withdrawals or distributions.
A Participant's Profit Sharing and Retirement Plan Annuity shall be calculated
as of his termination of Employment, based upon the Participant's attained age
and the Company's rate basis for annuities purchasable under the Profit Sharing
and Retirement Plan on such date. A Participant's Profit Sharing and Retirement
Plan Annuity may be calculated on either an immediate or deferred basis as
indicated in the context of this Plan, but, in any case, one shall be the
Actuarial Equivalent of the other.
Qualified Joint and Survivor Annuity: An annuity for the life of the
------------------------------------
Participant with a survivor annuity continuing after the Participant's death to
the Participant's Surviving Spouse for the Surviving Spouse's life in an amount
which is equal to fifty percent of the amount payable during the joint lives of
the Participant and such Surviving Spouse and which is the Actuarial Equivalent
of the Participant's Retirement Benefit.
Qualified Plan: A Defined Contribution Plan or a Defined Benefit Plan
--------------
which is qualified under Code (S) 401(a).
Qualified Pre-Retirement Survivor Annuity: The pre-retirement death
-----------------------------------------
benefit provided for in Section 7.1.1(2).
Retirement Benefit: The retirement benefit of a Participant
------------------
calculated under Article III in the form of a single life annuity payable
monthly commencing on Normal Retirement Date for the life of the Participant.
Social Security Offset Percentage: The percentage factor utilized in
---------------------------------
determining the social security offset for a Participant. This offset
percentage is based on the Participant's Social Security Retirement Age and the
age at which the Participant's benefits commence. The appropriate offset
percentages are as follows:
Benefit Social Security Retirement Age
Commencement ------------------------------
Age Age 65 Age 66 Age 67
------- ------ ------ ------
(Interpolate for months)
55 0.750% 0.688% 0.632%
56 0.750% 0.703% 0.645%
57 0.750% 0.706% 0.662%
58 0.750% 0.708% 0.667%
59 0.750% 0.711% 0.671%
60 0.750% 0.712% 0.675%
61 0.750% 0.682% 0.648%
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<PAGE>
62 0.750% 0.688% 0.625%
63 0.750% 0.692% 0.635%
64 0.750% 0.696% 0.643%
65 0.750% 0.700% 0.650%
66 0.750% 0.750% 0.700%
67 0.750% 0.750% 0.750%
Social Security Retirement Age: The earliest age at which a
------------------------------
Participant is entitled to receive his full benefit under the Social Security
Act. The appropriate Social Security Retirement Ages are as follows:
Calendar Year Age of Social Security
of Birth Retirement Age
------------- ------------------
1937 and Before Age 65
1938 to 1954 Age 66
1955 and after Age 67
Special Average Earnings: The average of the Participant's annual
------------------------
Compensation for the three completed consecutive calendar year periods during
his last five complete consecutive calendar years of Employment which yields the
highest average, or if employed less than three complete consecutive calendar
years the amount obtained by converting his compensation for the most recent
period of Employment to an annual rate, where compensation considered for any
year cannot exceed the Social Security contribution and benefits base under
Section 230 of the Social Security Act for that year. Notwithstanding the
above, Special Average Earnings will not exceed the Participant's Covered
Compensation.
Spouse: The person lawfully married to a Participant.
------
Surviving Spouse: The Spouse of a Participant on the earlier of:
----------------
(a) the date of the Participant's death; or
(b) the Participant's Benefit Commencement Date.
Trust or Trust Fund: The trust established under the Plan in which
-------------------
Plan assets are held.
Trust Agreement: The agreement between the Company and the Trustee
---------------
with respect to the Trust fund.
Trustee: The trustee appointed pursuant to Article X, and any
-------
successor trustee.
I-8
<PAGE>
Vested Separation: Termination of Employment of a Participant for any
-----------------
reason other than Disability before he is eligible for Early Retirement, with a
vested percentage in his Retirement Benefit.
Vesting Service: The Years of Service credited to a Participant under
---------------
Section 4.2 for purposes of determining the Participant's vested percentage in
his Retirement Benefit.
Year of Service:
---------------
(a) For purposes of determining eligibility to participate under
Article II and for purposes of determining Vesting Service:
(i) for Employment, or return to Employment after a One
Year Break in Service, beginning in 1975 or later years, a period of
twelve consecutive months beginning with the date of Employment or
return to Employment during which an Employee has not less than 1000
Hours of Service for an Employer (or an Affiliate in the case of an
Employee who has transferred his Employment to the Employer from such
Affiliate);
(ii) for Employment which began before 1975, with respect
to periods before the 1975 anniversary of such Employment, an
aggregate of fifty-two weeks during each of which an Employee was
employed on a permanent basis for at least 35 hours a week by an
Employer (or by an Affiliate in the case of an Employee who has
transferred his Employment to the Employer from such Affiliate);
(iii) for Employment which began before 1975, with respect
to periods after the 1975 anniversary of such Employment, a period of
twelve consecutive months beginning with the date of such anniversary
in 1975 or later years during which an Employee has not less than 1000
Hours of Service for an Employer (or an Affiliate in the case of an
Employee who has transferred his Employment to the Employer from such
Affiliate); and
(iv) for Employees who are former employees of Peninsular
Life Insurance Company and whose employment with Liberty National Life
Insurance Company began on May 20, 1985 as a result of the acquisition
by Liberty National Life Insurance Company of the Home Service
Division of Peninsular Life Insurance Company, a period of twelve
consecutive months beginning with the date of employment or return to
employment with Peninsular Life Insurance Company during which such
individuals had not less than 1,000 Hours of Service with either or
both Peninsular Life Insurance Company and Liberty National Life
Insurance Company.
I-9
<PAGE>
(b) For purposes of determining Credited Service:
(i) for Employment, or return to Employment after a One
Year Break in Service, beginning in 1975 or later years, a period of
twelve consecutive months beginning with the date of Employment or
return to Employment during which an Employee has not less than 2000
Hours of Service for an Employer in Employment covered by the Plan (or
for an Affiliate in employment covered by such Affiliate's Comparable
Plan in the case of an Employee who has transferred his Employment to
the Employer from such Affiliate);
(ii) for Employment which began before 1975, with respect
to periods before the 1975 anniversary of such Employment, an
aggregate of fifty-two weeks during each of which an Employee was
employed in Employment covered by the Plan on a permanent basis for at
least 35 hours a week by an Employer (or by an Affiliate in employment
covered by such Affiliate's Comparable Plan in the case of an Employee
who has transferred his Employment to the Employer from such
Affiliate);
(iii) for Employment which began before 1975 with respect
to periods after the 1975 anniversary of such Employment, a period of
twelve consecutive months beginning with the date of such anniversary
in 1975 or later years during which an Employee has not less than 2000
Hours of Service in Employment covered by the Plan for an Employer (or
for an Affiliate in employment covered by such Affiliate's Comparable
Plan in the case of an Employee who has transferred his Employment to
the Employer from such Affiliate);
(iv) for Employees who are former employees of Peninsular
Life Insurance Company and whose Employment with Liberty National Life
Insurance Company began on May 20, 1985 as a result of the acquisition
by Liberty National Life Insurance Company of the Home Service
Division of Peninsular Life Insurance Company and who are employed by
Liberty National Life Insurance Company for the period beginning on
May 20, 1985 and ending on a date which is no earlier than May 20,
1988, a period of twelve consecutive months beginning with the date of
employment or return to employment with Peninsular Life Insurance
Company during which such individuals had not less than 2,000 Hours of
Service with either or both Peninsular Life Insurance Company and
Liberty National Life Insurance Company; and
(v) For purposes of (i) and (iii) of this subparagraph
(b), an Employee who completes at least 1,000 Hours of Service but
less than 2,000 Hours of Service in a computation period shall be
credited with a fraction of a
I-10
<PAGE>
Year of Service for such period, determined by dividing his Hours of
Service in such period by 2,000.
I-11
<PAGE>
ARTICLE II
----------
PARTICIPATION
-------------
2.1 Admission as a Participant
--------------------------
2.1.1 An Eligible Employee shall become a Participant on the first day of
the payroll period next following the later of his completion of one Year of
Service or his attainment of age 21.
2.1.2 An Employee who did not become a Participant on the Entry Date next
following the date on which he met the eligibility requirements of Section 2.1.1
because he was not then an Eligible Employee shall become a Participant as of
the first day on which he becomes an Eligible Employee.
2.1.3 If an Employee has not completed 1,000 Hours of Service for the
Employer by the anniversary of his Employment, the next twelve-month period for
determining a Year of Service shall begin on the January 1 next following his
date of Employment and thereafter any subsequent twelve-month period shall begin
on the anniversary of his Employment.
2.2 Reemployment
------------
An individual who has ceased to be a Participant and who again becomes an
Eligible Employee shall become a Participant as of the first date on which he
again becomes an Eligible Employee, unless he has had a One Year Break in
Service. If an individual again becomes an Eligible Employee after a One Year
Break in Service, he shall become a Participant upon completion of one Year of
Service retroactive to a date which is not later than the date he again became
an Eligible Employee.
2.3 Termination of Participation
----------------------------
A Participant shall cease to be such:
(a) upon the payment to him of all nonforfeitable benefits due to
him under the Plan at a time when he is no longer eligible for any future
benefit accrual;
(b) upon his Non-Vested Separation;
(c) upon his death; or
(d) upon the transfer of his Accrued Benefit to another Qualified
Plan.
II-1
<PAGE>
ARTICLE III
RETIREMENT BENEFIT
------------------
3.1 Retirement Benefit Formula
--------------------------
3.1.1 A Participant's monthly Retirement Benefit shall be an amount equal
to 1/12 of the excess of (a) over the sum of (b), (c) and (d) below, where:
(a) is 2% of the Participant's Final Average Compensation for each
year of Credited Service up to 30 years plus 1% of the Participant's Final
Average Compensation for each year of Credited Service in excess of 30 years
(not exceeding 10%);
(b) is the social security offset which is equal to the smaller of:
(1) 50% of the basic benefit calculated above in Section
3.1.1(a), but substituting Special Average Earnings for Final Average
Compensation in the formula;
or
(2) the Social Security Offset Percentage times the
Participant's Special Average Earnings times each year of Credited Service
not to exceed 35 years;
(c) is the Participant's Profit Sharing and Retirement Plan Annuity;
and
(d) is the Participant's annual retirement income (expressed in the
form of a single life annuity commencing at Normal Retirement Date) under the
Comparable Plan or Plans of the Company or any affiliate of the Company or any
other corporation merged into the Company, or whose assets were acquired by the
Company.
3.1.2 Notwithstanding Section 3.1.1, for Participants who were
participating in the Liberty National Life Insurance Company Pension Plan on
April 5, 1982, the monthly Retirement Benefit of any such Participant retiring
after April 5, 1982, shall not be less than 1/12 of (a) or (b) below, whichever
is greater, where:
(a) is (i) plus (ii) less (iii), where:
(i) applies only to Participants with less than 30 years of
Credited Service on the anniversary of employment preceding April 5, 1982,
and is 1/12 of 2% times the Final Average Compensation times the number of
complete months of service for benefit accrual purposes from March 6, 1982,
through the earlier of the 30th year of Credited Service or the date of
termination of Employment; and,
(ii) is 1/12 of 1% times the Final Average Compensation times
the number of complete months of service for benefit accrual purposes from
March 6, 1982, or from the 30th year of Credited Service, if later, through
the earlier of the date of termination of Employment or the 40th year of
Credited Service for benefit accrual
III-1
<PAGE>
purposes; and
(iii) applies only to Participants with less than 35 years of
Credited Service on the anniversary of employment immediately preceding
April 5, 1982, and is the lesser of (x) 1/12 of the Social Security Offset
Percentage times the Participant's Special Average Earnings times the
number of complete months of service for benefit accrual purposes from
March 6, 1982, through the earlier of the 35th year of Credited Service for
benefit accrual purposes, or the date of termination of Employment or (y)
50% of the sum of the amounts in (a)(i) plus (a)(ii) but substituting
Special Average Earnings for Final Average Compensation in those formulas.
(b) is (i) plus (ii) less (iii), where:
(i) is 1/12 of 2% times the Final Average Compensation times
the number of complete months of service for benefit accrual purposes from
April 5, 1982, through the earlier of April 4, 1987 or the date of
termination of Employment; and
(ii) is 1/12 of 1.5% times the Final Average Compensation
times the number of complete months of service for benefit accrual purposes
from April 5, 1987, through the earlier of April 4, 1992 or the date of
termination of Employment; and
(iii) is the amount calculated in Section 3.1.2(a)(iii),
above. Any benefit provided under this Section shall be based solely on
Credited Service for benefit accrual purposes for an Employer participating
in this Plan.
3.1.3 The amount of Retirement Benefit calculated under this section shall
be subject to actuarial adjustment if it is payable in any other form of payment
authorized by this Plan.
3.1.4 The Retirement Benefit of a Participant who terminated Employment or
incurred a Disability prior to the Effective Date shall be determined in
accordance with the provisions of the Plan as in effect on the date of
termination of Employment or Disability.
3.2 Rules for Determining Years of Credited Service
-----------------------------------------------
3.2.1 Subject to Sections 3.2.2 through 3.2.7 below, Credited Service
shall mean the sum of a Participant's Years of Service, expressed in full years
and fractions thereof, except for the following:
(a) Any period of Employment prior to the first anniversary of the
Participant's Employment following his 20th birthday (or 24th birthday for years
prior to January 1, 1985); and
(b) Any period of Employment in a classification in which the
Participant does not qualify as an Eligible Employee.
3.2.2 If an Employee is on an authorized unpaid leave of absence granted
by his
III-2
<PAGE>
Employer, his period of absence shall be counted as Credited Service upon his
return to active Employment only if his Employer determines in writing, in
accordance with standard personnel policies applied in a non-discriminatory
manner to all Employees similarly situated, that such absence furthers the
interest of the Employer.
3.2.3 If an Employee is on an authorized military leave while his
reemployment rights are protected by law and provided that he directly entered
military service from his Employer's service and shall not have voluntarily
reenlisted after the date of first entering active military service, his period
of absence shall be counted as Credited Service upon his return to active
Employment.
3.2.4 If an Employee is on an authorized leave of absence on account of
Disability, he shall continue to receive Credited Service from the date of
Disability until the earlier of: (i) his Early Retirement Date; (ii) his Normal
Retirement Date; or (iii) his recovery from Disability.
3.2.5 An Employee who terminates Employment with no vested percentage in
his Retirement Benefit shall, if he returns to Employment, have no credit for
Credited Service prior to such termination of Employment if (i) for years prior
to January 1, 1985, the total of his consecutive One Year Breaks in Service
immediately preceding his reemployment exceed his aggregate years of Vesting
Service (whether or not consecutive, but excluding Vesting Service previously
disregarded under Section 4.2.4) prior to the termination; or (ii) for years on
or after January 1, 1985, the total of his consecutive One Year Breaks in
Service immediately preceding his reemployment exceed the greater of five years
or his aggregate years of Vesting Service (whether or not consecutive, but
excluding Vesting Service previously disregarded under Section 4.2.4) prior to
the termination. A Participant who had a Vested Termination and returns to
Employment will retain credit for his prior years of Credited Service unless he
received a distribution of his Accrued Retirement Benefit at the time of such
Vested Termination.
3.2.6 No Participant shall receive Credited Service during a period when
such Participant is accruing benefits under another defined benefit plan of the
Employer or an Affiliate unless the Retirement Benefit under this Plan is
reduced or offset by the full amount of benefits accrued by such Participant
under such other defined benefit plan.
3.2.7 By appropriate corporate action exercised in a uniform and
nondiscriminatory manner and, where applicable consented to by the Company, each
Employer may grant Credited Service for any Employment with such Employer prior
to the time it became an Employer.
III-3
<PAGE>
3.3 Limitation on Benefits
----------------------
Notwithstanding any other provisions of the Plan, a Participant's Accrued
Retirement Benefit shall not exceed the limitations of Code (S) 415 which are
hereby incorporated by reference. In the event that the limitations of Code (S)
415(e) would otherwise be violated, a Participant's benefits and/or annual
additions under plans of the Company or an Affiliate will be reduced as
necessary in the following order: (i) the accrued benefit under any defined
benefit plan (pro rata with respect to two or more such plans); (ii) unmatched
employee contributions under any defined contribution plan; (iii) matched
employee contributions under any defined contribution plan; (iv) matching
Employer contributions under any defined contribution plan; and (v) Employer
contributions to the Profit-Sharing and Retirement Plan of Liberty National Life
Insurance Company.
III-4
<PAGE>
ARTICLE IV
VESTING PROVISIONS
------------------
4.1 Determination of Vesting
------------------------
In the case of a Participant who performs at least one Hour of Service on
or after January 1, 1989, he shall have a vested percentage of 100% in his
Retirement Benefit upon: (i) termination of Employment due to death or
Disability or upon or after attaining Normal Retirement Age; or (ii) completion
of five years of Vesting Service.
4.2 Rules for Crediting Vesting Service
-----------------------------------
4.2.1 Subject to Sections 4.2.2 through 4.2.4 below, a Participant's
Vesting Service shall mean the sum of a Participant's Years of Service under the
Plan, except for Years of Service before the Participant attained age 18 (or age
22 in the case of Participants who do not complete at least one Hour of Service
on or after January 1, 1985).
4.2.2 If an Employee is on an authorized unpaid leave of absence granted
by his Employer in accordance with standard personnel policies of such Employer
applied in a non-discriminatory manner to all Employees similarly situated, his
period of absence shall not be considered a Break in Service and shall be
counted as Vesting Service upon his return to active Employment.
4.2.3 If an Employee is on an authorized military leave while his
reemployment rights are protected by law and provided that he directly entered
military service from his Employer's service and shall not have voluntarily
reenlisted after the date of first entering active military service, his period
of absence shall not be considered a Break in Service and shall be counted as
Vesting Service upon his return to active Employment.
4.2.4 An Employee who terminates Employment with no vested percentage in
his Retirement Benefit shall, if he returns to Employment, have no credit for
Vesting Service prior to such termination of Employment if (i) for years prior
to January 1, 1985, the total of his consecutive One Year Breaks in Service
immediately preceding his reemployment exceed his aggregate years of Vesting
Service (whether or not consecutive, but excluding Vesting Service previously
disregarded under this rule) prior to such termination; or (ii) for years on or
after January 1, 1985, the total of his consecutive One Year Breaks in Service
immediately preceding his reemployment exceed the greater of five years or his
aggregate years of Vesting Service (whether or not consecutive, but excluding
Vesting Service previously disregarded under this rule) prior to the
termination. A Participant who had a Vested Separation and returns to
Employment will retain credit for his prior years of Vesting Service.
IV-1
<PAGE>
4.3 Retirement Benefit Forfeitures
------------------------------
The unvested portion of the Retirement Benefit of a Participant who has
terminated Employment shall be forfeited as of the earliest date on which such
Participant's Vesting Service may be disregarded pursuant to Section 4.2.4. Any
forfeitures shall be applied to reduce the Employer actuarial liability under
the Plan.
4.4 Vesta Insurance Group, Inc.
---------------------------
A Participant who terminated employment with the Company on November 12,
1993, and who became - as of that same date - an employee of Vesta Insurance
Group, Inc., became fully vested in his Retirement Benefit as of such date.
IV-2
<PAGE>
ARTICLE V
AMOUNT AND COMMENCEMENT OF RETIREMENT BENEFITS
----------------------------------------------
5.1 Determination of Amount of Retirement Benefits
----------------------------------------------
5.1.1 Normal Retirement Benefits. A Participant's benefits upon Normal
--------------------------
Retirement shall be equal to his Retirement Benefit as of his Normal Retirement
Date. The Participant's Benefit Commencement Date shall be the last day of the
payroll period coincident with or next following his termination of Employment.
The Participant shall not be entitled to any benefits under this Paragraph
unless he shall survive until his Benefit Commencement Date.
5.1.2 Deferred Retirement Benefits. A Participant's benefits upon
----------------------------
Deferred Retirement shall be equal to his Retirement Benefit determined as of
his Deferred Retirement Date (without actuarial increase for deferred
commencement). The Participant's Benefit Commencement Date shall be the last
day of the payroll period coincident with or next following his termination of
Employment. The Participant shall not be entitled to any benefits under this
Paragraph unless he shall survive until his Benefit Commencement Date.
5.1.3 Early Retirement Benefits. A Participant's benefits upon Early
-------------------------
Retirement shall be equal to his Retirement Benefit calculated as of the date of
Early Retirement. The Participant's Benefit Commencement Date shall be his
Normal Retirement Date; however if he so elects, the Benefit Commencement Date
shall be the last day of the payroll period coincident with or next following
his Early Retirement, or the last day of any payroll period thereafter which is
prior to his Normal Retirement Date. If the Participant elects a Benefit
Commencement Date preceding his Normal Retirement Date, his benefit shall equal
the excess of (i) over (ii) below, where:
(i) is his Retirement Benefit, without reduction for his Profit
Sharing and Retirement Plan Annuity, multiplied by the early retirement
factor shown below:
V-1
<PAGE>
Years by Which the
Date of the Participant's Early Retirement
First Benefit Payment Factor to Be Applied
Precedes His Normal to Accrued Retirement
Retirement Date Benefit
---------------------- -------------------
(Interpolate for Months)
10 .500
9 .533
8 .567
7 .600
6 .633
5 .667
4 .733
3 .800
2 .867
1 .933
0 1.000
and
(ii) is his Profit Sharing and Retirement Plan Annuity.
A Participant shall not be entitled to any benefits under this Paragraph unless
he shall survive until his Benefit Commencement Date.
5.1.4 Vested Separation Benefits. A Participant's benefits upon Vested
--------------------------
Separation shall be equal to his Retirement Benefit calculated as of the date of
Vested Separation multiplied by his vesting percentage. The Participant's
Benefit Commencement Date shall be his Normal Retirement Date; provided,
however, that, such a Participant may elect to commence receiving his benefits
on or after the earliest date that he could have been eligible for Early
Retirement. If the Participant elects a Benefit Commencement Date preceding his
Normal Retirement Date, his benefit shall be equal to (a) times (b) minus (c),
where:
(a) is the Retirement Benefit which would have been payable to him
commencing on his Normal Retirement Date determined without reduction for
his Profit Sharing and Retirement Plan Annuity;
(b) is the appropriate early retirement factor shown in section
5.1.3; and
(c) is his Profit Sharing and Retirement Plan Annuity.
A Participant shall not be entitled to any benefits under this Paragraph unless
he shall survive until his Benefit Commencement Date.
5.1.5 Non-Vested Separation. A Participant shall not be entitled to any
---------------------
Retirement Benefit upon his Non-Vested Separation. In addition, if a
Participant who is zero percent vested in his Accrued Retirement Benefit
terminates Employment, he shall be deemed to have received a distribution of his
Accrued Retirement Benefit.
V-2
<PAGE>
5.2 Suspension of Payments on Resumption of Employment
--------------------------------------------------
5.2.1 If an Employee continues in Employment after his Normal Retirement
Date or if a former Employee is receiving monthly payment of his Retirement
Benefit, payment of his Retirement Benefit shall be suspended for each calendar
month during which such Employee or former Employee continues in (or resumes)
Employment and performs more than 40 Hours of Service per calendar month
considered as service under ERISA (S) 203(a)(3)(B).
5.2.2 No payment shall be withheld by the Plan pursuant to this Section
unless the Plan notifies the Employee by personal delivery or first class mail
during the first calendar month or payroll period in which the Plan withholds
payments that his benefits are suspended. Such notifications shall contain a
description of the specific reasons why benefit payments are being suspended, a
description of the Plan provision relating to the suspension of payments, a copy
of such provisions, and a statement to the effect that applicable Department of
Labor regulations may be found in Title 29 of the Code of Federal Regulations
(S) 2530.203-3. In addition, the notice shall inform the Employee of the Plan's
procedures for affording a review of the suspension of benefits. Requests for
such reviews shall be considered in accordance with the claims procedure adopted
by the Administrator.
5.2.3 If benefit payments have been suspended, payments shall resume no
later than the first day of the third calendar month after the calendar month in
which the Employee ceases to be employed in ERISA (S) 203(a)(3)(B) service. The
initial payment upon resumption shall include the payment scheduled to occur in
the calendar month when payments resume and any amounts withheld during the
period between the cessation of ERISA (S) 203(a)(3)(B) service and the
resumption of payments.
5.2.4 The Retirement Benefit payable upon resumption of benefit payment
shall be equal to the Participant's Retirement Benefit as of the date of his
subsequent termination of Employment reduced by the Actuarial Equivalent of
payments previously made to him; provided, however, that such Retirement Benefit
may not be less than the Retirement Benefit previously payable.
5.3 Limitation on Commencement of Benefits
--------------------------------------
5.3.1 Unless otherwise elected by a Participant, the Participant's Benefit
Commencement Date shall in no event be later than the 60th day after the close
of the Plan Year in which the latest of the following events occurs:
(a) the attainment by the Participant of his Normal Retirement Age;
(b) the tenth anniversary of the year in which the Participant
commenced participation in the Plan; or
(c) the Participant's termination of Employment.
V-3
<PAGE>
5.3.2 If the amount of benefits payable cannot be determined within such
60-day period, or if it is not possible to pay such benefits within such period
because the Administrator has been unable to locate the Participant after making
reasonable efforts to do so, then a payment, retroactive to such 60th day, shall
be made no later than 60 days after the earliest date on which the amount of
such benefits can be determined or the Participant can be located, as the case
may be.
5.3.3 Any other provision of this Article V to the contrary
notwithstanding, the Benefit Commencement Date of a Participant must be no later
than the first day of April following the calendar year in which the Participant
attains age 70-1/2 even if he continues in Employment after that date.
Notwithstanding the foregoing, if a Participant who is not a "5 percent owner"
(as defined in Code (S) 401(a)(9)) attained age 70-1/2 before January 1, 1988,
the Benefit Commencement Date must be no later than the first day of April
following the calendar year in which the Participant terminates Employment.
5.3.4 If the Actuarial Equivalent value of a Participant's Retirement
Benefit exceeds $3,500, the Participant (and, if applicable, his Spouse) must
consent, in writing filed with the Administrator, to any distribution from the
Plan before the Participant's attainment of Normal Retirement Age.
V-4
<PAGE>
ARTICLE VI
FORMS OF PAYMENT OF RETIREMENT BENEFIT
--------------------------------------
6.1 Methods of Distribution
-----------------------
6.1.1 A Participant's benefits shall be payable in the normal form of a
Qualified Joint and Survivor Annuity if the Participant is married on his
Benefit Commencement Date and in the normal form of an annuity for the life of
the Participant with Actuarially Equivalent payments guaranteed for 120 months
if the Participant is not married on that date, provided that, and subject to
Sections 6.1.2, 6.1.3 and 6.1.4, a Participant may within the 90-day period
prior to the Benefit Commencement Date elect, in accordance with Section 6.2,
any of the following optional forms of benefit payment instead of the normal
form:
(a) A Single Life Annuity, under which monthly payments calculated
---------------------
in accordance with Section 3.1.1 are made to the Participant during his lifetime
with no further payments from the Plan on his behalf after his death.
(b) A Joint and 50%, 66-2/3%, or 100% Survivor Annuity, under which
--------------------------------------------------
Actuarially Equivalent monthly payments are made to the Participant for the
joint lives of the Participant and his Beneficiary with payments continuing for
the life of the survivor in an amount equal to 50%, 66-2/3% or 100% of the joint
life payments (whichever is elected by the Participant). A Participant may
elect to add a period certain of 10 years in which event no reduction in
payments will be made for the longer of the 10 year period or the period during
which both the Participant and Beneficiary remain alive.
(c) A 120 Months Certain and Life Income Annuity, an optional form
--------------------------------------------
of payment for a married Participant, under which reduced Actuarially Equivalent
payments are made to the Participant during the Participant's lifetime, with the
provision that if the Participant's death occurs before he had received 120
monthly payments the value of the remaining number of such payments shall be
paid to his Beneficiary.
(d) Lump Sum, under which the Actuarially Equivalent value of the
--------
Participant's Retirement Benefit is paid in one sum.
6.1.2 Anything in Section 6.1.1 to the contrary notwithstanding, if the
Actuarial Equivalent value of a Participant's Retirement Benefit is $3,500 or
less, his benefit shall be paid in the form of a lump sum distribution and no
optional form of benefit payment shall be available.
6.1.3 Payment in any form may only be made over one of the following
periods (or a combination thereof):
(a) the life of the Participant,
(b) the life of the Participant and a designated Beneficiary,
(c) a period certain not extending beyond the life expectancy of
the Participant, or
(d) a period certain not extending beyond the joint and last
survivor
VI-1
<PAGE>
expectancy of the Participant and a designated Beneficiary.
6.1.4 If the Participant's Spouse is not his designated Beneficiary, the
method of distribution must assure that at least fifty percent of the present
value of the Participant's Retirement Benefit is paid within the life expectancy
of the Participant.
6.2 Election of Optional Forms
--------------------------
6.2.1 By notice to the Administrator within the 90-day period prior to a
Participant's Benefit Commencement Date, the Participant may elect, in writing
and subject to the spousal consent rules as set forth in Section 6.2.4, not to
receive the normal form of benefit payment otherwise applicable and to receive
instead an optional form of benefit payment provided for in Section 6.1.1.
6.2.2 Within a reasonable period, but in no event later than 30 days
before nor earlier than 90 days before a Participant's Benefit Commencement
Date, the Administrator shall provide to each Participant a written explanation
of:
(a) the terms and conditions of the Participant's normal form of
benefit payment;
(b) the Participant's right to make, and the effect of, an election
to waive the normal form of benefit payment;
(c) the rights of the Participant's Spouse under Section 6.2.4; and
(d) the right to make, and the effect of, a revocation of a previous
election to waive the normal form of benefit payment.
The Administrator may, on a uniform and nondiscriminatory basis, provide for
such other notices, information or election periods or take such other action as
the Administrator considers necessary or appropriate in order to comply with
Code (S)(S) 401(a)(11) and 417.
6.2.3 A Participant may revoke his election to take an optional form of
benefit at any time prior to the Participant's Benefit Commencement Date,
without the consent of his Spouse.
6.2.4 The election of an optional form of benefit by a married Participant
must be in the form of a waiver of a Qualified Joint and Survivor Annuity. The
election must be in writing and consented to by the Participant's Spouse. The
Spouse's consent to the waiver must specify the form of benefit being elected
and the non-Spouse Beneficiary, if any, and must be witnessed by the
Administrator or a notary public. Notwithstanding this consent requirement, if
the Participant establishes to the satisfaction of the Administrator that such
written consent may not be obtained because there is no Spouse or the Spouse
cannot be located, the Participant's election will be deemed effective. Any
consent necessary under this provision will be valid only with respect to the
Spouse who signs the consent, or in the event of a deemed effective election,
the designated Spouse.
6.2.5 The election of an optional form of benefit which contemplates the
payment of an
VI-2
<PAGE>
annuity shall not be given effect if any person who would receive benefits under
the annuity dies before the Benefit Commencement Date.
6.3 Direct Rollovers
----------------
6.3.1 Effective with respect to distributions made on or after January 1,
1993, a Participant or Spouse may elect to have all or a portion of any amount
payable to him or her from the Plan which is an "eligible rollover distribution"
(as defined in Section 6.3.2 below) transferred directly to an "eligible
retirement plan" (as defined in Section 6.3.2 below). Any such election shall
be made in accordance with such uniform rules and procedures as the
Administrative Committee may prescribe from time to time as to the timing and
manner of the election in accordance with Code (S) 401(a)(31).
6.3.2 For purposes of this Section and Section 7.2.4:
(a) "Eligible rollover distribution" shall mean any distribution of
all or any portion of the balance to the credit of the distributee other than:
(1) any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary; (2) any
distribution for a specified period of ten (10) years or more; (3) any
distribution to the extent such distribution is required under Code (S)
401(a)(9); or (4) the portion of any distribution that is not includable in
gross income.
(b) "Eligible retirement plan" shall mean, with respect to a
Participant, an individual retirement account or annuity described in Code (S)
408(a) or 408(b) ("IRA"); an annuity plan described in Code (S) 403(a); or a
qualified plan described in Code (S) 401(a), that accepts the distributee's
eligible rollover distribution and, with respect to a Spouse, shall mean an IRA.
VI-3
<PAGE>
ARTICLE VII
DEATH BENEFITS
--------------
7.1 Eligibility for Pre-Retirement Death Benefit
--------------------------------------------
7.1.1 A pre-retirement death benefit shall be payable under the Plan in
the event of the death of a Participant prior to his Benefit Commencement Date
who, on the date of death, was either:
(a) actively employed by the Employer;
(b) Disabled; or
(c) terminated but eligible for Early Retirement.
The death benefit payable under this Section 7.1.1 shall be the larger of:
(1) the lump sum Actuarial Equivalent, as of the day before the
death of the Participant, of the Accrued Retirement Benefit that would have been
payable upon Normal Retirement of the Participant; or
(2) the lump sum Actuarial Equivalent, as of the day before the
Participant's death, of the monthly benefit which would have been payable to the
Participant's Spouse in the form of an immediate Qualified Joint and Survivor
Annuity under the Plan if (i) in the case of a Participant who dies after having
attained the earliest retirement age under the Plan, the Participant had retired
on the day before his death, and (ii) in the case of a Participant who dies
before having attained the earliest retirement age under the Plan, the
Participant had separated from service as of his date of death, survived until
his earliest retirement age under the Plan, retired on the day after attainment
of his earliest retirement age under the Plan, and died immediately thereafter.
7.1.2 A pre-retirement death benefit shall also be payable under the
Plan in the event of the death of a married Participant prior to his or her
Benefit Commencement Date who had a Vested Separation prior to eligibility for
Early Retirement. The death benefit payable under this Section 7.1.2 shall be
equal to the benefit calculated under paragraph (2) of Section 7.1.1.
VII-1
<PAGE>
7.2 Form of Pre-Retirement Death Benefit
------------------------------------
7.2.1 The pre-retirement death benefit payable under Section 7.1.1 shall
be payable to the Surviving Spouse of such Participant in the form of an
Actuarially Equivalent single life annuity commencing on the date of death
unless the Participant has no Surviving Spouse or the Participant has made an
election under Section 7.3, with the Spouse's consent, not to have the benefit
paid in such form. If the Participant has no Surviving Spouse or has made an
effective election under Section 7.3, such benefit shall be paid to the
Participant's Beneficiary in the Actuarially Equivalent form elected by the
Participant commencing on the date elected, or if there is no designated
Beneficiary, to the Participant's estate in a single lump sum. The Surviving
Spouse or other Beneficiary may elect any other Actuarially Equivalent form of
payment permitted under Section 6.1.1, by an instrument in writing filed with
the Administrator within 60 days after the Participant's death.
7.2.2 The pre-retirement death benefit payable under Section 7.1.2 shall
be payable to the Surviving Spouse of such Participant in the form of an
Actuarially Equivalent single life annuity commencing on the date the
Participant would have attained earliest retirement age, unless the Surviving
Spouse shall elect another Actuarially Equivalent form of payment permitted by
Section 6.1.1, by an instrument in writing filed with the Administrator within
60 days after the Participant's death. No benefit shall be payable under Section
7.1.2 unless the Spouse is alive on such Benefit Commencement Date.
7.2.3 Notwithstanding the provisions of Sections 7.2.1 and 7.2.2, if the
present value of the pre-retirement death benefit payable under Section 7.1.1 or
7.1.2 is $3,500 or less, such benefit shall be distributed in a single lump sum
as soon as practicable following the death of the Participant.
7.2.4 Any lump sum payment payable to a Spouse pursuant to this Section
7.2 shall be eligible for a direct rollover in accordance with Section 6.3.
7.3 Election to Waive
-----------------
7.3.1 An election by a married Participant under Section 7.2.1 must be
in the form of an election to waive the Qualified Pre-Retirement Survivor
Annuity. In order for any waiver pursuant to this Section 7.3.1 to be effective,
the Participant's Spouse must consent in writing to such election, and such
consent must acknowledge the effect of the election and must be witnessed by the
Administrator or a notary public. Such spousal consent shall be effective only
with respect to the Spouse giving this consent and, once given, such consent
shall be irrevocable. The Participant shall have the right to revoke his waiver
at any time prior to the earlier of the Participant's Benefit Commencement Date
or death.
VII-2
<PAGE>
7.4 Beneficiaries
-------------
7.4.1 With respect to any death benefit payable pursuant to Section
7.1.1, a Participant's Beneficiary shall be his Surviving Spouse or, subject to
the Spousal consent rules in Section 7.3, other Beneficiary or Beneficiaries
designated by the Participant in accordance with rules established by the
Administrator. With respect to any death benefit payable pursuant to Section
7.1.2, a Participant's Beneficiary shall be his Surviving Spouse.
7.4.2 With respect to any form of payment of a Retirement Benefit
pursuant to Article V providing for payments after the death of the Participant,
a Participant shall designate, in accordance with the election procedure under
Article VI, one or more Beneficiaries to whom amounts due after his death shall
be paid, and the rights of such Beneficiary shall be governed by the terms of
the form of payment so elected.
7.4.3 No Spouse or other Beneficiary shall have any right to benefits
under the Plan unless he shall survive the Participant. If a Beneficiary fails
to survive a Participant for at least 30 days, it shall be presumed that the
Participant survived the Beneficiary.
7.5 After-Death Distribution Rules
------------------------------
7.5.1 Notwithstanding any Plan provision to the contrary, if a
Participant dies after distribution of his benefits has commenced, the remaining
portion of such benefits will continue to be distributed at least as rapidly as
under the method of distribution being used prior to the Participant's death.
7.5.2 Notwithstanding any Plan provision to the contrary, if a
Participant dies before distribution of his benefits has commenced, the
Participant's entire interest will be distributed no later than 5 years after
the Participant's death; provided, however, that, if any portion of the
Participant's interest is payable to his Beneficiary, distributions may be made
in substantially equal installments over the life or life expectancy of the
Beneficiary, commencing (i) in the case of a Beneficiary other than a Surviving
Spouse, no later than one year after the Participant's death; and (ii) in the
case of a Surviving Spouse, no later than the later of one year after the
Participant's death or the date on which the Participant would have attained age
70 1/2. If the Spouse dies before payments to such Spouse begin, subsequent
distributions shall be made as if the Spouse had been the Participant.
VII-3
<PAGE>
ARTICLE VIII
CONTRIBUTIONS AND FORFEITURES
-----------------------------
8.1 Contribution by the Company
---------------------------
The Company and each Participating Affiliate will make contributions to
the Trust at such times and in such amounts as the Company may determine.
8.2 Contributions by Employees
--------------------------
Employees are not required or permitted to make contributions under the
Plan.
8.3 Forfeitures
-----------
Forfeitures under the Plan will be applied to reduce the Company's
contributions and will not be applied to increase the benefits of any person
hereunder prior to the termination of the Plan or complete discontinuance of
contributions by the Company.
8.4 Return of Employer Contributions under Special Circumstances
------------------------------------------------------------
Notwithstanding any provision of this Plan to the contrary, upon timely
written demand by an Employer to the Trustee:
(a) Any contribution made by the Employer to the Plan under a
mistake of fact shall be returned to the Employer by the Trustee within one year
after the payment of the contribution;
(b) Any contribution made by the Employer incident to the
determination by the Commissioner of Internal Revenue that the Plan is initially
a Qualified Plan shall be returned to the Employer by the Trustee within one
year after notification from the Internal Revenue Service that the Plan is not
initially a Qualified Plan; and
(c) Any contribution made by the Employer conditioned upon the
deductibility of the contribution under Code (S) 404 shall be returned to the
Employer within one year after a deduction for the contribution under Code (S)
404 is disallowed by the Internal Revenue Service, but only to the extent
disallowed. Each contribution by an Employer shall be conditioned upon the
deductibility of the contribution under Code (S) 404 unless the Employer elects
otherwise.
VIII-1
<PAGE>
ARTICLE IX
FIDUCIARIES
-----------
9.1 Named Fiduciaries
-----------------
The Named Fiduciaries, who shall have authority to control and manage the
operation and administration of the Plan, are as follows:
(a) the Company, which shall have the sole right to (i) appoint and
remove from office the members of the Administrative Committee, the Trustee and
any investment manager; (ii) establish a funding policy relating to, and the
method for achieving the objectives of, the Plan; and (iii) amend or terminate
the Plan;
(b) the Administrative Committee, which shall have the authority and
duties specified in Article XI hereof;
(c) the Trustee, which shall have the authority and duties specified
in Article X hereof and the Trust Agreement; and, in addition, the authority and
duties of the Administrative Committee, in the event that no such Committee
shall be appointed or constituted by the Company; and
(d) any investment manager or managers selected by the Company who
renders investment advice with respect to Plan assets.
9.2 Employment of Advisers
----------------------
A "named fiduciary" with respect to the Plan (as defined in ERISA (S)
402(a)(2)) and any "fiduciary" (as defined in ERISA (S) 3(21)) appointed by such
a "named fiduciary", may employ one or more persons to render advice with regard
to any responsibility of such "named fiduciary" or "fiduciary" under the Plan.
9.3 Multiple Fiduciary Capacities
-----------------------------
Any "named fiduciary" with respect to the Plan (as defined in ERISA (S)
402(a)(2)) and any other "fiduciary" (as defined in ERISA (S) 3(21)) with
respect to the Plan may serve in more than one fiduciary capacity.
9.4 Reliance
--------
Any fiduciary with respect to the Plan may rely upon any direction,
information or action of any other fiduciary, acting within the scope of its
responsibilities under the Plan, as being proper under the Plan.
IX-1
<PAGE>
9.5 Scope of Authority and Responsibility
-------------------------------------
The responsibilities of the Administrative Committee and the Trustee for
the operation and administration of the Plan are allocated between them in
accordance with the provisions of the Plan and the Trust Agreement wherein their
respective duties are specified. Each fiduciary shall have only the authority
and duties as are specifically given to it under this Plan, shall be responsible
for the proper exercise of its own authorities and duties, and shall not be
responsible for any act or failure to act of any other fiduciary.
IX-2
<PAGE>
ARTICLE X
TRUSTEE
-------
10.1 Trust Agreement
---------------
The Company shall enter into one or more Trust Agreements with the Trustee
or Trustees selected by it in its sole discretion, and the Trustee shall receive
the contributions to the Trust Fund made by the Employer pursuant to the Plan
and shall hold, invest, reinvest, and distribute such fund, as applicable, in
accordance with the terms and provisions of the Trust Agreement. The Company
will determine the form and terms of such Trust Agreement and may modify such
Trust Agreement from time to time to accomplish the purposes of this Plan and
may, in its sole discretion, remove any Trustee and select any successor
Trustee.
10.2 Assets in Trust
---------------
Except as otherwise permitted under the Plan, all assets of the Plan shall
be held in trust by the Trustee who upon acceptance of such office shall have
such authority as is set forth in the Trust Agreement.
X-1
<PAGE>
ARTICLE XI
ADMINISTRATIVE COMMITTEE
------------------------
11.1 Appointment and Removal of Administrative Committee
---------------------------------------------------
The administration of the Plan shall be vested in an Administrative
Committee of at least three (3) persons who shall be appointed by the Board, and
may include persons who are not Participants in the Plan. A person appointed a
member of the Committee shall signify his acceptance in writing. The Board may
remove or replace any member of the Committee at any time in its sole
discretion, and any Committee member may resign by delivering his written
resignation to the Board, which resignation shall become effective upon its
delivery or at any later date specified therein. If at any time there shall be
a vacancy in the membership of the Committee, the remaining member or members of
the Committee shall continue to act until such vacancy is filled by action of
the Board.
11.2 Officers of Administrative Committee
------------------------------------
The Committee shall appoint from among its members a chairman, and shall
appoint as secretary a person who may be, but need not be, a member of the
Committee or a Participant in the Plan.
11.3 Action by Administrative Committee
----------------------------------
The Committee shall hold meetings upon such notice, at such place or
places, and at such times as its members may from time to time determine. A
majority of its members at the time in office shall constitute a quorum for the
transaction of business. All action taken by the Committee at any meeting shall
be by vote of the majority of its members present at such meeting, except that
the Committee also may act without a meeting by a consent signed by a majority
of its members. Any member of the Committee who is a Participant in the Plan
shall not vote on any question relating exclusively to himself.
11.4 Rules and Regulations
---------------------
Subject to the terms of the Plan, the Committee may from time to time
adopt such rules and regulations as it shall deem appropriate for the
administration of the Plan and for the conduct and transaction of its business
and affairs.
11.5 Powers
------
The Committee shall have such powers as may be necessary to discharge its
duties under the Plan, including the power:
(a) to interpret and construe the Plan in its discretion, to determine
all questions with regard to employment, eligibility, Credited Service,
Compensation, Retirement
XI-1
<PAGE>
Benefits, and such factual matters as date of birth and marital status, and
similarly related matters for the purpose of the Plan. The Committee's
determination of all questions arising under the Plan shall be conclusive upon
all Participants, the Board, the Company, Employers, the Trustee, and other
interested parties;
(b) to prescribe procedures to be followed by Participants and
Beneficiaries filing application for benefits;
(c) to prepare and distribute to Participants information explaining
the Plan;
(d) to appoint or employ individuals to assist in the administration
of the Plan and any other agents it deems advisable, including legal, accounting
and actuarial counsel;
(e) to instruct the Trustee to make benefit payments pursuant to the
Plan;
(f) to appoint an enrolled actuary and to receive and review the
periodic valuation of the Plan made by such actuary;
(g) to receive and review reports of disbursements from the Trust
Fund made by the Trustees; and
(h) to receive and review the periodic audit of the Plan made by a
certified public accountant appointed by the Company.
11.6 Information from Participants
-----------------------------
Each Participant shall be required to furnish to the Committee, in the
form prescribed by it, such personal data, affidavits, authorizations to obtain
information, and other information as the Committee may deem appropriate for the
proper administration of the Plan.
11.7 Reports
-------
The Committee shall prepare, or cause to be prepared, such periodic
reports to the U.S. Labor Department, the Internal Revenue Service and the
Pension Benefit Guaranty Corporation as may be required pursuant to the Code or
ERISA.
11.8 Authority to Act
----------------
The Committee may authorize one or more of its members, officers, or
agents to sign on its behalf any of its instructions, directions, notifications,
or communications to the Trustee, and the Trustee may conclusively rely thereon
and on the information contained therein.
XI-2
<PAGE>
11.9 Liability for Acts
------------------
The members of the Committee shall be entitled to rely upon all
valuations, certificates and reports furnished by the Plan actuary or accountant
and upon all opinions given by any legal counsel selected by the Committee, and
the members of the Committee shall be fully protected with respect to any action
taken or suffered by their having relied in good faith upon such actuary,
accountant or counsel and all action so taken or suffered shall be conclusive
upon each of them and upon all Participants and their Beneficiaries. No member
of the Committee shall incur any liability for anything done or omitted by him
except only liability for his own willful misconduct.
11.10 Compensation and Expenses
-------------------------
Unless authorized by the Board, a member or officer of the Committee
shall not be compensated for his service in such capacity, but shall be
reimbursed for reasonable expenses incident to the performance of such duty.
11.11 Indemnity
---------
The Company shall indemnify the members of the Committee and any of their
agents acting in behalf of the Plan against any and all liabilities or expenses,
including all legal fees related thereto, to which they may be subjected as
members of the Committee by reason of any act or failure to act which
constitutes a breach or an alleged breach of fiduciary responsibility under
ERISA or otherwise, except that due to a person's own willful misconduct.
11.12 Denied Claims
-------------
If any application for payment of a benefit under the Plan shall be
denied, the Committee shall with the denial write the claimant setting forth the
specific reasons for the denial and explaining the Plan's claim review
procedure. If a claimant whose claim has been denied wishes further
consideration of his claim, he may request the Committee to review his claim in
a written statement of the claimant's position filed with the Committee no later
than 60 days after the claimant receives such denial. The Committee shall make
a full review of the claim and the denial, giving the claimant written notice of
its decision within the next 60 days. Due to special circumstances, if no
decision has been made within the first 60 days and notice of the need for
additional time has been furnished within such period, the decision may be made
within the following 60 days. A claimant shall be required to exhaust the
administrative remedies provided by this Section 11.12 prior to seeking any
other form of relief.
XI-3
<PAGE>
ARTICLE XII
PLAN AMENDMENT OR TERMINATION
-----------------------------
12.1 Plan Amendment
--------------
The Company shall have the right at any time to amend the Plan, which
amendment shall be evidenced by an instrument in writing signed by an authorized
officer of the Company, effective retroactively or otherwise. No such amendment
shall have any of the effects specified in Section 12.2.
12.2 Limitations on Plan Amendment
-----------------------------
No Plan amendment shall:
(a) authorize any part of the Trust to be used for, or diverted to,
purposes other than for the exclusive benefit of Participants or their
Beneficiaries;
(b) decrease the accrued benefits of any Participant or his
Beneficiary under the Plan (except to the extent permitted under Code (S)
412(c)(8)); or
(c) change the vesting schedule, either directly or indirectly, unless
each Participant having not less than three years of Vesting Service is
permitted to elect, within a reasonable period specified by the Administrator
after the adoption of such amendment, to have his vested percentage computed
without regard to such amendment. The period during which the election may be
made shall commence with the date the amendment is adopted and shall end as the
later of:
(i) sixty days after the amendment is adopted;
(ii) sixty days after the amendment becomes effective; or
(iii) sixty days after the Participant is issued written notice
by the Administrator.
12.3 Right of the Employer to Terminate Plan
---------------------------------------
The Company intends and expects that from year to year it will be able to
and will deem it advisable to continue this Plan in effect and to make
contributions as herein provided. The Company reserves the right, however, to
terminate the Plan at any time which termination shall be evidenced by an
instrument in writing signed by an authorized officer of the Company delivered
to the Administrator and the Trustee.
XII-1
<PAGE>
12.4 Effect of Partial or Complete Termination
-----------------------------------------
12.4.1 Determination of Date of Complete or Partial Termination. The
--------------------------------------------------------
date of complete or partial termination shall be established by the
Administrator in accordance with the directions of the Company in accordance
with applicable law.
12.4.2 Effect of Termination.
---------------------
(a) As of the date of a partial termination of the Plan:
(i) the accrued benefit of each affected Participant who is
then an Employee, to the extent funded, shall become nonforfeitable;
(ii) no affected Participant shall be granted Credited
Service based on Years of Service after such date; and
(iii) Compensation paid to affected Participants after such
date shall not be taken into account.
(b) As of the date of the complete termination of the Plan:
(i) the accrued benefit of each Participant who is then an
Employee, to the extent funded, shall become non-forfeitable;
(ii) no Participant shall be granted Credited Service based
on Years of Service after such date;
(iii) Compensation paid after such date shall not be taken
into account;
(iv) no Eligible Employee shall become a Participant after
such date; and
(v) except as may otherwise be required by applicable law,
all Employer obligations to fund the Plan shall terminate.
12.5 Allocation of Assets
--------------------
At any time as the Company determines to distribute the Trust, the Trust
shall be applied to the payment of or provision for benefits in accordance with
the priority classes established by ERISA (S) 4044. The respective amounts
allocated to such priority classes shall be distributed to or set aside for the
benefit of the persons entitled thereto in such manner as is determined by the
Administrator.
XII-2
<PAGE>
12.6 Residual Assets
---------------
Any amounts remaining in the Trust after the satisfaction of all
liabilities of the Trust with respect to all Participants and their
Beneficiaries shall revert to the Employer.
12.7 Limitations Applicable to Certain Highly Paid Participants
----------------------------------------------------------
Notwithstanding any provision in the Plan to the contrary, in any Plan
Year the annual payments to a Participant who is among the 25 "highly
compensated employees" (as defined in Code Section 414(q)) with the greatest
Compensation for the Plan Year shall not exceed the amount which would be
payable to such Participant in the form of a single life annuity which is the
actuarial equivalent of the sum of the Participant's Accrued Benefit and other
Plan benefits, unless:
(a) after payment of all Plan benefits to such Participant, the value of
the Plan's assets equals or exceeds 110 percent of the value of the Plan's
"current liabilities" (as defined in Code Section 412(l)(7)), or
(b) the value of such Participant's Plan benefits is less than 1 percent
of the value of the Plan's current liabilities.
XII-3
<PAGE>
ARTICLE XIII
MISCELLANEOUS PROVISIONS
------------------------
13.1 Exclusive Benefit of Participants
---------------------------------
The Trust shall be held for the benefit of all persons who shall be
entitled to receive payments under the Plan. It shall be prohibited at any time
for any part of the Trust (other than such part as is required to pay expenses)
to be used for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries.
13.2 Plan Not a Contract of Employment
---------------------------------
The Plan is not a contract of Employment, and the terms of Employment of
any Employee shall not be affected in any way by the Plan or related instruments
except as specifically provided therein.
13.3 Source of Benefits
------------------
Benefits under the Plan shall be paid or provided for solely from the
Trust, and neither the Company, an Employer, the Administrator, Trustee or
Investment Manager shall assume any liability therefor.
13.4 Benefits Not Assignable
-----------------------
Benefits provided under the Plan may not be assigned or alienated, either
voluntarily or involuntarily. The preceding sentence shall also apply to the
creation, assignment or recognition of a right to any benefit payable with
respect to a Participant pursuant to a "domestic relations order" (as defined in
Code (S) 414(p)) unless such order is determined by the Administrator to be a
"qualified domestic relations order" (as defined in Code (S) 414(p)) or, in the
case of a "domestic relations order" entered before January 1, 1985, if either
payment of benefits pursuant to the order has commenced as of that date or the
Administrator decides to treat such order as a "qualified domestic relations
order" within the meaning of Code (S) 414(p) even if it does not otherwise
qualify as such.
13.5 Domestic Relations Orders
-------------------------
Any other provision of the Plan to the contrary notwithstanding, the
Administrator shall have all powers necessary with respect to the Plan for the
proper operation of Code (S) 414(p) with respect to "qualified domestic
relations orders" (or "domestic relations orders" treated as such) referred to
in Section 13.4, including, but not limited to, the power to establish all
necessary or appropriate procedures, to authorize the establishment of new
accounts with such assets and subject to such restrictions as the Administrator
may deem appropriate, and the Administrator may decide upon and direct
appropriate distributions therefrom.
XIII-1
<PAGE>
13.6 Benefits Payable to Minors, Incompetents and Others
---------------------------------------------------
In the event any benefit is payable to a minor or an incompetent or to a
person otherwise under a legal disability, or who, in the sole discretion of the
Administrator, is by reason of advanced age, illness or other physical or mental
incapacity incapable of handling and disposing of his property, or otherwise is
in such position or condition that the Administrator believes that he could not
utilize the benefit for his support or welfare, the Administrator shall have
discretion to apply the whole or any part of such benefit directly to the care,
comfort, maintenance, support, education or use of such person, or pay the whole
or any part of such benefit to the parent of such person, the guardian,
committee, conservator or other legal representative, wherever appointed, of
such person, the person with whom such person is residing, or to any other
person having the care and control of such person. The receipt by any such
person to whom any such payment on behalf of any Participant or Beneficiary is
made shall be a sufficient discharge therefor.
13.7 Merger or Transfer of Assets
----------------------------
13.7.1 The merger or consolidation of the Company with any other person,
or the transfer of the assets of the Company to any other person, shall not
constitute a termination of the Plan, if provision is made for the continuation
of the Plan.
13.7.2 The Plan may not merge or consolidate with, or transfer any assets
or liabilities to, any other plan, unless each Participant would (if the Plan
then terminated) receive a benefit immediately after the merger, consolidation
or transfer which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
13.8 Participation in the Plan by an Affiliate
-----------------------------------------
13.8.1 By duly authorized action, an Affiliate may adopt the Plan. Such
Affiliate by duly authorized action, also may determine the classes of its
Employees who shall be Eligible Employees. Such Affiliate shall make such
contributions to the Plan on behalf of such Employees as is determined by the
Company. If no such action is taken, the Eligible Employees and the amount of
Retirement Benefit shall be determined in accordance with the Plan provisions
applicable to an Employer.
13.8.2 By duly authorized action, any other Employer may terminate its
participation in the Plan or withdraw from the Plan and the Trust.
13.8.3 An Employer other than the Company shall have no power with
respect to the Plan except as specifically provided by this Section 13.8.
XIII-2
<PAGE>
13.9 Action by Employer
------------------
Any action required to be taken by an Employer pursuant to the terms of
the Plan shall be taken by the board of directors of the Employer or any person
or persons duly empowered to exercise the powers of the Employer with respect to
the Plan.
13.10 Provision of Information
------------------------
For purposes of the Plan, each Employee shall execute such forms as may be
reasonably required by the Administrator and the Employee shall make available
to the Administrator and the Trustee any information they may reasonably request
in this regard.
13.11 Controlling Law
---------------
The Plan is intended to qualify under Code (S) 401(a) and to comply with
ERISA, and its terms shall be interpreted accordingly. Otherwise, to the extent
not preempted by ERISA, the laws of the State of Alabama shall control the
interpretation and performance of the terms of the Plan.
13.12 Conditional Restatement
-----------------------
Anything in the foregoing to the contrary notwithstanding, the Plan has
been restated on the express condition that it will be considered by the
Internal Revenue Service as qualifying under the provisions of Code (S) 401(a)
and the Trust qualifying for exemption from taxation under Code (S) 501(a). If
the Internal Revenue Service determines that the Plan or Trust does not so
qualify, the Plan shall be amended or terminated as decided by the Company.
13.13 Rules of Construction
---------------------
Masculine pronouns used herein shall refer to men or women or both and
nouns and pronouns when stated in the singular shall include the plural and when
stated in the plural shall include the singular, unless qualified by the
context. Titles of Articles and Sections of the Plan are for convenience of
reference only and are to be disregarded in applying the provisions of the Plan.
Any reference in this Plan to an Article or Section is to the Article or Section
so specified of the Plan.
XIII-3
<PAGE>
IN WITNESS WHEREOF, LIBERTY NATIONAL LIFE INSURANCE COMPANY has caused
this Plan to be restated, effective as of January 1, 1989.
LIBERTY NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Anthony L. McWhorter
-------------------------
XIII-4
<PAGE>
APPENDIX A
TOP-HEAVY PROVISIONS
--------------------
A. As used in this Appendix A, each of the following terms shall have
the meanings for that term set forth below:
(a) Defined Benefit Plan means, a plan of the type defined in Code
--------------------
(S) 414(j) maintained by the Company or an Affiliate, as applicable.
(b) Defined Contribution Plan means, a plan of the type defined in
-------------------------
Code (S) 414(i) maintained by the Company or an Affiliate, as applicable.
(c) Determination Date means, for any Plan Year subsequent to the
------------------
first Plan Year, the last day of the preceding Plan Year. For the first Plan
Year of the Plan, Determination Date means the last day of that year.
(d) Determination Period means the Plan Year containing the
--------------------
Determination Date and the four preceding Plan Years.
(e) Key Employee means any Employee or former Employee (and the
------------
Beneficiaries of such Employee) who at any time during the Determination Period
was:
(i) an officer of an Employer having Limitation Compensation
greater than 50% of the dollar limitation under Code (S) 415(b)(1)(A) for
any Plan Year within the Determination Period,
(ii) an owner (or individual considered an owner under Code (S)
318) of one of the ten largest interests in an Employer if such
individual's Limitation Compensation exceeds 100% of the dollar limitation
in effect under Code (S) 415(c)(1)(A),
(iii) a "5-percent owner" (as defined in Code (S) 416(i)) of an
Employer, or
(iv) a "1-percent owner" (as defined in Code (S) 416(i)) of an
Employer who has Limitation Compensation of more than $150,000.
(f) Limitation Compensation means, for an Employee, the Employee's
-----------------------
earned income, wages, salaries, fees for professional services and other amounts
received for personal services actually rendered in the course of Employment
(including, but not limited to, commissions paid salesmen, compensation for
services on the basis of a percentage of profits, commissions on insurance
premiums, tips and bonuses); amounts described in Code (S)(S) 104(a)(3), 105(a)
and 105(h) to the extent includable in the Employee's gross income; amounts
described in Code (S) 105(d) whether or not excludable from the Employee's gross
income; reimbursed non-deductible moving
A-1
<PAGE>
expenses; the value of nonqualified stock options to the extent includable in
the Employee's gross income in the year of grant; the amount includable in the
Employee's gross income pursuant to an election under Code (S) 83(b);
distributions from an unfunded, non-qualified plan of deferred compensation; and
excluding the following:
(i) contributions to a plan of deferred compensation which are
not includable in the Employee's gross income for the taxable year in
which contributed, or contributions under a "simplified employee pension"
(within the meaning of Code (S) 408(k)) to the extent such contributions
are deductible by the Employee, or any distributions from a plan of
deferred compensation (other than an unfunded non-qualified plan);
(ii) amounts realized from the exercise of a non-qualified
stock option, or when restricted stock (or other property) held by the
Employee either becomes freely "transferable" or is no longer subject to a
"substantial risk of forfeiture" (both quoted terms within the meaning of
Code (S) 83(a));
(iii) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(iv) other amounts which received special tax benefits, or
contributions made (whether or not under a salary reduction agreement)
towards the purchase of an annuity described in Code (S) 403(b) (whether or
not the amounts are actually excludable from the gross income of the
Employee).
(g) Non-Key Employee means any Employee who is not a Key Employee.
----------------
(h) Permissive Aggregation Group means the Required Aggregation
----------------------------
Group of plans plus any other plan or plans of the Company or an Affiliate
which, when considered as a group with the Required Aggregation Group, would
continue to satisfy the requirements of Code (S)(S) 401(a)(4) and 410.
(i) Required Aggregation Group means (i) each Qualified Plan of an
--------------------------
Employer in which at least one Key Employee participates, and (ii) any other
Qualified Plan of an Employer which enables a plan described in (i) to meet the
requirements of Code (S)(S) 401(a)(4) and 410.
(j) Super Top-Heavy Plan means, for any Plan Year beginning after
--------------------
December 31, 1983, the Plan, if any Top-Heavy Ratio as determined under the
definition of Top-Heavy Plan exceeds 90%.
(k) Top-Heavy Plan means, for any Plan Year beginning after December
--------------
31, 1983, the Plan, if any of the following conditions exists:
(i) If the Top-Heavy Ratio for the Plan exceeds sixty percent
and the Plan is not part of any Required Aggregation Group or Permissive
Aggregation Group
A-2
<PAGE>
of plans.
(ii) If the Plan is a part of a Required Aggregation Group of
plans but not part of a Permissive Aggregation Group and the Top-Heavy
Ratio for the Required Aggregation Group of plans exceeds sixty percent.
(iii) If the Plan is a part of a Required Aggregation Group and
part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio
for the Permissive Aggregation Group exceeds sixty percent.
(l) Top-Heavy Ratio means,
---------------
(i) If the Company or an Affiliate maintains one or more
Defined Benefit Plans and the Company or an Affiliate has never maintained
any Defined Contribution Plan (including any "simplified employee pension"
within the meaning of Code (S) 408(k)) which during the 5-year period
ending on the Determination Date has or has had account balances, the Top-
Heavy Ratio for the Plan alone or for the Required or Permissive
Aggregation Group, as appropriate, is a fraction, the numerator of which
is the sum of the present values of accrued benefits under the aggregated
Defined Benefit Plans of all Key Employees as of the respective
Determination Date for each plan (including any part of any accrued
benefit distributed in the 5-year period ending on the Determination
Date), and the denominator of which is the sum of the present values of
all accrued benefits under the aggregated Defined Benefit Plans as of the
respective Determination Date for each plan (including any part of any
accrued benefit distributed in the 5-year period ending on the
Determination Date) determined in accordance with Code (S) 416.
(ii) If the Company or an Affiliate maintains one or more
Defined Benefit Plans and the Company or an Affiliate maintains or has
maintained one or more Defined Contribution Plans (including any
"simplified employee pension" within the meaning of Code (S) 408(k)) which
during the 5-year period ending on the Determination Date has or has had
any account balances, the Top-Heavy Ratio for any Required or Permissive
Aggregation Group, as appropriate, is a fraction, the numerator of which
is the sum of the present value of accrued benefits under the aggregated
Defined Benefit Plans for all Key Employees, determined in accordance with
(i) above, plus the sum of account balances under the aggregated Defined
Contribution Plans for all Key Employees as of the respective
Determination Date for each plan, and the denominator of which is the sum
of the present value of all accrued benefits under the aggregated Defined
Benefit Plans, determined in accordance with (i) above, plus the sum of
all account balances under the aggregated Defined Contribution Plans for
all Participants as of the respective Determination Date for each plan,
all determined in accordance with Code (S) 416. The account balances under
a Defined Contribution Plan in both the numerator and denominator of the
Top-Heavy Ratio are adjusted for any distribution of any account balance
made in the 5-year period ending on the Determination Date.
A-3
<PAGE>
(iii) For purposes of (i) and (ii) above, the value of account
balances and the present value of accrued benefits will be determined as
of the most recent Valuation Date that falls within or ends with the 12-
month period ending on the Determination Date, except as provided in Code
(S) 416 for the first and second plan year of a Defined Benefit Plan. The
account balances and accrued benefits of a Participant (A) who is a Non-
Key Employee but who was a Key Employee in a prior year, or (B) who has
not been credited with at least one Hour of Service with any Employer at
any time during the 5-year period ending on the Determination Date will be
disregarded. The calculation of the Top-Heavy Ratio, and the extent to
which distributions, rollovers, and transfers are taken into account will
be made in accordance with Code (S) 416. Deductible employee contributions
will not be taken into account for purposes of computing the Top-Heavy
Ratio. When aggregating plans, the value of account balances and accrued
benefits will be calculated with reference to the respective Determination
Dates for the aggregated plans that fall within the same calendar year.
(iv) Solely for the purpose of determining if the Plan, or any
other plan included in a Required Aggregation Group of which this Plan is
a part, is Top-Heavy (within the meaning of Code (S) 416(g)) such
determination shall be made under (A) the method, if any, that uniformly
applies for accrual purposes under all plans maintained by the Employer,
or (B) if there is no such method, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under the fractional
accrual rate of Code (S) 411(b)(l)(C).
(m) Valuation Date means, the date as of which account balances, or
--------------
accrued benefits are valued for purposes of calculating the Top-Heavy Ratio.
B. If the Plan is determined to be a Top-Heavy Plan or a Super Top-Heavy
Plan as of any Determination Date, then it shall be subject to the rules set
forth in this Appendix A, beginning with the first Plan Year commencing after
such Determination Date. Even if, as of a subsequent Determination Date, the
Plan is determined to no longer be a Top-Heavy Plan or a Super Top-Heavy Plan,
the rules set forth in these Sections will continue to apply.
C. For each Plan Year beginning before January 1, 1989 in which the Plan
is a Top-Heavy Plan or Super Top-Heavy Plan, Compensation for the purpose of
this Plan shall be limited to the first $200,000 (or such larger amount as may
be prescribed for the Plan Year involved pursuant to Code (S) 416(d)(2)) of the
amount that would otherwise have been Compensation.
D. (a) Except as provided in subparagraphs (b) and (c) below, for any
Plan Year in or after which the Plan is a Top-Heavy Plan, each Participant who
is a Non-Key Employee and has completed one Year of Service will accrue a
Retirement Benefit (to be provided solely by Employer contributions) and
expressed as a single life annuity commencing at normal retirement age (within
the meaning of Code (S) 411(a)(8)) of not less than 2% of his or her average
Limitation Compensation for the 5 consecutive years for which the Participant
had the highest Limitation
A-4
<PAGE>
Compensation. The aggregate Limitation Compensation for the years during such
five-year period in which the Participant was credited with one Year of Service
will be divided by the number of such years in order to determine average
Limitation Compensation. The minimum accrual is determined without regard to any
Social Security contribution. The minimum accrual applies even though under
other Plan provisions the Participant would not otherwise be entitled to receive
an accrual, or would have received a lesser accrual for the Plan Year. The
suspension of benefits provisions of this Plan shall not apply to the minimum
benefits hereunder.
(b) No additional benefit accruals shall be provided pursuant to (a)
above to the extent that the total accruals on behalf of the Participant
attributable to Employer contributions will provide a Retirement Benefit
expressed as a single life annuity commencing at normal retirement age (within
the meaning of Code (S) 411(a)(8)) that equals or exceeds 20% of the
Participant's highest average Limitation Compensation for the 5 consecutive
years for which the Participant had the highest Limitation Compensation. All
accruals of Employer derived benefits, whether or not attributable to years for
which the Plan is a Top-Heavy Plan, may be used in computing whether the minimum
accrual requirement of the preceding sentence is satisfied.
(c) The provision in (a) above shall not apply to any Participant to
the extent that the Participant is covered under any other plan or plans of an
Employer and the Employer has provided in that plan that the minimum allocation
or benefit requirement applicable to this Top-Heavy Plan will be met in the
other plan or plans.
E. If the Plan is a Top-Heavy Plan for any Plan Year, then the maximum
benefit which can be provided under Code (S) 415 shall be determined by
substituting "1.00" for "1.25" in Code (S) 415(e)(2)(B) and (3)(B), unless the
Plan meets the requirements of Code (S) 416(h)(2)(B) and the Administrator
increases the minimum rate of benefit accrual provided in Section D by one
percent.
F. Beginning with the Plan Year in which this Plan is Top-Heavy, the
following vesting schedule will apply:
Completed Years of Vested
Vesting Service Percentage
------------------ ----------
2 20%
3 40%
4 60%
5 100%
G. In the event that any provision of this Appendix A is no longer
required to qualify the Plan under the Code, then such provision shall thereupon
be void without the necessity of further amendment of the Plan.
A-5
<PAGE>
EXHIBIT 10.X
RECEIVABLES PURCHASE AGREEMENT
dated as of December 21, 1999
Among
AILIC RECEIVABLES CORPORATION,
as Seller,
AMERICAN INCOME LIFE INSURANCE COMPANY,
as Servicer,
PREFERRED RECEIVABLES FUNDING CORPORATION,
as Purchaser
and
BANK ONE, NA,
as a Financial Institution and Agent
1
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
PRELIMINARY STATEMENTS -1-
ARTICLE I
PURCHASE ARRANGEMENTS -1-
Section 1.1 Purchase Facility -1-
-----------------
Section 1.2 Increases -1-
---------
Section 1.3 Decreases -2-
---------
Section 1.4 Payment Requirements -2-
--------------------
ARTICLE II
PAYMENTS AND COLLECTIONS -5-
Section 2.1 Payments -5-
--------
Section 2.2 Collections Prior to Amortization -5-
---------------------------------
Section 2.3 Collections Following Amortization -6-
----------------------------------
Section 2.4 Application of Collections -6-
--------------------------
Section 2.5 Payment Recision -7-
----------------
Section 2.6 Aggregate Purchaser Interest -7-
----------------------------
ARTICLE III
PREFCO FUNDING -7-
Section 3.1 CP Costs -7-
--------
Section 3.2 CP Costs Payments -8-
-----------------
Section 3.3 Calculation of CP Costs -8-
-----------------------
ARTICLE IV
FINANCIAL INSTITUTION FUNDING -8-
Section 4.1 Financial Institution Funding -8-
-----------------------------
Section 4.2 Yield Payments -8-
--------------
Section 4.3 Selection and Continuation of Tranche Periods -8-
---------------------------------------------
Section 4.4 Financial Institution Discount Rates -8-
------------------------------------
Section 4.5 Suspension of the LIBO Rate -9-
---------------------------
ARTICLE V
REPRESENTATIONS AND WARRANTIES -9-
Section 5.1 Representations and Warranties of Seller Parties -9-
------------------------------------------------
Section 5.2 Financial Institution Representations and Warranties -14-
----------------------------------------------------
ARTICLE VI
CONDITIONS OF PURCHASES -14-
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 6.1 Conditions Precedent to Initial Purchase -14-
----------------------------------------
Section 6.2 Conditions Precedent to All Purchases and Reinvestments -15-
-------------------------------------------------------
ARTICLE VII
COVENANTS -15-
Section 7.1 Affirmative Covenants of the Seller Parties -15-
-------------------------------------------
Section 7.2 Negative Covenants of the Seller Parties -24-
----------------------------------------
ARTICLE VIII
ADMINISTRATION AND COLLECTION -26-
Section 8.1 Designation of Servicer -26-
-----------------------
Section 8.2 Duties of Servicer -26-
------------------
Section 8.3 Collection Rights -27-
-----------------
Section 8.4 Responsibilities of Seller -28-
--------------------------
Section 8.5 Reports -28-
-------
Section 8.6 Servicing Fees -28-
--------------
ARTICLE IX
AMORTIZATION EVENTS -28-
Section 9.1 Amortization Events -28-
-------------------
Section 9.2 Remedies -31-
--------
ARTICLE X
INDEMNIFICATION -32-
Section 10.1 Indemnities by the Seller Parties -32-
---------------------------------
Section 10.2 Increased Cost and Reduced Return -35-
---------------------------------
Section 10.3 Other Costs and Expenses -35-
------------------------
Section 10.4 Allocations -36-
-----------
ARTICLE XI
THE AGENT -36-
Section 11.1 Authorization and Action -36-
------------------------
Section 11.2 Delegation of Duties -37-
--------------------
Section 11.3 Exculpatory Provisions -37-
----------------------
Section 11.4 Reliance by Agent -37-
-----------------
Section 11.5 Non-Reliance on Agent and Other Purchasers -38-
------------------------------------------
Section 11.6 Reimbursement and Indemnification -38-
---------------------------------
Section 11.7 Agent in its Individual Capacity -38-
--------------------------------
Section 11.8 Successor Agent -38-
---------------
ARTICLE XII
ASSIGNMENTS; PARTICIPATIONS -39-
Section 12.1 Assignments -39-
-----------
Section 12.2 Participations -40-
--------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE XIII
LIQUIDITY FACILITY -40-
Section 13.1 Transfer to Financial Institutions -40-
----------------------------------
Section 13.2 Transfer Price Reduction Yield -40-
------------------------------
Section 13.3 Payments to PREFCO -40-
------------------
Section 13.4 Limitation on Commitment to Purchase from PREFCO -41-
------------------------------------------------
Section 13.5 Defaulting Financial Institutions -41-
---------------------------------
ARTICLE XIV
MISCELLANEOUS -42-
Section 14.1 Waivers and Amendments -42-
----------------------
Section 14.2 Notices -43-
-------
Section 14.3 Ratable Payments -43-
----------------
Section 14.4 Protection of Ownership Interests of the Purchasers -43-
---------------------------------------------------
Section 14.5 Confidentiality -44-
---------------
Section 14.6 Bankruptcy Petition -45-
-------------------
Section 14.7 Limitation of Liability -45-
-----------------------
Section 14.8 CHOICE OF LAW -46-
-------------
Section 14.9 CONSENT TO JURISDICTION -46-
-----------------------
Section 14.10 WAIVER OF JURY TRIAL -46-
--------------------
Section 14.11 Integration; Binding Effect; Survival of Terms -46-
----------------------------------------------
Section 14.12 Counterparts; Severability; Section References -47-
----------------------------------------------
Section 14.13 Bank One Roles -47-
--------------
Section 14.14 Characterization -47-
----------------
EXHIBIT I
DEFINITIONS -51-
EXHIBIT II
FORM OF PURCHASE NOTICE -71-
EXHIBIT III
PLACES OF BUSINESS OF THE SELLER PARTIES;
LOCATIONS OF RECORDS;
FEDERAL EMPLOYER IDENTIFICATION NUMBER(S) -73-
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
EXHIBIT IV
FORM OF COMPLIANCE CERTIFICATE -74-
EXHIBIT V
FORM OF ASSIGNMENT AGREEMENT -77-
EXHIBIT VI
CREDIT AND COLLECTION POLICY -84-
EXHIBIT VII
FORM OF CONTRACT(S) -85-
EXHIBIT VIII
FORM OF MONTHLY REPORT -86-
SCHEDULE A
COMMITMENTS OF FINANCIAL INSTITUTIONS -90-
SCHEDULE B
LIST OF CLOSING DOCUMENTS -91-
</TABLE>
iv
<PAGE>
RECEIVABLES PURCHASE AGREEMENT
This Receivables Purchase Agreement dated as of December 21, 1999 is among
AILIC RECEIVABLES CORPORATION, a Delaware corporation ("Seller"), AMERICAN
------
INCOME LIFE INSURANCE COMPANY, an insurance company organized under the laws of
Indiana ("AIL"), as the initial Servicer (the Servicer together with the Seller,
---
the "Seller Parties" and each a "Seller Party"), the funding entities listed on
-------------- ------------
Schedule A to this Agreement (together with their respective successors and
- ----------
assigns hereunder, the "Financial Institutions"), PREFERRED RECEIVABLES FUNDING
----------------------
CORPORATION ("PREFCO"), and BANK ONE, NA (with headquarters in Chicago,
------
Illinois), as agent for the Purchasers hereunder or any successor agent
hereunder (together with its successors and assigns hereunder, the "Agent").
-----
Unless defined elsewhere herein, capitalized terms used in this Agreement shall
have the meanings assigned to such terms in Exhibit I.
---------
PRELIMINARY STATEMENTS
Seller desires to transfer and assign Purchaser Interests to the Purchasers
from time to time.
PREFCO may, in its absolute and sole discretion, purchase Purchaser
Interests from Seller from time to time.
In the event that PREFCO declines to make any purchase, the Financial
Institutions shall, at the request of Seller, purchase Purchaser Interests from
time to time. In addition, the Financial Institutions have agreed to provide a
liquidity facility to PREFCO in accordance with the terms hereof.
Bank One, NA has been requested and is willing to act as Agent on behalf of
PREFCO and the Financial Institutions in accordance with the terms hereof.
ARTICLE I
PURCHASE ARRANGEMENTS
Section 1.1 Purchase Facility. Upon the terms and subject to the
-----------------
conditions hereof, Seller may, at its option, sell and assign Purchaser
Interests to the Agent for the benefit of one or more of the Purchasers. In
accordance with the terms and conditions set forth herein, PREFCO may, at its
option, instruct the Agent to purchase on behalf of PREFCO, or if PREFCO shall
decline to purchase, the Agent shall purchase, on behalf of the Financial
Institutions, Purchaser Interests from time to time in an aggregate amount not
to exceed the Purchase Limit during the period from the date hereof to but not
including the earlier to occur of the Amortization Date and the Liquidity
Termination Date.
Section 1.2 Increases. Seller shall provide the Agent with at
---------
least two Business Days' prior written notice of each Incremental Purchase.
Such notice (a "Purchase
--------
1
<PAGE>
Notice") shall be in the form set forth as Exhibit II hereto. Each Purchase
- ------ ----------
Notice shall be subject to Section 6.2 hereof and, except as set forth below,
-----------
shall be irrevocable and shall specify the requested Purchase Price (which
amount shall not be less than $500,000, or an increment of $100,000 in excess
thereof) and shall not be greater than the Commitment Availability as of the
date of the proposed purchase), the date of purchase (which shall be a
Settlement Date) and, in the case of an Incremental Purchase to be funded by the
Financial Institutions, the requested Discount Rate and Tranche Period.
Following receipt of a Purchase Notice, the Agent will determine whether PREFCO
agrees to make the purchase. If PREFCO declines to make a proposed purchase,
Seller may cancel the Purchase Notice or, in the absence of such a cancellation,
the Incremental Purchase of the Purchaser Interest will be made by the Financial
Institutions. On the date of each Incremental Purchase, upon satisfaction of the
applicable conditions precedent set forth in Article VI, PREFCO or the Financial
----------
Institutions, as applicable, shall deposit to the Facility Account, in
immediately available funds, no later than 12:00 noon (Chicago time), an amount
equal to (i) in the case of PREFCO, the aggregate Purchase Price of the
Purchaser Interests PREFCO is then purchasing or (ii) in the case of a Financial
Institution, such Financial Institutions' Pro Rata Share of the aggregate
Purchase Price of the Purchaser Interests the Financial Institutions are
purchasing.
Section 1.3 Decreases. Seller shall provide the Agent with prior
---------
written notice in conformity with the Required Notice Period of any reduction
from Collections requested by Seller of Capital (a "Reduction Notice"). Such
----------------
Reduction Notice shall designate (i) the date (the "Proposed Reduction Date")
-----------------------
upon which any such reduction of Capital shall occur (which date shall give
effect to the applicable Required Notice Period), and (ii) the aggregate amount
of Capital to be reduced which shall be applied ratably to the Purchaser
Interests of PREFCO and the Financial Institutions in accordance with the amount
of Capital (if any) owing to PREFCO, on the one hand, and the amount of Capital
(if any) owing to the Financial Institutions (ratably, based on their respective
Pro Rata Shares), on the other hand (the "Aggregate Reduction"). Only one (1)
-------------------
Reduction Notice shall be outstanding at any time. Notwithstanding the
foregoing, the Aggregate Reduction will not be made if the Amortization Date
shall have occurred for any reason on or prior to the Proposed Reduction Date.
Section 1.4 Payment Requirements. All amounts to be paid or
--------------------
deposited by any Seller Party pursuant to any provision of this Agreement shall
be paid or deposited in accordance with the terms hereof no later than 11:00
a.m. (Chicago time) on the day when due in immediately available funds, and if
not received before 11:00 a.m. (Chicago time) shall be deemed to be received on
the next succeeding Business Day. If such amounts are payable to a Purchaser
they shall be paid to the Agent, for the account of such Purchaser, at Bank One,
NA, 1 Bank One Plaza, Mail Suite IL1-0596, Chicago, Illinois 60670 (ABA No.
071000013; FMSD Clearing Account No. 7521-7683; Reference: AILIC Receivables
Corporation) until otherwise notified by the Agent. Upon notice to Seller, the
Agent may debit the Facility Account for all amounts due and payable hereunder.
All computations of Yield, per annum fees calculated as part of any CP Costs,
per annum fees hereunder and under the Fee Letter shall be made on the basis of
a year of 360 days for the actual number of days elapsed. If any amount
hereunder shall be payable on a day which is not a Business Day, such amount
shall be payable on the next succeeding Business Day.
2
<PAGE>
ARTICLE II
PAYMENTS AND COLLECTIONS
Section 2.1 Payments. Notwithstanding any limitation on recourse
--------
contained in this Agreement, Seller shall immediately pay to the Agent when due,
for the account of the relevant Purchaser or Purchasers on a full recourse
basis, (i) such fees as set forth in the Fee Letter (which fees shall be
sufficient to pay all fees owing to the Financial Institutions), (ii) all CP
Costs, (iii) all amounts payable as Yield, (iv) all amounts payable as Deemed
Collections (which shall be applied to reduce outstanding Capital hereunder in
accordance with Sections 2.2 and 2.3 hereof), (v) all amounts payable pursuant
------------ ---
to Section 2.6, (vi) all amounts payable pursuant to Article X, if any, (vii)
----------- ---------
all Servicer costs and expenses in connection with servicing, administering and
collecting the Receivables, (viii) all Broken Funding Costs and (ix) all Default
Fees (collectively, the "Obligations"). If any Person fails to pay any of the
-----------
Obligations when due, such Person agrees to pay, on demand, the Default Fee in
respect thereof until paid. Notwithstanding the foregoing, no provision of this
Agreement or the Fee Letter shall require the payment or permit the collection
of any amounts hereunder in excess of the maximum permitted by applicable law.
If at any time Seller receives any Collections or is deemed to receive any
Collections, Seller shall immediately pay such Collections or Deemed Collections
to the Servicer for application toward the purchase of new Receivables or for
handling as otherwise provided herein and, at all times prior to such payment,
such Collections shall be held in trust by Seller for the exclusive benefit of
the Purchasers and the Agent.
Section 2.2 Collections Prior to Amortization. Prior to the
---------------------------------
Amortization Date, any Collections and/or Deemed Collections received by the
Servicer (after the initial purchase of a Purchaser Interest hereunder and on or
prior to the Amortization Date of such Purchaser Interest) shall be set aside
and held in trust by the Servicer for the payment of any accrued and unpaid
Aggregate Unpaids up to the amount necessary to fund such Aggregate Unpaids. If
at any time any Collections and/or Deemed Collections are received by the
Servicer prior to the Amortization Date, Seller hereby requests and the
Purchasers hereby agree to make, simultaneously with such receipt, a
reinvestment (each a "Reinvestment") with that portion of each and every
------------
Collection received by the Servicer that is part of any Purchaser Interest, such
that after giving effect to such Reinvestment, the amount of Capital of such
Purchaser Interest immediately after such receipt and corresponding Reinvestment
shall be equal to the amount of Capital immediately prior to such receipt. On
each Settlement Date prior to the occurrence of the Amortization Date, the
Servicer shall remit to the Agent's account the amounts set aside during the
preceding Settlement Period and apply such amounts (if not previously paid in
accordance with Section 2.1) to reduce unpaid CP Costs, Yield and other
-----------
Obligations. If such CP Costs, Yield and other Obligations shall be reduced to
zero, any additional Collections and/or Deemed Collections received by the
Servicer shall (i) if applicable, be remitted to the Agent's account no later
than 11:00 a.m. (Chicago time) to the extent required to fund any Aggregate
Reduction on such Settlement Date and (ii) thereafter be remitted from the
Servicer to Seller on such Settlement Date.
3
<PAGE>
Section 2.3 Collections Following Amortization. On the Amortization
----------------------------------
Date and on each day thereafter, the Servicer shall set aside and hold in trust,
for the holder of each Purchaser Interest, all Collections and Deemed
Collections received on such day (together with all Collections and Deemed
Collections then held in trust pursuant to Section 2.2 or this Section 2.3).
----------- ------------
On and after the Amortization Date, the Servicer shall, at any time upon the
request from time to time by (or pursuant to standing instructions from) the
Agent (i) remit to the Agent's account the amounts set aside pursuant to the
preceding sentence, and (ii) apply such amounts to reduce the Capital associated
with each such Purchaser Interest and any other Aggregate Unpaids until such
time as the Aggregate Unpaids are reduced to zero.
Section 2.4 Application of Collections. If there shall be
--------------------------
insufficient funds on deposit for the Servicer to distribute funds in payment in
full of the aforementioned amounts pursuant to Section 2.2 or 2.3 (as
----------- ---
applicable), the Servicer shall distribute funds:
first, (i) if AIL or one of its Affiliates is then the Servicer and
-----
no Amortization Event or Potential Amortization Event shall have occurred
and then be continuing, to the payment of the accrued and unpaid Servicing
Fee, and (ii) if neither AIL nor any of its Affiliates is then the
Servicer, to the payment of the Servicer's reasonable out-of-pocket costs
and expenses in connection with servicing, administering and collecting the
Receivables,
second, to the reimbursement of the Agent's costs of collection and
------
enforcement of this Agreement,
third, to the ratable payment of all accrued and unpaid (i) fees under
-----
the Fee Letter, (ii) CP Costs, (iii) Yield and (iv) amounts payable under
Article X,
---------
fourth, to the ratable payment of all other unpaid Obligations,
------
provided that to the extent such Obligations relate to the payment of
--------
Servicer costs and expenses when Seller or one of its Affiliates is acting
as the Servicer, such costs and expenses will not be paid until after the
payment in full of all other Obligations,
fifth, (if applicable) in reduction of Capital of the Purchaser
-----
Interests,
sixth, to the payment of any accrued and unpaid Servicing Fee (unless
-----
such fee shall have been paid in accordance with first above), and
-----
seventh, after the Aggregate Unpaids have been indefeasibly reduced
-------
to zero, to Seller.
Collections applied to the payment of Aggregate Unpaids shall be
distributed in accordance with the aforementioned provisions, and, giving effect
to each of the priorities set forth in Section 2.4 above, shall be shared
-----------
ratably (within each priority) among the Agent and the Purchasers in accordance
with the amount of such Aggregate Unpaids owing to each of them in respect of
each such priority.
4
<PAGE>
Section 2.5 Payment Rescission. No payment of any of the Aggregate
------------------
Unpaids shall be considered paid or applied hereunder to the extent that, at any
time, all or any portion of such payment or application is rescinded by
application of law or judicial authority, or must otherwise be returned or
refunded for any reason. Seller shall remain obligated for the amount of any
payment or application so rescinded, returned or refunded, and shall promptly
pay to the Agent (for application to the Person or Persons who suffered such
rescission, return or refund) the full amount thereof, plus the Default Fee from
the date of any such rescission, return or refunding.
Section 2.6 Aggregate Purchaser Interest. Seller shall ensure that
----------------------------
the Purchaser Interests of the Purchaser shall at no time exceed in the
aggregate 100%. If the aggregate of the Purchaser Interests of the Purchasers
exceeds 100%, Seller shall immediately pay to the Agent an amount to be applied
to reduce the Capital of the Purchaser Interests (as allocated by the Agent),
such that after giving effect to such payment the aggregate of the Purchaser
Interests equals or is less than 100%.
ARTICLE III
PREFCO FUNDING
Section 3.1 CP Costs. Seller shall pay CP Costs with respect to
--------
the Capital associated with each Purchaser Interest of PREFCO for each day that
any Capital in respect of such Purchaser Interest is outstanding. Each
Purchaser Interest funded substantially with Pooled Commercial Paper will accrue
CP Costs each day on a pro rata basis, based upon the percentage share the
Capital in respect of such Purchaser Interest represents in relation to all
assets held by PREFCO and funded substantially with Pooled Commercial Paper.
Section 3.2 CP Costs Payments. On each Settlement Date, Seller
-----------------
shall pay to the Agent (for the benefit of PREFCO) an aggregate amount equal to
all accrued and unpaid CP Costs in respect of the Capital associated with all
Purchaser Interests of PREFCO for the Accrual Period then most recently ended in
accordance with Article II.
----------
5
<PAGE>
Section 3.3 Calculation of CP Costs. On the 13th day of each month
-----------------------
(or, if such day is not a Business Day, the next following Business Day), PREFCO
shall calculate the aggregate amount of CP Costs for the applicable Accrual
Period and shall notify the Seller of such aggregate amount.
ARTICLE IV
FINANCIAL INSTITUTION FUNDING
Section 4.1 Financial Institution Funding. Each Purchaser Interest
-----------------------------
of the Financial Institutions shall accrue Yield for each day during its Tranche
Period at either the LIBO Rate or the Base Rate in accordance with the terms and
conditions hereof. Until Seller gives notice to the Agent of another Discount
Rate in accordance with Section 4.4, the initial Discount Rate for any Purchaser
-----------
Interest transferred to the Financial Institutions pursuant to the terms and
conditions hereof shall be the Base Rate. If the Financial Institutions acquire
by assignment from PREFCO any Purchaser Interest pursuant to Article XIII, each
------------
Purchaser Interest so assigned shall each be deemed to have a new Tranche Period
commencing on the date of any such assignment.
Section 4.2 Yield Payments. On the Settlement Date for each
--------------
Purchaser Interest of the Financial Institutions, Seller shall pay to the Agent
(for the benefit of the Financial Institutions) an aggregate amount equal to the
accrued and unpaid Yield for the entire Tranche Period of each such Purchaser
Interest in accordance with Article II.
----------
Section 4.3 Selection and Continuation of Tranche Periods. (a)
---------------------------------------------
With consultation from (and approval by) the Agent, Seller shall from time to
time request Tranche Periods for the Purchaser Interests of the Financial
Institutions, provided that, if at any time the Financial Institutions shall
have a Purchaser Interest, Seller shall always request Tranche Periods such that
at least one Tranche Period shall end on each Settlement Date.
(b) Seller or the Agent may, effective on the last day of a
Tranche Period (the "Terminating Tranche") for any Purchaser Interest, divide
-------------------
any such Purchaser Interest into multiple Purchaser Interests or combine any
such Purchaser Interest with one or more other Purchaser Interests which either
have a Terminating Tranche ending on such day or are newly created on such day,
provided, in no event may a Purchaser Interest of PREFCO be combined with a
- --------
Purchaser Interest of the Financial Institutions.
Section 4.4 Financial Institution Discount Rates. Seller may select
------------------------------------
the LIBO Rate or the Base Rate for each Purchaser Interest of the
Financial Institutions. Seller shall by 11:00 a.m. (Chicago time): (i) at least
three (3) Business Days prior to the expiration of any Terminating Tranche with
respect to which the LIBO Rate is being requested as a new Discount Rate and
(ii) at least one (1) Business Day prior to the expiration of any Terminating
Tranche with respect to which the Base Rate is being requested as a new Discount
Rate, give the Agent irrevocable notice of the new Discount Rate for the
Purchaser Interest associated with such Terminating Tranche.
6
<PAGE>
Section 4.5 Suspension of the LIBO Rate. If any Financial
---------------------------
Institution notifies the Agent that it has determined that funding its Pro Rata
Share of the Purchaser Interests of the Financial Institutions at a LIBO Rate
would violate any applicable law, rule, regulation, or directive of any
governmental or regulatory authority, whether or not having the force of law, or
that (i) deposits of a type and maturity appropriate to match fund its Purchaser
Interests at such LIBO Rate are not available or (ii) such LIBO Rate does not
accurately reflect the cost of acquiring or maintaining a Purchaser Interest at
such LIBO Rate, then the Agent shall suspend the availability of such LIBO Rate
and require Seller to select the Base Rate for any Purchaser Interest accruing
Yield at such LIBO Rate.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 Representations and Warranties of Seller Parties. Each
------------------------------------------------
Seller Party hereby represents and warrants to the Agent and the Purchasers
that:
(a) Corporate Existence and Power. Each Torchmark Entity
----------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation. Each Torchmark Entity is duly qualified to
do business and is in good standing as a foreign corporation, and has and holds
all corporate power and all governmental licenses, authorizations, consents and
approvals required to carry on its business in each jurisdiction in which its
business is conducted, except where the failure to so qualify would not have a
Material Adverse Effect. AIL is duly qualified and licensed as an insurance
company in each state in which Receivables are originated.
(b) Power and Authority; Due Authorization Execution and
----------------------------------------------------
Delivery. The execution and delivery by each Torchmark Entity of this
- --------
Agreement and each other Transaction Document to which it is a party, and the
performance of its obligations hereunder and thereunder and, in the case of
Seller, Seller's use of the proceeds of purchases made hereunder, are within its
respective corporate powers and authority and have been duly authorized by all
necessary corporate action on its part. This Agreement and each other
Transaction Document to which each Torchmark Entity is a party has been duly
executed and delivered by such Torchmark Entity.
(c) No Conflict. The execution and delivery by each
-----------
Torchmark Entity of this Agreement and each other Transaction Document to which
it is a party, and the performance of its obligations hereunder and thereunder
do not contravene or violate (i) its certificate or articles of incorporation or
by-laws, (ii) any law, rule or regulation applicable to it, (iii) any
restrictions under any material agreement, contract or instrument to which it is
a party or by which it or any of its property is bound, or (iv) any order, writ,
judgment, award, injunction or decree binding on or affecting it or its
property, and do not result in the creation or imposition of any Adverse Claim
on assets of such Torchmark Entity or its Subsidiaries (except as created
hereunder) and no transaction contemplated hereby requires compliance with any
bulk sales act or similar law.
7
<PAGE>
(d) Governmental Authorization. Other than the filing of the
--------------------------
financing statements required hereunder, no authorization or approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required for the due execution and delivery by any Torchmark
Entity of this Agreement or any other Transaction Document to which it is a
party or the performance of its obligations hereunder and thereunder.
(e) Actions, Suits. There are no actions, suits or proceedings
--------------
pending, or to the best of such Seller Party's knowledge, threatened, against or
affecting any Torchmark Entity, or any of its properties, in or before any
court, arbitrator or other body, that could reasonably be expected to have a
Material Adverse Effect. No Torchmark Entity is in default with respect to any
order of any court, arbitrator or governmental body.
(f) Binding Effect. This Agreement and each other Transaction
--------------
Document to which any Torchmark Entity is a party constitute the legal, valid
and binding obligations of such Torchmark Entity enforceable against such
Torchmark Entity in accordance with their respective terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization
or other similar laws relating to or limiting creditors' rights generally and by
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(g) Accuracy of Information. All information heretofore furnished by
-----------------------
any Torchmark Entity or any of its Affiliates to the Agent or the Purchasers for
purposes of or in connection with this Agreement, any of the other Transaction
Documents or any transaction contemplated hereby or thereby is, and all such
information hereafter furnished by such Torchmark Entity or any of its
Affiliates to the Agent or the Purchasers will be, true and accurate in every
material respect on the date such information is stated or certified and does
not and will not contain any material misstatement of fact or omit to state a
material fact or any fact necessary to make the statements contained therein not
misleading.
(h) Use of Proceeds. No proceeds of any purchase hereunder will be
---------------
used (i) to purchase "margin stock" as defined in, or otherwise for a purpose
that violates or would be inconsistent with, Regulation T, U or X promulgated by
the Board of Governors of the Federal Reserve System from time to time or (ii)
to acquire any security in any transaction which is subject to Section 13 or 14
of the Securities Exchange Act of 1934, as amended.
(i) Good Title. Immediately prior to each purchase hereunder, Seller
----------
shall be the legal and beneficial owner of the Receivables and Related Security
with respect thereto, free and clear of any Adverse Claim, except as created by
the Transaction Documents. There have been duly filed all financing statements
or other similar instruments or documents necessary under the UCC (or any
comparable law) of all appropriate jurisdictions to perfect Seller's ownership
interest in each Receivable, its Collections and the Related Security.
(j) Perfection. This Agreement, together with the filing of the
----------
financing statements contemplated hereby, is effective to, and shall, upon each
purchase hereunder, transfer to the Agent for the benefit of the relevant
Purchaser or Purchasers (and the
8
<PAGE>
Agent for the benefit of such Purchaser or Purchasers shall acquire from Seller)
a valid and perfected first priority undivided percentage ownership interest in
each Receivable existing or hereafter arising and in the Related Security and
Collections with respect thereto, free and clear of any Adverse Claim, except as
created by the Transactions Documents. There have been duly filed all financing
statements or other similar instruments or documents necessary under the UCC (or
any comparable law) of all appropriate jurisdictions to perfect the Agent's (on
behalf of the Purchasers) ownership interest in the Receivables, the Related
Security and the Collections.
(k) Places of Business. The principal places of business and chief
------------------
executive offices of each Torchmark Entity and the offices where it keeps all of
its Records are located at the respective address(es) listed on Exhibit III or
-----------
such other locations of which the Agent has been notified in accordance with
Section 7.2(a) in jurisdictions where all action required by Section 14.4(a) has
- -------------- ---------------
been taken and completed. Each Torchmark Entity's Federal Employer
Identification Number is correctly set forth on Exhibit III.
-----------
(l) Collections. The conditions and requirements set forth in Section
----------- -------
7.1(j) and in subsections (b), (c) and (e) of Section 8.2 have at all times been
- ------ --------------- --- --- -----------
satisfied and duly performed.
(m) Material Adverse Effect. (i) The initial Servicer represents and
-----------------------
warrants that since September 30, 1999 no event has occurred that would have a
material adverse effect on the financial condition or operations of the initial
Servicer and its Subsidiaries or the ability of the initial Servicer to perform
its obligations under this Agreement, (ii) Seller represents and warrants that
since the date of this Agreement, no event has occurred that would have a
material adverse effect on (A) the financial condition or operations of Seller,
(B) the ability of Seller to perform its obligations under this Agreement, or
(C) the collectibility of the Receivables or Related Security generally or of
any material portion of the Receivables or Related Security and (iii) each
Seller Party represents and warrants that since September 30, 1999 no event has
occurred that would have a material adverse effect on the financial condition or
operation of the Performance Guarantor or AIL or the ability of the Performance
Guarantor or AIL to perform its obligations under the Transaction Documents.
(n) Names. In the past five (5) years, (i) Seller has not used any
-----
corporate names, trade names or assumed names other than the name in which it
has executed this Agreement and (ii) AIL has not used any corporate names, trade
names or assumed names other than as disclosed on Exhibit III hereto.
-----------
(o) Ownership of Torchmark Entities. Torchmark owns, directly or
-------------------------------
indirectly, 100% of the issued and outstanding capital stock of each of AIL and
Seller, in each case, free and clear of any Adverse Claim. AIL owns directly
100% of the issued and outstanding capital stock of Seller, free and clear of
any Adverse Claim. Such capital stock in each case is validly issued, fully
paid and nonassessable, and there are no options, warrants or other rights to
acquire securities of Seller.
9
<PAGE>
(p) Not a Holding Company or an Investment Company. No Torchmark
----------------------------------------------
Entity is (i) a "holding company" or a "subsidiary holding company" of a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended, or any successor statute or (ii) an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or any
successor statute.
(q) Compliance with Law. Each Torchmark Entity has complied in all
-------------------
material respects with all applicable laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject. Each
Receivable, together with the Contract related thereto, does not contravene any
laws, rules or regulations applicable thereto (including, without limitation,
--------- ------------------
laws, rules and regulations relating to truth in lending, fair credit billing,
fair credit reporting, equal credit opportunity, fair debt collection practices
and privacy), and no part of such Contract is in violation of any such law, rule
or regulation with respect to which any noncompliance, separately or in the
aggregate, is reasonably likely to have a Material Adverse Effect.
(r) Compliance with Credit and Collection Policy. AIL and Seller have
--------------------------------------------
complied in all material respects with the Credit and Collection Policy with
regard to each Receivable and the related Contract, and neither AIL nor Seller
has made any change to the Credit and Collection Policy, except such material
change as to which the Agent has been notified in accordance with Section
-------
7.1(a)(vii).
- -----------
(s) Payments to AIL. With respect to each Receivable transferred to
---------------
Seller under the Receivables Sale Agreement, Seller has given reasonably
equivalent value to AIL in consideration therefor and such transfer was not made
for or on account of an antecedent debt. No transfer by AIL of any Receivable
under the Receivables Sale Agreement is or may be voidable under any section of
the Bankruptcy Reform Act of 1978 (11 U.S.C. (S)(S) 101 et seq.), as amended.
-------
(t) Enforceability of Contracts. Each Contract with respect to each
---------------------------
Receivable is effective to create, and has created, a legal, valid and binding
obligation of the related Obligor (including each Obligor, whether a member of
an Agent-Hierarchy or otherwise, which is a guarantor of such Receivable) to pay
the Outstanding Balance of the Receivable created thereunder and any accrued
interest thereon, enforceable against such Obligor in accordance with its terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to or limiting creditors' rights
generally and by general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law).
(u) Eligible Receivables. Each Receivable included in the Net
--------------------
Receivables Balance as an Eligible Receivable on the date of its purchase under
the Receivables Sale Agreement was an Eligible Receivable on such purchase date.
10
<PAGE>
(v) Net Receivables Balance. The Seller has determined that,
-----------------------
immediately after giving effect to each purchase hereunder, the Net Receivables
Balance is at least equal to the aggregate Capital of all the Purchaser
Interests.
(w) Year 2000. Such Seller Party (i) has reviewed the areas
---------
within its business and operations which could be adversely affected by the Year
2000 Problem, (ii) has developed what it deems as a reasonable Year 2000 Plan to
address the Year 2000 Problem on a timely basis, (iii) is taking all actions it
deems reasonably necessary to meet the schedule and goals of the Year 2000 Plan
and (iv) has established adequate reserves to implement the Year 2000 Plan. Such
Seller Party does not reasonably anticipate that the Year 2000 Problem could
have a Material Adverse Effect.
(x) Accounting. The manner in which each Torchmark Entity
----------
accounts for the transactions contemplated by this Agreement and the Receivables
Sale Agreement does not jeopardize the true sale analysis.
(y) Compliance with Underwriting Guidelines. AIL has complied
---------------------------------------
in all material respects with its underwriting guidelines in issuing or agreeing
to issue each Insurance Product in connection with which a Receivable shall have
arisen, and in electing to extend the credit represented by such Receivable to
the applicable Obligor, and AIL has not made any material change to such
underwriting guidelines except such change as to which the Agent has been
notified in accordance with Section 7.1(a)(vii).
-------------------
(z) Compliance with Representations. On and as of the date of
-------------------------------
each purchase of a Purchaser Interest hereunder and the date of each
Reinvestment hereunder, each Seller Party hereby represents and warrants that
all of the other representations and warranties made by it set forth in this
Section 5.1 are true and correct on and as of the date of such purchase or
- -----------
Reinvestment (and after giving effect to such purchase or Reinvestment) as
though made on and as of each such date.
Section 5.2 Financial Institution Representations and Warranties. Each
----------------------------------------------------
Financial Institution hereby represents and warrants to the Agent and PREFCO
that:
(a) Existence and Power. Such Financial Institution is a
-------------------
corporation or a banking association duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, and has all corporate power to perform its obligations hereunder.
(b) No Conflict. The execution and delivery by such Financial
-----------
Institution of this Agreement and the performance of its obligations hereunder
are within its corporate powers, have been duly authorized by all necessary
corporate action, do not contravene or violate (i) its certificate or articles
of incorporation or association or by-laws, (ii) any law, rule or regulation
applicable to it, (iii) any restrictions under any agreement, contract or
instrument to which it is a party or any of its property is bound, or (iv) any
order, writ, judgment, award, injunction or decree binding on or affecting it or
its property, and do not result in the creation or
11
<PAGE>
imposition of any Adverse Claim on its assets. This Agreement has been duly
authorized, executed and delivered by such Financial Institution.
(c) Governmental Authorization. No authorization or approval or
--------------------------
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required for the due execution and delivery by such Financial
Institution of this Agreement and the performance of its obligations hereunder.
(d) Binding Effect. This Agreement constitutes the legal, valid
--------------
and binding obligation of such Financial Institution enforceable against such
Financial Institution in accordance with its terms, except as such enforcement
may be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws relating to or limiting creditors' rights generally and by general
principles of equity (regardless of whether such enforcement is sought in a
proceeding in equity or at law).
ARTICLE VI
CONDITIONS OF PURCHASES
Section 6.1 Conditions Precedent to Initial Purchase. The initial
----------------------------------------
purchase of a Purchaser Interest under this Agreement is subject to the
conditions precedent that (a) the Agent shall have received on or before the
date of such purchase those documents listed on Schedule B and (b) the Agent
----------
shall have received all fees and expenses required to be paid on such date
pursuant to the terms of this Agreement and the Fee Letter.
Section 6.2 Conditions Precedent to All Purchases and Reinvestments. Each
-------------------------------------------------------
purchase of a Purchaser Interest (other than pursuant to Section 13.1) and each
------------
Reinvestment shall be subject to the further conditions precedent that (a) in
the case of each such purchase or Reinvestment: (i) the Servicer shall have
delivered to the Agent on or prior to the date of such purchase, in form and
substance satisfactory to the Agent, all Monthly Reports as and when due under
Section 8.5 and (ii) upon the Agent's request, the Servicer shall have delivered
- -----------
to the Agent at least three (3) days prior to such purchase or Reinvestment an
interim Monthly Report showing the amount of Eligible Receivables; (b) neither
the Amortization Date nor the Liquidity Termination Date shall have occurred;
(c) on the date of each such purchase or Reinvestment, the following statements
shall be true (and acceptance of the proceeds of such purchase or Reinvestment
shall be deemed a representation and warranty by Seller that such statements are
then true):
(i) the representations and warranties set forth in Section 5.1 are true
-----------
and correct on and as of the date of such purchase or Reinvestment as
though made on and as of such date;
(ii) no event has occurred, or would result from such purchase or
Reinvestment, that would constitute an Amortization Event or a
Potential Amortization Event; and
12
<PAGE>
(iii) the aggregate Capital of all Purchaser Interests does not
exceed the Purchase Limit;
and (d) the Agent shall have received such other approvals, opinions or
documents as it may reasonably request. It is expressly understood that each
Reinvestment shall, unless otherwise directed by the Agent or any Purchaser,
occur automatically on each day that the Servicer shall receive any Collections
without the requirement that any further action be taken on the part of any
Person and notwithstanding the failure of Seller to satisfy any of the
foregoing conditions precedent in respect of such Reinvestment. The failure of
Seller to satisfy any of the foregoing conditions precedent in respect of any
Reinvestment shall give rise to a right of the Agent and the Purchasers, which
right may be exercised at any time on demand of the Agent, to rescind the
related purchase and direct Seller to pay to the Agent for the benefit of the
Purchasers an amount equal to the Collections that shall have been applied to
the affected Reinvestment.
ARTICLE VII
COVENANTS
Section 7.1 Affirmative Covenants of the Seller Parties. Until the
-------------------------------------------
date on which the Aggregate Unpaids have been indefeasibly paid in full and this
Agreement terminates in accordance with its terms, each Seller Party hereby
covenants, as to itself, as set forth below:
(a) Financial Reporting. Such Seller Party will maintain,
-------------------
for itself and each of its Subsidiaries, a system of accounting established and
administered in accordance with generally accepted accounting principles, and
furnish to the Agent:
(i) Annual Reporting. Within
---------------
(A) 90 days after the close of each fiscal year
of the Performance Guarantor, audited unqualified financial
statements (which shall include consolidated balance sheets,
statements of income and retained earnings and a statement of
cash flows) for the Performance Guarantor for such fiscal
year, certified by nationally recognized independent public
accountants;
(B) 120 days after the close of each fiscal
year of AIL, audited, unqualified financial statements (which
shall include balance sheets, statements of income and
retained earnings and a statement of cash flows) for AIL for
such fiscal year certified by nationally recognized
independent public accountants;
(C) 90 days after the close of each fiscal year
of Seller, unaudited financial statements (which shall
include balance sheets, statements of income and retained
earnings and a statement of cash flows) for Seller for such
fiscal year, certified by an Authorized Officer; and
13
<PAGE>
(D) 90 days after the close of each fiscal year of AIL,
an annual statement of the conditions and affairs of AIL prepared
in accordance with NAIC annual statement instructions and
accounting practices and procedures for, and as filed with, the
Insurance Department of its respective state of organization, all
certified by an Authorized Officer thereof.
(ii) Quarterly Reporting. Within 45 days after the close of
-------------------
the first three (3) quarterly periods of each of the Servicer's fiscal
years,
(A) in respect of each of the Performance Guarantor,
AIL and Seller, balance sheets of each such Person as at the
close of each such period and statements of income and retained
earnings and a statement of cash flows for each such Person for
the period from the beginning of such fiscal year to the end of
such quarter, all certified by an Authorized Officer thereof; and
(B) in respect of AIL, a quarterly statement of the
conditions and affairs of AIL prepared in accordance with NAIC
quarterly statement instructions and accounting practices and
procedures for, and as filed with, the Insurance Department of
its respective state of organization, all certified by an
Authorized Officer thereof.
(iii) Compliance Certificate. Together with the financial
----------------------
statements required hereunder, a compliance certificate in
substantially the form of Exhibit IV signed by an Authorized Officer
----------
of each of the Performance Guarantor, AIL and Seller, and dated the
date of such annual financial statement or such quarterly financial
statement, as the case may be.
(iv) Shareholders Statements and Reports. Promptly upon the
-----------------------------------
furnishing thereof to the shareholders of any Torchmark Entity copies
of all financial statements, reports and proxy statements so
furnished.
(v) S.E.C. Filings. Promptly upon the filing thereof,
--------------
copies of all registration statements and annual, quarterly, monthly
or other regular reports which any Torchmark Entity or any of its
Subsidiaries files with the Securities and Exchange Commission.
(vi) Copies of Notices. Promptly upon its receipt of any
-----------------
notice, request for consent, financial statements, certification,
report or other communication under or in connection with any
Transaction Document from any Person other than the Agent or PREFCO,
copies of the same.
(vii) Change in Credit and Collection Policy or Underwriting
------------------------------------------------------
Guidelines. At least thirty (30) days prior to the effectiveness of
----------
any material change in or amendment to the (A) Credit and Collection
Policy, a copy of the
14
<PAGE>
Credit and Collection Policy then in effect and a notice indicating
such change or amendment or (B) underwriting guidelines of AIL, a copy
of the underwriting guidelines of AIL then in effect and a notice
indicating such change or amendment.
(viii) Other Information. Promptly, from time to time, such
-----------------
other information, documents, records or reports relating to the
Receivables or the condition or operations, financial or otherwise, of
such Seller Party or any Torchmark Entity as the Agent may from time
to time reasonably request in order to protect the interests of the
Agent and the Purchasers under or as contemplated by this Agreement.
(b) Notices. Such Seller Party will notify the Agent in writing
-------
of any of the following promptly upon learning of the occurrence thereof,
describing the same and, if applicable, the steps being taken with respect
thereto:
(i) Amortization Events or Potential Amortization Events.
----------------------------------------------------
The occurrence of each Amortization Event and each Potential
Amortization Event, by a statement of an Authorized Officer of such
Seller Party.
(ii) Judgment and Proceedings. (A) The entry of any
------------------------
judgment or decree against (1) Torchmark or any of its respective
Subsidiaries, if the aggregate amount of all judgments and decrees
then outstanding against Torchmark and its Subsidiaries exceeds
$50,000,000, (2) AIL or any of its respective Subsidiaries, if the
aggregate amount of all judgments and decrees then outstanding against
AIL and its Subsidiaries exceeds $5,000,000 or (3) Seller; or (B) the
institution of any litigation, arbitration proceeding or governmental
proceeding against any Torchmark Entity which may have a Material
Adverse Effect.
(iii) Material Adverse Effect. The occurrence of any event
-----------------------
or condition that has, or could reasonably be expected to have, a
Material Adverse Effect.
(iv) Amortization Date. The occurrence of the "Amortization
----------------- ------------
Date" under the Receivables Sale Agreement.
----
(v) Defaults Under Other Agreements. The occurrence of a
-------------------------------
default or an event of default under any other material financing
arrangement pursuant to which any Torchmark Entity is a debtor or an
obligor.
(vi) Downgrade of Torchmark Entities. Any downgrade in the
-------------------------------
claims-paying ability or the rating of any Indebtedness of any
Torchmark Entity by Standard and Poor's Ratings Group or by Moody's
Investors Service, Inc., setting forth the nature of such change.
15
<PAGE>
(vii) Company Action Level Event. With respect to AIL, the
--------------------------
occurrence of a Company Action Level Event.
(c) Compliance with Laws and Preservation of Corporate Existence.
------------------------------------------------------------
Such Seller Party will comply in all respects with all applicable laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to which
it may be subject except, in the case of the Servicer, where noncompliance would
not be reasonably likely to have a Material Adverse Effect. Such Seller Party
will preserve and maintain its corporate existence, rights, franchises and
privileges in the jurisdiction of its incorporation, and qualify and remain
qualified in good standing as a foreign corporation in each jurisdiction where
its business is conducted except, in the case of the Servicer, where the failure
to so qualify would not be reasonably likely to have a Material Adverse Effect.
Such Seller Party shall cause AIL to remain at all times duly qualified and
licensed as an insurance company in each state in which Receivables are
originated.
(d) Audits. Such Seller Party will furnish to the Agent from time to
------
time such information with respect to it and the Receivables as the Agent may
reasonably request. Such Seller Party will, from time to time during regular
business hours as requested by the Agent upon reasonable notice, permit the
Agent, or its agents or representatives, (i) to examine and make copies of and
abstracts from all Records in the possession or under the control of such Person
relating to the Receivables and the Related Security, including, without
limitation, the related Contracts, and (ii) to visit the offices and properties
of such Person for the purpose of examining such materials described in clause
(i) above, and to discuss matters relating to such Person's financial condition
or the Receivables and the Related Security or any Person's performance under
any of the Transaction Documents or any Person's performance under the Contracts
and, in each case, with any of the officers or employees of Seller or the
Servicer having knowledge of such matters.
(e) Keeping and Marking of Records and Books.
----------------------------------------
(i) The Servicer will maintain and implement administrative and
operating procedures (including, without limitation, an ability to
recreate records evidencing Receivables in the event of the destruction
of the originals thereof), and keep and maintain all documents, books,
records and other information reasonably necessary or advisable for the
collection of all Receivables (including, without limitation, records
adequate to permit the immediate identification of each new Receivable
and all Collections of and adjustments to each existing Receivable). The
Servicer will give the Agent notice of any material change in the
administrative and operating procedures referred to in the previous
sentence.
(ii) Such Seller Party will (A) on or prior to the date hereof,
mark its general ledger and master data processing records and other
books and records relating to the Purchaser Interests with a legend,
acceptable to the Agent, describing the Purchaser Interests and (B) upon
the request of the Agent (x) mark
16
<PAGE>
each Contract with a legend describing the Purchaser Interests and (y)
deliver to the Agent all Contracts (including, without limitation, all
multiple originals of any such Contract) relating to the Receivables.
(f) Compliance with Contracts and Credit and Collection Policy. Such
----------------------------------------------------------
Seller Party will timely and fully (i) perform and comply with all provisions,
covenants and other promises required to be observed by it under the Contracts
related to the Receivables, and (ii) comply in all respects with the Credit and
Collection Policy in regard to each Receivable and the related Contract. Seller
will pay when due any taxes payable in connection with the Receivables,
exclusive of taxes on or measured by income or gross receipts of PREFCO, the
Agent or any Financial Institution.
(g) Performance and Enforcement of Receivables Sale Agreement. Seller
---------------------------------------------------------
shall perform its obligations and undertakings under and pursuant to the
Receivables Sale Agreement, shall purchase Receivables thereunder in strict
compliance with the terms thereof and shall vigorously enforce the rights and
remedies accorded to Seller under the Receivables Sale Agreement. Seller shall
take all actions to protect, perfect and enforce its rights and interests (and
the rights and interests of the Agent and the Purchasers as assignees of Seller)
under the Receivables Sale Agreement as the Agent may from time to time
reasonably request, including, without limitation, making claims to which it may
--------- ------------------
be entitled under any indemnity, reimbursement or similar provision contained in
the Receivables Sale Agreement and requesting such information or such audits as
may be permitted under the Receivables Sale Agreement.
(h) Ownership. Seller shall take all necessary action to (i) vest
---------
legal and equitable title to the Receivables, the Related Security and the
Collections purchased under the Receivables Sale Agreement irrevocably in
Seller, free and clear of any Adverse Claims other than Adverse Claims in favor
of the Agent and the Purchasers (including, without limitation, the filing of
--------- ------------------
all financing statements or other similar instruments or documents necessary
under the UCC (or any comparable law) of all appropriate jurisdictions, and the
giving of notice to each Obligor and to each Policy Holder owing premiums in
respect of which Receivables shall have arisen, to perfect Seller's ownership
interest in such Receivables, Related Security and Collections, and such other
action to perfect, protect or more fully evidence the interest of Seller therein
as the Agent may reasonably request), and (ii) establish and maintain, in favor
of the Agent, for the benefit of the Purchasers, a valid and perfected first
priority undivided percentage ownership interest (and/or a valid and perfected
first priority security interest) in all Receivables, Related Security and
Collections to the full extent contemplated herein, free and clear of any
Adverse Claims other than Adverse Claims in favor of the Agent for the benefit
of the Purchasers (including, without limitation, the filing of all financing
--------- ------------------
statements or other similar instruments or documents necessary under the UCC (or
any comparable law) of all appropriate jurisdictions to perfect the Agent's (for
the benefit of the Purchasers) interest in such Receivables, Related Security
and Collections and such other action to perfect, protect or more fully evidence
the interest of the Agent for the benefit of the Purchasers as the Agent may
reasonably request). Seller shall, by not later than January 20, 2000, give or
cause AIL to give to each Obligor in respect of any Receivable then outstanding
notice as to the transfers of the interests in the Receivables contemplated in
the Transaction Documents, and at all times thereafter give or cause
<PAGE>
AIL to give to each Obligor in respect of each Receivable then or thereafter
arising notice as to such interests for the purpose of perfecting such interests
in favor of Seller and the Agent. If at any time Seller shall fail to take any
actions required to be taken hereunder, or any additional actions as may have
been reasonably requested by the Agent (including, without limitation, the
giving of notice to each Obligor of the interests created under the Transaction
Documents in the Receivables), the Agent may, but shall not be required to, take
any such action.
(i) Purchasers' Reliance. Seller acknowledges that the Purchasers
--------------------
are entering into the transactions contemplated by this Agreement in reliance
upon Seller's identity as a legal entity that is separate from the other
Torchmark Entities. Therefore, from and after the date of execution and delivery
of this Agreement, Seller shall take all reasonable steps, including, without
limitation, all steps that the Agent or any Purchaser may from time to time
reasonably request, to maintain Seller's identity as a separate legal entity and
to make it manifest to third parties that Seller is an entity with assets and
liabilities distinct from those of the other Torchmark Entities and any
Affiliates thereof and not just a division of any other Torchmark Entity.
Without limiting the generality of the foregoing and in addition to the other
covenants set forth herein, Seller shall:
(A) conduct its own business in its own name and require that all
full-time employees of Seller, if any, identify themselves as such and not
as employees of any other Torchmark Entity (including, without limitation,
by means of providing appropriate employees with business or identification
cards identifying such employees as Seller's employees);
(B) compensate all employees, consultants and agents directly,
from Seller's bank accounts, for services provided to Seller by such
employees, consultants and agents and, to the extent any employee,
consultant or agent of Seller is also an employee, consultant or agent of
another Torchmark Entity, allocate the compensation of such employee,
consultant or agent between Seller and such Torchmark Entity on a basis
that reflects the services rendered to Seller and such Torchmark Entity;
(C) clearly identify its offices (by signage or otherwise) as its
offices and, if such office is located in the offices of any Torchmark
Entity, Seller shall lease such office at a fair market rent;
(D) have a separate telephone number, which will be answered only
in its name and separate stationery, invoices and checks in its own name;
(E) conduct all transactions with each other Torchmark Entity
strictly on an arm's-length basis, allocate all overhead expenses
(including, without limitation, telephone and other utility charges) for
items shared between Seller and each other Torchmark Entity on the basis of
actual use to the extent practicable and, to the extent such allocation is
not practicable, on a basis reasonably related to actual use;
18
<PAGE>
(F) at all times have a Board of Directors consisting of three
or more members, at least one of which is an Independent Director;
(G) observe all corporate formalities as a distinct entity, and
ensure that all corporate actions relating to (A) the selection,
maintenance or replacement of the Independent Director on its board of
directors, (B) the dissolution or liquidation of Seller or (C) the
initiation of, participation in, acquiescence in or consent to any
bankruptcy, insolvency, reorganization or similar proceeding involving
Seller, are duly authorized by unanimous vote of its Board of Directors
(including the Independent Director);
(H) maintain Seller's books and records separate from those of
each other Torchmark Entity and otherwise readily identifiable as its own
assets rather than assets of any other Torchmark Entity;
(I) prepare its financial statements separately from those of
each other Torchmark Entity and insure that any consolidated financial
statements of the Torchmark Entities that include Seller and that are filed
with the Securities and Exchange Commission or any other governmental
agency have notes clearly stating that Seller is a separate corporate
entity and that its assets will be available first and foremost to satisfy
the claims of the creditors of Seller;
(J) except as herein specifically otherwise provided, maintain
the funds or other assets of Seller separate from, and not commingled with,
those of any other Torchmark Entity and only maintain bank accounts or
other depository accounts to which the Seller alone is the account party,
into which the Seller alone makes deposits and from which the Seller alone
(or the Agent hereunder) has the power to make withdrawals;
(K) pay all of Seller's operating expenses from the Seller's own
assets (except for certain payments by another Torchmark Entity or other
Persons pursuant to allocation arrangements that comply with the
requirements of this Section 7.1(i));
--------------
(L) operate its business and activities such that: it does not
engage in any business or activity of any kind, or enter into any
transaction or indenture, mortgage, instrument, agreement, contract, lease
or other undertaking, other than the transactions contemplated and
authorized by this Agreement and the Receivables Sale Agreement; and does
not create, incur, guarantee, assume or suffer to exist any indebtedness or
other liabilities, whether direct or contingent, other than (1) as a result
of the endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business, (2) the incurrence
of obligations under this Agreement, (3) the incurrence of obligations, as
expressly contemplated in the Receivables Sale Agreement, to make payment
to AIL thereunder for the purchase of Receivables from
19
<PAGE>
AIL under the Receivables Sale Agreement, and (4) the incurrence of
operating expenses in the ordinary course of business of the type otherwise
contemplated by this Agreement;
(M) maintain its corporate charter and other organizational
documents in conformity with this Agreement, such that it does not amend,
restate, supplement or otherwise modify its Certificate of Incorporation or
By-laws in any respect that would impair its ability to comply with the
terms or provisions of any of the Transaction Documents, including, without
limitation, Section 7.1(i) of this Agreement;
--------------
(N) maintain the effectiveness of, and continue to perform under
the Receivables Sale Agreement and each of the other Transaction Documents
to which it is party, such that it does not amend, restate, supplement,
cancel, terminate or otherwise modify the Receivables Sale Agreement or any
other Transaction Document (whether or not Seller is party thereto), or
give or permit any consent, waiver, directive or approval thereunder or in
respect thereof or waive any default, action, omission or breach under the
Receivables Sale Agreement or any other Transaction Document or otherwise
grant any indulgence thereunder or in respect thereof, without (in each
case) the prior written consent of the Agent;
(O) maintain its corporate separateness such that it does not
merge or consolidate with or into, or convey, transfer, lease or otherwise
dispose of (whether in one transaction or in a series of transactions, and
except as otherwise contemplated herein) all or substantially all of its
assets (whether now owned or hereafter acquired) to, or acquire all or
substantially all of the assets of, any Person, nor at any time create,
have, acquire, maintain or hold any interest in any Subsidiary;
(P) maintain at all times the Required Capital Amount (as defined
in the Receivables Sale Agreement) and refrain from making any dividend,
distribution, redemption of capital stock or payment of any subordinated
indebtedness which would cause the Required Capital Amount to cease to be
so maintained; and
(Q) take such other actions as are necessary on its part to
ensure that the facts and assumptions set forth in the opinion issued by
Maynard, Cooper & Gale, P.C., as counsel for Seller, in connection with the
closing and the initial purchase under this Agreement and relating to
substantive consolidation issues, and in the certificates accompanying such
opinion, remain true and correct in all material respects at all times.
(j) Collections. Such Seller Party shall direct each applicable
-----------
Torchmark Entity to remit all Collections received by such Torchmark Entity
directly to the Servicer for the benefit of the Agent and the Purchasers.
Immediately upon receipt by any Torchmark Entity of any premium payable by
or on behalf of the Policy Holder or any other Person in respect of the
Insurance Product that shall have given rise to any Receivable, such
Torchmark Entity shall be required to remit to the Servicer an amount
calculated in reference thereto that, in the ordinary course of business
and in accordance
20
<PAGE>
with its customary practice, is then payable as a commission in respect of
such Insurance Product to the Obligor on such Receivable and which but for
the existence of such Receivable would be remitted to such Obligor. In the
event any payments relating to Receivables are remitted directly to Seller
or any Affiliate of Seller, Seller shall remit (or shall cause all such
payments to be remitted) directly to the Servicer, and at all times prior
to such remittance, Seller shall itself hold or, if applicable, shall cause
such payments to be held in trust for the exclusive benefit of the Agent
and the Purchasers. Seller shall maintain exclusive ownership, dominion and
control (subject to the terms of this Agreement) of each deposit account in
which any Collections are held and shall not grant the right to take
dominion and control of any such account except to the Agent on the demand
of the Agent. At any time following the occurrence of an Amortization
Event, the Agent may, at Seller's sole cost and expense, direct Seller to
notify, or to cause AIL to notify, the Obligors (including Obligors that
are guarantors) of Receivables and all Policy Holders owing premiums in
respect of which any Receivables shall have arisen of the ownership
interests of the Agent and the Purchasers under this Agreement and may also
direct that payments of all amounts due or that become due under any or all
Receivables or Related Security be made directly to the Agent (or its
respective designee) or to a lockbox or collection account designated by
the Agent.
(k) Taxes. Such Seller Party shall file all tax returns and
-----
reports required by law to be filed by it and shall promptly pay all taxes
and governmental charges at any time due and payable; provided that in the
--------
case of the Servicer, the Servicer shall not be required to pay any such
taxes which are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with generally
accepted accounting principles shall have been set aside on its books.
(l) Net Worth. Seller shall at all times maintain net
---------
worth in an amount not less than $3,000,000.
Section 7.2 Negative Covenants of the Seller Parties . Until the
----------------------------------------
date on which the Aggregate Unpaids have been indefeasibly paid in full and this
Agreement terminates in accordance with its terms, each Seller Party hereby
covenants, that:
(a) Name Change, Offices and Records. Such Seller Party
--------------------------------
will not (and will not permit AIL to) change its name, identity or corporate
structure (within the meaning of Section 9-402(7) of any applicable enactment of
the UCC) or relocate its chief executive office or any office where Records are
kept unless it shall have: (i) given the Agent at least forty-five (45) days'
prior written notice thereof and (ii) delivered to the Agent all financing
statements, instruments and other documents requested by the Agent in connection
with such change or relocation.
(b) Change in Payment Instructions to Obligors. Such Seller
------------------------------------------
Party will not make (or permit AIL to make) any change in the instructions to
Obligors regarding payments to be made on any Receivable without the prior
written consent of the Agent.
21
<PAGE>
(c) Modifications to Contracts and Credit and Collection Policy.
-----------------------------------------------------------
Such Seller Party will not make (or permit AIL to make) any change to the Credit
and Collection Policy that could adversely affect the collectibility of the
Receivables or decrease the credit quality of any newly created Receivables.
Except as provided in Section 8.2(d), the Servicer will not, and will not
--------------
extend, amend or otherwise modify the terms of any Receivable or any Contract
related thereto other than in accordance with the Credit and Collection Policy.
(d) Sales, Liens. Seller shall not sell, assign (by operation
------------
of law or otherwise) or otherwise dispose of, or grant any option with respect
to, or create or suffer to exist any Adverse Claim upon (including, without
limitation, the filing of any financing statement) or with respect to, any
Receivable, Related Security or Collections, or upon or with respect to any
Contract under which any Receivable arises, or any deposit account in which
Collections may be held, or assign any right to receive income with respect
thereto (other than, in each case, the creation of the interests therein in
favor of the Agent and the Purchasers provided for herein), and Seller shall
defend the right, title and interest of the Agent and the Purchasers in, to and
under any of the foregoing property, against all claims of third parties
claiming through or under Seller or AIL.
(e) Net Receivables Balance. At no time prior to the Amortization
-----------------------
Date shall Seller permit the Net Receivables Balance to be less than the
aggregate Capital of all the Purchaser Interests at such time.
(f) Amortization Date Determination. Seller shall not designate
-------------------------------
or permit the designation of an Amortization Date (as defined in the Receivables
Sale Agreement), or send any written notice to AIL in respect thereof, without
the prior written consent of the Agent, except with respect to the occurrence of
such Amortization Date arising pursuant to Section 5.1(d) of the Receivables
Sale Agreement.
(g) Change in Subordinated Note. Seller shall not amend, modify
---------------------------
(by course of conduct or otherwise) or terminate the Subordinated Note without
the prior written consent of the Agent.
ARTICLE VIII
ADMINISTRATION AND COLLECTION
Section 8.1 Designation of Servicer. (a) The servicing, administration
-----------------------
and collection of the Receivables shall be conducted by such Person (the
"Servicer") so designated from time to time in accordance with this
--------
Section 8.1. AIL is hereby designated as, and hereby agrees to perform the
- -----------
duties and obligations of, the Servicer pursuant to the terms of this Agreement.
The Agent may, at any time following the occurrence of an Amortization Event,
designate as Servicer any Person to succeed AIL or any successor Servicer.
(b) Without the prior written consent of the Agent and the
Required Financial Institutions, AIL shall not be permitted to delegate any of
its duties or responsibilities as Servicer to any Person other than, with
respect to certain Charged-Off Receivables, outside
22
<PAGE>
collection agencies in accordance with its customary practices. If at any time
the Agent shall designate as Servicer any Person other than AIL, all duties and
responsibilities theretofore delegated by AIL to a subservicer may, at the
discretion of the Agent, be terminated forthwith on notice given by the Agent to
AIL and to Seller.
(c) Notwithstanding the foregoing subsection (b), (i) AIL shall be
and remain primarily liable to the Agent and the Purchasers for the full and
prompt performance of all duties and responsibilities of the Servicer hereunder
and (ii) the Agent and the Purchasers shall be entitled to deal exclusively with
AIL in matters relating to the discharge by the Servicer of its duties and
responsibilities hereunder. The Agent and the Purchasers shall not be required
to give notice, demand or other communication to any Person other than AIL in
order for communication to the Servicer and its sub-servicer or other delegate
with respect thereto to be accomplished. AIL, at all times that it is the
Servicer, shall be responsible for providing any sub-servicer or other delegate
of the Servicer with any notice given to the Servicer under this Agreement.
Section 8.2 Duties of Servicer. (a) The Servicer shall take or
------------------
cause to be taken all such actions as may be necessary or advisable to collect
each Receivable from time to time, all in accordance with applicable laws, rules
and regulations, with reasonable care and diligence, and in accordance with the
Credit and Collection Policy.
(b) The Servicer will handle all Collections in a manner
consistent with the terms hereof and as the Agent may otherwise reasonably
request. The Servicer shall, if requested by the Agent at any time following the
occurrence of an Amortization Event, (i) establish such accounts as the Agent
may reasonably request for the remittance of Collections and the remittance of
premiums on Insurance Products in respect of which a Receivable shall have
arisen as an advance on the commissions payable in connection with such
Insurance Product, and (ii) thereafter instruct each Obligor to make payments on
Receivables directly to such accounts.
(c) The Servicer shall administer the Collections in accordance
with the procedures described herein and in Article II. The Servicer shall set
----------
aside and hold in trust for the account of Seller and the Purchasers their
respective shares of the Collections of Receivables in accordance with Article
-------
II. The Servicer shall, upon the request of the Agent at any time, segregate, in
- --
a manner acceptable to the Agent, all cash, checks and other instruments
received by it from time to time constituting Collections from the general funds
of the Servicer or Seller prior to the remittance thereof in accordance with
Article II. If the Servicer shall be required to segregate Collections pursuant
- -------
to the preceding sentence, the Servicer shall segregate and deposit with a bank
designated by the Agent such allocable share of Collections of Receivables set
aside for the Purchasers on the first Business Day following receipt by the
Servicer of such Collections, duly endorsed or with duly executed instruments of
transfer.
(d) The Servicer shall not extend the maturity of any Receivable
or adjust the Outstanding Balance of any Receivable other than in accordance
with the Credit and Collection Policy. The Servicer shall have the absolute and
unlimited right to commence or
23
<PAGE>
settle any legal action with respect to any Receivable or to foreclose upon or
repossess any Related Security.
(e) The Servicer shall hold in trust for Seller and the
Purchasers all Records that (i) evidence or relate to the Receivables, the
related Contracts and Related Security or (ii) are otherwise necessary or
desirable to collect the Receivables and shall, as soon as practicable upon
demand of the Agent at any time, deliver or make available to the Agent all such
Records, at a place selected by the Agent. The Servicer shall, as soon as
practicable following receipt thereof turn over to Seller any cash collections
or other cash proceeds received with respect to Indebtedness not constituting
Receivables. The Servicer shall, from time to time at the reasonable request of
the Agent, furnish to the Agent (as promptly as possible after any such request)
a calculation of the amounts set aside for the Purchasers pursuant to Article
-------
II.
- --
(f) Any payment (i) by an Obligor in respect of any
indebtedness owed by it to AIL or Seller or (ii) constituting a premium on an
Insurance Product in respect of which an advance giving rise to a Receivable
shall have been made in anticipation of the receipt of such premium, shall,
except as otherwise specified by such Obligor or Policy Holder or as otherwise
required by contract or law, and unless otherwise instructed by the Agent, be
applied as a Collection of any Receivable of the related Obligor (starting with
the oldest such Receivable) to the extent of any amounts then due and payable
thereunder before being applied to any other receivable or other obligation.
Section 8.3 Collection Rights. Seller hereby authorizes the Agent,
-----------------
and agrees that the Agent shall be entitled to (i) endorse Seller's name on
checks and other instruments representing Collections, (ii) enforce the
Receivables, the related Contracts and the Related Security and (iii) take such
action as shall be necessary or desirable to cause all cash, checks and other
instruments constituting Collections of Receivables to come into the possession
of the Agent rather than Seller.
Section 8.4 Responsibilities of Seller. Anything herein to the
--------------------------
contrary notwithstanding, the exercise by the Agent and the Purchasers of their
rights hereunder shall not release the Servicer, AIL or Seller from any of their
duties or obligations with respect to any Receivables or under the related
Contracts. The Purchasers shall have no obligation or liability with respect to
any Receivables or related Contracts, nor shall any of them be obligated to
perform the obligations of Seller.
Section 8.5 Reports. The Servicer shall prepare and forward to the
-------
Agent (i) on the 10th day of each month (or, if such day is not a Business Day,
the next following day that is a Business Day) and at such other times as the
Agent shall reasonably request, a Monthly Report, which Monthly Report shall set
forth the relevant information in respect of the calendar month then most
recently ended, and (ii) at such times as the Agent shall reasonably request, a
listing by Obligor of all Receivables.
Section 8.6 Servicing Fees. In consideration of AIL's agreement to
--------------
act as Servicer hereunder, Seller hereby agrees that, so long as AIL shall
continue to perform as
24
<PAGE>
Servicer hereunder, Seller shall pay AIL a fee (the "Servicing Fee") equal to
-------------
1/2 of 1% per annum of the average aggregate amount of outstanding Capital as
compensation for its servicing activities, which fee shall be payable monthly,
in arrears, on each Settlement Date in respect of the calendar month then most
recently ended. From and after the replacement of AIL as Servicer hereunder,
Seller shall pay all reasonable fees and expenses of the Person then acting as
Servicer hereunder, such fees and expenses to be paid on each Settlement Date or
at such other times as shall be acceptable to the Agent.
ARTICLE IX
AMORTIZATION EVENTS
Section 9.1 Amortization Events. The occurrence of any one or more
-------------------
of the following events shall constitute an Amortization Event:
(a) Any of the following shall occur:
(i) any Seller Party shall fail to make any payment or deposit
required hereunder when due; or
(ii) the Servicer shall fail to perform or observe any term,
covenant or agreement hereunder (other than as referred to in clause
(i) above) and such failure shall continue for five (5) consecutive
Business Days; or
(iii) Seller shall fail to perform or observe any term, covenant
or agreement set forth in Section 7.1(b)(i), Section 7.1(h), Section
----------------- -------------- -------
7.1(i)(L), (M) or (P), Section 7.1(l) or Section 7.2 and such failure
--------- --- --- -------------- -----------
shall continue for three (3) consecutive Business Days; or
(iv) Seller shall fail to perform or observe any term, covenant
or agreement hereunder (other than as referred to in any of the
foregoing clauses) and such failure shall continue for fifteen (15)
consecutive days.
(b) Any representation, warranty, certification or statement made by
any Torchmark Entity in this Agreement, any other Transaction Document or in any
other document delivered pursuant hereto or thereto shall prove to have been
incorrect in any material respect when made or deemed made.
(c) Any of the following shall occur:
(i) the failure of Seller to pay any Indebtedness when due; or
the default by Seller in the performance of any term, provision or
conditions contained in any agreement under which any Indebtedness was
created or is governed, or any other event shall occur or condition
exist, the effect of which is to cause, or to permit the holder or
holders of such Indebtedness to cause, such Indebtedness to become due
prior to its stated maturity; or any Indebtedness of Seller shall be
declared to
25
<PAGE>
be due and payable or required to be prepaid (other than by a
regularly scheduled payment) prior to the stated maturity thereof; or
(ii) the failure of Torchmark or any of its Subsidiaries
(including AIL) to pay when due any Indebtedness in excess of, singly
or in the aggregate for all such Subsidiaries, $10,000,000; or the
default by Torchmark or any of such Subsidiaries in the performance of
any term, provision or conditions contained in any agreement under
which any such Indebtedness was created or is governed, or any other
event shall occur or condition exist, the effect of which is to cause,
or to permit the holder or holders of such Indebtedness to cause, such
Indebtedness to become due prior to its stated maturity; or any such
Indebtedness of Torchmark or any such Subsidiary shall be declared to
be due and payable or required to be prepaid (other than by a
regularly scheduled payment) prior to the stated maturity thereof; or
(iii) any event or condition shall have occurred or exist which
would constitute a default under the Torchmark Credit Agreement (the
terms of which are incorporated herein by this reference thereto, and
shall remain in effect for purposes of this Agreement at all times
during the term of this Agreement without regard to whether the
Torchmark Credit Agreement shall then be in effect).
(d) (i) Any Torchmark Entity shall generally not pay its debts as
such debts become due or shall admit in writing its inability to pay its debts
generally or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against any Torchmark Entity seeking to
adjudicate it bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, receivership, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee or other similar official for
it or any substantial part of its property or (ii) any Torchmark Entity shall
take any corporate action to authorize any of the actions set forth in clause
(i) above in this subsection (d).
(e) The aggregate Purchaser Interests shall exceed 100% and shall
continue as such until the earliest to occur of (i) five (5) Business Days
following the date any Seller Party has actual knowledge thereof, (ii) two (2)
Business Days after demand in respect thereof shall have been made under the
Performance Guaranty and (iii) the next Settlement Date.
(f) A Change of Control shall occur.
(g) One or more final judgments for the payment of money shall be
entered against (i) Seller, (ii) AIL, in excess of $10,000,000 singly or in the
aggregate, or (iii) Torchmark, in excess of $25,000,000 singly or in the
aggregate, in each case on claims not covered by insurance or as to which the
insurance carrier has denied its responsibility, and such judgment shall
continue unsatisfied and in effect for fifteen (15) consecutive days without
being
26
<PAGE>
stayed on appeal or otherwise being appropriately contested in good faith by
such Torchmark Entity.
(h) An "Amortization Event" shall for any reason occur under and as
------------------
defined in the Receivables Sale Agreement, or AIL shall for any reason cease to
transfer, or cease to have the legal capacity to transfer, or otherwise be
incapable of transferring Receivables under the Receivables Sale Agreement.
(i) Any Transaction Document shall terminate in whole or in part
(except in accordance with its terms), or shall cease to be effective or to be
the legally valid, binding and enforceable obligation of Seller, AIL, Torchmark
or the Servicer, as applicable; or any Torchmark Entity, or Obligors in respect
of more than 10% of the Net Receivables Balance, shall directly or indirectly
contest in any manner such effectiveness, validity, binding nature or
enforceability; or the Agent for the benefit of the Purchasers shall cease to
have a valid and perfected first priority security interest in the Receivables,
the Related Security and the Collections with respect thereto.
(j) At any time, with respect to AIL, a Regulatory Action Level Event
shall occur.
(k) At any time, with respect to AIL, a Regulatory Control Event shall
occur.
(l) AIL shall assert the invalidity or unenforceability of any term
or provision relating to the subordination in right of payment of any
indebtedness owing to AIL by Seller to the indebtedness and obligations owing to
the Purchasers and the Agent by Seller.
(m) Torchmark shall assert the invalidity or unenforceability of any
term or provision of the Performance Guaranty, or shall at any time default in
the payment or performance of any of its obligations thereunder.
Section 9.2 Remedies. Upon the occurrence and during the
--------
continuation of an Amortization Event, the Agent may, or upon the direction of
the Required Financial Institutions shall, take any of the following actions:
(i) replace the Person then acting as Servicer, (ii) declare the Amortization
Date to have occurred, whereupon the Amortization Date shall forthwith occur,
without demand, protest or further notice of any kind, all of which are hereby
expressly waived by each Seller Party; provided, however, that upon the
--------
occurrence of an Amortization Event described in Section 9.1(d), or of an actual
--------------
or deemed entry of an order for relief with respect to any Seller Party under
the Federal Bankruptcy Code, the Amortization Date shall automatically occur,
without demand, protest or any notice of any kind, all of which are hereby
expressly waived by each Seller Party, and (iii) to the fullest extent permitted
by applicable law, declare that the Default Fee shall accrue with respect to any
of the Aggregate Unpaids outstanding at such time. The aforementioned rights and
remedies shall be in addition to all other rights and remedies of the Agent and
the Purchasers available under this Agreement, by operation of law, at equity or
otherwise, all of which are hereby expressly reserved, including, without
limitation, all rights and remedies provided under the UCC, all of which rights
shall be cumulative.
27
<PAGE>
ARTICLE X
INDEMNIFICATION
Section 10.1 Indemnities by the Seller Parties. Without limiting
---------------------------------
any other rights that the Agent or any Purchaser may have hereunder or under
applicable law, (A) Seller hereby agrees to indemnify the Agent and each
Purchaser and their respective assigns, officers, directors, agents and
employees (each an "Indemnified Party") from and against any and all damages,
-----------------
losses, claims, taxes, liabilities, costs, expenses and for all other amounts
payable, including reasonable attorneys' fees (which attorneys may be employees
of the Agent or such Purchaser) and disbursements (all of the foregoing being
collectively referred to as "Indemnified Amounts") awarded against or incurred
-------------------
by any of them arising out of or as a result of this Agreement or the
acquisition, either directly or indirectly, by a Purchaser of an interest in the
Receivables, and (B) the Servicer hereby agrees to indemnify each Indemnified
Party for Indemnified Amounts awarded against or incurred by any of them arising
out of the Servicer's activities as Servicer hereunder excluding, however, in
all of the foregoing instances under the preceding clauses (A) and (B):
(i) Indemnified Amounts to the extent a final judgment of a
court of competent jurisdiction holds that such Indemnified Amounts
resulted from gross negligence or willful misconduct on the part of the
Indemnified Party seeking indemnification;
(ii) Indemnified Amounts to the extent the same includes losses
in respect of Receivables that are uncollectible on account of the
insolvency, bankruptcy or lack of creditworthiness of the related Obligor;
or
(iii) taxes imposed by the jurisdiction in which such
Indemnified Party's principal executive office is located, on or measured
by the overall net income of such Indemnified Party to the extent that the
computation of such taxes is consistent with the characterization for
income tax purposes of the acquisition by the Purchasers of Purchaser
Interests as a loan or loans by the Purchasers to Seller secured by the
Receivables, the Related Security and the Collections;
provided, however, that nothing contained in this sentence shall limit the
- --------- --------
liability of any Seller Party or limit the recourse of the Purchasers to any
Seller Party for amounts otherwise specifically provided to be paid by such
Seller Party under the terms of this Agreement. Without limiting the generality
of the foregoing indemnification, Seller shall indemnify the Agent and the
Purchasers for Indemnified Amounts (including, without limitation, losses in
respect of uncollectible receivables for matters specifically described below,
regardless of whether reimbursement therefor would constitute recourse to Seller
or the Servicer) relating to or resulting from:
(i) any representation or warranty made by any Torchmark Entity
(or any officers of any such Person) under or in connection with this
Agreement, any other
28
<PAGE>
Transaction Document or any other information or report delivered by any
such Person pursuant hereto or thereto, which shall have been false or
incorrect when made or deemed made;
(ii) the failure by any Torchmark Entity to comply with any
applicable law, rule, regulation, agreement (including any confidentiality
agreement), order, writ, judgment, injunction, decree or award, including
with respect to any Receivable or Contract related thereto, or the
nonconformity of any Receivable or Contract included therein with any such
applicable law, rule or regulation or any failure of any Torchmark Entity
to keep or perform any of its obligations, express or implied, with respect
to any Contract;
(iii) any failure of any Torchmark Entity to perform its duties,
covenants or other obligations in accordance with the provisions of this
Agreement or any other Transaction Document;
(iv) any products liability or similar claim arising out of or
in connection with merchandise, insurance or services that are the subject
of any Contract;
(v) any dispute, claim, offset or defense (other than
discharge in bankruptcy of the Obligor) of the Obligor to the payment of
any Receivable (including, without limitation, a defense based on such
Receivable or the related Contract not being a legal, valid and binding
obligation of such Obligor enforceable against it in accordance with its
terms), or any other claim resulting from the sale of the merchandise or
service related to such Receivable or the furnishing or failure to furnish
such merchandise or services;
(vi) the commingling of Collections of Receivables at any time
with other funds;
(vii) any investigation, litigation or proceeding related to or
arising from this Agreement or any other Transaction Document, the
transactions contemplated hereby, the use of the proceeds of a purchase,
the ownership of the Purchaser Interests or any other investigation,
litigation or proceeding relating to any Torchmark Entity in which any
Indemnified Party becomes involved as a result of any of the transactions
contemplated hereby;
(viii) any inability to litigate any claim against any Obligor
in respect of any Receivable as a result of such Obligor being immune from
civil and commercial law and suit on the grounds of sovereignty or
otherwise from any legal action, suit or proceeding;
(ix) any Amortization Event described in Section 9.1(d);
---------------
29
<PAGE>
(x) any failure of Seller to acquire and maintain legal and
equitable title to, and ownership of any Receivable and the Related
Security and Collections with respect thereto, free and clear of any
Adverse Claim (other than as created hereunder); or any failure of Seller
to give reasonably equivalent value to AIL under the Receivables Sale
Agreement in consideration of the transfer by AIL of any Receivable, or any
attempt by any Person to void such transfer under statutory provisions or
common law or equitable action;
(xi) any failure to vest and maintain vested in the Agent and
the Purchasers, or to transfer to the Agent and the Purchasers, legal and
equitable title to, and ownership of, a first priority undivided percentage
ownership (to the extent of the Purchaser Interests contemplated hereunder)
in the Receivables, the Related Security and the Collections, free and
clear of any Adverse Claim;
(xii) the failure to have filed, or any delay in filing,
financing statements or other similar instruments or documents under the
UCC of any applicable jurisdiction or other applicable laws with respect to
any Receivable, the Related Security and Collections with respect thereto,
and the proceeds of any thereof, whether at the time of any Incremental
Purchase or Reinvestment or at any subsequent time;
(xiii) any action or omission by any Torchmark Entity which
reduces or impairs the rights of the Agent or the Purchasers with respect
to any Receivable or the value of any such Receivable;
(xiv) any action or omission by any Insurance Agent or any
member of an Agent-Hierarchy which (A) reduces or impairs the rights of
the Agent or the Purchasers with respect to any Receivable or the value of
any such Receivable and (B) does not entail the commencement by such
Insurance Agent or member of any bankruptcy or insolvency proceeding or any
other action or omission (including any failure to pay) by reason of the
lack of creditworthiness or ability to pay on the part of such Insurance
Agent or Agent-Hierarchy;
(xv) any attempt by any Person to void any Incremental Purchase
or Reinvestment hereunder under statutory provisions or common law or
equitable action; and
(xvi) the Year 2000 Problem.
Section 10.2 Increased Cost and Reduced Return. If after the date
---------------------------------
hereof, any Funding Source shall be charged any fee, expense or increased cost
on account of the adoption of any applicable law, rule or regulation (including
any applicable law, rule or regulation regarding capital adequacy) or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency: (i) that subjects any Funding Source to any
charge or withholding on or with respect to any Funding Agreement or a Funding
Source's obligations under a Funding Agreement, or on or with respect to the
Receivables, or changes the basis of taxation of payments to any Funding Source
of any
30
<PAGE>
amounts payable under any Funding Agreement (except for changes in the rate of
tax on the overall net income of a Funding Source) or (ii) that imposes,
modifies or deems applicable any reserve, assessment, insurance charge, special
deposit or similar requirement against assets of, deposits with or for the
account of a Funding Source, or credit extended by a Funding Source pursuant to
a Funding Agreement or (iii) that imposes any other condition the result of
which is to increase the cost to a Funding Source of performing its obligations
under a Funding Agreement, or to reduce the rate of return on a Funding Source's
capital as a consequence of its obligations under a Funding Agreement, or to
reduce the amount of any sum received or receivable by a Funding Source under a
Funding Agreement or to require any payment calculated by reference to the
amount of interests or loans held or interest received by it, then, upon demand
by the Agent, Seller shall pay to the Agent, for the benefit of the relevant
Funding Source, such amounts charged to such Funding Source or compensate such
Funding Source for such reduction.
Section 10.3 Other Costs and Expenses. (a) Seller shall pay to the
------------------------
Agent and PREFCO on demand all costs and out-of-pocket expenses in connection
with the preparation, execution, delivery and administration of the Transaction
Documents, the transactions contemplated hereby and the other documents to be
delivered hereunder, including without limitation, the cost (subject to Section
-------
10.3(b) below) of PREFCO's auditors auditing the books, records and procedures
- -------
of Seller, reasonable fees and out-of-pocket expenses of legal counsel for
PREFCO and the Agent (which such counsel may be employees of PREFCO or the
Agent) with respect thereto and with respect to advising PREFCO and the Agent as
to their respective rights and remedies under this Agreement. Seller shall pay
to the Agent on demand any and all costs and expenses of the Agent and the
Purchasers, if any, including reasonable counsel fees and expenses in connection
with the enforcement of this Agreement and the other documents delivered
hereunder and in connection with any restructuring or workout of this Agreement
or such documents, or the administration of this Agreement following an
Amortization Event. Seller shall reimburse PREFCO on demand for all other costs
and expenses incurred by PREFCO ("Other Costs"), including, without limitation,
-----------
the cost of auditing PREFCO's books by certified public accountants, the cost of
rating the Commercial Paper by independent financial rating agencies, and the
reasonable fees and out-of-pocket expenses of counsel for PREFCO or any counsel
for any shareholder of PREFCO with respect to advising PREFCO or such
shareholder as to matters relating to PREFCO's operations.
(b) The cost and expense of an outside auditor at any time engaged by
the Agent or PREFCO to conduct an audit of the books, records and procedures of
Seller and the Torchmark Entities, whether pursuant to Section 7.1(d) hereof or
--------------
otherwise, shall be borne by Seller, and Seller shall promptly reimburse the
Agent therefor upon demand of the Agent.
Section 10.4 Allocations. PREFCO shall allocate the liability for
-----------
Other Costs among Seller and other Persons with whom PREFCO has entered into
agreements to purchase interests in receivables ("Other Sellers"). If any Other
-------------
Costs are attributable to Seller and not attributable to any Other Seller,
Seller shall be solely liable for such Other Costs. However, if Other Costs are
attributable to Other Sellers and not attributable to Seller, such Other Sellers
shall be solely liable for such Other Costs. All allocations to be made
pursuant to the foregoing
31
<PAGE>
provisions of this Article X shall be made by PREFCO in its sole discretion and
------
shall be binding on Seller and the Servicer.
ARTICLE XI
THE AGENT
Section 11.1 Authorization and Action. Each Purchaser hereby
------------------------
designates and appoints Bank One to act as its agent hereunder and under each
other Transaction Document, and authorizes the Agent to take such actions as
agent on its behalf and to exercise such powers as are delegated to the Agent by
the terms of this Agreement and the other Transaction Documents together with
such powers as are reasonably incidental thereto. The Agent shall not have any
duties or responsibilities, except those expressly set forth herein or in any
other Transaction Document, or any fiduciary relationship with any Purchaser,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities on the part of the Agent shall be read into this Agreement or any
other Transaction Document or otherwise exist for the Agent. In performing its
functions and duties hereunder and under the other Transaction Documents, the
Agent shall act solely as agent for the Purchasers and does not assume nor shall
be deemed to have assumed any obligation or relationship of trust or agency with
or for any Torchmark Entity or any of such Torchmark Entity's successors or
assigns. The Agent shall not be required to take any action that exposes the
Agent to personal liability or that is contrary to this Agreement, any other
Transaction Document or applicable law. The appointment and authority of the
Agent hereunder shall terminate upon the indefeasible payment in full of all
Aggregate Unpaids. Each Purchaser hereby authorizes the Agent to execute each
of the Uniform Commercial Code financing statements on behalf of such Purchaser
(the terms of which shall be binding on such Purchaser).
Section 11.2 Delegation of Duties. The Agent may execute any of
--------------------
its duties under this Agreement and each other Transaction Document by or
through agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agents or attorneys-in-fact
selected by it with reasonable care.
Section 11.3 Exculpatory Provisions. Neither the Agent nor any of
----------------------
its directors, officers, agents or employees shall be (i) liable for any action
lawfully taken or omitted to be taken by it or them under or in connection with
this Agreement or any other Transaction Document (except for its, their or such
Person's own gross negligence or willful misconduct), or (ii) responsible in any
manner to any of the Purchasers for any recitals, statements, representations or
warranties made by any Torchmark Entity contained in this Agreement, any other
Transaction Document or any certificate, report, statement or other document
referred to or provided for in, or received under or in connection with, this
Agreement, or any other Transaction Document or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement, or
any other Transaction Document or any other document furnished in connection
herewith or therewith, or for any failure of any Torchmark Entity to perform its
obligations hereunder or thereunder, or for the satisfaction of any condition
specified in Article VI, or for the perfection, priority, condition, value or
----------
sufficiency of any collateral
32
<PAGE>
pledged in connection herewith. The Agent shall not be under any obligation to
any Purchaser to ascertain or to inquire as to the observance or performance of
any of the agreements or covenants contained in, or conditions of, this
Agreement or any other Transaction Document, or to inspect the properties, books
or records of the Torchmark Entities. The Agent shall not be deemed to have
knowledge of any Amortization Event or Potential Amortization Event unless the
Agent has received notice from Seller or a Purchaser.
Section 11.4 Reliance by Agent. The Agent shall in all cases be
-----------------
entitled to rely, and shall be fully protected in relying, upon any document or
conversation believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons and upon advice and statements of
legal counsel, independent accountants and other experts selected by the Agent.
The Agent shall in all cases be fully justified in failing or refusing to take
any action under this Agreement or any other Transaction Document unless it
shall first receive such advice or concurrence of PREFCO or the Required
Financial Institutions or all of the Purchasers, as applicable, as it deems
appropriate and it shall first be indemnified to its satisfaction by the
Purchasers, provided that unless and until the Agent shall have received such
--------
advice, the Agent may take or refrain from taking any action, as the Agent shall
deem advisable and in the best interests of the Purchasers. The Agent shall in
all cases be fully protected in acting, or in refraining from acting, in
accordance with a request of PREFCO or the Required Financial Institutions or
all of the Purchasers, as applicable, and such request and any action taken or
failure to act pursuant thereto shall be binding upon all the Purchasers.
Section 11.5 Non-Reliance on Agent and Other Purchasers. Each
------------------------------------------
Purchaser expressly acknowledges that neither the Agent, nor any of its
officers, directors, employees, agents, attorneys-in-fact or affiliates has made
any representations or warranties to it and that no act by the Agent hereafter
taken, including, without limitation, any review of the affairs of any Seller
Party, shall be deemed to constitute any representation or warranty by the
Agent. Each Purchaser represents and warrants to the Agent that it has and
will, independently and without reliance upon the Agent or any other Purchaser
and based on such documents and information as it has deemed appropriate, made
its own appraisal of and investigation into the business, operations, property,
prospects, financial and other conditions and creditworthiness of Seller and
made its own decision to enter into this Agreement, the other Transaction
Documents and all other documents related hereto or thereto.
Section 11.6 Reimbursement and Indemnification. The Financial
---------------------------------
Institutions agree to reimburse and indemnify the Agent and its officers,
directors, employees, representatives and agents ratably according to their Pro
Rata Shares, to the extent not paid or reimbursed by the Seller Parties (i) for
any amounts for which the Agent, acting in its capacity as Agent, is entitled to
reimbursement by the Seller Parties hereunder and (ii) for any other expenses
incurred by the Agent, in its capacity as Agent and acting on behalf of the
Purchasers, in connection with the administration and enforcement of this
Agreement and the other Transaction Documents.
Section 11.7 Agent in its Individual Capacity. The Agent and its
--------------------------------
Affiliates may make loans to, accept deposits from and generally engage in any
kind of business with any
33
<PAGE>
Torchmark Entity or any Affiliate thereof as though the Agent were not the Agent
hereunder. With respect to the acquisition of Purchaser Interests pursuant to
this Agreement, the Agent shall have the same rights and powers under this
Agreement in its individual capacity as any Purchaser and may exercise the same
as though it were not the Agent, and the terms "Financial Institution,"
---------------------
"Purchaser," "Financial Institutions" and "Purchasers" shall include the Agent
---------- ---------------------- ----------
in its individual capacity.
Section 11.8 Successor Agent. The Agent may, upon five days'
---------------
notice to Seller and the Purchasers, and the Agent will, upon the direction of
all of the Purchasers (other than the Agent, in its individual capacity) resign
as Agent. If the Agent shall resign, then the Required Financial Institutions
during such five-day period shall appoint from among the Purchasers a successor
agent. If for any reason no successor Agent is appointed by the Required
Financial Institutions during such five-day period, then effective upon the
termination of such five day period, the Purchasers shall perform all of the
duties of the Agent hereunder and under the other Transaction Documents and
Seller and the Servicer (as applicable) shall make all payments in respect of
the Aggregate Unpaids directly to the applicable Purchasers and for all purposes
shall deal directly with the Purchasers. After the effectiveness of any
retiring Agent's resignation hereunder as Agent, the retiring Agent shall be
discharged from its duties and obligations hereunder and under the other
Transaction Documents and the provisions of this Article XI and Article X shall
---------- ---------
continue in effect for its benefit with respect to any actions taken or omitted
to be taken by it while it was Agent under this Agreement and under the other
Transaction Documents.
ARTICLE XII
ASSIGNMENTS; PARTICIPATIONS
Section 12.1 Assignments. (a) Seller and each Financial Institution
-----------
hereby agree and consent to the complete or partial assignment by PREFCO of all
or any portion of its rights under, interest in, title to and obligations under
this Agreement to the Financial Institutions pursuant to Section 13.1 or to any
------------
other Person, and upon such assignment, PREFCO shall be released from its
obligations so assigned. Further, Seller and each Financial Institution hereby
agree that any assignee of PREFCO of this Agreement or all or any of the
Purchaser Interests of PREFCO shall have all of the rights and benefits under
this Agreement as if the term "PREFCO" explicitly referred to such party, and no
------
such assignment shall in any way impair the rights and benefits of PREFCO
hereunder. Neither the Seller nor the Servicer shall have the right to assign
its rights or obligations under this Agreement.
(b) Any Financial Institution may at any time and from time to
time assign to one or more Persons ("Purchasing Financial Institutions") all or
---------------------------------
any part of its rights and obligations under this Agreement pursuant to an
assignment agreement, substantially in the form set forth in Exhibit V hereto
---------
(the "Assignment Agreement") executed by such Purchasing Financial Institution
--------------------
and such selling Financial Institution. The consent of PREFCO shall be required
prior to the effectiveness of any such assignment. Each assignee of a Financial
Institution must have a short-term debt rating of A-1 or better by Standard &
Poor's Ratings Group and P-1 by Moody's Investor Service, Inc. and must agree to
deliver to the Agent, promptly following any request therefor by the Agent or
PREFCO, an enforceability opinion in
34
<PAGE>
form and substance satisfactory to the Agent and PREFCO. Upon delivery of the
executed Assignment Agreement to the Agent, such selling Financial Institution
shall be released from its obligations hereunder to the extent of such
assignment. Thereafter the Purchasing Financial Institution shall for all
purposes be a Financial Institution party to this Agreement and shall have all
the rights and obligations of a Financial Institution under this Agreement to
the same extent as if it were an original party hereto and no further consent or
action by Seller, the Purchasers or the Agent shall be required.
(c) Each of the Financial Institutions agrees that in the event that
it shall cease to have a short-term debt rating of A-1 or better by Standard &
Poor's Ratings Group and P-1 by Moody's Investor Service, Inc. (an "Affected
--------
Financial Institution"), such Affected Financial Institution shall be obliged,
- ---------------------
at the request of PREFCO or the Agent, to assign all of its rights and
obligations hereunder to (x) another Financial Institution or (y) another
funding entity nominated by the Agent and acceptable to PREFCO, and willing to
participate in this Agreement through the Liquidity Termination Date in the
place of such Affected Financial Institution; provided that the Affected
--------
Financial Institution receives payment in full, pursuant to an Assignment
Agreement, of an amount equal to such Financial Institution's Pro Rata Share of
the Capital and Yield owing to the Financial Institutions and all accrued but
unpaid fees and other costs and expenses payable in respect of its Pro Rata
Share of the Purchaser Interests of the Financial Institutions.
Section 12.2 Participations. Any Financial Institution may, in the
--------------
ordinary course of its business at any time sell to one or more Persons (each a
"Participant") participating interests in its Pro Rata Share of the Purchaser
-----------
Interests of the Financial Institutions, its obligation to pay PREFCO its
Acquisition Amounts or any other interest of such Financial Institution
hereunder. Notwithstanding any such sale by a Financial Institution of a
participating interest to a Participant, such Financial Institution's rights and
obligations under this Agreement shall remain unchanged, such Financial
Institution shall remain solely responsible for the performance of its
obligations hereunder, and Seller, PREFCO and the Agent shall continue to deal
solely and directly with such Financial Institution in connection with such
Financial Institution's rights and obligations under this Agreement. Each
Financial Institution agrees that any agreement between such Financial
Institution and any such Participant in respect of such participating interest
shall not restrict such Financial Institution's right to agree to any amendment,
supplement, waiver or modification to this Agreement, except for any amendment,
supplement, waiver or modification described in Section 14.1(b)(i).
------------------
ARTICLE XIII
LIQUIDITY FACILITY
Section 13.1 Transfer to Financial Institutions. Each Financial
----------------------------------
Institution hereby agrees, subject to Section 13.4, that immediately upon
------------
written notice from PREFCO delivered on or prior to the Liquidity Termination
Date, it shall acquire by assignment from PREFCO, without recourse or warranty,
its Pro Rata Share of one or more of the Purchaser Interests of PREFCO as
specified by PREFCO. Each such assignment by PREFCO shall be made pro rata
among the Financial Institutions, provided, however, that PREFCO may at any
-------- -------
35
<PAGE>
time and from time to time, in its sole and absolute discretion, make any such
assignment to any Affected Financial Institution on a non-pro rata basis. Each
Financial Institution shall, no later than 1:00 p.m. (Chicago time) on the date
of such assignment, pay in immediately available funds to the Agent at an
account designated by the Agent, for the benefit of PREFCO, its Acquisition
Amount. Unless a Financial Institution has notified the Agent that it does not
intend to pay its Acquisition Amount, the Agent may assume that such payment has
been made and may, but shall not be obligated to, make the amount of such
payment available to PREFCO in reliance upon such assumption. PREFCO hereby
sells and assigns to the Agent for the ratable benefit of the Financial
Institutions, and the Agent hereby purchases and assumes from PREFCO, effective
upon the receipt by PREFCO of the PREFCO Transfer Price, the Purchaser Interests
of PREFCO which are the subject of any transfer pursuant to this Article XIII.
------------
Section 13.2 Transfer Price Reduction Yield. If the Adjusted
------------------------------
Liquidity Price is included in the calculation of the PREFCO Transfer Price for
any Purchaser Interest, each Financial Institution agrees that the Agent shall
pay to PREFCO the Reduction Percentage of any Yield received by the Agent with
respect to such Purchaser Interest.
Section 13.3 Payments to PREFCO. In consideration for the reduction
------------------
of the PREFCO Transfer Prices by the PREFCO Transfer Price Reductions, effective
only at such time as the aggregate amount of the Capital of the Purchaser
Interests of the Financial Institutions equals the PREFCO Residual, each
Financial Institution hereby agrees that the Agent shall not distribute to the
Financial Institutions and shall immediately remit to PREFCO any Yield,
Collections or other payments received by it to be applied pursuant to the terms
hereof or otherwise to reduce the Capital of the Purchaser Interests of the
Financial Institutions.
Section 13.4 Limitation on Commitment to Purchase from PREFCO.
------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, no Financial
Institution shall have any obligation to purchase any Purchaser Interest from
PREFCO, pursuant to Section 13.1 or otherwise, if:
------------
(i) PREFCO shall have voluntarily commenced any
proceeding or filed any petition under any bankruptcy, insolvency or
similar law seeking the dissolution, liquidation or reorganization of
PREFCO or taken any corporate action for the purpose of effectuating
any of the foregoing; or
(ii) involuntary proceedings or an involuntary petition
shall have been commenced or filed against PREFCO by any Person under
any bankruptcy, insolvency or similar law seeking the dissolution,
liquidation or reorganization of PREFCO and such proceeding or
petition shall have not been dismissed.
Section 13.5 Defaulting Financial Institutions. If one or more
---------------------------------
Financial Institutions defaults in its obligation to pay its Acquisition Amount
pursuant to Section 13.1 (each such Financial Institution shall be called a
------------
"Defaulting Financial Institution" and the aggregate amount of such defaulted
- ---------------------------------
obligations being herein called the "PREFCO Transfer Price Deficit"), then upon
-----------------------------
notice from the Agent, each Financial Institution other than the Defaulting
36
<PAGE>
Financial Institutions (a "Non-Defaulting Financial Institution") shall promptly
------------------------------------
pay to the Agent, in immediately available funds, an amount equal to the lesser
of (x) such Non-Defaulting Financial Institution's proportionate share (based
upon the relative Commitments of the Non-Defaulting Financial Institutions) of
the PREFCO Transfer Price Deficit and (y) the unused portion of such Non-
Defaulting Financial Institution's Commitment. A Defaulting Financial
Institution shall forthwith upon demand pay to the Agent for the account of the
Non-Defaulting Financial Institutions all amounts paid by each Non-Defaulting
Financial Institution on behalf of such Defaulting Financial Institution,
together with interest thereon, for each day from the date a payment was made by
a Non-Defaulting Financial Institution until the date such Non-Defaulting
Financial Institution has been paid such amounts in full, at a rate per annum
equal to the Federal Funds Effective Rate plus two percent (2%). In addition,
without prejudice to any other rights that PREFCO may have under applicable law,
each Defaulting Financial Institution shall pay to PREFCO forthwith upon demand,
the difference between such Defaulting Financial Institution's unpaid
Acquisition Amount and the amount paid with respect thereto by the Non-
Defaulting Financial Institutions, together with interest thereon, for each day
from the date of the Agent's request for such Defaulting Financial Institution's
Acquisition Amount pursuant to Section 13.1 until the date the requisite amount
------------
is paid to PREFCO in full, at a rate per annum equal to the Federal Funds
Effective Rate plus two percent (2%).
ARTICLE XIV
MISCELLANEOUS
Section 14.1 Waivers and Amendments. (a) No failure or delay on
----------------------
the part of the Agent or any Purchaser in exercising any power, right or remedy
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or remedy preclude any other further
exercise thereof or the exercise of any other power, right or remedy. The
rights and remedies herein provided shall be cumulative and nonexclusive of any
rights or remedies provided by law. Any waiver of this Agreement shall be
effective only in the specific instance and for the specific purpose for which
given.
(b) No provision of this Agreement may be amended,
supplemented, modified or waived except in writing in accordance with the
provisions of this Section 14.1(b). PREFCO, Seller, the Servicer and the Agent,
---------------
at the direction of the Required Financial Institutions, may enter into written
modifications or waivers of any provisions of this Agreement, provided, however,
-------- -------
that no such modification or waiver shall:
(i) without the consent of each affected Purchaser, (A)
extend the Liquidity Termination Date or the date of any payment or
deposit of Collections by Seller or the Servicer, (B) reduce the rate
or extend the time of payment of Yield (or any component thereof), (C)
reduce any fee payable to the Agent for the benefit of the Purchasers,
(D) except pursuant to Article XII hereof, change the amount of the
-----------
Capital of any Purchaser, any Financial Institution's Pro Rata Share
(except pursuant to Sections 13.1 or 13.5) or any Financial
------------- ----
Institution's Commitment, (E) amend, modify or waive any provision of
the definition of Required Financial Institutions or this Section
-------
14.1(b), (F) consent to or permit
-------
37
<PAGE>
the assignment or transfer by Seller of any of its rights and
obligations under this Agreement, (G) change the definition of
"Eligible Receivable,"or (H) amend or modify any defined term (or any
-------------------
defined term used directly or indirectly in such defined term) used in
clauses (A) through (G) above in a manner that would circumvent the
intention of the restrictions set forth in such clauses; or
(ii) without the written consent of the then Agent, amend,
modify or waive any provision of this Agreement if the effect thereof
is to affect the rights or duties of such Agent; or
(iii) without the written consent of the Servicer, amend,
modify or waive any provision of this Agreement if the effect thereof
is to affect the rights or duties of the Servicer.
Notwithstanding the foregoing, without the consent of the Financial
Institutions, the Agent may, with the consent of Seller, amend this Agreement
solely to add additional Persons as Financial Institutions hereunder. Any
modification or waiver made in accordance with this Section 14.1 shall apply to
------------
each of the Purchasers equally and shall be binding upon Seller, the Purchasers,
the Servicer and the Agent.
Section 14.2 Notices. Except as provided below, all communications
-------
and notices provided for hereunder shall be in writing (including bank wire,
telecopy or electronic facsimile transmission or similar writing) and shall be
given to the other parties hereto at their respective addresses or telecopy
numbers set forth on the signature pages hereof or at such other address or
telecopy number as such Person may hereafter specify for the purpose of notice
to each of the other parties hereto. Each such notice or other communication
shall be effective (i) if given by telecopy, upon the receipt thereof, (ii) if
given by mail, three (3) Business Days after the time such communication is
deposited in the mail with first class postage prepaid or (iii) if given by any
other means, when received at the address specified in this Section 14.2.
------------
Seller hereby authorizes the Agent to effect purchases and Tranche Period and
Discount Rate selections based on telephonic notices made by any Person whom the
Agent in good faith believes to be acting on behalf of Seller. Seller agrees to
deliver promptly to the Agent a written confirmation of each telephonic notice
signed by an authorized officer of Seller; however, the absence of such
confirmation shall not affect the validity of such notice. If the written
confirmation differs from the action taken by the Agent, the records of the
Agent shall govern absent manifest error.
Section 14.3 Ratable Payments. If any Purchaser, whether by setoff
----------------
or otherwise, has payment made to it with respect to any portion of the
Aggregate Unpaids owing to such Purchaser (other than payments received pursuant
to Section 10.2 or 10.3) in a greater proportion than that received by any other
------------ ----
Purchaser entitled to receive a ratable share of such Aggregate Unpaids, such
Purchaser agrees, promptly upon demand, to purchase for cash without recourse or
warranty a portion of such Aggregate Unpaids held by the other Purchasers so
that after such purchase each Purchaser will hold its ratable proportion of such
Aggregate Unpaids; provided that if all or any portion of such excess amount is
thereafter recovered from such
38
<PAGE>
Purchaser, such purchase shall be rescinded and the purchase price restored to
the extent of such recovery, but without interest.
Section 14.4 Protection of Ownership Interests of the Purchasers.
---------------------------------------------------
(a) Seller agrees that from time to time, at its expense, it will promptly
execute and deliver all instruments and documents, and take all actions, that
may be reasonably necessary or desirable, or that the Agent may request, to
perfect, protect or more fully evidence the Purchaser Interests, or to enable
the Agent or the Purchasers to exercise and enforce their rights and remedies
hereunder. At any time, the Agent may, or the Agent may direct Seller or the
Servicer to, notify the Obligors (including Obligors that are guarantors) of
Receivables, at Seller's expense, of the ownership interests of the Purchasers
under this Agreement and may also direct that payments of all amounts due or
that become due under any or all Receivables be made directly to the Agent or
its designee. Seller or the Servicer (as applicable) shall, at any Purchaser's
request, withhold the identity of such Purchaser in any such notification.
(b) If any Seller Party fails to perform any of its
obligations hereunder, the Agent or any Purchaser may (but shall not be required
to) perform, or cause performance of, such obligation, and the Agent's or such
Purchaser's costs and expenses incurred in connection therewith shall be payable
by Seller as provided in Section 10.3. Each Seller Party irrevocably authorizes
------------
the Agent at any time and from time to time in the sole discretion of the Agent,
and appoints the Agent as its attorney-in-fact, to act on behalf of such Seller
Party (i) to execute on behalf of Seller as debtor and to file financing
statements necessary or desirable in the Agent's sole discretion to perfect and
to maintain the perfection and priority of the interest of the Purchasers in the
Receivables and (ii) to file a carbon, photographic or other reproduction of
this Agreement or any financing statement with respect to the Receivables as a
financing statement in such offices as the Agent in its sole discretion deems
necessary or desirable to perfect and to maintain the perfection and priority of
the interests of the Purchasers in the Receivables. This appointment is coupled
with an interest and is irrevocable.
Section 14.5 Confidentiality. (a) Each Seller Party and each
---------------
Purchaser shall maintain and shall cause each of its employees and officers to
maintain the confidentiality of this Agreement and the other confidential
proprietary information with respect to Seller, the Servicer and its Affiliates,
the Agent and PREFCO and their respective businesses obtained by it or them in
connection with the structuring, negotiating and execution of the transactions
contemplated herein, except that such Seller Party and such Purchaser and its
officers and employees may disclose (i) such information to such Seller Party's
and such Purchaser's external accountants and attorneys and as required by any
applicable law or order of any judicial or administrative proceeding, and (ii)
such information as relates to the off-balance sheet accounting treatment
intended by the transactions contemplated in the Transaction Documents to any
rating agency rating any Indebtedness or the claims-paying ability of any
Torchmark Entity. In the event any rating agency that is rating any
Indebtedness or the claims-paying ability of any Torchmark Entity shall request
any additional information of the type the disclosure of which is restricted by
this Section 14.5(a), Seller may with the consent of the Agent (which consent
---------------
shall not be unreasonably withheld) disclose such information to such rating
agency.
39
<PAGE>
(b) Anything herein to the contrary notwithstanding, each
Seller Party hereby consents to the disclosure of any nonpublic information with
respect to it (i) to the Agent, the Financial Institutions or PREFCO by each
other, (ii) by the Agent or the Purchasers to any prospective or actual assignee
or participant of any of them, (iii) by the Agent to any rating agency,
Commercial Paper dealer or provider of a surety, guaranty or credit or liquidity
enhancement to PREFCO or any entity organized for the purpose of purchasing, or
making loans secured by, financial assets for which Bank One acts as the
administrative agent and to any officers, directors, employees, outside
accountants and attorneys of any of the foregoing, (iv) to the extent the same
becomes available to the Agent or any Purchaser on a non-confidential basis from
a source other than another party hereto, or (v) to the extent necessary in
connection with any legal proceeding relating to the enforcement of any right of
the Agent or the Purchasers under the Transaction Documents. In addition, the
Purchasers and the Agent may disclose any such nonpublic information pursuant to
any law, rule, regulation, direction, subpoena, request or order of any
judicial, administrative or regulatory authority or proceedings (whether or not
having the force or effect of law).
Section 14.6 Bankruptcy Petition. Seller, the Servicer, the Agent
-------------------
and each Financial Institution hereby covenants and agrees that, prior to the
date that is one year and one day after the payment in full of all outstanding
senior Indebtedness of PREFCO, it will not institute against, or join any other
Person in instituting against, PREFCO any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or other similar proceeding
under the laws of the United States or any state of the United States.
Section 14.7 Limitation of Liability. Except with respect to any
-----------------------
claim arising out of the willful misconduct or gross negligence of PREFCO, the
Agent or any Financial Institution, no claim may be made by any Seller Party or
any other Person against PREFCO, the Agent or any Financial Institution or their
respective Affiliates, directors, officers, employees, attorneys or agents for
any special, indirect, consequential or punitive damages in respect of any claim
for breach of contract or any other theory of liability arising out of or
related to the transactions contemplated by this Agreement, or any act, omission
or event occurring in connection therewith; and each Seller Party hereby waives,
releases, and agrees not to sue upon any claim for any such damages, whether or
not accrued and whether or not known or suspected to exist in its favor.
Section 14.8 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF
THE STATE OF ILLINOIS.
Section 14.9 CONSENT TO JURISDICTION. EACH SELLER PARTY HEREBY
-----------------------
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES
FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO, ILLINOIS IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT EXECUTED
BY SUCH PERSON PURSUANT TO THIS AGREEMENT AND EACH SELLER PARTY HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE
40
<PAGE>
HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT
MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING
HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY PURCHASER TO BRING PROCEEDINGS
AGAINST ANY SELLER PARTY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL
PROCEEDING BY ANY SELLER PARTY AGAINST THE AGENT OR ANY PURCHASER OR ANY
AFFILIATE OF THE AGENT OR A PURCHASER INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT
OR ANY DOCUMENT EXECUTED BY SUCH SELLER PARTY PURSUANT TO THIS AGREEMENT SHALL
BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
Section 14.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES
--------------------
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, ANY DOCUMENT EXECUTED BY THE
SELLER PURSUANT TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER OR
THEREUNDER.
Section 14.11 Integration; Binding Effect; Survival of Terms.
----------------------------------------------
(a) This Agreement and the Fee Letter contain the final and
complete integration of all prior expressions by the parties hereto with respect
to the subject matter hereof and shall constitute the entire agreement among the
parties hereto with respect to the subject matter hereof superseding all prior
oral or written understandings.
(b) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns (including any trustee in bankruptcy). This Agreement shall create and
constitute the continuing obligations of the parties hereto in accordance with
its terms and shall remain in full force and effect until terminated in
accordance with its terms; provided, however, that the rights and remedies with
-------- -------
respect to (i) any breach of any representation and warranty made by any Seller
Party pursuant to Article V, (ii) the indemnification and payment provisions of
---------
Article X, and Sections 14.5 and 14.6 shall be continuing and shall survive any
- --------- ------------- ----
termination of this Agreement.
Section 14.12 Counterparts; Severability; Section References. This
----------------------------------------------
Agreement may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same Agreement. Any provisions of this Agreement which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
41
<PAGE>
Unless otherwise expressly indicated, all references herein to "Article,"
"Section," "Schedule" or "Exhibit" shall mean articles and sections of, and
schedules and exhibits to, this Agreement.
Section 14.13 Bank One Roles. Each of the Financial Institutions
--------------
acknowledges that Bank One acts, or may in the future act, (i) as administrative
agent for PREFCO, (ii) as issuing and paying agent for the Commercial Paper,
(iii) to provide credit or liquidity enhancement for the timely payment for the
Commercial Paper and (iv) to provide other services from time to time for PREFCO
(collectively, the "Bank One Roles"). Without limiting the generality of this
--------------
Section 14.13, each Financial Institution hereby acknowledges and consents to
- -------------
any and all Bank One Roles and agrees that in connection with any Bank One Role,
Bank One may take, or refrain from taking, any action that it, in its
discretion, deems appropriate, including, without limitation, in its role as
administrative agent for PREFCO, and the giving of notice to the Agent of a
mandatory purchase pursuant to Section 13.1.
------------
Section 14.14 Characterization. (a) It is the intention of the
----------------
parties hereto that each purchase of a Purchaser Interest hereunder shall
constitute and be treated as an absolute and irrevocable sale, which purchase
shall provide the applicable Purchaser with the full benefits of ownership of
the applicable Purchaser Interest. Except as specifically provided in this
Agreement, each sale of a Purchaser Interest hereunder is made without recourse
to Seller; provided, however, that (i) Seller shall be liable to each Purchaser
and the Agent for all representations, warranties and covenants made by Seller
pursuant to the terms of this Agreement, and (ii) such sale does not constitute
and is not intended to result in an assumption by any Purchaser or the Agent or
any assignee thereof of any obligation of Seller, AIL or any other person
arising in connection with the Receivables, the Related Security, or the related
Contracts, or any other obligations of Seller or AIL.
(b) In addition to any ownership interest which the Agent
may from time to time acquire pursuant hereto, the Seller hereby grants to the
Agent for the ratable benefit of the Purchasers a valid and perfected security
interest in all of Seller's right, title and interest in, to and under all
Receivables now existing or hereafter arising, the Collections, all Related
Security, all other rights and payments relating to such Receivables, all of
Seller's rights under the Receivables Sale Agreement and all proceeds of any of
the foregoing prior to all other liens on and security interests therein to
secure the prompt and complete payment of the Aggregate Unpaids. After an
Amortization Event, the Agent and the Purchasers shall have, in addition to the
rights and remedies that they may have under this Agreement, all other rights
and remedies provided to a secured creditor after default under the UCC and
other applicable law, which rights and remedies shall be cumulative.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date hereof.
AILIC RECEIVABLES CORPORATION
By: ________________________________
Name:
Title:
Address:
3700 South Stonebridge Drive
McKinney, Texas 75070
FAX: (972) 569-3282
Attention: Danny Almond
AMERICAN INCOME LIFE INSURANCE COMPANY,
as Servicer
By: ________________________________
Name:
Title:
Address:
1200 Wooded Acres
Waco, Texas 76710
FAX: (205) 325-4157
Attention: Michael J. Klyce
Vice President and Treasurer
Signature Page to
Receivables Purchase Agreement
43
<PAGE>
PREFERRED RECEIVABLES FUNDING CORPORATION
By: ________________________________
Name:
Title: Authorized Signatory
Address: c/o Bank One, NA, as Agent
Asset Backed Finance
Suite IL1-0079, 1-19
1 Bank One Plaza
Chicago, Illinois 60670-0019
Fax: (312) 732-1844
BANK ONE, NA, as a Financial Institution
and as Agent
By: ________________________________
Name:
Title:
Address: Bank One, NA
Asset Backed Finance
Suite IL1-0079, 1-19
1 Bank One Plaza
Chicago, Illinois 60670-0019
Fax: (312) 732-4487
44
<PAGE>
Signature Page to
Receivables Purchase Agreement
45
<PAGE>
EXHIBIT I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Accrual Period" means a period commencing on and including the 10th day of
--------------
a calendar month and ending but excluding the 10th day of the following calendar
month; provided that (i) the initial Accrual Period hereunder shall be the
--------
period from and including the date of the initial purchase hereunder to but
excluding the next date that is the 10th day of a calendar month and (ii) the
final Accrual Period hereunder shall end on the date the Aggregate Unpaids shall
be reduced to zero.
"Acquisition Amount" means, on the date of any purchase from PREFCO of
------------------
Purchaser Interests pursuant to Section 13.1, (i) with respect to each Financial
------------
Institution other than Bank One, the lesser of (a) such Financial Institution's
Pro Rata Share of the PREFCO Transfer Price and (b) such Financial Institution's
unused Commitment and (ii) with respect to Bank One, the difference between (a)
the PREFCO Transfer Price and (b) the aggregate amount payable by all other
Financial Institutions on such date pursuant to clause (i) above.
"Adjusted Liquidity Price" means, in determining the PREFCO Transfer Price
------------------------
for any Purchaser Interest, an amount equal to
RI x [(i) DC + (ii) NDR ]
-----
1.025
where:
RI = the undivided percentage interest evidenced by such Purchaser
Interest.
DC = the Deemed Collections.
NDR = the Outstanding Balance of all Receivables other than Charged-Off
Receivables.
Each of the foregoing shall be determined from the most recent Monthly Report
received from the Servicer.
"Adverse Claim" means a lien, security interest, charge or encumbrance, or
-------------
other right or claim in, of or on any Person's assets or properties in favor of
any other Person.
46
<PAGE>
"Affected Financial Institution" has the meaning specified in Section
------------------------------ -------
12.1(c).
- -------
"Affiliate" means, with respect to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person or any Subsidiary of such Person. A Person shall be
deemed to control another Person if the controlling Person owns 10% or more of
any class of voting securities of the controlled Person or possesses, directly
or indirectly, the power to direct or cause the direction of the management or
policies of the controlled Person, whether through ownership of stock, by
contract or otherwise.
"Agent" has the meaning set forth in the preamble to this Agreement.
-----
"Agent-Hierarchy" means, in reference to any Insurance Agent, such
---------------
Insurance Agent together with all other Persons (including the SGA thereof and
all managing general agents, general agents, supervisory agents, Insurance
Agents and similar professional relations) which, under existing arrangements
with such Insurance Agent, share directly or indirectly (i) in the proceeds of
any commissions payable to such Insurance Agent by AIL, including any amounts
paid or advanced that give rise to any Receivable, and (ii) in the obligations
and liabilities relating to any Receivable arising in connection with the
cancellation or termination of the underlying Insurance Product.
"Aggregate Reduction" has the meaning specified in Section 1.3.
------------------- -----------
"Aggregate Unpaids" means, at any time, an amount equal to the sum of all
-----------------
accrued and unpaid fees under the Fee Letter, CP Costs, Yield, Capital and all
other unpaid Obligations (whether due or accrued) at such time.
"Agreement" means this Receivables Purchase Agreement, as it may be amended
---------
or modified and in effect from time to time.
"AIL" has the meaning set forth in the preamble to this Agreement.
---
"Amortization Date" means the earliest to occur of (i) the day on which any
-----------------
of the conditions precedent set forth in Section 6.2 are not satisfied, (ii) the
-----------
Business Day immediately prior to the occurrence of an Amortization Event set
forth in Section 9.1(d), (iii) the Business Day specified in a written notice
--------------
from the Agent following the occurrence of any other Amortization Event, (iv)
the date which is 30 Business Days after the Agent's receipt of written notice
from Seller that it wishes to terminate the facility evidenced by this Agreement
and (v) March 31, 2000.
"Amortization Event" has the meaning specified in Article IX.
------------------ ----------
"Assignment Agreement" has the meaning set forth in Section 12.1(b).
-------------------- --------------
47
<PAGE>
"Authorized Control Level Risk Based Capital" means the authorized control
-------------------------------------------
level risk-based capital as determined in accordance with the risk-based capital
instructions adopted by the NAIC, as such instructions may be amended, modified,
supplemented or restated from time to time. For reference purposes only, such
term is also defined in Section 27-1-36-4 of the Indiana Code.
"Authorized Officer" shall mean, with respect to any Seller Party, its
------------------
respective president, corporate controller or chief financial officer.
"Bank One" means Bank One, NA, a national banking association having its
--------
principal offices in Chicago, Illinois, in its individual capacity and its
successors.
"Base Rate" means a rate per annum equal to the corporate base rate, prime
---------
rate or base rate of interest, as applicable, announced by the Reference Bank
from time to time, changing when and as such rate changes.
"Broken Funding Costs" means for any Purchaser Interest which: (i) has its
--------------------
Capital reduced without compliance by the Seller with the notice requirements
hereunder or (ii) does not become subject to an Aggregate Reduction following
the delivery of any Reduction Notice or (iii) is assigned under Article XIII or
------------
terminated prior to the date on which it was originally scheduled to end; an
amount equal to the excess, if any, of (A) the CP Costs or Yield (as applicable)
that would have accrued during the remainder of the Tranche Periods or the
tranche periods for Commercial Paper determined by the Agent to relate to such
Purchaser Interest (as applicable) subsequent to the date of such reduction or
termination (or in respect of clause (ii) above, the date such Aggregate
Reduction was designated to occur pursuant to the Reduction Notice) of the
Capital of such Purchaser Interest if such reduction, assignment or termination
had not occurred or such Reduction Notice had not been delivered, over (B) the
sum of (x) to the extent all or a portion of such Capital is allocated to
another Purchaser Interest, the amount of CP Costs or Yield actually accrued
during the remainder of such period on such Capital for the new Purchaser
Interest, and (y) to the extent such Capital is not allocated to another
Purchaser Interest, the income, if any, actually received during the remainder
of such period by the holder of such Purchaser Interest from investing the
portion of such Capital not so allocated. In the event that the amount referred
to in clause (B) exceeds the amount referred to in clause (A), the relevant
Purchaser or Purchasers agree to pay to Seller the amount of such excess. All
Broken Funding Costs shall be due and payable hereunder upon demand.
"Business Day" means any day on which banks are not authorized or required
------------
to close in New York, New York or Chicago, Illinois and The Depository Trust
Company of New York is open for business, and, if the applicable Business Day
relates to any computation or payment to be made with respect to the LIBO Rate,
any day on which dealings in dollar deposits are carried on in the London
interbank market.
"Capital" of any Purchaser Interest means, at any time, (A) the Purchase
-------
Price of such Purchaser Interest, minus (B) the sum of the aggregate amount of
Collections and other payments received by the Agent which in each case are
applied to reduce such Capital in accordance with the terms and conditions of
this Agreement; provided that such Capital shall be restored (in
--------
48
<PAGE>
accordance with Section 2.5) in the amount of any Collections or other payments
-----------
so received and applied if at any time the distribution of such Collections or
payments are rescinded, returned or refunded for any reason.
"Change of Control" means (i) the acquisition by any Person, or two or more
-----------------
Persons acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 20% or more of the outstanding shares of voting stock of the
Performance Guarantor or (ii) the Performance Guarantor shall at any time cease
to own directly or indirectly 100% of the issued and outstanding capital stock
of each of AIL and Seller.
"Charged-Off Receivable" means a Receivable: (i) as to which the Obligor
----------------------
thereof has taken any action, or suffered any event to occur, of the type
described in Section 9.1(d) (as if references to Torchmark Entity therein refer
--------------
to such Obligor); (ii) which, consistent with the Credit and Collection Policy,
would be written off Seller's books as uncollectible , or (iii) which has been
identified by Seller as uncollectible.
"Charge-Off Ratio" means, as of the last day of any month, a fraction
----------------
(expressed as a percentage) equal to (i) the aggregate Outstanding Balance of
all Receivables that became Charged-Off Receivables at any time during such
month, divided by (ii) the Outstanding Balance of all Receivables on such date.
"Collections" means, with respect to any Receivable, all cash collections
-----------
and other cash proceeds in respect of such Receivable, including, without
limitation, (i) all yield, finance charges or other related amounts accruing in
respect thereof, (ii) all cash proceeds of Related Security with respect to such
Receivable, (iii) all payments by any guarantor in respect of such Receivable
and (iv) upon the payment to AIL of any premium, the funds then available for
payment to the applicable Obligor as commission or related fees and which,
consistent with the Credit and Collection Policy, would be retained by AIL for
application against any Receivable.
"Commercial Paper" means promissory notes of PREFCO issued by PREFCO in the
----------------
commercial paper market.
"Commitment" means, for each Financial Institution, the commitment of such
----------
Financial Institution to purchase its Pro Rata Share of Purchaser Interests from
(i) Seller and (ii) PREFCO, such Pro Rata Share not to exceed, in the aggregate,
the amount set forth opposite such Financial Institution's name on Schedule A to
----------
this Agreement, as such amount may be modified in accordance with the terms
hereof.
"Commitment Availability" means at any time the positive difference (if
-----------------------
any) between (a) an amount equal to the aggregate amount of the Commitments
minus (b) an amount equal to 2% of such aggregate Commitments at such time minus
- ----- -----
(c) the aggregate Capital at such time.
"Company Action Level Event" means a "company-action-level-event" as such
--------------------------
term is defined in Section 27-1-36-29 of the Indiana Code, or any successor
statute, as the same may be
49
<PAGE>
amended, modified, recodified or reenacted, in whole or in part, including all
rules and regulations promulgated thereunder.
"Concentration Limit" means, at any time, for any Obligor, for Training
-------------------
Advance Receivables as a group or for Miscellaneous Receivables as a group, such
percentage of the aggregate Capital of the Purchaser Interests as may from time
to time be designated in a written notice by the Agent to Seller in respect of
such Obligor, the Training Advance Receivables or the Miscellaneous Receivables.
In the event the Agent shall at any time specify a Concentration Limit in
respect of any Obligor, the Concentration Limit shall be calculated as if such
Obligor and all of its Affiliates are one Obligor.
"Contingent Obligation" of a Person means any agreement, undertaking or
---------------------
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or application for a letter of credit.
"Contract" means, with respect to any Receivable, any and all instruments,
--------
agreements (including loan agreements, notes, agent agreements, general agent
agreements, supervisory agent agreements, regional director agreements, broker-
dealer agreements and indemnity agreements), statements or other writings
pursuant to which (i) such Receivable arises or which evidence such Receivable
or (ii) the applicable Obligor shall have agreed to guaranty directly or
indirectly all or a portion of the payment obligations of the primary Obligor on
such Receivable.
"CP Costs" means, for each day, the sum of (i) discount accrued on Pooled
--------
Commercial Paper on such day, plus (ii) any and all accrued commissions in
respect of placement agents and Commercial Paper dealers, and issuing and paying
agent fees incurred, in respect of such Pooled Commercial Paper for such day,
plus (iii) other costs associated with funding small or odd-lot amounts with
respect to all receivable purchase facilities which are funded by Pooled
Commercial Paper for such day, minus (iv) any accrual of income net of expenses
received on such day from investment of collections received under all
receivable purchase facilities funded substantially with Pooled Commercial
Paper, minus (v) any payment received on such day net of expenses in respect of
Broken Funding Costs related to the prepayment of any receivables interest of
PREFCO pursuant to the terms of any receivable purchase facilities funded
substantially with Pooled Commercial Paper. In addition to the foregoing costs,
if Seller shall request any Incremental Purchase during any period of time
determined by the Agent in its sole discretion to result in incrementally higher
CP Costs applicable to such Incremental Purchase, the Capital associated with
any such Incremental Purchase shall, during such period, be deemed to be funded
by PREFCO in a special pool (which may include capital associated with other
receivable purchase facilities) for purposes of determining such additional CP
Costs applicable only to such special pool and charged each day during such
period against such Capital.
50
<PAGE>
"Credit and Collection Policy" means , in respect of any Receivable, the
----------------------------
credit and collection policies and practices of AIL relating to Contracts and
Receivables, as in effect on the date hereof and summarized in Exhibit VI
----------
hereto, and as modified from time to time in accordance with this Agreement.
"Deemed Collections" means the aggregate of all amounts Seller shall have
------------------
been deemed to have received as a Collection of a Receivable. Seller shall be
deemed to have received a Collection in full of a Receivable if at any time:
(i) the Outstanding Balance of any such Receivable is either (x)
reduced as a result of any dispute involving any of the Policy Holder, the
Insurance Agent or any other Obligor or AIL in respect of such Receivable
and relating to any aspect of the transaction giving rise to such
Receivable, (y) reduced as a result of any discount or any adjustment or
otherwise by any Torchmark Entity (other than cash Collections on account
of the Receivables) or (z) reduced or canceled as a result of a setoff in
respect of any claim by any Person (whether such claim arises out of the
same or a related transaction or an unrelated transaction and including,
without limitation, any setoff occurring by reason of the application of
the proceeds of any subsequent advance or prepayment made by AIL to the
applicable Insurance Agent or other Obligor in respect of any Insurance
Product issued or scheduled to be issued after the date such Receivable
shall have arisen), or
(ii) the applicable Policy Holder (or any other authorized Person)
shall for any reason at any time decline, cancel, fail to accept or
otherwise terminate the Insurance Product, the issuance or proposed
issuance of which shall have led to the creation of such Receivable, or AIL
shall at any time for any reason refuse to or fail to issue, or shall
terminate, any such Insurance Product, or
(iii) any of the representations or warranties in Article V are not
---------
true on the initial date an interest in such Receivable shall be
transferred to the Purchasers hereunder or such Receivable shall not
constitute an Eligible Receivable on any date the Outstanding Balance of
such Receivable is included in the calculation of Net Receivables Balance,
or
(iv) the applicable Policy Holder dies or ceases for any reason to
make any or all payments due as premiums or otherwise in respect of the
Insurance Product that shall have given rise to such Receivable during the
period that such Receivable shall remain outstanding, or
(v) the applicable Obligor directly or indirectly contests in any
manner the effectiveness, validity, binding nature or enforceability of the
related Contract or this Agreement.
Seller hereby agrees to pay all Deemed Collections immediately to the Servicer
for application in accordance with the terms and conditions hereof.
51
<PAGE>
"Default Fee" means with respect to any amount due and payable by Seller in
-----------
respect of any Aggregate Unpaids, an amount equal to the greater of (i) $1000
and (ii) interest on any such unpaid Aggregate Unpaids at a rate per annum equal
to 2% above the Base Rate.
"Designated Obligor" means an Obligor identified as such by the Agent to
------------------
Seller in writing based upon the reasonable credit judgment of the Agent. In
the case of any Obligor that is a member of an Agent Hierarchy, identification
of such Obligor as being a Designated Obligor shall relate solely to such
Obligor and shall not automatically cause any other member of such Agent
Hierarchy to constitute a Designated Obligor.
"Discount Rate" means, the LIBO Rate or the Base Rate, as applicable, with
-------------
respect to each Purchaser Interest of the Financial Institutions.
"Eligible Receivable" means, at any time, a Receivable:
-------------------
(i) each Obligor in respect of which (a) if a natural person, is a
resident of the United States, (b) if a corporation or other business
organization, is organized under the laws of the United States or any
political subdivision thereof and has its chief executive office in the
United States; (c) is not, and the Policy Holder in respect of the
Insurance Product that gave rise to such Receivable is not, an Affiliate
of any of the parties hereto; (d) is not a Designated Obligor; (e) is not,
and the Policy Holder in respect of the Insurance Product that gave rise to
such Receivable is not, a government or a governmental subdivision or
agency; and (f) in the case of an Insurance Agent, is a qualified, licensed
agent in good standing of AIL,
(ii) the Obligor of which is not the Obligor of any Charged-Off
Receivable,
(iii) which is not (a) an Unsupported Receivable, (b) a Charged-Off
Receivable or (c) a Receivable as to which any payment or part thereof
remains unpaid on the date occurring fourteen months after the date of the
creation of such Receivable,
(iv) which (a) by its terms is due and payable within one year or
less of the date of its creation, with payments thereon commencing within
30 days of the original billing date and becoming due monthly thereafter,
(b) has not had its payment terms extended, and (c) relates solely to the
premium on the applicable Insurance Product that is scheduled to be paid
within the first year of such Insurance Product's coming into existence and
not to any premium scheduled to be paid in any subsequent period,
(v) which is an "account" or "general intangible" within the meaning
of Section 9-106 of the UCC of all applicable jurisdictions, and is not an
"instrument" within the meaning of Section 9-105 of the UCC of any
applicable jurisdiction,
(vi) which is denominated and payable only in United States dollars
in the United States,
52
<PAGE>
(vii) which arises under a Contract in substantially the form of one
of the form contracts set forth on Exhibit VII hereto or otherwise approved
-----------
by the Agent in writing, which, together with such Receivable, is in full
force and effect and constitutes the legal, valid and binding obligation of
each related Obligor (including, in the event the applicable Insurance
Agent shall be a member of an Agent-Hierarchy, each other member of such
Agent-Hierarchy as a guarantor of such Receivable) enforceable against such
Obligor in accordance with its terms subject to no offset, counterclaim or
other defense,
(viii) which arises under a Contract which (A) does not require any
Obligor under such Contract, any member of the applicable Agent-Hierarchy
or any other Person to consent to the transfer, sale or assignment of the
rights and duties of Seller under such Contract and (B) does not contain a
confidentiality provision that purports to restrict the ability of any
Purchaser to exercise its rights under this Agreement, including, without
limitation, its right to review the Contract,
(ix) which, together with the Contract related thereto, does not
contravene any law, rule or regulation applicable thereto (including,
without limitation, any law, rule and regulation relating to truth in
lending, fair credit billing, fair credit reporting, equal credit
opportunity, fair debt collection practices and privacy) and with respect
to which no part of the Contract related thereto is in violation of any
such law, rule or regulation,
(x) which satisfies all applicable requirements of the Credit and
Collection Policy and in respect of which all representations and
warranties set forth in Section 5.1 and relating to Receivables shall be
-----------
true and correct,
(xi) which was generated in the ordinary course of AIL's business,
under a duly authorized Contract,
(xii) which either (A) represents monies advanced or prepaid to the
applicable Insurance Agent, as commissions for a new Insurance Product, by
AIL (and not by any other Person in whole or in part) and was advanced to
such Insurance Agent based exclusively upon (and does not exceed the
commissions payable in respect of) the first year's premium for such new
Insurance Product without regard to any premiums (or
53
<PAGE>
commissions thereon) for any subsequent periods, (B) constitutes a
Miscellaneous Receivable representing a loan or an advance made to an SGA
(and not any other type of Obligor), which Miscellaneous Receivable has
been created in accordance with the applicable requirements for such loan
and advances to SGAs, and does not exceed the limits for such loans and
advances, set forth in the Credit and Collection Policy, or (C) constitutes
a Training Advance Receivable representing an advance to a new Insurance
Agent then becoming part of an existing Agent-Hierarchy, which Training
Advance Receivable has been created in accordance with the applicable
requirements for advances to new Insurance Agents, and does not exceed the
limits for such advances, set forth in the Credit and Collection Policy;
provided that in no event shall any Miscellaneous Receivable or Training
--------
Advance Receivable have an Outstanding Balance in excess of $10,000
(xiii) if the primary Obligor thereon is an Insurance Agent that is a
member of an Agent-Hierarchy, 100% of the payment obligation on such
Receivable is guaranteed jointly or severally by the members of such Agent-
Hierarchy, and
(xiv) in the event the Obligor thereon shall have died or been
terminated as an agent of AIL, all obligations relating to such Receivable
shall have been assumed by the Agent-Hierarchy in respect of such Obligor;
provided that such Receivable shall cease to be an Eligible Receivable if
--------
at any time the members of the Agent-Hierarchy shall cease to exist or be
terminated as agents of AIL or such members shall assert the invalidity or
unenforceability of their obligations in respect of the Receivable.
Notwithstanding the foregoing, a Receivable that otherwise satisfies the
criteria set forth above but for the fact that (A) the Obligor thereon is a
resident of Canada or New Zealand and (B) such Receivable is denominated in
the lawful currency of Canada or New Zealand rather than United States
Dollars may constitute an "Eligible Receivable" for purposes of this
Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Facility Account" means the account of Seller at Bank One, Account
----------------
No. 10-36987.
"Federal Funds Effective Rate" means, for any period, a fluctuating
----------------------------
interest rate per annum equal for each day during such period equal to (a)
the weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds
brokers, as published for such day (or, if such day is not a Business Day,
for the preceding Business Day) by the Federal Reserve Bank of New York in
the Composite Closing Quotations for U.S. Government Securities; or (b) if
such rate is not so published for any day which is a Business Day, the
average of the quotations at approximately 10:30 a.m. (Chicago time) for
such day on such transactions received by the Reference Bank from three
federal funds brokers of recognized standing selected by it.
54
<PAGE>
"Fee Letter" means that certain letter agreement dated as of the date
----------
hereof among the Agent, PREFCO and Seller, and acknowledged by Torchmark,
as it may be amended or modified and in effect from time to time.
"Finance Charges" means, with respect to a Contract, any finance,
---------------
interest, late payment charges, fees, chargebacks or similar charges owing
by an Obligor pursuant to such Contract.
"Financial Institutions" has the meaning set forth in the preamble in
----------------------
this Agreement.
"Funding Agreement" means this Agreement and any agreement or
-----------------
instrument executed by any Funding Source with or for the benefit of
PREFCO.
"Funding Source" means (i) any Financial Institution or (ii) any
--------------
insurance company, bank or other funding entity providing liquidity, credit
enhancement or back-up purchase support or facilities to PREFCO.
"Incremental Purchase" means a purchase of one or more Purchaser
--------------------
Interests which increases the total outstanding Capital hereunder.
"Indebtedness" of a Person means such Person's (i) obligations for
------------
borrowed money, (ii) obligations representing the deferred purchase price
of property or services (other than accounts payable arising in the
ordinary course of such Person's business payable on terms customary in the
trade), (iii) obligations, whether or not assumed, secured by liens or
payable out of the proceeds or production from property now or hereafter
owned or acquired by such Person, (iv) obligations which are evidenced by
notes, acceptances, or other instruments, (v) capitalized lease
obligations, (vi) net liabilities under interest rate swap, exchange or cap
agreements, (vii) Contingent Obligations and (viii) liabilities in respect
of unfunded vested benefits under plans covered by Title IV of ERISA.
"Independent Director" shall mean a member of the Board of Directors
--------------------
of Seller who is not at such time, and has not been at any time during the
preceding five (5) years, (A) a director, officer, employee or affiliate
of any Torchmark Entity or any of their respective Subsidiaries or
Affiliates, or (B) the beneficial owner (at the time of such individual's
appointment as an Independent Director or at any time thereafter while
serving as an Independent Director) of any of the outstanding capital stock
of any Torchmark Entity or any of their respective Subsidiaries or
Affiliates.
"Insurance Agent" means, in respect of any Receivable, the insurance
---------------
broker or agent that shall have arranged the issuance or the proposed
issuance of an Insurance Product in connection with which such Receivable
shall have arisen.
55
<PAGE>
"Insurance Product" means any life insurance policy (whether term
-----------------
life, whole life or other life insurance policy of any type or kind),
supplemental health insurance policy or any annuity, rider, other policy or
similar contract.
"Lapse Ratio" means, at any time, the average of the Monthly Lapse
-----------
Ratios for the three calendar months then most recently ended.
"LIBO Rate" means the rate per annum equal to the sum of (i) (a) the
---------
rate at which deposits in U.S. Dollars are offered by the Reference Bank to
first-class banks in the London interbank market at approximately 11:00
a.m. (London time) two Business Days prior to the first day of the relevant
Tranche Period, such deposits being in the approximate amount of the
Capital of the Purchaser Interest to be funded or maintained, divided by
(b) one minus the maximum aggregate reserve requirement (including all
basic, supplemental, marginal or other reserves) which is imposed against
the Reference Bank in respect of Eurocurrency liabilities, as defined in
Regulation D of the Board of Governors of the Federal Reserve System as in
effect from time to time (expressed as a decimal), applicable to such
Tranche Period plus (ii) 0.75% per annum. The LIBO Rate shall be rounded,
if necessary, to the next higher 1/16 of 1%.
"Liquidity Termination Date" means December 19, 2000.
--------------------------
"Material Adverse Effect" means a material adverse effect on (i) the
-----------------------
financial condition or operations of any Seller Party and its Subsidiaries,
(ii) the ability of any Seller Party to perform its obligations under this
Agreement or the ability of the Performance Guarantor to perform its
obligations under the Performance Guaranty, (iii) the legality, validity or
enforceability of this Agreement or any other Transaction Document, (iv)
any Purchaser's interest in the Receivables generally or in any significant
portion of the Receivables, the Related Security or the Collections with
respect thereto, or (v) the collectibility of the Receivables generally or
of any material portion of the Receivables.
"Minimum SGA Net Worth" means, with respect to any SGA at any time of
---------------------
determination, a ratio (expressed as a percentage) of (i) the present value
of all future commissions then payable to such SGA or to any member of its
Agent-Hierarchy in respect of Insurance Products that have been arranged by
such Agent-Hierarchy, as determined in accordance with the Credit and
Collection Policy, divided by (ii) the aggregate Outstanding
-------
Balance of all Receivables then owing by such SGA or any member of its
Agent-Hierarchy, which ratio shall not be less than 100% at such time.
"Miscellaneous Receivable" means the indebtedness arising in
------------------------
connection with the extension by AIL to an Obligor or a loan of an advance,
whether for working capital purposes or otherwise, in accordance with the
Credit and Collection Policy, which loan or advance (i) has not been
advanced in connection with the issuance of a specific Insurance Product,
and the anticipated receipt of a commission thereon, and (ii) does not
constitute a Training Advance Receivable therewith.
56
<PAGE>
"Monthly Lapse Ratio" means, at any time, a percentage equal to (i)
-------------------
the number of Insurance Products issued by AIL that lapsed or were
terminated during the calendar month then most recently ended divided by
(ii) the average number of Insurance Products issued by AIL that were in
force during such calendar month.
"Monthly Report" means a report, in substantially the form of Exhibit
-------------- -------
VIII hereto (appropriately completed), furnished by the Servicer to the
----
Agent pursuant to Section 8.5.
-----------
"NAIC" means the National Association of Insurance Commissioners.
----
"Net Receivables Balance" means, at any time, (i) the aggregate
-----------------------
Outstanding Balance of all Eligible Receivables at such time, minus (ii)
-----
the aggregate amount by which the Outstanding Balance of all Eligible
Receivables of each Obligor and its Affiliates exceeds the Concentration
Limit (if any) for such Obligor, minus (iii) the aggregate amount by which
-----
the aggregate Outstanding Balance of all Eligible Receivables comprising
Training Advance Receivables exceeds the Concentration Limit (if any) for
Training Advance Receivables, minus (iv) the aggregate amount by which the
-----
aggregate Outstanding Balance of all Eligible Receivables comprising
Miscellaneous Receivables exceeds the Concentration Limit (if any) for
Miscellaneous Receivables.
"Obligations" shall have the meaning set forth in Section 2.1.
----------- -----------
"Obligor" means a Person (including any guarantor) obligated to make
-------
payments pursuant to a Contract or by reason of the arrangements existing
within an Agent-Hierarchy.
"Outstanding Balance" of any Receivable at any time means the then
-------------------
outstanding principal balance thereof.
"Performance Guarantor" means Torchmark, in its capacity as guarantor
---------------------
under the Performance Guaranty.
"Performance Guaranty" means that certain Performance Guaranty dated
--------------------
as of the date hereof made by Torchmark, as guarantor, in respect of the
obligations of AIL and Seller and certain other liabilities specified
therein, as the same may from time to time be amended, restated,
supplemented or otherwise modified.
"Person" means an individual, partnership, corporation (including a
------
business trust), joint stock company, trust, unincorporated association,
joint venture or other entity, or a government or any political subdivision
or agency thereof.
"Policy Holder" means, in respect of any Receivable, the Person that
-------------
shall have requested the issuance of the Insurance Product, which request
shall have led to the creation of such Receivable, and/or the Person or
Persons that shall have the obligation to make payments of the premium and
related charges for such Insurance Product.
57
<PAGE>
"Pooled Commercial Paper" means Commercial Paper notes of PREFCO
-----------------------
subject to any particular pooling arrangement by PREFCO, but excluding
Commercial Paper issued by PREFCO for a tenor and in an amount specifically
requested by any Person in connection with any agreement effected by
PREFCO.
"Potential Amortization Event" means an event which, with the passage
----------------------------
of time or the giving of notice, or both, would constitute an Amortization
Event.
"PREFCO" has the meaning set forth in the preamble to this Agreement.
------
"PREFCO Residual" means the sum of the PREFCO Transfer Price
---------------
Reductions.
"PREFCO Transfer Price" means, with respect to the assignment by
---------------------
PREFCO of one or more Purchaser Interests to the Agent for the benefit of
the Financial Institutions pursuant to Section 13.1, the sum of (i) the
------------
Capital of each Purchaser Interest (the "Capital Component") and (ii) all
-----------------
accrued and unpaid Yield for such Purchaser Interest; provided that if at
--------
any time the senior long-term unsecured debt rating of Torchmark shall be
below BB from Standard & Poor's Ratings Group or below Ba2 from Moody's
Investor Services, Inc., the Capital Component at such time shall be equal
to the lesser of (a) the Capital of each Purchaser Interest and (b) the
Adjusted Liquidity Price of each Purchaser Interest.
"PREFCO Transfer Price Reduction" means in connection with the
-------------------------------
assignment of a Purchaser Interest by PREFCO to the Agent for the benefit
of the Financial Institutions, in the event the Adjusted Liquidity Price
shall have been used in the determination of the PREFCO Transfer Price
therefor, the positive difference between (i) the Capital of such Purchaser
Interest and (ii) the Adjusted Liquidity Price for such Purchaser Interest.
"Proposed Reduction Date" has the meaning set forth in Section 1.3.
----------------------- -----------
"Pro Rata Share" means, for each Financial Institution, the Commitment
--------------
of such Financial Institution divided by the Purchase Limit, adjusted as
necessary to give effect to the application of the terms of Sections 13.1
-------------
or 13.5.
----
"Purchase Limit" means $100,000,000.
--------------
"Purchase Notice" has the meaning set forth in Section 1.2.
--------------- -----------
"Purchase Price" means, with respect to any Incremental Purchase of a
--------------
Purchaser Interest, the amount paid to Seller for such Purchaser Interest
which shall not exceed the least of (i) the amount requested by Seller in
the applicable Purchase Notice, (ii) the unused portion of the Purchase
Limit on the applicable purchase date, (iii) the Commitment Availability on
the applicable purchase date and (iv) the excess, if any, of the Net
Receivables Balance on the applicable purchase date over the aggregate
outstanding amount of Capital without taking into account such proposed
Incremental Purchase.
58
<PAGE>
"Purchaser" means PREFCO or a Financial Institution, as applicable.
---------
"Purchaser Interest" means, at any time, an undivided percentage
------------------
ownership interest (computed as set forth below) associated with a
designated amount of Capital, selected pursuant to the terms and conditions
hereof in (i) each Receivable arising prior to the time of the most recent
computation or recomputation of such undivided interest, (ii) all Related
Security with respect to each such Receivable, and (iii) all Collections
with respect to, and other proceeds of, each such Receivable. Each such
undivided percentage interest shall equal:
C
---
NRB
where:
C = the Capital of such Purchaser Interest.
NRB = the Net Receivables Balance.
Such undivided percentage ownership interest shall be initially computed on
its date of purchase. Thereafter, until its Amortization Date, each
Purchaser Interest shall be automatically recomputed (or deemed to be
recomputed) on each day prior to its Amortization Date. The variable
percentage represented by any Purchaser Interest as computed ( or deemed
recomputed) as of the close of the business day immediately preceding its
Amortization Date shall remain constant at all times after such
Amortization Date.
"Receivable" means the indebtedness and other obligations owed by an
----------
Obligor to AIL (but for giving effect to any transfer or conveyance under
the Receivables Sale Agreement or this Agreement), whether constituting an
account, chattel paper, instrument or general intangible, whether arising
prior to, contemporaneous with or subsequent to the execution of this
Agreement, and existing in connection with any Insurance Product issued by
AIL (or an Affiliate thereof), the extension of credit by AIL to an Obligor
(whether constituting an advance against anticipated premiums, a working
capital advance or an extension of credit for any other purpose) or the
rendering of any services by AIL to an Obligor. "Receivable" shall
include, without limitation, (i) any "debit balance," "agent debit balance"
or "actual debit balance," or any similar or successor concept thereto,
owing at any time by an Obligor to AIL, (ii) any amounts advanced to an
Obligor by AIL, such as an annualized payment, commission advance, regular
advance, special advance, loan, indebtedness, obligation for repayment, or
any other advance of any type, whether with respect to commissions (whether
annualized, renewal, override or any other type or kind), earnings,
compensation, payments, service fees, bonuses, incentives, credits, monies
due, sums due or other amounts earned or expected to be earned by such
Obligor and (iii) the obligation of such Obligor to pay any Finance Charges
with respect to any of the foregoing. Indebtedness and other rights and
obligations arising from any one transaction, notwithstanding the joint or
several
59
<PAGE>
obligation of more than one Obligor thereon, shall constitute a single
Receivable separate from a Receivable consisting of the indebtedness and
other rights and obligations arising from any other transaction.
"Receivables Sale Agreement" means the Receivables Sale Agreement of
--------------------------
even date herewith between AIL, as seller, and Seller, as buyer, as the
same may from time to time be amended, restated, supplemented or otherwise
modified.
"Records" means, with respect to any Receivable, all Contracts and
-------
other documents, books, records and other information (including, without
limitation, computer programs, tapes, disks, punch cards, data processing
software and related property and rights) relating to such Receivable, any
Related Security therefor and the related Obligor(s).
"Reduction Notice" has the meaning set forth in Section 1.3.
---------------- -----------
"Reduction Percentage" means, for any Purchaser Interest acquired by
--------------------
the Financial Institutions from PREFCO for less than the Capital of such
Purchaser Interest, a percentage equal to a fraction the numerator of which
is the PREFCO Transfer Price Reduction for such Purchaser Interest and the
denominator of which is the Capital of such Purchaser Interest.
"Reference Bank" means Bank One or such other bank as the Agent shall
--------------
designate with the consent of Seller.
"Regulatory Action Level Event" means a "regulatory-action-level-
-----------------------------
event" as such term is defined in Section 27-1-36-35 of the Indiana Code,
as the same may be amended, modified, recodified or reenacted, in whole or
in part, including all rules and regulations promulgated thereunder.
"Regulatory Control Event" means any event that causes the applicable
------------------------
entity to be placed under supervision or any other regulatory control
pursuant to Article 27-9 of the Indiana Code or any parallel provision in
any other state law, or any successor provisions, as any of the foregoing
may be amended, modified, recodified or reenacted, in whole or in part,
including all rules and regulations promulgated thereunder.
"Reinvestment" has the meaning set forth in Section 2.2.
------------ -----------
"Related Security" means, with respect to any Receivable:
----------------
(i) all of Seller's interest (including any assignment or pledge
in favor of the Seller or any offset rights held by Seller) in or to (A)
any and all commissions, annualized commissions, renewal commissions,
override commissions, earnings, compensation, payments, service fees,
bonuses, incentives, credits, monies due, sums due or other amounts,
whether earned or unearned or that may at any time be or become payable to
the related Obligor, whether existing in connection with any Receivable or
60
<PAGE>
otherwise, by AIL or any Affiliate thereof and (B) any and all premiums and
related payments due from Policy Holders in respect of any Insurance
Product the issuance or proposed issuance of which shall have given rise to
such Receivable, to the extent such premiums and related payments are
allocable to the commissions payable by AIL to the applicable Obligor in
respect of such Insurance Product;
(ii) all of Seller's interest (including any assignment or
pledge in favor of the Seller or any offset rights held by the Seller) in
any other assets or interests in property of the applicable Insurance Agent
or Agent-Hierarchy,
(iii) all other security interests or liens and property subject
thereto from time to time, if any, purporting to secure payment of such
Receivable, whether pursuant to a Contract related to such Receivable or
otherwise, together with all financing statements and security agreements
describing any such arrangements securing such Receivable,
(iv) all guaranties, contracts of suretyship, insurance and
other agreements or arrangements of whatever character from time to time
supporting or securing payment of such Receivable whether pursuant to a
Contract related to such Receivable or otherwise,
(v) all Records related to such Receivable,
(vi) all of Seller's right, title and interest in, to and under
the Receivables Sale Agreement, and
(vii) all proceeds of any of the foregoing.
"Required Financial Institutions" means, at any time, Financial
-------------------------------
Institutions with Commitments in excess of 66-2/3% of the Purchase Limit.
"Required Notice Period" means a period of two Business Days.
----------------------
"Seller" has the meaning set forth in the preamble to this Agreement.
------
"Seller Interest" means, at any time, an undivided percentage
---------------
ownership interest of Seller in the Receivables, Related Security and all
Collections with respect thereto equal to (i) one, minus (ii) the aggregate
of the Purchaser Interests.
"Seller Parties" has the meaning set forth in the preamble to this
--------------
Agreement.
"Servicer" means at any time the Person (which may be the Agent) then
--------
authorized pursuant to Article VIII to service, administer and collect
------------
Receivables.
"Servicing Fee" has the meaning set forth in Section 8.6.
------------- -----------
61
<PAGE>
"Settlement Date" means (A) the 15th day of each month, and (B) the
---------------
last day of the relevant Tranche Period in respect of each Purchaser
Interest of the Financial Institutions.
"Settlement Period" means (A) in respect of each Purchaser Interest
-----------------
of PREFCO, the calendar month then most recently ended, and (B) in respect
of each Purchaser Interest of the Financial Institutions, the entire
Tranche Period of such Purchaser Interest.
"SGA" means a Person that (i) has been engaged by AIL as a "state
---
general agent", (ii) serves as the senior manager of an Agent-Hierarchy and
(iii) has guaranteed to AIL the repayment in full of all Receivables owing
by any member of such Agent-Hierarchy.
"Subordinated Note" means the Subordinated Note issued under and in
-----------------
connection with the Receivables Sale Agreement, as the same may be amended,
restated, supplemented or otherwise modified from time to time.
"Subsidiary" of a Person means (i) any corporation more than 50% of
----------
the outstanding securities having ordinary voting power of which shall at
the time be owned or controlled, directly or indirectly, by such Person or
by one or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (ii) any partnership, association, joint venture or
similar business organization more than 50% of the ownership interests
having ordinary voting power of which shall at the time be so owned or
controlled. Unless otherwise expressly provided, all references herein to
a "Subsidiary" shall mean a Subsidiary of Seller.
"Terminating Tranche" has the meaning set forth in Section 4.3(b).
------------------- --------------
"Torchmark" means Torchmark Corporation, a Delaware corporation, and
---------
its successors.
"Torchmark Credit Agreement" means that certain Credit Agreement dated
--------------------------
as of October 22, 1997 among Torchmark, certain lenders parties thereto
from time to time and Bank One (formerly known as The First National Bank
of Chicago), as such Credit Agreement is in effect on the date hereof and
without giving effect to any amendment, restatement, supplement,
termination, release or other modification of all or any term or provision
of such Credit Agreement after the date hereof.
"Torchmark Entities" means, collectively, Torchmark, AIL and Seller.
------------------
"Total Adjusted Capital" means the total adjusted capital as
----------------------
determined in accordance with the risk-based capital instructions adopted
by the NAIC, as such instructions may be amended, modified, supplemented or
restated from time to time. For reference purposes only, such term is also
defined in Section 27-1-36-24 of the Indiana Code.
62
<PAGE>
"Training Advance Receivable" means a Receivable representing an
---------------------------
advance made to any Person at the time of the commencement of such Person's
engagement as an Insurance Agent for AIL.
"Tranche Period" means, with respect to any Purchaser Interest held by
--------------
a Financial Institution:
(a) if Yield for such Purchaser Interest is calculated on the basis
of the LIBO Rate, a period of one, two, three or six months, or such other
period as may be selected by Seller with consultation from (and approval
by) the Agent, commencing on a Business Day selected by Seller or the Agent
pursuant to this Agreement. Such Tranche Period shall end on the day in
the applicable succeeding calendar month which corresponds numerically to
the beginning day of such Tranche Period, provided, however, that if there
--------
is no such numerically corresponding day in such succeeding month, such
Tranche Period shall end on the last Business Day of such succeeding month;
or
(b) if Yield for such Purchaser Interest is calculated on the basis
of the Base Rate, a period commencing on a Business Day selected by Seller
and agreed to by the Agent, provided no such period shall exceed one month.
--------
If any Tranche Period would end on a day which is not a Business Day, such
Tranche Period shall end on the next succeeding Business Day, provided,
--------
however, that in the case of Tranche Periods corresponding to the LIBO
Rate, if such next succeeding Business Day falls in a new month, such
Tranche Period shall end on the immediately preceding Business Day. In the
case of any Tranche Period for any Purchaser Interest of which commences
before the Amortization Date and would otherwise end on a date occurring
after the Amortization Date, such Tranche Period shall end on the
Amortization Date. The duration of each Tranche Period which commences
after the Amortization Date shall be of such duration as selected by the
Agent.
"Transaction Documents" means, collectively, this Agreement, each
---------------------
Purchase Notice, the Receivables Sale Agreement, the Subordinated Note, the
Performance Guaranty, the Fee Letter and all other instruments, documents
and agreements executed and delivered in connection herewith.
"UCC" means the Uniform Commercial Code as from time to time in effect
---
in the specified jurisdiction.
"Unsupported Receivable" means any Receivable which as of January 31,
----------------------
2000 (i) is subject to a Purchaser Interest, (ii) is owing by a member of
an Agent-Hierarchy the SGA in respect of which shall then fail to have the
Minimum SGA Net Worth for such SGA and (iii) such SGA shall have been an
SGA for longer than twelve (12) months.
63
<PAGE>
"Year 2000 Plan" means a plan to prevent the Year 2000 Problem from
--------------
having an adverse effect upon the business, financial condition,
operations, property or prospects of a Person.
"Year 2000 Problem" means, with respect to any Person, the risk that
-----------------
computer applications directly used by that Person cannot or will not: (a)
handle date information involving any and all dates before, during and/or
after January 1, 2000, including accepting input, providing output and
performing date calculations in whole or in part; (b) operate accurately
without interruption on and in respect of any and all dates before, during
and/or after January 1, 2000; and (c) store and provide date input
information without creating any ambiguity as to the century.
"Yield" means for each respective Tranche Period relating to Purchaser
-----
Interests of the Financial Institutions, an amount equal to the product of
the applicable Discount Rate for such Purchaser Interest multiplied by the
Capital of such Purchaser Interest for each day elapsed during such Tranche
Period, annualized on a 360 day basis.
All accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles. All terms used in
Article 9 of the UCC in the State of Illinois, and not specifically defined
herein, are used herein as defined in such Article 9.
64
<PAGE>
EXHIBIT II
FORM OF PURCHASE NOTICE
[Date]
Bank One, NA,
as Agent for the Purchasers parties
to the Receivables Purchase Agreement
referred to below
Suite IL1-0079, 1-21
1 Bank One Plaza
Chicago, Illinois 60670
Attention: Asset Backed Finance
Re: Purchase Notice
---------------
Ladies and Gentlemen:
The undersigned refers to the Receivables Purchase Agreement, dated as
of December 21, 1999 (the "Receivables Purchase Agreement," the terms defined
therein being used herein as therein defined), among the undersigned, as Seller
and American Income Life Insurance Company, as initial Servicer, Preferred
Receivables Funding Corporation ("PREFCO"), certain Financial Institutions
parties thereto and Bank One, NA, as Agent for PREFCO and such Financial
Institutions, and hereby gives you notice, irrevocably, pursuant to Section 1.2
of the Receivables Purchase Agreement, that the undersigned hereby requests an
Incremental Purchase under the Receivables Purchase Agreement, and in that
connection sets forth below the information relating to such Incremental
Purchase (the "Proposed Purchase") as required by Section 1.2 of the Receivables
Purchase Agreement:
(i) The Business Day of the Proposed Purchase is [insert purchase
date], which date is at least three (3) Business Days after the date hereof and
is a Settlement Date.
(ii) The requested Purchase Price in respect of the Proposed Purchase
is $__________.
(iii) The requested Discount Rate is [LIBO Rate] [Base Rate] [Pooled
Commercial Paper rate] [having a Tranche Period of ___________________].
65
<PAGE>
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Purchase
(before and after giving effect to the Proposed Purchase):
(i) the representations and warranties of the undersigned set forth
in Section 5.1 of the Receivables Purchase Agreement are true and correct on and
as of the date of such Proposed Purchase as though made on and as of such date;
(ii) no event has occurred and is continuing, or would result from
such Proposed Purchase, that will constitute an Amortization Event or a
Potential Amortization Event; and
(iii) neither the Liquidity Termination Date nor the Amortization
Date shall have occurred, the aggregate Capital of all Purchaser Interests shall
not exceed the Purchase Limit and the aggregate Purchaser Interests shall not
exceed 100%.
Very truly yours,
AILIC RECEIVABLES CORPORATION
By: ________________________________
Name:
Title:
Signature Page to
Purchase Notice
66
<PAGE>
EXHIBIT III
PLACES OF BUSINESS OF THE SELLER PARTIES;
LOCATIONS OF RECORDS;
FEDERAL EMPLOYER IDENTIFICATION NUMBER(S)
AILIC RECEIVABLES CORPORATION
Principal Place of Business
- ---------------------------
None, except:
3700 South Stonebridge Drive
McKinney, Texas 75070
Location(s) of Records
- ----------------------
None, except:
3700 South Stonebridge Drive
McKinney, Texas 75070
Federal Employer Identification Number(s)
- -----------------------------------------
None, except:
Corporate, Partnership Trade and Assumed Names
- ----------------------------------------------
None.
AMERICAN INCOME LIFE INSURANCE COMPANY
Principal Place of Business
- ---------------------------
None, except:
1200 Wooded Acres
Waco, Texas 76710
67
<PAGE>
Location(s) of Records
- ----------------------
None, except:
1200 Wooded Acres
Waco, Texas 76710
3700 South Stonebridge Drive
McKinney, Texas 75070
Federal Employer Identification Number(s)
- -----------------------------------------
None, except:
74-1365939
Corporate, Partnership Trade and Assumed Names
- ----------------------------------------------
None.
68
<PAGE>
EXHIBIT IV
FORM OF COMPLIANCE CERTIFICATE
To: Bank One, NA, as Agent
This Compliance Certificate is furnished pursuant to that certain
Receivables Purchase Agreement dated as of December 21, 1999 among AILIC
Receivables Corporation (the "Seller"), American Income Life Insurance Company
------
(the "Servicer"), the Purchasers party thereto and Bank One, NA, as agent for
--------
such Purchasers (the "Agreement"). Terms used herein and not otherwise defined
---------
herein shall have the meanings assigned under the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected _____________________ of [the Performance
Guarantor][AIL][Seller].
2. I have reviewed the terms of the Agreement and I have made, or have
caused to be made under my supervision, a detailed review of the transactions
and conditions of [the Performance Guarantor][AIL][Seller] and its Subsidiaries
during the accounting period covered by the attached financial statements.
3. The examinations described in paragraph 2 did not disclose, and I have
no knowledge of, the existence of any condition or event which (i) constitutes
an Amortization Event or Potential Amortization Event, as each such term is
defined under the Agreement, during or at the end of the accounting period
covered by the attached financial statements or as of the date of this
Certificate, except as set forth in paragraph 5 below, or (ii) which has had or
is reasonably likely to have a Material Adverse Effect.
4. Schedule I attached hereto sets forth financial data and computations
evidencing the compliance with certain covenants of the Agreement, all of which
data and computations are true, complete and correct. [Schedule I attached
hereto further sets forth financial data and computations evidencing the
compliance with the covenants of, and the absence of default under, the
Torchmark Credit Agreement, all of which data and computations are true,
complete and accurate.]/1/
5. Described below are the exceptions, if any, to paragraph 3 by listing,
in detail, the nature of the condition or event, the period during which it has
existed and the action which Seller has taken, is taking, or proposes to take
with respect to each such condition or event:
__________________
/1/To be included in the Compliance Certificate to be issued by the Performance
Guarantor.
69
<PAGE>
It is understood and acknowledged that the undersigned is executing this
Certificate not in an individual capacity but solely in his or her capacity as
an officer of the Seller and is without any personal liability as to the matters
contained in this certificate.
The foregoing certifications, together with the computations set forth in
Schedule I hereto and the financial statements delivered with this Certificate
- ----------
in support hereof, are made and delivered this ____ day of ______________,
____________.
________________________________
Name:
Title:
70
<PAGE>
Signature Page to
Compliance Certificate
71
<PAGE>
SCHEDULE I TO COMPLIANCE CERTIFICATE
A. Unless otherwise defined herein, the terms used in this Compliance
Certificate have the meanings ascribed thereto in the Agreement.
This schedule relates to the month ended:___________
72
<PAGE>
EXHIBIT V
FORM OF ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT is entered into as of the ___ day of
____________, ____, by and between _____________________ ("Seller") and
------
__________________ ("Purchaser").
---------
PRELIMINARY STATEMENTS
- ----------------------
A. This Assignment Agreement is being executed and delivered in
accordance with Section 12.1(b) of that certain Receivables Purchase
Agreement dated as of December 21], 1999 by and among AILIC Receivables
Corporation, American Income Life Insurance Company, as "Servicer",
Preferred Receivables Funding Corporation, Bank One, NA, as Agent, and the
Seller and certain other Financial Institutions party thereto (as amended,
modified or restated from time to time, the "Purchase Agreement").
------------------
Capitalized terms used and not otherwise defined herein are used with the
meanings set forth or incorporated by reference in the Purchase Agreement.
B. The Seller is a Financial Institution party to the Purchase
Agreement, and the Purchaser wishes to become a Financial Institution
thereunder; and
C. The Seller is selling and assigning to the Purchaser an undivided
____________% (the "Transferred Percentage") interest in all of Seller's
----------------------
rights and obligations under the Purchase Agreement and the Transaction
Documents, including, without limitation, the Seller's Commitment and (if
applicable) the Capital of the Seller's Purchaser Interests as set forth
herein;
The parties hereto hereby agree as follows:
1. This sale, transfer and assignment effected by this Assignment
Agreement shall become effective (the "Effective Date") two (2) Business
--------------
Days (or such other date selected by the Agent in its sole discretion)
following the date on which a notice substantially in the form of Schedule
II to this Assignment Agreement ("Effective Notice") is delivered by the
----------------
Agent to PREFCO, the Seller and the Purchaser. From and after the Effective
Date, the Purchaser shall be a Financial Institution party to the Purchase
Agreement for all purposes thereof as if the Purchaser were an original
party thereto and the Purchaser agrees to be bound by all of the terms and
provisions contained therein.
2. If the Seller has no outstanding Capital under the Purchase
Agreement, on the Effective Date, Seller shall be deemed to have hereby
transferred and assigned to the Purchaser, without recourse, representation
or warranty (except as provided in paragraph 6 below), and the Purchaser
shall be deemed to have hereby irrevocably taken, received and assumed from
the Seller, the Transferred Percentage of the Seller's Commitment and all
rights and obligations associated therewith under the terms of the Purchase
Agreement, including, without limitation, the Transferred Percentage of the
Seller's future funding obligations under Section 4.1 of the Purchase
-----------
Agreement.
73
<PAGE>
3. If the Seller has any outstanding Capital under the Purchase
Agreement, at or before 12:00 noon, local time of the Seller, on the
Effective Date the Purchaser shall pay to the Seller, in immediately
available funds, an amount equal to the sum of (i) the Transferred
Percentage of the outstanding Capital of the Seller's Purchaser Interests
(such amount, being hereinafter referred to as the "Purchaser's Capital");
-------------------
(ii) all accrued but unpaid (whether or not then due) Yield attributable to
the Purchaser's Capital; and (iii) accruing but unpaid fees and other costs
and expenses payable in respect of the Purchaser's Capital for the period
commencing upon each date such unpaid amounts commence accruing, to and
including the Effective Date (the "Purchaser's Acquisition Cost");
----------------------------
whereupon, the Seller shall be deemed to have sold, transferred and assigned to
the Purchaser, without recourse, representation or warranty (except as
provided in paragraph 6 below), and the Purchaser shall be deemed to have
hereby irrevocably taken, received and assumed from the Seller, the
Transferred Percentage of the Seller's Commitment and the Capital of the
Seller's Purchaser Interests (if applicable) and all related rights and
obligations under the Purchase Agreement and the Transaction Documents,
including, without limitation, the Transferred Percentage of the Seller's
future funding obligations under Section 4.1 of the Purchase Agreement.
4. Concurrently with the execution and delivery hereof, the Seller
will provide to the Purchaser copies of all documents requested by the
Purchaser which were delivered to such Seller pursuant to the Purchase
Agreement.
5. Each of the parties to this Assignment Agreement agrees that at
any time and from time to time upon the written request of any other party,
it will execute and deliver such further documents and do such further acts
and things as such other party may reasonably request in order to effect
the purposes of this Assignment Agreement.
6. By executing and delivering this Assignment Agreement, the Seller
and the Purchaser confirm to and agree with each other, the Agent and the
Financial Institutions as follows: (a) other than the representation and
warranty that it has not created any Adverse Claim upon any interest being
transferred hereunder, the Seller makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made by any other Person in or in connection with the
Purchase Agreement or the Transaction Documents or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the
Purchaser, the Purchase Agreement or any other instrument or document
furnished pursuant thereto or the perfection, priority, condition, value or
sufficiency of any collateral; (b) the Seller makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of the Seller, any Obligor, any Seller Affiliate or the
performance or observance by the Seller, any Obligor, any Seller Affiliate
of any of their respective obligations under the Transaction Documents or
any other instrument or document furnished pursuant thereto or in
connection therewith; (c) the Purchaser confirms that it has received a
copy of the Transaction Documents, together with such other documents and
information as it has deemed appropriate to make its own credit analysis
and decision to enter into this Assignment Agreement; (d) the Purchaser
will, independently and without reliance upon the Agent, PREFCO, the Seller
or any
74
<PAGE>
other Financial Institution or Purchaser and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Purchase
Agreement and the Transaction Documents; (e) the Purchaser appoints and
authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under the Transaction Documents as are delegated to
the Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; (f) the Purchaser appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under
the Transaction Documents as are delegated to the Agent by the terms
thereof, together with such powers as are reasonably incidental thereto;
and (g) the Purchaser agrees that it will perform in accordance with their
terms all of the obligations which, by the terms of the Purchase Agreement
and the Transaction Documents, are required to be performed by it as a
Financial Institution or, when applicable, as a Purchaser.
7. Each party hereto represents and warrants to and agrees with the
Agent that it is aware of and will comply with the provisions of the
Purchase Agreement, including, without limitation, Sections 4.1, 13.1 and
14.6 thereof.
8. Schedule I hereto sets forth the revised Commitment of the Seller
and the Commitment of the Purchaser, as well as administrative information
with respect to the Purchaser.
9. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS.
10. The Purchaser hereby covenants and agrees that, prior to the date
which is one year and one day after the payment in full of all senior
indebtedness for borrowed money of PREFCO, it will not institute against,
or join any other Person in instituting against, PREFCO any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings or other
similar proceeding under the laws of the United States or any state of the
United States.
75
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed by their respective duly authorized officers as of the
date hereof.
[SELLER]
By:
Title:
[Purchaser]
By:
Title:
76
<PAGE>
SCHEDULE I TO ASSIGNMENT AGREEMENT
----------------------------------
LIST OF LENDING OFFICES, ADDRESSES
FOR NOTICES AND COMMITMENT AMOUNTS
----------------------------------
Date: _______________, ____
Transferred Percentage: ________%
- ----------------------
A-1 A-2 B-1 B-2
--- --- --- ---
Outstanding
Commitment Commitment Capital Ratable
Seller [existing] [revised] (if any) Share
- ------ ---------- --------- -------- -----
A-1 B-1 B-2
--- --- ---
Outstanding
Commitment Capital Ratable
Seller [initial] (if any) Share
- ------ ---------- -------- -----
Address for Notices
- -------------------
Attention:
Phone:
Fax:
77
<PAGE>
SCHEDULE II TO ASSIGNMENT AGREEMENT
-----------------------------------
EFFECTIVE NOTICE
TO:________________________, Seller
________________________
________________________
________________________
TO:________________________, Purchaser
________________________
________________________
________________________
The undersigned, as Agent under the Receivables Purchase Agreement
dated as of December 21, 1999 by and among AILIC Receivables Corporation,
American Income Life Insurance Company, as "Servicer", Preferred Receivables
Funding Corporation, Bank One, NA, as Agent, and the Financial Institutions
party thereto, hereby acknowledges receipt of executed counterparts of a
completed Assignment Agreement dated as of ____________, ____ between
__________________, as Seller, and __________________, as Purchaser. Terms
defined in such Assignment Agreement are used herein as therein defined.
1. Pursuant to such Assignment Agreement, you are advised that the
Effective Date will be ______________, ____.
2. PREFCO hereby consents to the Assignment Agreement as required by
Section 12.1(b) of the Purchase Agreement.
[3. Pursuant to such Assignment Agreement, the Purchaser is required
to pay $____________ to the Seller at or before 12:00 noon (local time of the
Seller) on the Effective Date in immediately available funds.]
Very truly yours,
BANK ONE, NA,
individually and as Agent
By:__________________________
Title:_______________________
78
<PAGE>
PREFERRED RECEIVABLES FUNDING
CORPORATION
By: ____________________________
Authorized Signatory
79
<PAGE>
EXHIBIT VI
CREDIT AND COLLECTION POLICY
(Attached)
80
<PAGE>
EXHIBIT VII
FORM OF CONTRACT(S)
(Attached)
81
<PAGE>
EXHIBIT VIII
FORM OF MONTHLY REPORT
(Attached)
[In addition to such other information as may be included on this
exhibit, each Monthly Report should set forth the following with respect to
the related Calculation Period (as defined in the Receivables Sale
Agreement): (i) the aggregate Outstanding Balance of Receivables created
and conveyed by AIL to Seller in purchases pursuant to the Receivables Sale
Agreement during such Calculation Period, as well as the Net Receivables
Balance included therein, (ii) the aggregate purchase price payable to AIL
in respect of such purchases, specifying the Discount Factor (as defined in
the Receivables Sale Agreement) in effect for such Calculation Period and
the aggregate Purchase Price Credits (as defined in the Receivables Sale
Agreement) deducted in calculating such aggregate purchase price, (iii) the
aggregate amount of funds received by the Servicer during such Calculation
Period which are to be applied as Reinvestments, (iv) the increase or
decrease in the amount outstanding under the Subordinated Note as of the
end of such Calculation Period after giving effect to the application of
funds toward the aggregate purchase price and the restrictions on
Subordinated Loans (as defined in the Receivables Sale Agreement) set forth
in Section 1.2(a)(ii) of the Receivables Sale Agreement, and (v) the amount
of any capital contribution made by AIL to Seller as of the end of such
Calculation Period pursuant to Section 1.2(b) of the Receivables Sale
Agreement.]
[In the event Seller elects to have any Monthly Report serve as a Purchase
Notice, the following shall be appended to such Monthly Report as the last
page thereof:
Seller gives you notice, irrevocably, pursuant to Section 1.2 of the
Receivables Purchase Agreement, that the undersigned hereby requests
an Incremental Purchase under the Receivables Purchase Agreement, and
in that connection sets forth below the information relating to such
Incremental Purchase (the "Proposed Purchase") as required by Section
1.2 of the Receivables Purchase Agreement:
(i) The Business Day of the Proposed Purchase is [insert
purchase date], which date is at least three (3) Business Days after
the date hereof and is a Settlement Date.
(ii) The requested Purchase Price in respect of the Proposed
Purchase is $__________.
(iii) The requested Discount Rate is [LIBO Rate] [Base Rate]
[Pooled Commercial Paper rate] [having a Tranche Period of
___________________].
The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the date of the Proposed
Purchase (before and after giving effect to the Proposed Purchase):
82
<PAGE>
(i) the representations and warranties of the undersigned set forth
in Section 5.1 of the Receivables Purchase Agreement are true and correct
on and as of the date of such Proposed Purchase as though made on and as of
such date;
(ii) no event has occurred and is continuing, or would result from
such Proposed Purchase, that will constitute an Amortization Event or a
Potential Amortization Event; and
(iii) neither the Liquidity Termination Date nor the Amortization
Date shall have occurred, the aggregate Capital of all Purchaser Interests
shall not exceed the Purchase Limit and the aggregate Purchaser Interests
shall not exceed 100%.
Very truly yours,
AILIC RECEIVABLES CORPORATION
By: ________________________________
Name:
Title: ]
83
<PAGE>
SCHEDULE A
COMMITMENTS OF FINANCIAL INSTITUTIONS
- ---------------------------------------- --------------------------------------
Financial Institution Commitment
--------------------- ----------
- ---------------------------------------- --------------------------------------
BANK ONE, NA $102,040,816.00
- ---------------------------------------- --------------------------------------
84
<PAGE>
SCHEDULE B
DOCUMENTS TO BE DELIVERED TO THE AGENT
ON OR PRIOR TO THE INITIAL PURCHASE
(Attached)
85
<PAGE>
::ODMA\PCDOCS\CHICAGO4\1004451\9 December 23, 1999 (2:59PM)
86
<PAGE>
EXHIBIT 20
[LOGO OF TORCHMARK CORPORATION APPEARS HERE]
March 23, 2000
To the Stockholders of
Torchmark Corporation:
Torchmark's 2000 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
27, 2000.
The accompanying notice and proxy statement discuss proposals which will be
submitted to 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 or vote over the telephone or the Internet. If you
attend the meeting, you may withdraw your proxy and vote your stock in person
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 1999.
Sincerely,
/s/ C.B. Hudson
---------------------------
C.B. Hudson
Chairman, President & Chief
Executive Officer
<PAGE>
---------------------------------
Notice of Annual Meeting of Stockholders
to be held April 27, 2000
---------------------------------
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 27, 2000 at 10:00 a.m., Central Daylight
Time. You will be asked to:
(1) Elect the nominees shown in the proxy statement as directors to
serve for their designated terms or until their successors have been duly
elected and qualified.
(2) Consider the appointment of Deloitte & Touche LLP as independent
auditors.
(3) Transact any other business that properly comes before the meeting.
These matters are more fully discussed in the accompanying proxy statement.
The close of business on Wednesday, March 1, 2000 is the date for
determining stockholders who are entitled to notice of and to vote at the
annual meeting. You are requested to mark, date, sign, and return the enclosed
form of proxy in the accompanying envelope, whether or not you expect to
attend the annual meeting in person. You may also choose to vote your shares
over the telephone or the Internet. You may revoke your proxy at any time
before it is voted at the meeting.
The annual meeting may be adjourned from time to time without further notice
other than by an announcement at the meeting or at any adjournment. Any
business described in this notice may be transacted at any adjourned meeting.
By Order of the Board of Directors
/s/ Carol A. McCoy
Carol A. McCoy
Associate Counsel & Corporate
Secretary
Birmingham, Alabama
March 23, 2000
<PAGE>
PROXY STATEMENT
Solicitation of Proxies
The Board of Directors of Torchmark Corporation solicits your proxy for use
at the 2000 annual meeting of stockholders and at any adjournment of the
meeting. The annual meeting will 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 27, 2000. C.B. Hudson and Larry M.
Hutchison are named as proxies on the proxy/direction card. They have been
designated as directors' proxies by the Board of Directors.
If the enclosed proxy/direction card is returned, properly executed, and in
time for the meeting, your shares will be voted at the meeting. All proxies
will be voted in accordance with the instructions set forth on the
proxy/direction card. If proxies are executed and returned which do not
specify a vote on the proposals considered, those proxies will be voted FOR
such proposals. You have the right to revoke your proxy by giving written
notice of revocation addressed to the Secretary of the Company at the address
shown above at any time before the proxy is voted.
The card is considered to be voting instructions furnished to the respective
trustees each of the Torchmark Corporation Savings and Investment Plan, the
Waddell & Reed Financial, Inc. 401-K and 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's accounts under these plans. If the 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 any plan in which shares are allocated to the participant's
individual account will vote those shares in the same proportion as the total
shares in that 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. Abstentions have the same legal effect as a vote against a
matter presented at the meeting. Any shares for 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 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 1, 2000 is
entitled to one vote for each share of common stock held on that date upon
each proposal to be voted on by the stockholders at the meeting. At the close
of business on March 1, 2000, there were 129,858,697 shares of common capital
stock of the Company outstanding (not including 152,385,585 shares held by the
Company and its subsidiaries which are non-voting while so held). There is no
cumulative voting of the common stock.
Principal Stockholders
The table below 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,
1999.
<TABLE>
<CAPTION>
Name and Address Number of Shares(1) Percent of Class
---------------- ------------------- ----------------
<S> <C> <C>
AMVESCAP PLC 7,496,502 5.70%
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 Asset Management Limited), 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.
1
<PAGE>
PROPOSAL NUMBER 1
Election of Directors
The Company's By-laws provide that there will be not less than seven nor
more than fifteen directors with the exact number to be fixed by the Board of
Directors. In October, 1999, the number of directors was increased to ten
persons and Lamar C. Smith was elected to the newly created directorship.
The Board of Directors proposes the election of David L. Boren, Louis T.
Hagopian and Harold T. McCormick as directors, to hold office for a term of
three years, expiring at the close of the annual meeting of stockholders to be
held in 2003 or until their successors are elected and qualified and of R.K.
Richey as a director, to hold office for a term of one year, expiring at the
close of the annual stockholders meeting in 2001 or until his successor is
elected and qualified. Messrs. Boren, Hagopian, McCormick and Richey's current
terms expire in 2000. The term of office of the other six directors continues
until the close of the annual meeting of stockholders in the year shown in the
biographical information below.
Non-officer directors retire from the Board of Directors at the annual
meeting of stockholders which immediately follows their 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 these directors may be elected annually to additional
one year terms not to continue beyond the annual meeting of stockholders
following the director's 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, the directors'
proxies will vote for the election of any other person recommended by the
Board of Directors 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 59) has been a director of the Company since April,
1996. He is a director of Waddell & Reed Financial, Inc., Phillips Petroleum
Corporation, AMR Corporation and Texas Instruments, Inc. Principal occupation:
President of The University of Oklahoma, Norman, Oklahoma since November,
1994.
Joseph M. Farley (age 72) has been a director of the Company since 1980. His
term expires in 2001. He is a director of Waddell & Reed Financial, Inc.
Principal occupation: Of Counsel at Balch & Bingham LLP, Attorneys and
Counselors, Birmingham, Alabama since November, 1992.
Louis T. Hagopian (age 74) has been a director of the Company since 1988. He
is a director of Waddell & Reed Financial, Inc. 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 54) has been a director since 1986. His term expires in
2001. Principal occupation: Chairman, President and Chief Executive Officer of
the Company since March, 1998. (Chairman of Insurance Operations of the
Company, January, 1993-March, 1998; Chairman of Liberty, United American and
Globe October, 1991-September, 1999 and Chief Executive Officer of Liberty
December, 1989-September, 1999, of United American November, 1982-September,
1999 and of Globe February, 1986-September, 1999).
2
<PAGE>
Joseph L. Lanier, Jr. (age 68) has been a director of the Company since
1980. His term expires in 2001. He is a director of Waddell & Reed Financial,
Inc., 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.
Mark S. McAndrew (age 46) has been a director of the Company since July,
1998. His term expires in 2002. Principal occupation: Chairman and Chief
Executive Officer of United American, Globe and American Income since
September, 1999; President of United American and Globe since October, 1991
and of American Income since September, 1999; Executive Vice President of the
Company since September, 1999. (Vice President of the Company, April-
September, 1999).
Harold T. McCormick (age 71) has been a director since April, 1992. He is a
director of Waddell & Reed Financial, Inc. 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 65) has been a director of the Company since April,
1993. His term expires in 2002. He is a director of Waddell & Reed Financial,
Inc. 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 73) has been a director of the Company since 1980. He is a
director of Full House Resorts, Inc. and Waddell & Reed Financial, Inc. and a
Director Emeritus of the United Group of Mutual Funds, Waddell & Reed Funds,
Inc. and Target/United Funds, Inc. Principal occupation: Chairman of the
Executive Committee of the Board of Directors of the Company since March,
1998. (Chairman of the Company, August, 1986-March, 1998 and Chief Executive
Officer of the Company, December, 1984-March, 1998).
Lamar C. Smith (age 52) has been a director of the Company since October,
1999. His term expires in 2002. He is a director of Millers American Group,
Inc. Principal Occupation: Chairman since 1992 and Chief Executive Officer
since 1990 of United Services Planning Association, Inc., Independent Research
Agency for Life Insurance, Inc. and First Command Bank.
- --------
(1) Liberty, Globe, United American and American Income as used in this proxy
statement refer to Liberty National Life Insurance Company, Globe Life And
Accident Insurance Company, United American Insurance Company and American
Income Life Insurance Company, subsidiaries of the Company.
3
<PAGE>
PROPOSAL NUMBER 2
Approval of Auditors
A proposal to approve the appointment of the firm of Deloitte & Touche 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, 2000 will be presented to the stockholders at the annual meeting. Deloitte
& Touche served as the principal independent accountants of Torchmark,
auditing the financial statements of the Company and its subsidiaries for the
fiscal year ended December 31, 1999. The Audit Committee of the Board
recommends the appointment of Deloitte & Touche as the Company's principal
accountants for 2000.
KPMG Peat Marwick LLP served as the principal independent accountants of
Torchmark, auditing the financial statements of the Company and its
subsidiaries from 1981 through the fiscal year ended December 31, 1998. In
1998, senior management of the Company conducted extensive interviews with
several independent accounting firms and held discussions regarding the
selection of principal independent accountants with the members of the Audit
Committee of the Board. After deliberation, senior management recommended to
the Audit Committee that Deloitte & Touche be engaged as the Company's
principal accountants as of January 1, 1999, effective upon the issuance of
KPMG's reports on the consolidated financial statements of Torchmark and its
subsidiaries and the separately issued financial statements of Torchmark's
subsidiaries, unit investment trusts and benefit plans as of and for the year
ending December 31, 1998. (KPMG completed its engagement as Torchmark's
independent auditor on October 14, 1999, the date upon which the last of the
audit reports as of and for the year ended December 31, 1998 for the entities
noted above were issued.) Upon review, on October 21, 1998, the Audit
Committee approved the engagement of Deloitte & Touche.
The reports of KPMG on the financial statements of Torchmark for the fiscal
years ending December 31, 1997 and 1998 did not contain any adverse opinion or
disclaimer of opinion. KPMG's reports were not qualified or modified as to
uncertainty, audit scope or accounting principles except as follows: KPMG's
Auditor's Report on the Consolidated Financial Statements of Torchmark as of
and for the year ended December 31, 1997 refers to a change in accounting
principles to adopt the provisions of Statement of Financial Accounting
Standards Board's Statement of Financial Accounting Standard 121 "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed Of". During such years and during the period between December 31,
1998 and the date of completion of KPMG's engagement, there was no
disagreement between KPMG and Torchmark on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of KPMG, would have
caused that firm to make reference to the subject matter of such disagreement
in connection with its report on the Company's financial statements.
A representative of Deloitte & Touche 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 Deloitte & Touche 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 are not aware of any 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, the persons named in the proxy, or in the event no
person is named, C.B. Hudson and Larry M. Hutchison will vote in accordance
with their judgment on these matters.
4
<PAGE>
INFORMATION REGARDING DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
Executive Officers
The following table shows certain information concerning each person deemed
to be an executive officer of the Company, except those persons also serving
as directors. Each executive officer is elected by the Board of Directors of
the Company or its subsidiaries annually and serves at the pleasure of that
board. There are no arrangements or understandings between any executive
officer and any other person pursuant to which the officer was selected.
<TABLE>
<CAPTION>
Principal Occupation
and Business Experience
Name Age for the Past Five Years(1)
---- --- --------------------------
<C> <C> <S>
Tony G. Brill............... 57 Executive Vice President and Chief
Administrative Officer of Company since
September, 1999. (Vice President of Company,
January, 1997-September, 1999; Managing
Partner, KPMG Peat Marwick LLP, Birmingham,
Alabama 1969-December, 1996).
Gary L. Coleman............. 47 Executive Vice President and Chief Financial
Officer of Company since September, 1999.
(Vice President and Chief Accounting Officer
of Company, July, 1994-September, 1999).
Larry M. Hutchison.......... 46 Executive Vice President and General Counsel
of Company since September, 1999; Vice
President, Secretary and General Counsel of
United American since May, 1994. (Vice
President and General Counsel of Company,
April, 1997-September, 1999).
Anthony L. McWhorter........ 50 Chairman and Chief Executive Officer of
Liberty and UILIC since September, 1999;
President of Liberty since December, 1994 and
of UILIC since September, 1998; Executive
Vice President of Company since September,
1999.
Rosemary J. Montgomery...... 50 Executive Vice President and Chief Actuary of
Company, United American and Globe since
September, 1999. (Senior Vice President and
Chief Actuary of United American, October,
1991-September, 1999 and of Globe, May, 1992-
September, 1999).
</TABLE>
5
<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, 1999.
<TABLE>
<CAPTION>
Company Common Stock
or Options Beneficially
Owned as of
December 31, 1999(1)
-------------------------
Name Directly(2) Indirectly(3)
---- ----------- -------------
<S> <C> <C>
David L. Boren....................................... 15,980 0
Norman, OK
Joseph M. Farley..................................... 135,810 4,800
Birmingham, AL
Louis T. Hagopian.................................... 137,218 0
Darien, CT
C. B. Hudson......................................... 2,018,328 40,755
Plano, TX
Joseph L. Lanier, Jr. ............................... 134,064 18,912
Lanett, AL
Mark S. McAndrew..................................... 172,380 6,053
McKinney, TX
Harold T. McCormick ................................. 42,253 7,200
Panama City, FL
George J. Records.................................... 48,942 0
Oklahoma City, OK
R. K. Richey......................................... 439,601 1,862,856
Horseshoe Bay, TX
Lamar C. Smith....................................... 0 0
Fort Worth, TX
Tony G. Brill........................................ 115,972 1,383
Frisco, TX
Gary L. Coleman...................................... 181,059 12,421
Richardson, TX
Larry M. Hutchinson.................................. 69,597 7,860
Duncanville, TX
Anthony L. McWhorter................................. 114,576 10,230
Birmingham, AL
Rosemary J. Montgomery............................... 151,950 1,531
Frisco, TX
All Directors, Nominees and Executive Officers as a
group:(4)............................................ 3,777,730 1,974,001
</TABLE>
- --------
(1) No directors, director nominees or executive officers other than R. K.
Richey (1.7%) and C.B. Hudson (1.5%) beneficially own 1% or more of the
common stock of the Company.
(2) Includes: for David L. Boren, 14,000 shares; for Joseph Farley, 66,400
shares; for Louis Hagopian, 85,325 shares; for Joseph Lanier, 80,195
shares; for Mark McAndrew, 76,300 shares; for Harold McCormick, 40,215
shares; for George Records, 35,784 shares; for R. K. Richey, 13,099
shares; for C. B. Hudson, 1,047,948 shares; for Tony Brill, 59,488 shares;
for Anthony McWhorter, 57,778 shares; for Gary Coleman, 96,218 shares; for
Larry Hutchison, 47,979 shares; for Rosemary Montgomery, 85,139 shares and
for all directors, executive officers and nominees as a group, 1,805,868
shares, that are subject to presently exercisable Company stock options.
Lamar Smith holds options on 11,594 shares. None of such options are
presently exercisable prior to July 3, 2000.
(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 or limited partnership. Indirect
beneficial ownership also includes approximately
6
<PAGE>
12,755 shares, 6,053 shares, 786 shares, 8,466 shares, 12,421 shares,
7,860 shares and 531 shares calculated based upon conversion of stock unit
balances held in the accounts of Messrs. Hudson, McAndrew, Brill,
McWhorter, Coleman and Hutchison and Ms. Montgomery, respectively, in the
Company Savings and Investment Plan to shares. Additionally, indirect
beneficial ownership includes for Mr. Richey 313,800 shares subject to
options held by Richey Capital Partners, Ltd., a family limited
partnership. Indirect ownership for Mr. McWhorter also includes
approximately 1,764 shares calculated based upon conversion of stock unit
balance in the Profit Sharing & Retirement Plan of Liberty (PS&R Plan) to
shares.
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 4.3% of the common stock of the Company.
During 1999, the Board of Directors met five times. In 1999, 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-Messrs. Farley,
Hagopian, and McCormick; Compensation -- Messrs. Farley, Lanier and Hagopian;
Executive -- Messrs. Boren, Farley, Hagopian, Hudson, Lanier, McCormick,
Records and Richey; Finance -- Messrs. Farley, Lanier, McCormick and Records
and Nominating -- 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 1999.
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 1999.
The executive committee exercises all the powers of the Board of Directors
in the interim between Board meetings. The executive committee did not meet in
1999.
The finance committee serves as the pricing committee in connection with
capital financing by the Company. The finance committee did not meet in 1999.
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 1999.
7
<PAGE>
COMPENSATION AND OTHER TRANSACTIONS WITH
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------ -----------------------------
Awards
-----------------------------
(g)
(e) (f) Securities (i)
(a) (d) Other Annual Restricted Stock underlying All other
Name and (b) (c) Bonus Compensation Award(s) Options/SARs Compensation
Principal Position Year Salary ($) ($)(1) ($)(2) ($) (#)(4) ($)(5)
------------------ ---- ---------- ------- ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
C.B. Hudson 1999 800,000 0 0 151,734 5,910
Chairman, President 1998 800,000 0 0 259,740 5,772
and CEO 1997 800,000 400,000 0 557,181 5,806
Mark S. McAndrew 1999 575,000 150,000 0 153,198 4,800
Chairman, President 1998 525,000 150,000 1,687,500(3) 62,500 4,800
and CEO of United 1997 475,000 120,000 0 66,782 4,800
American, Globe and
American Income
Tony G. Brill 1999 500,016 100,000 0 115,813 4,800
Executive Vice President 1998 450,000 0 1,687,500(3) 63,258 4,800
and Chief 1997 400,000 85,000 0 116,825 0
Administrative Officer
Anthony L. McWhorter 1999 350,120 120,000 0 108,374 4,800
Chairman, President 1998 300,722 27,000 1,054,688(3) 47,505 4,800
and Chief Executive 1997 245,024 100,000 0 42,758 4,800
Officer of Liberty and
UILIC
Gary L. Coleman 1999 300,000 30,000 0 89,303 4,800
Executive Vice 1998 275,000 30,000 0 30,379 4,800
President and Chief 1997 250,000 60,000 0 91,007 4,800
Financial Officer
Charles B. Cooper 1999 515,000 0 0 0 265,595
President of 1998 515,000 50,000 527,344(3) 20,000 9,600
American Income until 1997 475,000 100,000 0 11,326 9,600
September 1999
Bernard Rapoport 1999 427,500 0 13,305 0 101,518 118,088
Chairman and CEO 1998 570,000 0 11,800 0 20,000 9.600
of American Income 1997 525,000 100,000 10,351 0 44,178 9,600
until September 1999
</TABLE>
- --------
(1) Messrs. Hudson and Coleman elected to defer $400,000 and $50,000,
respectively, of their 1999 bonuses and received therefor Company stock
options under the provisions of the Torchmark Corporation 1998 Stock
Incentive Plan (1998 Incentive Plan). Messrs. Hudson, Brill, McWhorter and
Coleman elected to defer $400,000, $100,000, $93,000 and $50,000,
respectively, of their 1998 bonuses pursuant to the executive deferred
compensation stock option provisions of the 1998 Incentive Plan.
(2) Includes for Mr. Rapoport--$13,305, $11,800 and $10,351 required to be
paid to him from the American Income Life Insurance Company Exempt
Employees 401K Profit Sharing Plan (American Income Profit Sharing Plan)
in 1999, 1998, and 1997, respectively, because of his continued active
employment and participation in such plan after age 70.
(3) At year end 1999, Messrs. McAndrew, McWhorter, Brill and Cooper held
33,600, 21,000, 33,600 and 1,875 restricted shares, respectively, valued
at $976,500, $610,313, $976,500 and $54,492 (based on a year-end closing
price of $29.0625 per share). Restricted stock (40,000 shares) awarded on
January 1, 1998 at $42.1875 per share to each of Messrs. McAndrew and
Brill vests as follows: 1-1-99 6,400 shares; 1-1-00 6,000 shares; 1-1-01
5,600 shares; 1-1-02 5,200 shares; 1-1-03 4,800 shares; 1-1-04 4,400
shares; 1-1-05 4,000 shares; and 1-1-06 3,600 shares. Restricted stock
(25,000 shares) awarded on January 1, 1998 at $42.1875 per share to
Mr. McWhorter vests as follows: 1-1-99 4,000 shares; 1-1-00 3,750 shares;
1-1-01
8
<PAGE>
3,500 shares; 1-1-02 3,250 shares; 1-1-03 3,000 shares; 1-1-04 2,750
shares; 1-1-05 2,500 shares. Restricted stock (12,500 shares) awarded on
January 1, 1998 at $42.1875 per share to Mr. Cooper was scheduled to vest
as follows: 1-1-99 2,000 shares; 1-1-00 1,875 shares; 1-1-01 1,750 shares;
1-1-02 1,625 shares; 1-1-03 1,500 shares; 1-1-04 1,375 shares; 1-1-05
1,250 shares; and 1-1-06 1,125 shares. Such shares scheduled to vest on 1-
1-01 and thereafter were forfeited to the Company by Mr. Cooper upon his
retirement. Cash dividends on all restricted stock are paid directly to
the stockholder at the same rate as on unrestricted stock. Messrs.
McAndrew, McWhorter, Brill and Cooper agreed as a condition of their
restricted stock awards to waive receipt of any shares of Waddell & Reed
Financial, Inc. (WDR) stock distributed by Torchmark to its common
shareholders in the WDR spin-off on November 6, 1998.
(4) In November 1999, Messrs. McAndrew, Brill, McWhorter, Coleman and Rapoport
elected to participate in a program under the TMK Incentive Plan whereby
they exercised existing Torchmark stock options and received restoration
options for 53,198, 40,813, 33,374, 22,836 and 91,518 Torchmark shares,
respectively. On December 21, 1999, Messrs. Hudson, McAndrew, Brill,
McWhorter, Coleman and Rapoport received stock option grants pursuant to
the TMK Incentive Plan on 100,000, 100,000, 75,000, 75,000, 60,000 and
10,000 Torchmark shares, respectively. Also, on that same date, Messrs.
Hudson and Coleman elected to receive 1999 bonus amounts of $400,000 and
$50,000, respectively, in the form of Torchmark stock options on 51,734
shares and 6,467 shares, respectively.
In December 1998, Messrs. Hudson, Rapoport, McAndrew, Cooper, McWhorter,
Coleman and Brill received stock option grants of 100,000, 20,000, 62,500,
20,000, 37,500, 25,000 and 52,500 shares, respectively, pursuant to the
1998 Incentive Plan. Also, in December 1998, Messrs. Hudson, Brill,
McWhorter and Coleman elected to receive 1998 bonus amounts of $400,000,
$93,000, $50,000 and $100,000 in the form of stock options on 43,031
shares, 10,005 shares, 5,379 shares and 10,758 shares pursuant to the
terms of the 1998 Incentive Plan. On November 6, 1998, pursuant to the
terms of each existing option plan, adjustments were made to all
outstanding stock options granted prior to that date to reflect the WDR
spin-off based upon each optionee's election to receive either Adjusted
Torchmark Options or a combination of Adjusted Torchmark Options and WDR
Conversion Options granted in WDR Class A common stock. Accordingly, all
shares reflected as underlying options granted prior to November 6, 1998
have been so adjusted.
On January 2, 1997, Mr Brill was granted options under the TMK Incentive
Plan on 116,825 Torchmark shares. On January 31, 1997, Mr. Hudson elected
to convert all his 1996 bonus amounts plus accrued interest of $1,151 held
in the TMK Executive Deferral Plan, subject to subsequently obtained
shareholder approval, to stock options on 89,881 Torchmark shares. In
1997, Messrs. Hudson, Rapoport, McAndrew, Cooper, McWhorter and Coleman
elected to participate in a program under the TMK Incentive Plan whereby
they exercised existing Torchmark stock options and received restoration
options for 467,183, 11,500, 51,300, 8,700, 42,758 and 76,988 Torchmark
shares, respectively. Messrs. Rapoport, McAndrew and Cooper received
options on 3,471, 15,482 and 2,626 WDR Class A shares as a November 6,
1998 spin-off adjustment to their Torchmark restoration options. Messrs.
Coleman and Rapoport also were awarded options pursuant to the TMK
Incentive Plan on 14,019 and 29,207 additional Torchmark shares in 1997.
Mr. Hudson was also granted options under the TMK Incentive Plan on 117
additional Torchmark shares in 1997 and on 116,709 Torchmark shares on
January 2, 1998.
(5) Includes Company contributions to Torchmark Corporation Savings and
Investment Plan, a funded, qualified defined contribution plan, for each
of Messrs. Hudson, McAndrew, Brill, McWhorter and Coleman of $4,800 in
1999, 1998 and 1997; interest only on prior contributions to the Torchmark
Corporation Supplemental Savings and Investment Plan, an unfunded, non-
qualified defined contribution plan, for Mr. Hudson of $1,110.31, $972.11,
and $1,006.00, respectively. Includes for Messrs. Rapoport and Cooper,
employer company contributions to the American Income Profit Sharing Plan,
a funded, qualified defined contribution plan, of $9,600.00 in 1999, 1998
and 1997. Includes for Mr. Cooper, $167,805 as payment for accrued but
unused vacation at the time of his retirement. Includes for Messrs. Cooper
and Rapoport, to close their American Income Profit Sharing Plan accounts,
$88,190 and $108,488 paid upon their respective retirements.
9
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------
Potential realizable
value at assumed annual rates
of stock price appreciation
Individual Grants for option term
--------------------------------------------- -------------------------------
% of
Number of total options Exercise
Securities granted to or
underlying employees base
options in price Expiration
Name granted(#) fiscal year ($/share) Date 5% ($) 10% ($)
(a)(1) (b)(1) (c)(2) (d) (e) 0% ($) (f) (g)
------ ---------- ------------- --------- ---------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
C.B. Hudson 51,734 3.1 27.8125 12-21-10 0 1,022,073 2,666,361
100,000 6.0 27.8125 12-23-09 0 1,749,114 4,432,595
Mark S. McAndrew 53,198 3.2 34.5000 11-17-09 0 1,154,230 2,925,044
100,000 6.0 27.8125 12-23-09 0 1,749,114 4,432,595
Tony G. Brill 40,813 2.4 34.5000 11-17-09 0 885,515 2,244,066
75,000 4.5 27.8125 12-23-09 0 1,311,836 3,324,446
Anthony L. McWhorter 33,374 2.0 34.5000 11-17-09 0 724,112 1,835,039
75,000 4.5 27.8125 12-23-09 0 1,311,836 3,324,446
Gary L. Coleman 22,836 1.4 34.5000 11-17-09 0 495,470 1,255,617
60,000 3.6 27.8128 12-23-09 0 1,049,469 2,659,557
6,467 0.4 27.8125 12-21-10 0 127,764 333,308
Bernard Rapoport 91,518 5.5 34.5000 11-17-09 0 1,985,655 5,032,035
10,000 0.6 27.8125 12-23-09 0 174,911 443,259
</TABLE>
- --------
(1) Charles B. Cooper retired September 30, 1999 and was not awarded any stock
options in 1999.
(2) Options expiring on 11-17-09 and 12-23-09 are non-qualified stock options
granted in Torchmark common stock pursuant to the 1998 Incentive Plan with
a ten year and two day term at an exercise price equal to the closing
price of the Company's common stock on the grant date. Options expiring on
12-23-09 are not exercisable during the first two years after the grant
date and vest 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. Options
expiring on 11-17-09 are first exercisable six months from the grant date
by persons subject to the SEC's Section 16 reporting requirements and are
exercisable at a grant by persons not subject to Section 16 reporting
requirements.
Options expiring on 12-21-10 are non-qualified stock options granted in
Torchmark stock with an eleven year term, an exercise price equal to the
closing price of the Company's common stock on the grant date and are
fully vested upon issuance, but only first exercisable as to 1/10 per year
commencing on the first anniversary of the grant date.
10
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
(d) (e)
(b) (c) Number of Securities Value of unexercised
(a) Shares acquired Value underlying unexercised in-the-money options
Name on exercise (#)(1) Realized ($) options at FY-end (#) at FY-end ($)
----- ------------------ ------------ ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C.B. Hudson............. 0 0 980,605 479,132 $4,902,568 $ 686,802
Mark S. McAndrew........ 83,000 1,285,221 76,300 215,698 $ 193,893 $ 125,000
Tony G. Brill........... 58,413 758,985 30,282 207,201 $ 220,678 $ 314,428
Anthony L. McWhorter.... 51,403 818,402 57,778 154,878 $ 108,927 $ 93,750
Gary L. Coleman......... 35,048 526,644 96,218 126,153 $ 90,768 $ 83,084
Charles B. Cooper....... 0 0 123,700 0 $1,101,970 $ 0
Bernard Rapoport........ 140,000 2,090,787 152,225 10,000 $ 0 $ 12,500
</TABLE>
- --------
(1) Of the shares shown as acquired on exercise, Messrs. McAndrew, Brill,
McWhorter, Coleman and Rapoport retained 26,280, 12,969, 13,598, 8,999 and
35,725 shares, respectively, after cashless option exercises.
Pension Plans
Torchmark Corporation Pension Plan; Liberty National Life Insurance Company
Pension Plan for Non-Commissioned Employees. 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 TMK 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 at age 65 under the LNL 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 2% for each of the participant's first 30
years of credited service plus 1% for each year of credited service in excess
of 30 years (up to a maximum of 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 both pension plans 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). Benefits under both pension plans vest 100% at five years. Upon the
participant's retirement, benefits under the plan are payable as an annuity or
in a lump sum. In 1999, covered compensation was $160,000 for Messrs. Hudson,
McAndrew, Brill and Coleman under the TMK Pension Plan and for Mr. McWhorter
under the LNL Pension Plan.
Vested benefits under the non-qualified Torchmark Supplemental Retirement
Plan, in which Messrs. Hudson, McAndrew, McWhorter and Coleman have
participated, were frozen as of December 31, 1994 and no additional benefits
accrue after that date pursuant to the supplementary retirement plan. Messrs.
Hudson, McAndrew, McWhorter and Coleman participate in the Torchmark
Supplementary Pension Plan. Mr. Brill does not participate in any
supplementary pension plan.
Messrs. Hudson, McAndrew, Brill and Coleman have 25 years, 20 years, three
years and 18 years of credited service under the TMK Pension Plan,
respectively. Mr. McWhorter has 25 years of credited service under the LNL
Pension Plan. Messrs. Rapoport and Cooper were not covered by any pension plan
prior to their retirements.
The following tables show the estimated annual benefits payable under the
TMK Pension Plan or LNL Pension Plan along with the TMK Supplemental
Retirement Plan (which was frozen in 1994) upon retirement of participants
with varying final average earnings and years of service. Primarily because of
the termination of the Supplemental Retirement Plan, the benefits shown below
as payable pursuant to the TMK Pension or LNL Pension Plans and the TMK
Supplemental Retirement Plan 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.
11
<PAGE>
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
1999 to $130,000 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,
Messrs. Hudson, McAndrew and Coleman have five years less of credited
service under the Supplemental Retirement Plan than under the TMK Pension
Plan.
LNL Pension and TMK Supplemental Retirement Plans*
<TABLE>
<CAPTION>
Final Years of Credited Service
Average ---------------------------------------------------------------------------
Earnings 15 20 25 30 35
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000 30,000 40,000 50,000 60,000 65,000
200,000 60,000 80,000 100,000 120,000 130,000
300,000 90,000 120,000 150,000 180,000 195,000
400,000 120,000 160,000 200,000 240,000 260,000
500,000 150,000 200,000 250,000 300,000 325,000
</TABLE>
- --------
* Benefits paid under a qualified defined benefit plan are limited by law in
1999 to $130,000 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, Mr.
McWhorter has five years less of credited service under the Supplemental
Retirement Plan than under the LNL Pension Plan.
Payments to Directors
Directors of the Company are currently compensated on the following basis:
(1) Directors who are not officers or employees of the Company or a
subsidiary of the Company (Outside Directors) receive a fee of $1,000 for
each attended Board meeting, a fee of $500 for each attended Board
committee meeting, and an annual retainer of $40,000, payable each January
for the entire year. They do not receive fees for the execution of written
consents in lieu of Board meetings and Board committee meetings. They
receive an allowance for their travel and lodging expenses if they do not
live in the area where the meeting is held.
Each Outside Director 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 (for amounts
earned prior to 1999) and pursuant to the deferred compensation stock
option provisions of the 1998 Incentive Plan (for amounts earned in 1999
and in subsequent years). They may subsequently elect to convert such
balances to stock options with either fair market value or discounted
exercise prices. In December 1998, Messrs. Hagopian, Lanier, McCormick, and
Records chose to make such deferrals of 1999 compensation, which were
converted into options on 5,044, 4,938, 4,885 and 4,832 shares,
respectively, in 1999.
12
<PAGE>
(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.
(3) Compensation paid to the director serving as Chairman of the
Executive Committee is determined annually by the Compensation Committee in
their discretion.
Each person who served as a director on or prior to February 29, 2000 is
eligible to receive upon retirement from the Board 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. Directors who retired prior to the termination of this
retirement benefit program effective February 29, 2000 have been and will
continue to receive their retirement benefit payments in cash. Directors with
accrued but unpaid retirement benefits under this program on the date of
termination will be offered the opportunity to convert the present value of
such retirement benefits on that date to options in Company common stock.
Other Transactions
Robert Richey, Vice President of a Company subsidiary and son of R.K.
Richey, received compensation and fringe benefits from that Company subsidiary
in 1999 of $133,261.
In 1999, the Company paid MidFirst Bank $76,922 in fees as the servicing
agent for portions of the Company subsidiaries' commercial real estate
portfolios. George J. Records is an officer, director and 45.57% beneficial
owner of Midland Financial Co., the parent corporation of MidFirst Bank.
Lamar C. Smith is an officer, director and 15% owner of Independent Research
Agency for Life Insurance, Inc. (IRA), a life insurance general agency which
sells certain insurance products offered by Torchmark subsidiaries pursuant to
agency agreements. In 1999, that company, IRA, received commission payments of
$39,208,000 for sales of life insurance on behalf of Torchmark subsidiaries,
which comprised approximately 28% of IRA's 1999 revenues.
R.K. Richey is a 33 1/3% owner of Elgin Development Company, LLC (Elgin
Development). On October 1, 1999, Elgin Development and other investors
purchased certain investment real estate from Torchmark and its subsidiaries
for $ 97,400,000. Mr. Richey's financial interest in the purchase by the Elgin
Development group was $1.5 million.
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, 1999, 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 R.K. Richey amended his 1998 Form 5 to disclose an inadvertently
omitted gift of shares to a family member; Louis T. Hagopian filed a late Form
4 reporting a cashless option exercise transaction; Anthony L. McWhorter filed
a late Form 4 reporting a cashless option exercise transaction and one
additional sale; and Rosemary J. Montgomery amended her 1999 Form 5 to report
a change from direct to indirect holdings to reflect a gift of stock to her
spouse.
13
<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 Compensation 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 1998 Stock Incentive Plan and to determine senior executives
eligible to participate in the executive deferred compensation stock option
program under the 1998 Incentive Plan.
In 1993, the Compensation 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 Compensation Committee utilized an unaffiliated executive
compensation consultant from KPMG Peat Marwick LLP to review certain of its
executive compensation policies and practices. The Compensation Committee met
on several occasions in 1999 with the Chairman to discuss the salaries and
bonuses of the five most highly compensated executives, including the
Chairman. Also, the Compensation Committee received written materials
discussing compensation of persons reporting to the five most highly
compensated executives, including the Chairman.
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 also takes into consideration competitive remuneration practices in
the insurance and financial services sectors. Torchmark's executive
compensation 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 a number of factors, including but not limited
to, growth in earnings per share, return on equity and pre-tax operating
income for holding company executives and on insurance operating income,
underwriting income and premium growth for the executives of the Company's
insurance subsidiaries.
To the extent readily determinable and as one of the factors in its
consideration of compensation matters, the Compensation 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 Compensation Committee's control also affect
the deductibility of compensation. For these and other reasons, the
Compensation Committee will not necessarily and in all circumstances limit
executive compensation to that deductible under Section 162(m) of the Internal
Revenue Code. The Compensation 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 vary by operating company based upon that
particular company's current position. Annually, the Company's Chairman,
President and Chief Executive Officer calculates a proposed pool to fund
current year bonuses and subsequent year salaries for all executives whose
combined cash compensation exceeds $150,000 per year. The proposed
salary/bonus pool is determined based upon a formula within a range of
approximately 5% that takes into account prior year salaries and bonuses paid,
estimated and adjusted earnings per share and estimated return on equity,
adjusted for certain minimum tax-effected earnings per share and minimum
return on equity. The amount of the proposed pool is submitted to the
Compensation Committee for its review and approval. The Compensation
Committee, in consultation with the Company's Chairman, President and Chief
Executive Officer, then reviews each subsidiary's performance relative to the
goals and fixes salaries and bonuses for that operating subsidiary's
executives. The degree to which
14
<PAGE>
these executives have met their particular subsidiary's goals in turn
determines the amount of the bonus, if any, and whether senior executive
officers of the Company receive salary increases. Such executives do not
receive any cost of living salary adjustments.
Stock Option Program
The Company began awarding stock options to executives and key employees in
1984. The option plan under which options in Company common stock were awarded
in 1999 was adopted in April 1998. It has as its stated purpose attracting and
retaining employees who contribute to the Company's 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 Compensation Committee, as
administrator of the 1998 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 1999, for the five
most highly compensated executive officers (excluding Messrs. Cooper and
Rapoport), the options granted were in proportion to current compensation
adjusted by a subjective factor ranging from .083% to .160%.
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 be
eligible from year to year for 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 generally 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's 1998 Incentive Plan, adopted in April, 1998, contains
provisions permitting designated executives to receive deferred compensation
stock options. 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%. The Compensation Committee
did not designate any Company executives to participate in this program in
1999. However, Messrs. Hudson and Coleman elected to receive all or a portion
of their respective 1999 bonuses in the form of stock options under the
regular provisions of the 1998 Incentive Plan.
Compensation of Chief Executive Officer
C. B. Hudson joined the Company subsidiary Globe in 1974 as its Chief
Actuary and has served as a senior executive officer and director of the
Company's principal insurance subsidiaries since that time. During the period
1982 to 1991, he was elected as Chairman and Chief Executive Officer of United
American, Globe and Liberty, all principal insurance subsidiaries of the
Company. Mr. Hudson was elected to the Torchmark Board of Directors in 1986
and was named Chairman of Insurance Operations of the Company in January 1993.
He assumed the responsibilities of Chairman, President and Chief Executive
Officer of the Company on March 10, 1998. In the three-year period 1997-1999,
which is covered by the Summary Compensation Table on page 8, Torchmark's
diluted earnings per share (excluding a non-recurring charge in the fourth
quarter of 1999) grew from $1.67 per share to $2.55 per share. Return on
equity increased to 16.2% in 1999 from 15.1% in 1998, after declining from
18.2% in 1997 as a result of Torchmark's receipt of the proceeds of the
initial public offering of
15
<PAGE>
its former asset management subsidiary. Torchmark repurchased 10.9 million
shares in the 1997-1999 period, 7.8% of the outstanding shares at the
beginning of that period.
The Compensation Committee gave consideration to the factors discussed on
page 14 in the compensation principles section as well as to Mr. Hudson's
ability and determination and his vision and leadership in continuing to
enhance the long term value of the Company. Mr. Hudson was awarded a 1999
discretionary bonus of $400,000 from the pool by the Compensation Committee,
all of which he chose to receive in the form of Company stock options.
Mr. Hudson's base salary and any stock options awarded to him are not
directly tied to any one or a group of specific measures of corporate
performance. His base salary is determined by the Compensation Committee
considering his tenure of service with the Company and its subsidiaries and
affiliates, his current job responsibilities, the progression of
responsibilities and positions he has assumed in the Company over the course
of his career and a comparison of salaries paid at peer companies.
Any stock options awarded to Mr. Hudson are also not directly related to
specific measures of corporate performance. Such award is generally based on
his current compensation.
Compensation of Other Executives
The other executive officers listed in the Summary Compensation Table in the
Proxy Statement are compensated by salary and a discretionary bonus which may
be impacted by a number of factors, including but not limited to, growth in
earnings per share and return on equity at the Company and growth in insurance
operating income, underwriting income and premium of the various Company
subsidiaries, affiliates or areas of operation for which each is responsible.
The pool of funds available for determining their salaries and bonuses is
calculated based upon the formula described in the discussion of the salary
and bonus system. Determination of any salary increase or bonus award to such
an executive is then recommended by the Chairman, President and Chief
Executive Officer in his discretion based upon an evaluation of a number of
factors, including those listed above, to the Compensation Committee for its
decision.
Mr. McAndrew serves as the chief operating officer of the Company's
subsidiaries United American, Globe and American Income, holding the titles
Chairman, President and Chief Executive Officer in those companies. He is
responsible for the Company's direct response insurance marketing. Mr.
McAndrew was awarded a $150,000 discretionary bonus by the Compensation
Committee for 1999, which he chose to receive in cash.
Mr. Brill is the Executive Vice President and Chief Administrative Officer
in charge of insurance administration for Torchmark and all its insurance
subsidiaries. He is primarily responsible for the Company's Year 2000
compliance efforts. The Compensation Committee awarded Mr. Brill a $100,000
discretionary bonus for 1999, which he elected to take in cash.
Mr. McWhorter is the Chairman, President and Chief Executive Officer of
Liberty and UILIC, serving as the Chief Operating Officer of Liberty since
1994 and of UILIC since 1998. Mr. McWhorter was awarded a $120,000
discretionary bonus by the Compensation Committee for 1999, which he elected
to be paid in cash.
Mr. Coleman serves as Executive Vice President and Chief Financial Officer
of the Company. He has been responsible for the Company's accounting
operations since 1994 and is also in charge of all financial areas. The
Compensation Committee awarded Mr. Coleman an $80,000 bonus, $50,000 of which
he chose to take in Torchmark stock options and $30,000 of which he was paid
in cash.
Mr. Rapoport served for a number of years prior to his September 1999
retirement as the Chairman of the Board and Chief Executive Officer of
American Income. Mr. Cooper served as President and Chief Operating Officer of
American Income from 1977 until his retirement on September 30, 1999. Because
of their retirements, neither Mr. Rapoport nor Mr. Cooper received a bonus for
1999.
16
<PAGE>
Compensation and Company Performance
As indicated above, the annual aspect of executive compensation for holding
company executives of Torchmark centers on growth in the earnings per share
and return on equity as well as increases in pre-tax operating income and for
executives of the insurance subsidiaries on growth in underwriting income and
premium income. Over the last year, pre-tax operating income has increased 1%
from $490 million in 1998 to $494 million in 1999. Excluding a non-recurring
charge, pre-tax operating income increased 5% to $515 million in 1999. Diluted
earnings per share excluding the non-recurring charge grew from $2.29 per
share in 1998 to $2.55 per share in 1999, an 11% change. Return on equity
increased 7% from 15.1% in 1998 to 16.2% in 1999. Premium income, which made
up 85% of the company's total revenues, rose to $4.88 billion in 1999 from
$1.75 billion in 1998. Underwriting income comprised 63% of the Company's pre-
tax operating income for 1999. Underwriting income has decreased from $317
million to $313 million in 1999 over 1998.
The above performance resulted in compensation increases to certain of the
Company's executives as a group shown in the Summary Compensation Table on
page 8. Cash compensation paid persons who are listed in that table other than
Messrs. Cooper and Rapoport, who retired as executive officers of a Company
subsidiary in September 1999, increased 14% in 1999 over 1998, because Messrs.
McAndrew, Brill and McWhorter elected to be paid all of their bonuses in cash
and Mr. Coleman elected to receive stock options for only a portion of his
bonus, taking the balance as a cash payment.
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
diluted earnings per share from continuing operations excluding realized
investment gains, the related acquisition cost adjustment, and the equity in
Vesta earnings have increased 53% and rose from $1.67 in 1996 to $2.55 in
1999.
Louis T. Hagopian, Chairman
Joseph M. Farley
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.
17
<PAGE>
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG
TORCHMARK CORPORATION
S&P 500 INDEX AND THE S&P INSURANCE (LIFE/HEALTH) INDEX
[LINE GRAPH]
12/94 12/95 12/96 12/97 12/98 12/99
----- ----- ----- ----- ----- -----
TORCHMARK CORP $100 $133 $152 $259 $255 $212
S & P 500 $100 $138 $169 $226 $290 $351
S & P INSURANCE
(LIFE & HEALTH) $100 $144 $175 $219 $232 $199
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).
Information for graph produced by Research Data Group, Inc.
18
<PAGE>
MISCELLANEOUS INFORMATION
PROPOSALS OF STOCKHOLDERS
In order for a proposal by a stockholder of the Company to be eligible to be
included in the proxy statement and proxy form for the annual meeting of
stockholders in 2000, the proposal must be received by the Company at its home
office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before
November 25, 2000. If a stockholder proposal is submitted outside the proposal
process mandated by Securities and Exchange Commission rules, it will be
considered untimely if received after February 10, 2001.
GENERAL
The cost of this solicitation of proxies will be paid by the Company. The
Company is requesting that certain banking institutions, brokerage firms,
custodians, trustees, nominees, and fiduciaries forward solicitation material
to the underlying beneficial owners of the shares of the Company they hold of
record. The Company will reimburse all reasonable forwarding expenses.
THE ANNUAL REPORT OF THE COMPANY FOR 1999, 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,
1999 AND THE FINANCIAL STATEMENTS AND SCHEDULES THERETO. UPON REQUEST AND
PAYMENT OF COPYING COST, THE EXHIBITS TO THE FORM 10-K WILL BE FURNISHED.
THESE WRITTEN REQUESTS SHOULD BE DIRECTED TO INVESTOR RELATIONS DEPARTMENT,
TORCHMARK CORPORATION AT ITS ADDRESS STATED ABOVE.
By Order of the Board of Directors
/s/ Carol A. McCoy
-----------------------------
Carol A. McCoy
Associate Counsel & Corporate
Secretary
March 23, 2000
19
<PAGE>
Exhibit 23(a)-(f)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements (Nos.
2-76378, 2-93760, 33-23580, 33-1032 and 33-65507) on Forms S-8 of our report
dated January 28, 2000, appearing in this Annual Report on Form 10-K of
Torchmark Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 23, 2000
<PAGE>
EXHIBITS 23(g)-(l)
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, 2-93760, 33-23580, 33-1032, 33-65507 and 333-27111) on Forms S-8 of our
report dated January 29, 1999, except for note 17 which is as of February 10,
1999 relating to the consolidated balance sheet of Torchmark Corporation and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and cash
flows and related schedules for each of the years in the two-year period ended
December 31, 1998, which appears in the December 31, 1999 Annual Report on Form
10-K of Torchmark Corporation.
KPMG LLP
Birmingham, Alabama
March 23, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ David L. Boren
--------------------------------
David L. Boren, Director
Date:___________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Joseph M. Farley
-------------------------------
Joseph M. Farley, Director
Date:__________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Louis T. Hagopian
--------------------------------
Louis T. Hagopian, Director
Date:___________________________
<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. Hutchison, Gary L. Coleman and Carol A.
McCoy, and each of them severally, his lawful attorneys and agents, for him and
in his name and in the capacity indicated below, with full power and authority
to do any and all acts and things and to execute any and all instruments which
said attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, and
all instruments or documents submitted as a part of or in conjunction with the
Form 10-K. The undersigned hereby ratifies and confirms his signature as it may
be signed by said attorneys and all that said attorneys and agents shall do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ C. B. Hudson
-------------------------------------------
C. B. Hudson, Chairman, President, Chief
Executive Officer and Director
Date:______________________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Joseph L. Lanier, Jr.
---------------------------------------
Joseph L. Lanier, Jr., Director
Date:__________________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Mark S. McAndrew
-------------------------------------
Mark S. McAndrew, Director
Date:________________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacity indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Harold T. McCormick
----------------------------------------
Harold T. McCormick, Director
Date:___________________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacities indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form-10, any and
all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ R.K. Richey
----------------------------------
R. K. Richey, Director
Date:_____________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacities indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ George J. Records
------------------------------------
George J. Records, Director
Date:_______________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Director of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy,
and each of them severally, his lawful attorneys and agents, for him and in his
name and in the capacities indicated below, with full power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents determine may be necessary, advisable, or required to
enable the said Corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, or requirements of the Securities and
Exchange Commission in connection with the Form 10-K for the fiscal year ended
December 31, 1999. Without limiting the generality of the foregoing, the powers
granted include the power and authority to execute and file the Form 10-K, any
and all amendments to the Form 10-K and any and all instruments or documents
submitted as a part of or in conjunction with the Form 10-K. The undersigned
hereby ratifies and confirms his signature as it may be signed by said attorneys
and all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Lamar C. Smith
----------------------------------
Lamar C. Smith, Director
Date:_____________________________
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned Officer of Torchmark Corporation does hereby
constitute and appoint Larry M. Hutchison and Carol A. McCoy, and each of them
severally, his lawful attorneys and agents, for him and in his name and in the
capacity indicated below, with full power and authority to do any and all acts
and things and to execute any and all instruments which said attorneys and
agents determine may be necessary, advisable, or required to enable the said
Corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations, or requirements of the Securities and Exchange
Commission in connection with the Form 10-K for the fiscal year ended December
31, 1999. Without limiting the generality of the foregoing, the powers granted
include the power and authority to execute and file the Form 10-K, any and all
amendments to the Form 10-K and any and all instruments or documents submitted
as a part of or in conjunction with the Form 10-K. The undersigned hereby
ratifies and confirms his signature as it may be signed by said attorneys and
all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the date indicated below his name.
/s/ Gary L. Coleman
-------------------------------------------
Gary L. Coleman, Executive Vice President
and Chief Financial Officer (Principal
Accounting Officer)
Date:______________________________________
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 5,679,795
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,189
<MORTGAGE> 94,599
<REAL-ESTATE> 16,379
<TOTAL-INVEST> 6,187,810
<CASH> 14,441
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,893,322
<TOTAL-ASSETS> 12,131,664
<POLICY-LOSSES> 4,869,241
<UNEARNED-PREMIUMS> 85,344
<POLICY-OTHER> 215,923
<POLICY-HOLDER-FUNDS> 81,919
<NOTES-PAYABLE> 789,949
193,324
0
<COMMON> 147,801
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<TOTAL-LIABILITY-AND-EQUITY> 12,131,664
1,884,086
<INVESTMENT-INCOME> 447,337
<INVESTMENT-GAINS> (110,971)
<OTHER-INCOME> 6,443
<BENEFITS> 1,236,547
<UNDERWRITING-AMORTIZATION> 247,800
<UNDERWRITING-OTHER> 340,140
<INCOME-PRETAX> 402,408
<INCOME-TAX> (134,320)
<INCOME-CONTINUING> 258,930
<DISCONTINUED> (1,060)
<EXTRAORDINARY> 0
<CHANGES> 16,086
<NET-INCOME> 273,956
<EPS-BASIC> 2.06
<EPS-DILUTED> 2.04
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