<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7697
------------------------
SOUTHWESTERN LIFE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-6069928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH AKARD STREET, DALLAS,
TEXAS
(Address of principal 75201
executive offices) (Zip Code)
</TABLE>
(214) 954-7703
(Registrant's telephone number, including area code)
I.C.H. CORPORATION, 100 MALLARD CREEK ROAD, SUITE 400, LOUISVILLE, KENTUCKY
40207
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES
OUTSTANDING
CLASS AND TITLE OF AS OF MAY 13,
CAPITAL STOCK 1994
- -------------------------------------- -----------------
<S> <C>
Common Stock, $1.00 Par Value 47,834,739
</TABLE>
------------------------
The Index to Exhibits appears on Page .
This filing contains pages.
This Amendment No. 1 amends Items 1 of Part I and Exhibit 11.1 of the Form
10-Q of Southwestern Life Corporation for the quarter ended March 31, 1994.
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<PAGE>
This Amendment No. 1 amends Item 1 of Part I and Exhibit 11.1 of the Form
10-Q of Southwestern Life Insurance Company for the quarter ended March 31,
1994.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value....................................... $1,638,241 $1,691,693
Held to maturity at amortized cost..................................... 25,972 26,149
Equity securities, at fair value......................................... 63,579 75,831
Mortgage loans on real estate, at amortized cost......................... 124,841 138,504
Real estate, at lower of cost or fair value.............................. 67,100 67,491
Policy loans............................................................. 176,743 177,736
Collateral loans......................................................... 31,048 34,099
Investments in limited partnerships...................................... 42,593 43,640
Cash and short-term investments.......................................... 301,382 366,922
Other invested assets.................................................... 28,097 16,058
---------- ------------
Total investments.................................................... 2,499,596 2,638,123
Due from reinsurers........................................................ 381,407 388,083
Notes and accounts receivable and uncollected premiums..................... 12,344 6,951
Accrued investment income.................................................. 28,020 31,633
Deferred policy acquisition costs.......................................... 192,494 168,525
Present value of future profits of acquired business....................... 49,415 50,705
Deferred income tax asset.................................................. 73,822 53,033
Excess cost of investments in subsidiaries over net assets acquired, net of
accumulated amortization.................................................. 305,231 307,604
Other assets............................................................... 55,251 47,999
Assets held in separate accounts........................................... 5,061 5,207
---------- ------------
$3,602,641 $3,697,863
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Insurance liabilities:
Future policy benefits and other policy liabilities...................... $ 928,310 $ 927,303
Universal life and investment contract liabilities....................... 1,667,980 1,684,396
Notes payable:
Due within one year...................................................... 34,548 34,546
Due after one year....................................................... 383,229 383,435
Federal income taxes currently payable..................................... 27,002 29,015
Other liabilities.......................................................... 136,880 138,791
Liabilities related to separate accounts................................... 5,061 5,207
---------- ------------
3,183,010 3,202,693
---------- ------------
Stockholders' equity:
Preferred stock.......................................................... 229,239 229,239
Common stock............................................................. 71,701 71,594
Common stock, Class B.................................................... -- 100
Additional paid-in capital............................................... 155,495 155,499
Net unrealized investment gains (losses), net of deferred income taxes in
1993.................................................................... (10,875) 20,458
Retained earnings........................................................ 28,140 71,833
---------- ------------
473,700 548,723
Notes receivable collateralized by common stock.......................... (1,745) (1,729)
Treasury stock, at cost.................................................. (52,324) (51,824)
---------- ------------
419,631 495,170
---------- ------------
$3,602,641 $3,697,863
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1994 1993
----------- -----------
(RESTATED)
<S> <C> <C>
Income:
Premium income and other considerations............. $ 116,574 $ 118,386
Net investment income............................... 30,007 62,424
Realized investment gains (losses).................. (45,774) 19,135
Equity in earnings (losses) of equity investees and
limited partnerships............................... 412 11,866
Gain on sale of stock by Bankers Life Holding
Corporation........................................ 99,376
Other income........................................ 2,499 26,647
----------- -----------
103,718 337,834
----------- -----------
Benefits, expenses and costs:
Policyholder benefits............................... 90,685 114,006
Amortization of deferred policy acquisition costs
and present value of future profits................ 12,293 13,066
Other operating expenses............................ 37,480 48,927
Amortization of excess cost......................... 2,398 2,401
Interest expense.................................... 12,445 19,178
----------- -----------
155,301 197,578
----------- -----------
Operating earnings (loss) before income taxes......... (51,583) 140,256
Income tax expense (credit)........................... (12,214) 34,633
----------- -----------
Operating earnings (loss)............................. (39,369) 105,623
Cumulative effect to January 1, 1993 of change in
method of accounting for postretirement benefits, net
of tax effect........................................ (1,812)
Extraordinary losses, net of tax effect............... (1,231)
----------- -----------
Net earnings (loss)................................... (39,369) 102,580
Less dividends on preferred stock..................... (4,325) (7,700)
----------- -----------
Net earnings (loss) applicable to common stock........ $ (43,694) $ 94,880
----------- -----------
----------- -----------
Weighted average shares outstanding................... 47,878,690 47,908,225
----------- -----------
----------- -----------
Earnings (loss) per common share:
Primary:
Operating earnings (loss)........................... $ (.91) $ 2.05
Cumulative effect to January 1, 1993 of change in
method of accounting for postretirement benefits... (.04)
Extraordinary losses................................ (.03)
----------- -----------
Net earnings (loss)............................... $ (.91) $ 1.98
----------- -----------
----------- -----------
Fully diluted:
Operating earnings (loss)........................... $ (.91) $ 1.79
Cumulative effect to January 1, 1993 of change in
method of accounting for postretirement benefits... (.03)
Extraordinary losses................................ (.02)
----------- -----------
Net earnings (loss)............................... $ (.91) $ 1.74
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Operating earnings (loss)........................... $ (39,369) $ 105,623
Items not requiring (providing) cash:
Adjustments related to universal life and
investment products:
Interest credited to account balances........... 4,502 33,026
Charges for mortality and administration........ (17,587) (18,376)
Depreciation and amortization..................... 4,056 3,820
Increase in future policy benefits................ 483 3,306
Decrease (increase) in deferred policy acquisition
costs............................................ (30) 2,708
Increase (decrease) in currently payable income
taxes............................................ (2,013) 5,595
Decrease (increase) in deferred income taxes...... (12,536) 40,801
Increase in policy liabilities, other policyholder
funds, accounts payable and accrued expenses..... 10,012 156
Decrease (increase) in notes and accounts
receivable and accrued investment income......... (920) 1,363
Increase (decrease) in asset valuation
allowances....................................... 46,435 1,352
Equity in earnings of equity investees and limited
partnerships..................................... (412) (11,866)
Gain on termination of reinsurance................ (17,117)
Gain on sale of stock by Bankers Life Holding
Corporation...................................... (99,376)
Other, net........................................ 5,848 (3,023)
---------- ----------
Net cash provided (used) by operating
activities................................... (1,531) 47,992
---------- ----------
Cash flows from investing activities:
Sales and maturities of long-term invested assets... 283,667 522,927
Purchases of fixed maturities....................... (284,376) (342,692)
Purchases of other long-term invested assets........ (47,519) (50,060)
---------- ----------
Net cash provided (used) by investing
activities................................... (48,228) 130,175
---------- ----------
Cash flows from financing activities:
Proceeds of collateralized mortgage note
obligations........................................ 171,000
Policyholder contract deposits...................... 42,374 46,195
Policyholder contract withdrawals................... (48,851) (166,146)
Principal payments on notes payable................. (204) (37,686)
Early retirement of subordinated debt............... (38,190)
Principal payments on collateralized mortgage note
obligations........................................ (172,245)
Purchase of common stock for treasury............... (500)
Dividends on preferred shares....................... (4,325) (7,700)
Other............................................... (4,275)
---------- ----------
Net cash provided (used) by financing
activities................................... (15,781) (204,772)
---------- ----------
Net decrease in cash and short-term investments....... (65,540) (26,605)
Cash and short-term investments at beginning of
period............................................... 366,922 421,765
---------- ----------
Cash and short-term investments at end of period...... $ 301,382 $ 395,160
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOUTHWESTERN LIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Effective June 15, 1994, I.C.H. Corporation changed its name to Southwestern
Life Corporation (the Company or SLC).
The financial information included herein was prepared in conformity with
generally accepted accounting principles, and such principles were applied on a
basis consistent with those reflected in the 1993 Annual Report to Shareholders.
The information furnished includes all adjustments and accruals which are,
in the opinion of management, necessary for a fair statement of results for the
interim periods.
The disclosures in the notes presume that the users of the interim financial
information have read or have access to the audited financial statements
included in the 1993 Annual Report to Shareholders.
For the three months ended March 31, 1993, the Company had previously
reported a non-operating gain totaling $79,459,000, net of deferred income tax
effects, representing the Company's equity in the proceeds of a common stock
offering by the Company's then-equity investee, Bankers Life Holding Corporation
(BLHC). On September 30, 1993, the Company sold its investment in BLHC to
Conseco, Inc. (Conseco) and one of Conseco's subsidiaries for $287,639,000. Upon
the sale of the investment in BLHC, the Company reclassified its previously
reported non-operating gain as a component of operating earnings and, as a
result of the reclassification, revenues were increased by $99,376,000 to
reflect the pre-tax gain resulting from BLHC's stock offering and income tax
expense was increased $19,917,000 to reflect the tax effects associated with
such gain. The accompanying financial statements for the three months ended
March 31, 1993, have been restated to reflect such reclassification. As a result
of the reclassification, primary operating earnings per common share for the
three months ended March 31, 1993, increased from $.39 to $2.05 and fully
diluted operating earnings per common share increased from $.40 to $1.79. The
reclassification had no effect on reported net earnings or net earnings per
common share.
Primary earnings per share are computed by dividing earnings, less preferred
dividend requirements, by the weighted average number of common shares
outstanding. In computing fully diluted earnings per share, the weighted average
number of common shares outstanding is adjusted to reflect common stock
equivalents resulting from stock options and the assumed conversion of the
Company's Series 1984-A and 1986-A Preferred Stock into common shares, and
preferred dividend requirements are adjusted to eliminate dividends on the
shares assumed to have been converted. The computation of fully diluted earnings
per share excludes the assumed conversion of such preferred shares for each
period in which the assumed conversion would be antidilutive.
Previously reported amounts for 1993 have, in some instances, been
reclassified to conform to the 1994 presentation.
4
<PAGE>
SOUTHWESTERN LIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVESTMENT IN BANKERS LIFE HOLDING CORPORATION:
The Company continued to reflect its equity in the earnings of BLHC through
the date of sale. Following are unaudited condensed statement of financial
results for BLHC for the three months March 31, 1993 and the Company's equity in
such results as reflected in its consolidated statement of earnings (in
thousands):
<TABLE>
<S> <C>
Bankers Life Holding Corporation:
Revenues........................................... $354,700
Earnings From operations........................... 29,800
Extraordinary loss from early debt retirment....... (4,800)
Net earnings attributable to common stock.......... 20,500
Amounts recorded by the Company:
Equity in operating earnings of BLHC............... $ 11,106
Equity in extraordinary losses of BLHC............. (1,175)
--------
Equity in earnings of BLHC......................... $ 9,931
--------
--------
</TABLE>
3. NOTES PAYABLE:
Notes payable at March 31, 1994 and December 31, 1993, are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under senior secured loan...... $ 30,000 $ 30,000
11 1/4% Senior Subordinated Notes due
1996..................................... 266,101 266,101
11 1/4% Senior Subordinated Notes due
2003..................................... 91,161 91,161
9 1/2% unsecured note payable due 1996.... 25,550 25,550
Note payable, interest at prime, due in
monthly installments through 1999,
collateralized by aircraft equipment..... 4,668 4,872
Other..................................... 297 297
-------- --------
$417,777 $417,981
-------- --------
-------- --------
</TABLE>
At March 31, 1994, the Company has notes receivable totaling $26,500,000
from an unaffiliated third party, which is collateralized by the Company's note
payable with a carrying value of $20,505,000. The Company has the right to set
off its obligation against the notes receivable. In the accompanying balance
sheets, the Company's notes receivable have been reflected net of amounts due
under the note payable.
4. FEDERAL INCOME TAXES:
The provision (credit) for income taxes on operating earnings (loss)
consists of the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1994 1993
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense (credit)............... $ 322 $(6,168)
Deferred tax expense (credit).............. (12,536) 40,801
-------- -------
$(12,214) $34,633
-------- -------
-------- -------
</TABLE>
5
<PAGE>
SOUTHWESTERN LIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FEDERAL INCOME TAXES (CONTINUED):
Net unrealized investment gains included in stockholders' equity at December
31, 1993, are reflected net of deferred income taxes totaling $8,226,000. The
deferred income tax effects of unrealized investment losses included in
stockholders' equity at March 31, 1994, totaling approximately $3,806,000 have
been offset by an increase in the deferred income tax asset valuation allowance
by a corresponding amount due to the uncertainty as to the Company's ability to
generate capital gains in an amount sufficient to offset the unrealized capital
losses.
5. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES:
The Company and its subsidiaries have been under examination by the Internal
Revenue Service (IRS) for the tax years 1983 through 1992. The IRS has completed
its examination for the years 1983 through 1985 and had previously issued
Preliminary Notices of Deficiencies totaling approximately $17.5 million, before
interest. The Company protested such assessed deficiencies and subsequently
reached an agreement with the IRS under which the Company and certain of its
subsidiaries will incur approximately $4.6 million of additional taxes and
interest. The IRS has not completed its examination for the years 1986 through
1992 and therefore has not issued Notices of Deficiencies for those years.
Management believes that the ultimate liability for additional taxes and
interest for these later years will not exceed amounts recorded in the Company's
financial statements.
Modern American Life Insurance Company (Modern) is a defendant in a class
action lawsuit filed on or about May 14, 1993 in the Circuit Court of Jackson
County, Missouri, styled WILLIAM D. CASTLE, ET AL. V. MODERN AMERICAN LIFE
INSURANCE COMPANY (the Castle case). The suit purports to be brought on behalf
of a class of persons who own what plaintiffs denominate as charter contracts,
issued by life insurance companies merged into or acquired by Modern and its
predecessors. The suit alleges breach of contract, and seeks declaratory
judgment, costs, expenses and such other relief as the Court deems appropriate.
As an alternative, the suit seeks rescission. Southwestern Life Corporation was
added as a defendant to the CASTLE case by an amended petition, filed February
16, 1994, alleging that the Company should be liable for any judgment against
Modern through either disregarding Modern's corporate existence or finding
tortious interference by the Company with plaintiff's contracts with Modern. The
Company has filed a motion to dismiss the amended petition which currently is
pending.
On or about October 12, 1993, the plaintiffs in the CASTLE case also filed a
lawsuit in the Circuit Court of Cole County, Missouri, naming Modern American
and the Director of the Missouri Department of Insurance (the Missouri Director)
as defendants. The second lawsuit, styled ROBERT J. MEYER, ET AL. V. JAY ANGOFF,
DIRECTOR OF THE MISSOURI DEPARTMENT OF INSURANCE AND MODERN AMERICAN LIFE
INSURANCE COMPANY (the MEYER case), is an appeal from the regulatory proceedings
before the Missouri Department of Insurance, by which Modern received regulatory
approvals required for it to participate in a restructuring of the Company's
insurance holding company organization. The restructuring was completed on or
about September 29, 1993. The plaintiffs in the MEYER case are seeking reversal
or remand of the Director's order of approval, declaratory judgment and such
other relief to which they claim they are entitled. The Cole Circuit Court has
determined that it will review the Missouri Department's decision on the record
pursuant to Missouri's administrative procedure act.
Modern believes it has meritorious defenses to both the CASTLE and MEYER
cases and intends to defend both cases vigorously.
Various other lawsuits and claims are pending against the Company and its
subsidiaries. Based in part upon the opinion of counsel as to the ultimate
disposition of the above discussed and other matters, management believes that
the liability, if any, will not be material.
6
<PAGE>
SOUTHWESTERN LIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. REALIZED INVESTMENT GAINS (LOSSES):
Following is an analysis of the major components of gains (losses) on
investments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1994 1993
-------- -------
<S> <C> <C>
Fixed maturities........................... $ 2,020 $14,350
Mortgage-backed securities................. (46,448) (1,014)
Equity securities.......................... (1,224) 6,211
Other...................................... (122) (412)
-------- -------
$(45,774) $19,135
-------- -------
-------- -------
</TABLE>
Subsequent to the filing of its initial Report on Form 10-Q for three months
ended March 31, 1994, the Company determined that it had incurred an other than
temporary decline in the value of certain mortgage-backed securities and is
amending its Report to reflect a writedown in the value of such securities
totaling $46,448,000. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Report on Form
10-Q/A.
7. EXTRAORDINARY LOSSES:
For the three months ended March 31, 1993, the Company reflected an
extraordinary loss totaling $690,000, resulting from the premium paid to effect
the early redemption of $37.5 million principal amount of the Company's 16 1/2%
Senior Subordinated Debentures due 1994. In addition, the Company reflected its
equity in the extraordinary loss of BLHC resulting from early retirement of debt
totaling $1,175,000. The extraordinary losses have been reflected net of the
estimated tax effects totaling $634,000.
8. TRANSACTIONS WITH CONSOLIDATED FIDELITY LIFE INSURANCE COMPANY:
Effective June 15, 1993, the Company purchased shares of preferred stock
from an affiliate, Consolidated Fidelity Life Insurance Company (CFLIC), in
exchange for certain investments with an estimated fair value of $63 million.
CFLIC is a subsidiary of Consolidated National Corporation (CNC) and CNC was
also the then-controlling shareholder of the Company. The purchase of the CFLIC
preferred stock was the first step in a series of transactions which are
designed 1) to terminate existing reinsurance arrangements under which business
written by a subsidiary and a former subsidiary of the Company is reinsured
(through an unaffiliated insurer) by CFLIC and 2) to redeem or retire certain of
the Company's securities which are currently held by CFLIC. See Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
more detailed discussion of the anticipated effects of the proposed
transactions.
9. CHANGE IN CONTROL:
On February 11, 1994, the Company purchased all of the 100,000 shares of its
Class B Common Stock held by CNC for total cash consideration of $500,000. The
Class B Common Stock had entitled CNC to elect 75% of the Company's Board of
Directors. Upon the purchase, the Class B shares were automatically converted
into an identical number of shares of Common Stock and at March 31, 1994, have
been reflected as Treasury Shares. Concurrently with the purchase of such stock,
the Company entered into Independent Contractor and Services Agreements
(Services Agreements) with Robert T. Shaw and C. Fred Rice, the controlling
shareholders of CNC. The Services Agreements provide for a lump sum payment to
Messrs. Shaw and Rice totaling $2 million as of the closing date and additional
payments totaling $8,575,000 over a ten-year period. In addition, the Company
agreed to provide customary employee benefits to Messrs. Shaw and Rice and their
dependents. In the event of the
7
<PAGE>
SOUTHWESTERN LIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CHANGE IN CONTROL (CONTINUED):
deaths of Messrs. Shaw or Rice, any amounts not previously paid under the
Services Agreements will become immediately payable to their estates. In
consideration for the Services Agreements, Messrs. Shaw and Rice agreed that
they would attempt to identify business opportunities in the insurance industry
which may be suitable for the Company and to consult with the Company regarding
such other matters as the Company may reasonably request. In addition, Mr. Rice
continues to serve as an executive officer of the Company and, if re-elected,
will continue to serve on the Company's Board of Directors. The Services
Agreements replaced a management and consulting contract with CNC that provided
for annual payments to CNC totaling $2 million. In addition, Mr. Shaw was
granted an option to acquire certain aircraft equipment currently owned by the
Company at its depreciated book value. The Company provided a liability for the
present value of amounts payable under the Services Agreements totaling
$9,050,000 in its financial statements for the year ended December 31, 1993.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Effective June 15, 1994, I.C.H. Corporation changed its name to Southwestern
Life Corporation (the Company or SLC).
LIQUIDITY AND CAPITAL RESOURCES:
On February 11, 1994, SLC purchased all of the 100,000 shares of its Class B
Common Stock from Consolidated National Corporation (CNC) for total cash
consideration of $500,000. The Class B Common Stock had entitled CNC to elect
75% of SLC's Board of Directors and, by virtue of such voting power, CNC was
considered to be SLC's controlling shareholder. The Class B shares were
automatically converted into an identical number of shares of SLC Common Stock,
which at March 31, 1994, have been reflected as Treasury Shares. As a result of
the repurchase, and subsequent conversion, SLC is no longer authorized to issue
Class B Common Stock and all references in SLC's Certificate of Incorporation to
the Class B Common Stock have been eliminated. Concurrent with the repurchase of
the Class B Common Stock, Stephens Inc. (Stephens) and Torchmark Corporation
(Torchmark) purchased 4,457,000 shares and 4,667,000 shares, respectively, of
Common Stock from CNC, which reduced CNC and its subsidiaries' holding in SLC
Common Stock to approximately 1,620,000 shares, or 3.4% of SLC's presently
outstanding shares. Additional information regarding the repurchase of the Class
B Common Stock and other terms of the transaction are included in Note 9 of the
Notes to Financial Statements in this Form 10-Q/A and the Company's 1993 Annual
Report to Shareholders. Management believes the repurchase of the Class B Common
Stock is significant for various reasons. Most importantly, management believes
that SLC's access to both debt and equity capital markets has been limited
because of the control position held by CNC through the Class B Common Stock,
and that the repurchase and conversion of the Class B Common Stock and
considerable reduction in CNC's holdings of SLC Common Stock could ultimately
enhance SLC's ability to refinance its currently outstanding debt. In May 1994,
SLC engaged Stephens, an investment banking firm, to conduct a review of SLC in
order to provide advice and recommendations to SLC's Board of Directors
concerning SLC's strategic plans. See "Transactions With Consolidated Fidelity
Life Insurance Company" below for a summary of the terms and the current status
of a proposed transaction involving CNC's subsidiary and the Company.
During the three months ended March 31, 1994, SLC experienced a significant
decline in the fair value of its available for sale fixed maturity investments,
primarily as a result of increases in market interest rates. Because such
securities are reflected at their fair value for financial reporting purposes,
the decline in fair value, coupled with an operating loss in the 1994 first
quarter, had a significant impact on stockholders' equity and book value per
common share. Common stockholders' equity declined $75.5 million, from $265.9
million, or $5.55 per share, at year-end 1993 to $190.4 million, or $3.98 per
share, at March 31, 1994. Of this decline, $31.3 million, or $.66 per share, was
attributable to the change in unrealized investment gains and losses. Because of
its available liquidity and other factors, management does not anticipate that
SLC will be required to liquidate a substantial portion of its available for
sale fixed maturity portfolio over the near-term. See "Investment Portfolio"
below for additional information regarding SLC's available for sale fixed
maturities.
At March 31, 1994, the parent company held cash, short-term investments and
readily-marketable fixed maturity investments totaling approximately $120.6
million. As discussed in more detail in the Company's 1993 Annual Report, SLC
has considerable flexibility in determining whether it will utilize cash to make
a $100 million sinking fund installment with respect to its 11 1/4% Senior
Subordinated Notes due 1996 (Old Notes). Assuming that a sinking fund
installment relative to the Old Notes is not made utilizing available cash in
1994, management believes that SLC has sufficient liquidity with which to meet
its debt service and preferred dividend requirements over the next twelve
months. Depending on market conditions and other factors, SLC may from
time-to-time utilize its available liquidity to purchase some of its Old Notes
or other outstanding securities in open-market or private placement
transactions.
9
<PAGE>
TRANSACTIONS WITH CONSOLIDATED FIDELITY LIFE INSURANCE COMPANY:
Effective June 15, 1993, SLC entered into an agreement (the Agreement) which
initiated the process of terminating certain reinsurance arrangements involving
Consolidated Fidelity Life Insurance Company (CFLIC), a subsidiary of CNC. The
reinsurance arrangements involve certain annuity business with reserves totaling
$323.3 million as of March 31, 1994, which was transferred by a subsidiary of
SLC, Southwestern Life Insurance Company (Southwestern), to an unaffiliated
reinsurer in 1990. The unaffiliated reinsurer, in turn, transferred the business
to another CNC subsidiary, Marquette National Life Insurance Company
(Marquette). In 1991, Marquette transferred the annuity business to CFLIC.
The reinsurance arrangements have been under review by the Texas Department
of Insurance and, in March 1993, SLC and Southwestern agreed with the Texas
Department that they would, among other things, develop a plan to enhance and
diversify the assets supporting the liabilities reinsured by CFLIC, including
possibly recapturing the reinsured annuity business. The recapture is subject to
negotiations with the unaffiliated reinsurer and approval by the Texas
Department.
CNC and CFLIC agreed to structure the proposed recapture in a manner that
will permit SLC to redeem or retire certain of its outstanding securities,
provided CFLIC would be allowed to retain certain assets following the
recapture. CFLIC holds SLC's senior secured debt, with a current balance of $30
million, approximately $22.2 million stated value of SLC's Series 1984-A
Preferred Stock and $7 million stated value of SLC's Series 1987-B Preferred
Stock.
CFLIC also intends to terminate another reinsurance arrangement under which
business written by Bankers Life and Casualty Company (Bankers), a former SLC
subsidiary, is reinsured by CFLIC. Under terms of the Agreement, SLC is
responsible for the negotiation on CFLIC's behalf of both the Southwestern and
Bankers recaptures and management of the affairs of CFLIC and Marquette,
including management of their investments, until the recaptures are effected.
Upon completion of the recaptures, CFLIC will have no remaining insurance
business.
To facilitate the recaptures of the reinsured business, SLC acquired $63
million of CFLIC preferred stock in exchange for its ownership interest in
certain investments with an estimated fair value as of June 15, 1993, of $63
million, including its ownership in a limited partnership (the HMC/Life Partners
L.P.), which has subsequently been liquidated, and 83 percent of SLC's ownership
interest in I.C.H. Funding Corporation (ICH Funding). ICH Funding is a special
purpose entity that was formed in 1992 to hold SLC's residual interest in a pool
of mortgage-backed securities acquired from Bankers. The CFLIC preferred stock
is non-redeemable and non-voting, with cumulative 6% annual dividends that will
be payable in kind until the recaptures are completed. SLC and CFLIC anticipate
that the assets received by CFLIC from SLC in consideration for the preferred
stock, along with other assets held by CFLIC, including its ownership in
Marquette, will be transferred to Southwestern upon recapture of the annuity
business. Following the recaptures, CFLIC is obligated to redeem its preferred
stock by transferring its ownership in the SLC securities and additional assets
to SLC. Upon their receipt, SLC intends to retire the SLC debt and securities.
For financial reporting purposes, no gain or loss was recognized on the
transfer of the assets to CFLIC. The Agreement identifies the specific assets
and liabilities plus, subject to certain conditions, an amount in cash that will
be retained by CFLIC following the recaptures. All remaining assets held by
CFLIC, including the SLC securities, will revert to SLC in redemption of CFLIC's
preferred stock. As a consequence, SLC will benefit or suffer the consequences
to the extent of any appreciation or depreciation in the value of the assets
transferred to CFLIC. At March 31, 1994, SLC has reflected its investment in the
CFLIC preferred stock at its approximate fair value of $41.8 million, or $21.2
million less than the value assigned to such preferred stock at June 15, 1993.
The reduction in fair value between the two dates was primarily attributable to
a decline in the fair value of the 83% interest in ICH Funding transferred to
CFLIC.
10
<PAGE>
Management believes the transactions with CFLIC will be beneficial for
several reasons. In addition to eliminating $30 million in scheduled debt
principal requirements, the redemption or retirement of the SLC securities would
reduce SLC's interest and preferred dividend requirements by approximately $5.4
million annually. The termination of the reinsurance treaties is dependent on
the performance and level of concentration of the assets of CFLIC supporting the
reinsured liabilities and the completion of successful negotiations.
Management's present goal is to complete the transactions with CFLIC as soon as
possible. As part of the transactions involving CNC, Torchmark and Stephens
described under "Liquidity and Capital Resources," SLC, CNC and CFLIC agreed
with each of Torchmark and Stephens that CFLIC's reinsurance agreements will be
terminated by May 30, 1994, on substantially the same terms as set out in the
June 15, 1993 agreement, and SLC agreed that, if the recaptures were not
completed by March 31, 1994, CNC will have the right to transfer its ownership
interest in CFLIC to SLC, in exchange for the specified assets to be retained by
CFLIC following the transactions. As of the date of this Report on Form 10-Q,
SLC has not received notification from CNC that it is exercising such right, and
management cannot predict if such right will be exercised.
INVESTMENT PORTFOLIO:
In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" issued by the Financial Accounting Standards Board (FASB), which
established new standards of accounting and reporting for, among other things,
all investments in debt securities. SFAS No. 115 expanded the use of fair value
accounting (which is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale) and required financial institutions to classify
their fixed maturity investments in one of three categories: held-to-maturity,
available-for-sale, or trading. The Company classified its fixed maturity
investments as either held-to-maturity or available-for-sale. Under SFAS No.
115, securities classified as "held-to-maturity" are carried at amortized cost
and declines in value do not result in a writedown to fair value unless such
losses are determined to be other than temporary. Securities classified as
"available-for-sale" are carried at their fair value and losses are reflected as
unrealized losses, unless the decline in value is determined to be other than
temporary, in which case the losses must be reflected as realized losses and
charged to earnings. SFAS No. 115 also indicates that a decline in value of a
security below its amortized cost is properly classified as other than temporary
if the value of the security cannot reasonably be expected to increase to at
least its amortized cost in the near future.
In 1993, the Emerging Issues Task Force (EITF) of the FASB issued EITF Issue
No. 93-18, "Impairment Recognition for Purchased Investment in a Collateralized
Mortgage Obligation Investment or in a Mortgage-Backed Interest Only
Certificate", which provided an analytical framework for measuring the
impairment of certain "high-risk" CMO's and which has been widely used to
provide guidance as to when write-downs should be taken on other CMO investments
in accordance with SFAS No. 115. Under EITF No. 93-18, if the future cash flows
from an investment on a discounted basis utilizing a "risk-free" rate of return
are projected to be less than the investment's amortized cost on the basis of
generally accepted accounting principles (GAAP), a write-down to present value
is required.
In light of SFAS No. 115 and positions taken by the EITF, the Company
classified its investments in certain Class B pass-through certificates issued
by Fund America Investors Corporation II (the Fund America Investment) and the
residual interest in a special purpose trust, the Secured Investors Structured
Trust 1993-1 (the SIST Residual), as available-for-sale and reduced the carrying
value of such investments from $95.5 million to $67.1 million at December 31,
1993. The reduction in fair value of $28.4 million was determined to be
temporary and thus was accounted for as an unrealized investment loss and
reported as a charge to stockholders' equity.
The Fund America Investment and the SIST Residual are both highly sensitive
to changes in mortgage loan prepayment rates and changes in market interest
rates, particularly the London Interbank Offered Rate (LIBOR) upon which
interest payments to holders of senior classes of these
11
<PAGE>
investments are generally based. During the first three months of 1994, mortgage
loan prepayment rates and LIBOR both increased, as a consequence, the aggregate
unrealized losses on the Fund America Investment and SIST Residual increased to
$46.4 million at March 31, 1994. Based on a decline in mortgage loan prepayment
rates toward the end of March 1994 (and continuing in April 1994), management
initially determined that the declines in value of the Fund America Investment
and the SIST Residual were temporary in nature and, accordingly, adjustments in
fair value were reflected as unrealized losses in stockholders' equity.
The Fund America Investment and the SIST Residual are collateralized by the
principal component of bonds (the RFCO Strips) issued by the Resolution Funding
Corporation, a mixed-ownership government corporation established for the sole
purpose of providing financing for the Resolution Trust Corporation, the agency
charged with resolving failed savings and loan associations. By their terms, the
payment of the RFCO Strips are due in full in single payments in April 2030 (in
the case of the Fund America Investment) and in January 2021 (in the case of the
SIST Residual) in amounts sufficient to assure the full recovery of SLC's Fund
America Investment and SIST Residual. Although not obligations of, or guaranteed
as to principal by, the United States of America, the Offering Circulars for the
RFCO Strips stated that the principal amounts of the RFCO Strips would be fully
repaid from proceeds of noninterest bearing obligations of the United States
issued by the Secretary of the Treasury and deposited in a separate account at
the Federal Reserve Bank in New York. Accordingly, management believed that
these investments were not "high risk" CMOs, as defined in current authoritative
accounting literature, and that, if held to maturity, there was no permanent
impairment in the value of these investments.
Subsequent to the filing of its June 30, 1994, Report on Form 10-Q, the
Company, after consulting with its independent accountants and other advisors,
re-evaluated the Fund America Investment and the SIST Residual. Notwithstanding
the collateral provided by the RFCO Strips as discussed above, on the basis of
its review of these investments, and the application of SFAS No. 115 and EITF
No. 93-18, the Company determined that the declines in value of these
investments at March 31, 1994 were other than temporary and that a restatement
of the financial statements contained in its Report on Form 10-Q for such period
to reflect a reduction in earnings was appropriate. Accordingly, at March 31,
1994, SLC has reflected a charge to earnings for the writedown of these
investments from their GAAP book value totaling $96.4 million to their fair
value totaling $50.0 million, or a total charge of $46.4 million. For financial
reporting purposes, the $50.0 million fair value of these investments will
become their new cost basis for periods after March 31, 1994. Prior to March 31,
1994, SLC and its subsidiaries had accrued investment income on these
investments at an annual rate of 6% of their prior GAAP book values, or
approximately $5.7 million of annual investment income. Because the fair values
of these investments at March 31, 1994 were determined based on an assumed 11%
discount rate, investment income on these investments will be accrued at 11% of
their new cost basis for periods subsequent to that date, or approximately $5.5
million of annual investment income. As a consequence, the writedowns reflected
at March 31, 1994, are not expected to have a significant effect on the
Company's future reported results of operations. However, as discussed below,
significant additional writedowns in future periods could ultimately have a
significant effect on reported results.
The declines in value of the Fund America Investment and the SIST Residual
have not had, and are not expected to have any effect on the Company's operating
cash flows. For purposes of statutory accounting, the Investment Working Group
of the National Association of Insurance Commissioners (NAIC) has tentatively
decided not to follow or adopt the GAAP accounting standards of SFAS No. 115 and
EITF No. 93-18 described above.
Although no further writedowns of the Fund America Investment and the SIST
Residual were required at June 30, 1994, further increases in interest rates and
continued unsettled activity in the market for CMOs may necessitate further
substantial writedowns of these investments. Any such additional writedowns will
be reported as a charge to earnings for the period or periods in which they are
realized. Although the Company is unable to predict the size or timing of any
such additional writedowns, it believes that there is a likelihood that such
writedowns will be required at some point
12
<PAGE>
in the future. Such writedowns, if required, could result in a significant
reduction in subsequently reported earnings. In connection with preparing its
financial statements for the nine month period ended September 30, 1994, the
Company intends to re-evaluate the Fund America Investment and the SIST Residual
to determine whether an additional writedown is required as of such date.
At December 31, 1993, SLC reflected unrealized investment gains of
$20,458,000 and at March 31, 1994, reflected unrealized investment losses of
$10,875,000. Following is an analysis of the major components of such unrealized
gains (losses) (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Available for sale fixed
maturities....................... $ (24,594) $ 21,424
Equity securities................. 5,521 7,271
Equity in unrealized gains of
limited partnerships............. 3,568 5,349
Other............................. 503 (159)
---------- ------------
(15,002) 33,885
Less effect on other balance sheet
accounts:
Deferred policy acquisition
costs.......................... 5,995 (16,647)
Unearned revenue reserves....... (1,868) 6,266
---------- ------------
Gross unrealized investment gains
(losses)......................... (10,875) 23,504
Minority interest in unrealized
losses........................... 5,180
Deferred income taxes............. (8,226)
---------- ------------
Net unrealized investment
gains (losses)............... $ (10,875) $ 20,458
---------- ------------
---------- ------------
</TABLE>
The difference between amortized cost and fair value of SLC's available for
sale fixed maturities decreased from an approximate $21.4 million unrealized
gain at year-end 1993 to an approximate $24.6 million unrealized loss at March
31, 1994, or a net change of $46.0 million. The fair values of other than the
above described mortgage-backed debt securities declined approximately $74.4
million between the two dates primarily as a result of increases in market
interest rates and the negative effect of such rate increases on the fair values
of such securities. As discussed above, at year-end 1993, unrealized investment
losses totaling $28.4 million had been reflected relative to the Fund America
Investment and the SIST Residual. As a result of these writedowns of the Fund
America Investment and the SIST Residual, the $28.4 million in unrealized
investment losses relative to these mortgage-backed securities at year-end 1993
were eliminated at March 31, 1994.
Unless determined to be other than temporary, changes in the fair values of
available for sale fixed maturities have no effect on SLC's reported results of
operations, but can have a volatile effect on SLC's stockholders' equity and
book value per common share, as the carrying values of available for sale fixed
maturities are adjusted in SLC's balance sheet to their fair values at each
reporting date through a charge or credit to stockholders' equity. In addition,
unrealized investment losses generally have a more significant impact on
stockholders' equity than unrealized gains because of deferred income tax
effects. Net unrealized investment gains must be tax-effected, or reduced for
the potential income tax expense associated with such gains, through a provision
of a deferred income tax liability. Net unrealized investment losses are
likewise tax-effected, or reduced for the potential income tax benefits
associated with such losses; however, if such tax-effecting results in a
deferred income tax asset, consideration must be given to providing a valuation
allowance against such deferred income tax asset. At present the Company does
not have sufficient unrealized investment gains to offset its unrealized
investment losses. Accordingly, a valuation allowance has been provided against
the Company's deferred income tax asset related to unrealized investment losses,
which effectively eliminates the recognition of any portion of the income tax
benefits associated with such unrealized losses. Because of its available
liquidity and other factors, such as its seasoned block of traditional life
insurance business, SLC has no current plans, and management believes that SLC
will not have the
13
<PAGE>
need over the near-term, to liquidate a significant portion of its available for
sale fixed maturity investments at a loss. Following is an analysis of gross
unrealized investment gains and losses on available for sale fixed maturities as
of March 31, 1994 and December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
---------- -------------
<S> <C> <C>
Gross unrealized gains.............. $ 25,701 $ 63,535
Gross unrealized losses............. (50,295) (42,111)
---------- -------------
Net unrealized gains (losses)... $(24,594) $ 21,424
---------- -------------
---------- -------------
</TABLE>
The following table sets forth the carrying value and quality for each of
the two categories of fixed maturities as of March 31, 1994, classified in
accordance with the rating assigned by Standard & Poor's Corporation (S&P) or,
if not rated by S&P, based on ratings assigned by the National Association of
Insurance Commissioners, with Class 1 treated as A, Class 2 treated as BBB-,
Class 3 treated as BB- and Classes 4, 5 and 6 treated as B and below (in
millions):
<TABLE>
<CAPTION>
AVAILABLE HELD TO PERCENT OF PERCENT OF
FOR SALE MATURITY AT TOTAL TOTAL TOTAL
AT FAIR AMORTIZED FIXED FIXED INVESTED
INVESTMENT QUALITY VALUE COST MATURITIES MATURITIES ASSETS
- ----------------------------------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AAA................................ $ 639.1 $ 1.9 $ 641.0 38.5% 25.6%
AA................................. 209.3 209.3 12.6 8.3
A.................................. 446.6 446.6 26.8 17.8
BBB+............................... 86.9 86.9 5.2 3.5
BBB................................ 87.6 87.6 5.3 3.5
BBB-............................... 83.9 83.9 5.1 3.3
--------- ----- ---------- ----- ---
Total investment grade......... 1,553.4 1.9 1,555.3 93.5 62.0
--------- ----- ---------- ----- ---
BB+................................ 24.6 24.6 1.5 1.0
BB and BB-......................... 42.8 42.8 2.5 1.7
B and Below........................ 17.4 24.1 41.5 2.5 1.6
--------- ----- ---------- ----- ---
Total noninvestment-grade...... 84.8 24.1 108.9 6.5 4.3
--------- ----- ---------- ----- ---
Total fixed maturities..... $ 1,638.2 $26.0 $ 1,664.2 100.0% 66.3%
--------- ----- ---------- ----- ---
--------- ----- ---------- ----- ---
</TABLE>
Fixed maturities classified as held to maturity are principally private
placement corporate securities and gross unrealized losses on such investments
totaled $1.5 million as of March 31, 1994.
The amortized cost and fair value of noninvestment-grade fixed maturities
totaled $111.5 million and $109.3 million, respectively, at March 31, 1994.
Effective March 31, 1994, SLC's subsidiaries sold substantially all of their
commercial mortgage loans with remaining principal balances of less than
$300,000 for approximately $9.0 million. No significant gains or losses were
incurred as a result of such sale. SLC is considering the sale of substantially
all of its remaining commercial mortgage loan portfolio. At March 31, 1994,
mortgage loans represented approximately 5% of SLC's total investment portfolio.
Cash and short-term investments declined from $366.9 million at year-end
1993 to $301.4 million at March 31, 1994, primarily as a result of reinvestments
made in higher-yielding longer duration securities.
As discussed in the Company's 1993 Annual Report, the claims-paying ratings
assigned to certain of SLC's subsidiaries by various nationally recognized
statistical rating organizations were lowered over the past two years. Except as
discussed below, management believes SLC's subsidiaries have not experienced
more than normal policy surrenders and withdrawals as a result of these ratings
downgrades. For the three months ended March 31, 1994, policyholder contract
deposits totaled $42.4 million and policyholder contract withdrawals totaled
$48.9 million. Approximately $28.1 million of such
14
<PAGE>
withdrawals represented scheduled maturities of guaranteed investment contracts
(GICs) which were not reinvested with an SLC subsidiary due to the lowered
ratings. Because of its available liquidity and readily marketable securities,
the subsidiary has not encountered, and management does not anticipate that the
subsidiary will encounter, any difficulty in meeting its obligations relative to
such withdrawals. Exclusive of the GIC withdrawals, policyholder contract
deposits exceeded policyholder withdrawals by $21.6 million.
RESULTS OF OPERATIONS:
For the three months ended March 31, 1994, SLC incurred an operating loss
and a net loss, before preferred dividend requirements, of $39.4 million.
Included in such loss were the previously discussed writedowns of the Fund
America Investment and the SIST Residual totaling $46.4 million. The 1994 first
quarter results compare to a restated gain from operations for the same period
in 1993 of $105.6 million, and net earnings, before preferred dividend
requirements, totaling $102.6 million. The 1994 first quarter results also
compare to an operating loss, before preferred dividend requirements, in the
fourth quarter of 1993 totaling $11.0 million and a net loss, before preferred
dividend requirements, totaling $16.4 million. Preferred dividend requirements
totaled $4.3 million in the 1994 first quarter, as compared to $5.7 million in
the 1993 fourth quarter and $7.7 million in the 1993 first quarter. Results in
the 1993 first quarter also included a charge for a change in accounting for
postretirement benefits totaling $1.8 million and extraordinary losses related
to the early retirement of debt totaling $1.2 million. Results for the fourth
quarter of 1993 included a charge for a change in accounting for debt and equity
securities totaling $4.9 million and extraordinary losses totaling $.6 million.
For the three months ended March 31, 1993, SLC had previously reported a
non-operating gain totaling $79.5 million, net of deferred income tax effects,
representing SLC's equity in the proceeds of a common stock offering by SLC's
then-equity investee, Bankers Life Holding Corporation (BLHC). On September 30,
1993, SLC sold its investment in BLHC to Conseco, Inc. (Conseco) and one of
Conseco's subsidiaries. Upon the sale of the investment in BLHC, SLC
reclassified its previously reported non-operating gain as a component of
operating earnings and, as a result of the reclassification, revenues were
increased by $99.4 million to reflect the pre-tax gain resulting from BLHC's
stock offering and income tax expense was increased by $19.9 million to reflect
the tax effects associated with such gain. The accompanying financial statements
for the three months ended March 31, 1993, have been restated to reflect such
reclassification. As a result of the reclassification, primary operating
earnings per common share for the three months ended March 31, 1993, increased
from $.39 to $2.05, and fully diluted operating earnings per common share
increased from $.40 to $1.79. The reclassification had no effect on reported net
earnings or net earnings per common share.
SLC's results for the first quarter of 1993 were affected by several items
of an infrequent and non-recurring nature, including the gain recognized on the
stock offering by BLHC and a gain from the termination of a reinsurance
arrangement with Bankers. In addition, in the first quarter of 1993, SLC
included in its results of operations its equity in the earnings of BLHC. The
results for the fourth
15
<PAGE>
quarter of 1993 were affected by provisions for certain non-recurring charges.
Following is a condensed summary of results for the three months ended March 31,
1994, December 31, 1993 and March 31, 1993, by major sources of income and
expense (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1994 1993 1993
--------- ------------ ---------
<S> <C> <C> <C>
Operating earnings before
non-recurring income (charges),
equity in the earnings of BLHC,
realized investment gains
(losses), interest expense on
long-term debt, and provision
for income taxes................ $ 6,636 $ 8,290 $ 9,835
Gain on BLHC stock offering...... 99,376
Gain on sale of BLHC............. 267
Gain on reinsurance
termination..................... 17,118
Equity in operating earnings of
BLHC............................ 11,106
Realized investment gains
(losses)........................ (45,774) 2,580 19,135
Services Agreements with CNC
principals...................... (9,050)
Provision for cost of litigation
and other contingencies......... (1,000)
Interest expense on long-term
debt............................ (12,445) (14,540) (16,314)
Income tax (expense) benefit..... 12,214 2,496 (34,633)
--------- ------------ ---------
Operating earnings (loss)........ (39,369) (14,540) 105,623
Less dividends on preferred
stock........................... (4,325) 2,496 (7,700)
--------- ------------ ---------
Operating earnings (loss)
attributable to common
stock....................... $(43,694) $(16,641) $ 97,923
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
For the three months ended March 31, 1994, premium income and other
considerations decreased $1.8 million, or 1.5%, as compared to the corresponding
period in 1993. Following is a summary of premiums by major line of business for
each of the respective periods (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Individual life and annuity................. $ 29,971 $ 31,453
Individual health........................... 54,294 54,902
Group and other............................. 32,309 32,031
-------- --------
$116,574 $118,386
-------- --------
-------- --------
</TABLE>
Individual life and annuity premiums declined $1.5 million, primarily as a
result of the termination of the reinsurance arrangement between Bankers and an
SLC subsidiary effective March 31, 1993. Premiums earned under such reinsurance
arrangement totaled $2.6 million in the 1993 first quarter. SLC's subsidiaries
presently derive substantial revenues from their interest-sensitive and
universal life products; however, for financial reporting purposes, these types
of products are treated as deposit products and, therefore, premiums received
are not reflected as a component of premium income.
During the first quarter of 1994, net investment income decreased $32.4
million, or 52%, as compared to the corresponding period in 1993. Net investment
income includes 1) earnings on surplus investments and assets invested to
support the reserve liabilities of the Company's traditional and
interest-sensitive life and health insurance products (general investment
portfolio) and 2) investment activity related to separately held assets
supporting a GIC product, the credited rate on which is indexed to the S&P 500
Stocks Composite Average (S&P 500). In addition, in 1993, net investment income
included investment income on certain mortgage-backed securities held in a
special purpose trust (the Trust) securing the Trust's collateralized mortgage
note obligation. The accounts of the Trust are no longer consolidated with those
of the Company for periods after July 30, 1993, as the
16
<PAGE>
result of SLC's sale of a 75% interest in the Trust. Assets supporting the S&P
500 GIC product include, among other investments, put and call options on
various equity based index futures, including the S&P 500. The return on such
investments is highly volatile and, under certain market conditions, such as the
overall decline in equity markets experienced in the first quarter of 1994, can
result in investment losses, or negative investment yields. The negative
investment yield experienced in the 1994 first quarter on the assets supporting
the indexed GIC product was more than offset by a reduction in GIC benefits as
discussed below under the analysis of change in policyholder benefits. Following
is a summary of investment income (loss) for the three categories of investments
as described above for the three months ended March 31, 1994 and 1993 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1994 1993
------- -------
<S> <C> <C>
General investment portfolio.................. $40,533 $44,206
Investments supporting indexed GIC product.... (8,045) 11,438
Mortgage-backed securities held in the
Trust........................................ 9,701
------- -------
Gross investment income....................... 32,488 65,345
Less investment expenses...................... (2,481) (2,921)
------- -------
Net investment income..................... $30,007 $62,424
------- -------
------- -------
</TABLE>
The decline in investment income from the general investment portfolio was
attributable, in part, to an approximate $190 million decrease in the base of
invested assets between the two periods. Such decrease in invested assets
resulted, in part, from the transfer to Bankers effective March 31, 1993, of
approximately $163.6 million in invested assets upon the termination of a
reinsurance agreement between Bankers and an SLC subsidiary. In addition, as
previously discussed in the Company's 1993 Annual Report, an SLC subsidiary
experienced a significant increase in GIC withdrawals (other than the indexed
GIC product) throughout 1993, which also contributed to the decrease in invested
assets. Yields on the general investment portfolio averaged approximately 6.7%
for each of the respective periods.
Realized investment losses totaled $45.8 million for the 1994 first quarter,
as compared to investment gains totaling $19.1 million for the comparable 1993
period. Substantially all of the investment losses in 1994 were attributable to
writedowns of the Fund America Investment and the SIST Residual as previously
discussed under "Investment Portfolio." Investment gains in 1993 included $8.2
million of gains resulting from BLHC's redemption of certain of its securities
utilizing proceeds of its stock offering. Other gains in 1993 resulted primarily
from sales of fixed maturities and equity securities. See Note 6 of the Notes to
Financial Statements for a comparative analysis of realized investment gains and
losses.
Equity in the earnings (losses) of equity investees and limited partnerships
includes SLC's pro rata share of the operating earnings of BLHC and other
investments in limited partnerships which are accounted for by the equity
method. Following is an analysis of the components of such earnings (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1994 1993
---- -------
<S> <C> <C>
Equity in operating earnings of:
BLHC........................................... $11,106
Limited partnership investments................ $412 760
---- -------
$412 $11,866
---- -------
---- -------
</TABLE>
In 1993, other income included $17.1 million of non-recurring income
associated with the termination of a reinsurance agreement between Bankers and
an SLC subsidiary as previously discussed.
17
<PAGE>
Excluding the income from the reinsurance transaction, other income decreased
from $9.5 million in 1993 to $2.5 million in 1994. A substantial portion of the
decline in other income resulted from reduced profits earned through reinsurance
experience refunds.
Following is a summary of policyholder benefits by major business segment
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1994 1993
------- --------
<S> <C> <C>
Individual life and annuity.................. $36,754 $ 38,696
Individual health............................ 39,670 36,460
Group and other.............................. 20,717 19,760
Accumulation products........................ (6,456) 19,090
------- --------
$90,685 $114,006
------- --------
------- --------
</TABLE>
Life and annuity benefits decreased approximately $1.9 million, or 5%, a
substantial portion of which was attributable to a reduction in credited rates
on interest-sensitive life insurance policies between the periods. Individual
health benefits increased $3.2 million, reflecting a deterioration in the
individual health benefit ratio from 66.4% in 1993 to 73.1% in 1994. Group
benefits increased approximately $1.0 million, or 5%, resulting in an increase
in the group benefit ratio from 61.7% in 1993 to 64.1% in 1994. Benefits related
to accumulation products include primarily interest credited to annuity and GIC
account balances. As previously discussed, benefits attributable to the GIC
product indexed to the S&P 500 totaled a negative $10.5 million in the 1994
first quarter as compared to benefit expense totaling $11.2 million in 1993.
Other operating expenses decreased approximately $11.3 million from the 1993
period to the 1994 period. Following is a summary of the major items included in
other operating expenses (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Non-deferrable commissions.................... $10,070 $11,719
General and administrative expenses........... 23,709 28,258
Taxes, licenses and fees...................... 3,701 4,537
Placement fee for collateralized mortgage note
obligations.................................. 4,413
------- -------
$37,480 $48,927
------- -------
------- -------
</TABLE>
Non-deferrable commissions decreased primarily as a result of a reduction in
the sale of new group health insurance products. General and administrative
expenses decreased primarily as a result of the expense reduction and
consolidation programs implemented during 1993. The placement fee in 1993
relates to the refinancing of a previously-consolidated subsidiary's
collateralized mortgage note obligations.
Interest expense declined $6.7 million, or approximately 35% in the first
three months of 1994 as compared to the same period in 1993. In 1994, SLC
incurred interest expense only on its outstanding long-term debt, whereas in
1993 it had two categories of interest expense, including interest on long-term
debt and collateralized mortgage obligations. Interest expense relative to
long-term debt declined $3.8 million, or 24%, primarily as a result of the
retirement of approximately $120.9 million of SLC's 16 1/2% Senior Subordinated
Debentures during 1993. During the first quarter of 1993, SLC's consolidated
results included the accounts of the Trust that held mortgage-backed securities
used to collateralize certain promissory notes payable to unaffiliated parties.
SLC, through ICH Funding, sponsored the formation of and held a residual equity
interest in the Trust. Interest expense related to the Trust's obligations and
included in SLC's consolidated results totaled $2.9 million for the first three
months of 1993. In July 1993, SLC's and an affiliate's ownership interests were
reduced through
18
<PAGE>
a sale of a 75% interest in the Trust. As a consequence of the sale, the
accounts of the Trust are no longer included in SLC's consolidated results and
there was no similar interest expense was incurred in 1994.
Income tax expense in the 1994 first quarter represented $23.7 of SLC's
pre-tax loss, as compared to 24.7% of pre-tax earnings in the corresponding
period in 1993. The effective tax rate differed from the expected 35% rate in
1994 primarily as a result of amortization of excess cost for which there are no
income tax consequences and a $5.0 million increase in the deferred income tax
valuation allowance based on the uncertainty as to the Company's ability to
fully utilize it available loss carryforwards. In 1993, the effective tax rate
differed from the then-expected 34% rate as a result of amortization of excess
cost and a $13.9 million reduction in the valuation allowance relative to SLC's
deferred income tax assets. SLC's deferred income tax assets, before valuation
allowance, declined from $145.1 million at year-end 1992 to $69.3 million at
March 31, 1993, primarily as a result of the gain recognized on the BLHC stock
offering and other realized and unrealized investment gains in the first quarter
of 1993. Accordingly, the valuation allowance relative to SLC's deferred income
tax assets totaling $24.1 million at year-end 1992 was reduced to $10.2 million
at March 31, 1993, based on management's assessment that SLC's ability to
realize the benefits of its remaining tax assets, specifically its capital loss
carryforwards, had been significantly enhanced.
SLC recognized a $1.8 million charge, net of $.9 million in deferred taxes,
for the cumulative effective to January 1, 1993, of the adoption of Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." SLC had previously provided a
liability totaling $20.1 million for postretirement benefits for retirees of
certain acquired companies through its purchase accounting relative to such
companies. The 1993 charge reflected the cost of providing postretirement
benefits for its remaining employees. SLC also reported extraordinary losses in
1993 totaling $1.2 million, net of tax effects, related to early extinguishment
of debt. See Note 7 of the Notes to Financial Statements for additional
information regarding such losses.
Preferred dividend requirements declined $3.4 million from $7.7 million in
the 1993 first quarter to $4.3 million in the 1994 first quarter. Utilizing
proceeds from the sale of its interest in BLHC, SLC redeemed $50 million stated
value of its 11% Series 1987-A Preferred Stock on September 30, 1993, and $50
million stated value of its 16% Series 1987-C Preferred Stock on December 2,
1993.
Following is condensed comparative statement of earnings information for the
three months ended March 31, 1994 and December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
<S> <C> <C>
Revenues............................. $103,718 $169,781
--------- ------------
--------- ------------
Operating loss....................... $(39,369) $(10,957)
Cumulative effect of accounting
change, net of tax effect........... (4,922)
Extraordinary losses, net of tax
effect.............................. (559)
--------- ------------
Net loss............................. (39,369) (16,438)
Less dividends on preferred stock.... (4,325) (5,684)
--------- ------------
Net loss applicable to common
stock............................... $(43,694) $(22,122)
--------- ------------
--------- ------------
Per common share, primary basis:
Operating loss..................... $ (.91) $ (.35)
--------- ------------
--------- ------------
Net loss............................. $ (.91) $ (.46)
--------- ------------
--------- ------------
</TABLE>
Revenues declined $66.1 million in the first quarter of 1994 as compared to
the last quarter of 1993, primarily as a result of the $46.4 million in
writedowns of the Fund America Investment and the
19
<PAGE>
SIST Residual, and the negative investment income on assets supporting the
indexed GIC product, both as previously discussed. Investment income on such
assets supporting the indexed GIC product totaled $6.7 million for the 1993
fourth quarter, as compared to a negative $8.0 million in the 1994 first
quarter, or a net change of $14.7 million. Other factors contributing to the
decline in revenues included a $2.3 million reduction in premium income
(principally annuity premiums), a $1.9 million decrease in other investment
gains, and other miscellaneous reductions totaling $.7 million.
The operating loss in the first quarter of 1994 totaled $39.4 million, as
compared to an operating loss of $11.0 million in the 1993 fourth quarter. As
previously reflected, the fourth quarter 1993 results included non-recurring
charges totaling $10.0 million, of which $9.0 million represented a provision
for the Services Agreements entered into with the principal shareholders of CNC.
Operating earnings before non-recurring credits and charges, realized investment
gains (losses), interest expense on long-term debt and income tax benefits
declined from $8.3 million in the 1993 fourth quarter to $6.6 million in the
1994 first quarter, primarily as a result of increased claims incurred in the
individual life and health segments. Individual life claims, which can vary
significantly from quarter to quarter, increased approximately $4.9 million.
Individual health benefits increased approximately $9.1 million, reflecting an
increase in the individual health benefit ratio from 55.5% to 73.1%. The
increase in individual health benefits was offset, in part, by an approximate
$5.3 million improvement in results of the group segment, primarily as a result
of the corrective actions taken in the fourth quarter of 1993 (as discussed in
the Company's 1993 Annual Report). Group operations continued to operate at a
slight loss in the 1994 first quarter, but based on actions taken to date to
discontinue coverage for certain unprofitable group cases and to implement
appropriate premium rate increases, management expects that the group segment
will return to profitability in future quarters. The accumulation segment also
reflected an approximate $2.4 million improvement in operating results primarily
as a result of an improvement in the spread between rates earned on invested
assets and rates credited to policyholder account balances. Incurred operating
expenses, primarily insurance taxes, licenses and fees, also declined
approximately $5.0 million between the periods. The Company reflected
substantial provisions for guaranty fund assessments in the 1993 fourth quarter
and had no similar charges in the 1994 first quarter. Interest expense decreased
approximately $2.1 million primarily as a result of the redemption effective at
year-end 1993 of SLC's remaining $45.9 million principal amount of 16 1/2%
Senior Subordinated Debentures due 1994. Preferred dividend requirements
declined an approximate $1.4 million, as a result of SLC's redemption of $50
million stated value of its 16% Series 1987-C Preferred Stock in December 1993.
Reporting results of insurance operations on a quarterly basis necessitates
numerous estimates throughout the year, principally in the calculation of
reserves and in the determination of the effective rate for federal income
taxes. It is the Company's practice to review its estimates at the end of each
quarter and, if necessary, make appropriate refinements, with the resulting
effect being reported in current operations. Only at year-end is the Company
able to assess retrospectively the precision of its previous quarter estimates.
The Company's fourth quarter results contain the effect of the difference
between previous estimates and final year end results, and therefore, the
results for an interim period may not be indicative of the results for the
entire year.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWESTERN LIFE CORPORATION
By ___________________________________
John T. Hull,
EXECUTIVE VICE PRESIDENT,
TREASURER AND PRINCIPAL ACCOUNTING
OFFICER
Date: October , 1994
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------- ----------
<S> <C> <C>
11.1 Computation of Earnings (Loss) Per Share of Common Stock on Average
Shares Outstanding and Fully Diluted Bases for the Three Months
Ended March 31, 1994 and 1993.....................................
</TABLE>
<PAGE>
EXHIBIT 11.1
SOUTHWESTERN LIFE CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK
ON AVERAGE SHARES OUTSTANDING AND FULLY DILUTED BASES
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1994 1993
---------- ----------
(RESTATED)
<S> <C> <C>
Computation for statements of earnings:
Operating earnings (loss)........................... $(39,369) $105,623
Less dividends on preferred stock................... (4,325) (7,700)
---------- ----------
Operating earnings (loss) applicable to common
stock.............................................. (43,694) 97,923
Cumulative effect to January 1, 1993 of change in
method of accounting for postretirement benefits... (1,812)
Extraordinary losses................................ (1,231)
---------- ----------
Net earnings (loss) applicable to common stock...... $ (43,694) $ 94,880
---------- ----------
---------- ----------
Weighted average common shares outstanding.......... 47,870,690 47,908,225
---------- ----------
---------- ----------
Earnings (loss) per common share:
Operating earnings (loss)......................... $ (.91) $ 2.05
Cumulative effect to January 1, 1993 of change in
method of accounting for postretirement
benefits......................................... (.04)
Extraordinary losses.............................. (.03)
---------- ----------
Net earnings (loss)............................. $ (.91) $ 1.98
---------- ----------
---------- ----------
Additional computations (A):
Weighted average common shares outstanding.......... 47,878,690 47,908,225
Incremental common shares applicable to common stock
options based on the common stock daily average
market price during the period..................... 825,657 995,313
---------- ----------
Weighted average common shares, as adjusted......... 48,704,347 48,903,538
---------- ----------
---------- ----------
Weighted average common shares outstanding.......... 47,878,690 47,908,225
Incremental common shares applicable to common stock
options based on the more dilutive of the common
stock ending or daily average market price during
the period......................................... 826,028 1,298,964
Assumed conversion of convertible preferred
shares............................................. 7,867,451 7,867,542
---------- ----------
Weighted average common shares, assuming full
dilution........................................... 56,572,169 57,074,731
---------- ----------
---------- ----------
Net earnings (loss) applicable to common stock
assuming conversion of convertible preferred
stock.............................................. $ (39,526) $ 99,048
---------- ----------
---------- ----------
Earnings (loss) per common share:
Average shares outstanding:
Operating earnings (loss)....................... $ (.90) $ 2.01
Cumulative effect to January 1, 1993 of change
in method of accounting for postretirement
benefits........................................ (.04)
Extraordinary losses............................ (.03)
---------- ----------
Net earnings (loss)........................... $ (.90) $ 1.94
---------- ----------
---------- ----------
Fully diluted, assuming conversion of all
applicable securities (B):
Operating earnings (loss)....................... $ (.70) $ 1.79
Cumulative effect to January 1, 1993 of change
in method of accounting for postretirement
benefits........................................ (.03)
Extraordinary losses............................ (.02)
---------- ----------
Net earnings (loss)........................... $ (.70) $ 1.74
---------- ----------
---------- ----------
<FN>
- ------------------------------
(A) These calculations are submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083, although not required by footnote 2 to paragraph
14 of Accounting Principles Board Opinion No. 15 because they result in
dilution of less than 3% or antidilution.
(B) Fully diluted earnings in 1994 as reflected in this exhibit are considered
"antidilutive" because they result in per share earnings that exceed per
share earnings as determined on the primary basis or per share losses that
are less than per share losses as determined on the primary basis. Fully
diluted earnings per share in 1994 as reflected in the consolidated
statement of earnings (loss) were determined based on primary earnings per
share calculations as a result of such antidilution.
</TABLE>
