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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 1-11396
JOHN ALDEN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 59-2840712
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
7300 CORPORATE CENTER DRIVE, MIAMI, FLORIDA 33126-1223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 715-3767
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHT NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K 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 [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 16, 1998 WAS APPROXIMATELY $522,462,746.
AS OF MARCH 16, 1998, 24,526,104 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE 1998
ANNUAL MEETING OF STOCKHOLDERS OF THE COMPANY, WHICH WILL BE FILED ON OR BEFORE
APRIL 30, 1998.
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TABLE OF CONTENTS
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PART I..................................................................... 1
ITEM 1. BUSINESS......................................................... 1
Historical Perspective........................................... 1
Anticipated Sale of the Company.................................. 1
Business Strategy................................................ 2
Sale of Discontinued Operations.................................. 4
Investments...................................................... 5
Reinsurance...................................................... 5
Competition...................................................... 6
Government Regulation............................................ 7
Employees........................................................ 9
Ratings.......................................................... 10
ITEM 2. PROPERTIES....................................................... 10
ITEM 3. LEGAL PROCEEDINGS................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 11
PART II.................................................................... 12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 12
Principal Markets and Sales Prices............................... 12
Holders.......................................................... 12
Dividends........................................................ 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 26
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT............................. 26
PART III................................................................... 28
PART IV.................................................................... 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................... 29
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-K, the Company's Annual Report to
Stockholders, any Form 10-Q and any Form 8-K of the Company and any other
written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-
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looking statements are subject to certain uncertainties and other factors that
could cause actual results to differ materially from such statements. These
uncertainties and other factors (which are described in more detail elsewhere in
this Form 10-K) include, but are not limited to, uncertainties relating to
general economic conditions and cyclical industry conditions, uncertainties
relating to federal and state government and regulatory policies, volatile and
unpredictable developments (including utilization of medical services), medical
inflation, the uncertainties of the reserving process, the competitive
environment in which the Company operates, the uncertainties inherent in the
development and introduction into the marketplace of the Company's new small
group health insurance product, the ability of the Company to obtain desired
contracts and pricing with providers, the ability to obtain dividend approval
from state regulators, the uncertainties regarding the timing of the assumption
of policies coinsured with SunAmerica, the ability to modify or replace
computerized systems to be year 2000 compliant, and the ability of the Company
to control costs. There can be no certainty as to the timing of the consummation
of the acquisition of the Company as described below or obtaining approval from
regulators and stockholders for the proposed sale of the Company. The words
"believe", "expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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PART I
ITEM 1. BUSINESS
HISTORICAL PERSPECTIVE
John Alden Financial Corporation (the "Company") is an insurance holding
company that, through its subsidiaries, is principally engaged in providing
group health insurance to small businesses. For more than 25 years, the Company
has provided comprehensive group health benefit packages to employers through
its small group health insurance products. The Company is one of the largest
insurance company providers in the group market, selling primarily to groups
with fewer than 50 employees, while concentrating on groups with fewer than 25
employees. The Company offers traditional group indemnity products and "managed
indemnity" products, which have provider network, utilization review and case
management features to contain costs. The Company has offered these products in
47 states.
In addition to the small group health insurance products, the Company's
healthcare business includes two other related product lines. Through Alden Risk
Management Services ("ARMS"), the Company provides healthcare stop-loss
reinsurance products to a number of organizations that bear a significant
portion of their own risk, including employer groups whose benefit programs are
self-funded. Through a joint venture corporation, the Company also offers health
maintenance organization ("HMO") products in the South Florida market.
During recent years, the healthcare industry has undergone a substantial
transformation, primarily caused by healthcare legislation, originally at the
state level and, more recently, also at the federal level (the "reforms") and
the growth of managed care organizations. The reforms include, among other
things, guaranteed issue, mandated benefits, premium rate limits (including
"community rating" and "modified community rating"), guaranteed renewability,
minimum loss ratio mandates and risk adjustment mechanisms which allocate losses
of individual carriers to group carriers. Among other things, such legislation
places certain limits on the Company's ability to reprice its products to
reflect increasing medical costs. A large number of the states in which the
Company sells health insurance have adopted some form of healthcare reform
legislation and approximately two thirds of the states have enacted reforms
limiting the use of individual underwriting. Additionally, the healthcare
industry has seen rapid growth of HMO's and other managed care organizations.
Finally, the healthcare providers are organizing themselves in new ways such as
Physician Hospital Organizations ("PHO's").
In response to these varied changes in the environment in which the
Company operates, the Company has undergone its own transformation. Beginning in
late 1994 and throughout 1995, the Company conducted a strategic evaluation of
its operations. As a result of this evaluation, the Company determined that it
needed to focus all of its energies and resources on its healthcare operations.
In addition, on March 27, 1996, the Board of Directors of the Company authorized
the sale of its Asset Accumulation Segment, which included substantially all of
the annuity business (the "Annuity Operations"), and the Western Diversified
Group, the principal subsidiaries of the Company that market credit life and
disability and retail service warranty coverage (see "Sale of Discontinued
Operations"). The sale of the Annuity Operations occurred on March 31, 1997,
and the sale of the Western Diversified Group occurred on September 30, 1997.
During the first quarter of 1998, the Company also discontinued its marketing
of products written by third party insurers.
ANTICIPATED SALE OF THE COMPANY
On March 9, 1998, the Company entered into an agreement to merge with a
wholly-owned subsidiary of Fortis, Inc. ("Fortis"), a wholly-owned subsidiary
of Fortis Amev, Netherlands, and Fortis AG, Belgium, as a result of which,
among other things, the Company will become a wholly-owned subsidiary of Fortis
and each outstanding share of the Company's common stock will be converted into
the right to receive $22.50 in cash. Consummation of the merger is subject to
regulatory and stockholder approvals, as well as other customary terms and
conditions. It is anticipated that the merger will be consummated during 1998.
In connection with and as a condition to Fortis entering into the agreement to
merge, the Company granted an option to Fortis to acquire, under certain
circumstances, common stock of the Company representing up to 19.9% of the
Company's outstanding common stock at an exercise price of $22.50 per share.
See Note 2 to the Company's Consolidated Financial Statements. Further
description of the merger agreement is set forth in the Company's current
report on Form 8-K dated March 9, 1998 filed with the Securities and Exchange
Commission.
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BUSINESS STRATEGY
Small Group Health Insurance Products
The Company has continued its efforts to strengthen its products and
negotiate new and better contracts with its providers. This strategy is designed
to reduce the risks created in its marketplace by healthcare reforms and
changing patterns of behavior by providers while offering customers attractive,
high quality, affordable products. In this pursuit, during early 1996, the
Company began a major project to design benefit plans that were more easily
understood and administered by providers and which steer customers into selected
provider networks. The strategy resulted in the development of a new product
which has been introduced in 31 states representing most of the states in which
the Company expects to focus its marketing efforts. It has been designed to
offer customers the high quality, affordable features they demand, reward
policyholders for using the Company's selected local provider system, generate
stronger relationships with providers and reduce the risks healthcare reforms
have created in the marketplace. The features of the new product, while not
unique, were designed to be similar to, and competitive with, the key features
of products offered by the Company's competitors. In response to increasing
restrictions on the Company's ability to use individual underwriting and in
order to better spread medical risks, the Company increased its marketing
efforts to groups having five to fifteen employees, which are slightly larger
groups than those to which the Company has made most of its sales in the past
(see "Healthcare Marketing"). Sales of the new product have in fact been to
larger groups than the average group size of the old product. During 1997,
approximately 59.7% of all certificates issued by the Company were with respect
to groups having five or more employees representing 58.7% of the annualized
gross premiums. The Company is currently increasing its efforts to sell to the
three and four life groups and ten to fifty life groups. Although there can be
no assurance as to the success of this new product in the competitive healthcare
industry, it has been designed to be more attractive to providers and customers
thereby increasing demand in the marketplace and sales. It is anticipated that
the cost of implementing this strategy may result in an increase in the group
gross expense ratio over the next several quarters and possibly thereafter.
The new product employs greater differentials between in-network and
out-of-network benefits to increase steerage to contracted providers.
Out-of-network benefits are now subject to certain higher coinsurance
percentages, reimbursements based upon in-network negotiated levels or Medicare
allowable levels, separate and higher deductibles and out-of-pocket limits.
Certain medical services, such as preventive benefits, are only available
in-network. The new product includes limits on transplants and outpatient
therapies. Changes in both the type of benefit and the amount covered have been
made, especially in the types of benefits that are particularly prone to over
utilization. Additionally, certain markets now have "value plans" available that
will appeal to a healthier segment of the market and compete in low-cost areas
of the market. The new product is designed to be "provider network friendly".
Plan designs can be customized for the local marketplace and medical delivery
system. The number of plan designs offered in each market has been reduced to
make administration by the provider easier than the traditional group product.
Additionally, the new product employs greater use of co-pays, as provider
networks generally prefer co-pays over deductibles since they are more
understandable and easier to administer. Beginning in the second quarter of
1998, the Company will add a new feature to the new product called Employee
Level Selection. This feature will allow insureds to choose different networks,
which may be more convenient to employees of an employer with multiple
locations.
In addition to the development of the new product, as part of the
Company's business strategy, during 1996 the Company began exiting certain
markets and/or states in which it determined that it could not operate on a
profitable basis. This included ceasing to offer coverage through certain
purchasing alliances and the exiting of the State of Kentucky. In the first
quarter of 1997, the Company decided to stop selling small group insurance plans
in California, Maryland and New Jersey, and to terminate existing small group
insurance plans in these states. By the end of the third quarter 1997, virtually
all of the policies in these states had expired. The Company is focusing its
marketing efforts and resources in those markets and states in which it believes
it can best increase profitability and market
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share. Conversely, the Company intends to reduce its marketing efforts and
significantly reduce its financial exposure and may, in some cases, withdraw
from business in those states where legislative reform and intense competition
have significantly increased the risk profile of writing small employer health
coverage. The Company continues to monitor the business in the various states,
and based on competitive and regulatory issues, the Company may decide to exit
additional states. It is possible that the Company could experience an
increase in the group medical loss ratio for existing business in additional
exit states, if any.
During the first quarter of 1997, the Company reduced the number of
service centers for its group business from seven to three. The Company believes
it gained efficiencies as well as cost reductions from the consolidation.
Another changing part of the healthcare mix is the providers themselves.
Providers are now organizing in a manner that allows them to contract directly
with a selected number of payors rather than through an intermediary
organization such as a Preferred Provider Organization ("PPO"). The Company
believes that characteristics of a PHO as compared to characteristics of a PPO
include smaller, higher-quality groups, greater discounts and stronger medical
management.
As of December 31, 1997, the Company's small group indemnity and managed
indemnity products covered approximately 284,000 employees and approximately
544,000 total insureds, including dependents.
In the third quarter of 1994, the Company entered into an HMO joint
venture, NHP Holding Company, Inc. ("NHP"), with Dimension Physician-Hospital
Organization, Inc. ("Dimension"), to serve the South Florida area. Dimension
included five leading hospitals and approximately 1,600 physicians and, through
its existing HMO, provided medical coverage to approximately 11,000 people.
Currently, NHP's South Florida HMO network includes 30 hospitals and
approximately 4,400 physicians. At December 31, 1997, NHP was providing medical
coverage to approximately 111,000 people throughout South Florida, including
approximately 13,000 Medicare customers and approximately 10,000 Medicaid
customers. Through its small group business, the Company may also pursue
opportunities to market HMO-like insurance products in other areas.
Healthcare Stop-loss Reinsurance Products
ARMS's business consists primarily of providing healthcare stop-loss
reinsurance coverage and related insurance products to employers that elect to
self-insure a portion of their employee medical benefit programs. These products
cover the employers' risk of catastrophic claims in excess of deductible amounts
on both specific and aggregate bases. In 1997, the Company exited the portion of
its stop-loss reinsurance business that was issued to managed care organizations
and HMO's and this portion is currently in runoff. At December 31, 1997, the
Company's healthcare stop-loss reinsurance products to employers covered
approximately 868,000 lives.
Healthcare Marketing
Sales of the Company's small group health insurance products are
diversified geographically. At the current time, business is actively marketed
in 31 states and the District of Columbia. The small group health insurance
products are marketed primarily through the Company's captive marketing
organization, North Star Marketing Corporation, which markets products through
approximately 56,000 independent insurance agents. Group insurance generally is
a small part of the business of the independent insurance agents contacted by
the marketing organization. No single agent accounts for a significant portion
of the group product sales. The ability of the Company to provide a detailed
explanation of the Company's products, competitive information that will assist
the agent to make the sale, and service support to the insured group, enables
the Company to meet the agents' need for timely information and other service
support. This, in turn, enhances the ability of the Company to compete on a
basis other than price or agent compensation alone. The sales representatives'
compensation is based on both the amount of insurance sold and the first year
loss ratios on their sales.
In the past, the Company's use of individual medical underwriting and its
policy features and pricing were better suited to the small group marketplace of
businesses having fewer than five employees. As of December 31, 1997,
approximately 50.2% of all employees insured by the Company were in groups
consisting of
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five or more employees, which groups accounted for approximately 45.0% of the
annualized gross premiums in force at such date. In response to increasing
restrictions on the Company's ability to use individual medical underwriting and
in order to better spread medical risks, the Company has increased its marketing
efforts to business groups with five to fifteen employees. This segment of the
small group market may have characteristics that differ from those of slightly
smaller group sizes, and may be more sensitive to the identity of provider
systems, pricing, product characteristics and other competitive factors. There
can be no assurance that the Company will be able to successfully market the new
product. In the first quarter of 1998, the Company ceased marketing products
written by third party insurers.
To reach self-insured employer groups, ARMS uses 20 regional marketing
employees to market to unaffiliated third party administrators ("TPAs"). These
TPAs are generally small, independent businesses specializing in benefits
administration services. ARMS has sold employer excess-loss insurance through
approximately 250 TPAs nationwide, representing approximately 1,100 self-insured
employers.
SALE OF DISCONTINUED OPERATIONS
On March 31, 1997, the Company sold substantially all of its Annuity
Operations to SunAmerica Life Insurance Company ("SunAmerica"). The transaction
included the sale of all of the common stock of John Alden Life Insurance
Company of New York, the then New York-domiciled subsidiary of the Company,
("JANY") and the coinsurance of substantially all of the annuity business of
another subsidiary, John Alden Life Insurance Company ("JALIC"). The coinsurance
was initially on an indemnity basis and the parties agreed to transition the
business to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, the policy will remain reinsured on an indemnity basis. As of December
31, 1997, approximately 70% of the ceded annuity reserves have either
transitioned to an assumption basis or lapsed. The majority of the remaining
policies are expected to be assumed by December 31, 1998.
As consideration for the Annuity Operations, SunAmerica paid the Company
approximately $238.2 million. The consideration represented approximately $162.3
million of premium paid to acquire the business and approximately $75.9 million
of adjusted capital and surplus of JANY. It did not include any capital and
surplus used to support the annuity business in JALIC, which remained in JALIC.
On September 30, 1997, the Company sold all of the common stock of
substantially all of the subsidiaries comprising the Western Diversified
Group to Protective Life Insurance Company.
As a result of the sales of the Annuity Operations and Western Diversified
Group, the Company recorded a net deferred gain of approximately $45.0 million.
This amount was net of estimated transaction expenses, taxes, goodwill and other
adjustments relating to these transactions. During the three months ended
December 31, 1997, the Company recognized approximately $24.0 million of the net
deferred gain in income as a result of the assumption of policy reserves by
SunAmerica. The Company expects to recognize the majority of the remainder of
the net deferred gain by December 31, 1998.
The Company's available capital was enhanced by both the after-tax gain
generated from the transactions and by the release of the net capital previously
allocated to support these businesses. The Company continues to evaluate the
best uses of its capital, including the approximately $200 million of excess
capital generated from the sale of the Company's annuity and credit businesses.
In the event that the sale of the Company does not occur, this capital may be
used to repurchase common stock, pay dividends, reduce debt, acquire blocks of
business or for general corporate purposes, or for a combination of two or more
of such uses. During December 1997 and January 1998, the Company repurchased
approximately 1.1 million shares of common stock for a total purchase price of
approximately $25.9 million.
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INVESTMENTS
The Company's investment portfolio at December 31, 1996 aggregated
approximately $6.0 billion. At December 31, 1997, after the disposition of
discontinued operations, the Company's investment portfolio aggregated
approximately $1.0 billion as follows (dollars in thousands):
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DECEMBER 31,
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1997 1996
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Debt securities:
Held-to-maturity securities........................................... $ 44,780 $ 45,357
Available-for-sale securities......................................... 550,585 4,248,774
Trading account securities............................................ 3,504 4,518
Equity securities........................................................ 23 82,098
Mortgage loans........................................................... 145,770 1,449,242
Investment in real estate, at cost, less accumulated depreciation........ 40,354 39,903
Real estate owned........................................................ 3,021 11,483
Policy loans and other notes receivable.................................. 32,091 75,186
Short-term investments................................................... 196,218 6,371
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Total invested assets................................................. $ 1,016,346 $ 5,962,932
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The composition of the Company's debt securities as of December 31, 1997
is as follows (dollars in thousands):
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DECEMBER 31, 1997
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AMOUNT %
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RATING (1):
AAA (2)................................................................ $ 183,880 30.7%
AA..................................................................... 90,918 15.2
A...................................................................... 259,655 43.3
BBB.................................................................... 64,416 10.8
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Total................................................................ $ 598,869 100.0%
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(1) Debt securities are classified according to the lowest rating by a
nationally recognized statistical rating organization. Debt securities not
rated by any such organization are classified according to the rating
assigned to them by the NAIC as follows: NAIC class 1 is considered
equivalent to an A or higher rating; class 2, BBB; class 3, BB; and classes
4-6, B and below.
(2) Includes approximately $48,506,000 of U.S. government and agency debt
securities.
See Note 6 to the Company's consolidated financial statements for further
discussion regarding invested assets.
REINSURANCE
The Company has entered into a variety of reinsurance arrangements under
which it cedes business to other insurance companies to mitigate risk exposure
and to permit premium and asset growth while maintaining acceptable risk-based
capital ratios. The different types of reinsurance arrangements used by the
Company are described below.
The Company uses stop-loss reinsurance to mitigate its risk exposure. The
Company chooses retention limits for such reinsurance based upon the risk
distributions of each product line rather than the broader risk distribution of
the Company as a whole. The Company believes that the small group health risk
distribution is sufficiently large, and thus it does not purchase excess
reinsurance on that line.
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The Company uses reinsurance to manage its aggregate retained risk
exposures in order to maintain risk-based capital ratios (see "-- Government
Regulation -- Risk-Based Capital and Investment Reserve Requirements") while
sustaining growth and making debt service payments. Rather than depending solely
on limiting business written, at the cost of both foregone profits and
reductions in general expense economies of scale, the Company has instead made
coinsurance its primary means of controlling growth in risk exposure. Since the
business coinsured has been the Company's more mature product lines, for which
the reinsurers have considerable historical data from which to derive pricing
comfort, the Company seeks to limit reinsurance costs by participating in the
ongoing profits on such coinsured business under contractual formulas. In
addition, such profit sharing provisions compensate the Company for its
marketing efforts, since the reinsurers are generally unable to generate
sufficient business through their own distribution networks. Substantially all
of the Company's group accident and health insurance business has been coinsured
under a Group Reinsurance Agreement with London Life Insurance Company and
Transamerica Occidental Life Insurance Company (the "Group Reinsurance
Agreement"). See further discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Reinsurance".
As discussed above, in conjunction with the sale of the Annuity
Operations, the Company entered into a coinsurance agreement with SunAmerica
relating to substantially all of the JALIC annuity business. This coinsurance
was initially on an indemnity basis and the parties agreed to transition the
business to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, the policy will remain reinsured on an indemnity basis. As of December
31, 1997, approximately 70% of the ceded annuity reserves have either
transitioned to an assumption basis or lapsed. The majority of the remaining
policies are expected to be assumed by December 31, 1998. At December
31, 1997, there are assets held in trust directly or indirectly available for
payments to policyholders supporting the remainder of the ceded reserves.
SunAmerica is rated "A+ (Superior)" by A.M. Best and Company ("A.M. Best").
For excess stop-loss and catastrophe reinsurance, where reinsurance cash
flows are small and disproportionate to risk, the Company generally restricts
reinsurance arrangements to established professional reinsurers with an A.M.
Best rating of "A+ (Superior)" or other rating agency equivalent designations.
For health coinsurance, where reinsurer cash buildups are minimal, the Company
applies the same reinsurer minimum standards.
The reinsurance of risk does not relieve the Company of its original
liability to policyholders. The ceded business is included in contract holder
liabilities and is reflected as reinsurance receivables or investment deposits
recoverable on the Company's consolidated balance sheet. Receivables from
reinsurers and investment deposits recoverable aggregated $187.1 million and
$970.7 million at December 31, 1997 and December 31, 1996, respectively.
Additionally, included in other assets at December 31, 1997 in the accompanying
consolidated balance sheet was approximately $1.4 billion of investment contract
deposits recoverable on the JALIC coinsurance, net of a similar amount of
contract holder liabilities related to the discontinued operations.
COMPETITION
The Company operates in a highly competitive environment. There are
numerous insurance companies, managed care providers and other entities that
compete with the Company, many of which have greater resources than the Company.
The Company believes that the principal competitive factors in the sale of
insurance are product features, price, commission structure, perceived stability
of the insurer, service, name recognition and managed care capability. Many
other insurance companies compete for sales in the Company's markets. In
addition, the Company's ability to compete is affected, in part, by its ability
to recruit, train and retain quality marketing and sales representatives.
The Company competes in the healthcare industry primarily with other large
health insurers, Blue Cross and Blue Shield associations and managed care
providers, the most significant of which are HMO's.
State and federal legislative reforms, the rapid growth of HMO's and
managed care organizations and new forms of healthcare provider organizations
have negatively impacted the Company's ability to compete. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Statement of Income Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Business Outlook".
GOVERNMENT REGULATION
General Regulation
As an insurance holding company, the Company is subject to regulation by
the states in which its insurance subsidiaries are domiciled or transact
business. Most states have enacted legislation that requires each insurance
company in a holding company system to register with the insurance regulatory
authority of its state of domicile and furnish to it financial and other
information concerning the operations of companies within the holding company
system that may materially affect the operations, management or financial
condition of the insurers within the system. All transactions within a holding
company system affecting insurers must be fair and equitable, and each insurer's
policyholder surplus following any transaction must be both reasonable in
relation to its outstanding liabilities and adequate for its needs. State laws
also require prior notice or regulatory agency approval of changes in control of
an insurer or its holding company; certain inter-company transfers of assets
within the holding company structure may also require notice to or approval from
the regulatory agency.
In addition, the laws of various states establish regulatory agencies with
broad administrative powers to grant and revoke licenses to transact business,
regulate trade practices, license agents, require statutory financial statements
and prescribe the type and amount of investments permitted.
The insurance subsidiaries of the Company may be required by the
applicable insurance codes of the states in which they operate to file rates and
policy forms in connection with certain insurance products. In most cases, such
rates and/or policy forms must be approved by the relevant insurance department
prior to use. Many states require the inclusion of specified provisions in
insurance policies issued or delivered in the state. The foregoing state
regulation and supervision are designed primarily to ensure the financial
stability of insurance companies and to protect policyholders, rather than
stockholders or creditors.
Insurance companies are required to file detailed statutory annual
statements with the state insurance regulators in each of the states in which
they transact business, and their business and accounts are subject to
examination at any time. In addition, insurance regulators periodically examine
the insurer's financial condition, adherence to statutory accounting practices,
and compliance with insurance department rules and regulations. Applicable state
insurance laws, rather than federal bankruptcy laws, apply to the liquidation or
the reorganization of insurance companies.
The NAIC has adopted a small group model law to limit the differentials in
rates carriers can charge between new business and renewal business and with
respect to similar demographic groups. The NAIC also has adopted a model law to
assure access to health insurance by all small employer groups. This model law
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents in a group, by limiting the applicability
of pre-existing condition exclusions, by requiring carriers to offer a basic
plan exempt from certain mandated benefits as well as a standard plan, and by
establishing mechanisms to spread the risk of high risk employees to small group
carriers. NAIC model laws are binding upon the Company only to the extent that
they are adopted by states in which the Company's insurance subsidiaries are
domiciled or conduct business. States may enact NAIC model laws as proposed or
with variations from the proposed text, or laws which have the same effect as
the NAIC model laws.
7
<PAGE> 11
Regulatory Changes
The NAIC and insurance regulators periodically re-examine existing laws
and regulations and their application to insurance companies. The NAIC has
formed committees and appointed advisory groups to study and formulate
regulatory proposals or model acts. Recently, this re-examination has focused on
insurance company investment and solvency issues and, in some instances, has
resulted in new interpretations of existing law, development of new laws and the
implementation of non-statutory guidelines.
Many states have enacted small group reforms that either go further than
or are unique in their approach compared to the NAIC model law. A large number
of the states in which the Company sells health insurance have adopted some form
of healthcare reform legislation and approximately two-thirds of the states have
enacted reforms limiting the use of individual underwriting. Such reform
legislation included the NAIC small group model law reforms discussed above, as
well as guaranteed renewal and mandated loss ratios. Insurance reform will
likely continue at the state level. These state reforms have restricted the
Company's ability to adjust pricing based on underwriting and to maintain
targeted profit margins for its products. In certain states, such reforms could
preclude the Company from competing profitably, causing the Company to withdraw
from doing business in such state. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Statement of Income Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Outlook".
In 1996, Congress enacted HR 3103 ("Health Insurance Portability and
Accountability Act", or "HIPAA"), also commonly referred to as the
Kennedy-Kassenbaum Bill. HIPAA provisions applicable to both insured and
self-funded employer group coverage include minimum standards for pre-existing
condition exclusions, waiver of pre-existing condition exclusions for
individuals meeting minimum prior coverage requirements and prohibition of
health related exclusion of individuals from employer group coverage. HIPAA also
provides guaranteed acceptance of small employers with 2 to 50 employees for
insured coverage. In other respects, HIPAA's group and small group provisions
are largely in line with state small group reform laws already enacted by the
large majority of states. In the individual market, HIPAA requires guaranteed
acceptance for eligible individuals moving out of group plans who have at least
18 months of prior coverage. However, most states have or are expected to amend
their laws to alleviate any inconsistencies with the federal minimum standards.
States which have not already enacted all of the HIPAA group and small group
standards may enact state reforms consistent with HIPAA. The final outcome of
state amendments or new legislation, as well as federal regulations addressing
these provisions, cannot be predicted.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
The Company is a legal entity separate and distinct from its subsidiaries.
As a holding company with no business operations other than holding the stock of
its subsidiaries, its primary sources of cash needed to meet its obligations,
including principal and interest payments under its credit agreement, are
dividends and other payments from its insurance and non-insurance subsidiaries.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Cash Flows".
The Company's available capital was enhanced by both the after-tax gain
generated from the sale of its annuity and credit businesses and by the release
of the net capital previously allocated to support these businesses. The Company
continues to evaluate the best uses of its capital, including the approximately
$200 million of excess capital generated from the sale of the Company's annuity
and credit businesses. In the event that the sale of the Company does not occur,
this capital may be used to repurchase common stock, pay dividends, reduce debt,
acquire blocks of business or for general corporate purposes, or for a
combination of two or more of such uses. During December 1997 and January 1998,
the Company repurchased approximately 1.1 million shares of common stock for a
total purchase price of approximately $25.9 million.
The Company's insurance subsidiaries are subject to various regulatory
restrictions on the maximum amount of payments including loans, cash advances,
contracts for services or other related company transactions
8
<PAGE> 12
that they may enter into with the Company or any of its subsidiaries or
affiliates without obtaining prior regulatory approval. As a Minnesota-domiciled
insurance company, JALIC is subject to Minnesota requirements that life
insurance company dividends must receive prior regulatory approval if their fair
market value, together with that of other dividends or distributions made within
the preceding 12 months, exceeds the greater of: (i) 10% of the insurer's
surplus as regards policyholders as of the 31st day of December next preceding;
or (ii) the net gain from operations of the insurer, not including realized
investment gains, for the 12-month period ending the 31st day of December next
preceding. The Minnesota dividend statute requires notice to the Minnesota
Commissioner of Commerce for dividend payments made by an insurance carrier
within five days after declaration and at least ten days prior to payment. The
Minnesota statute generally also limits payment of dividends to a carrier's
unassigned surplus less 25% of unassigned surplus attributable to unrealized
capital gains. As a Texas-domiciled insurance company, Houston National Life
Insurance Company, a subsidiary of the Company and the parent of JALIC,
("HNLIC") is subject to Texas requirements that life insurance company dividends
must receive prior regulatory approval if their fair market value, together with
that of other dividends or distributions made within the preceding 12 months,
exceeds the greater of: (i) 10% of the insurer's surplus as regards
policyholders as of the preceding December 31st; or (ii) the statutory net gain
from operations of the insurer for the 12-month period ending the preceding
December 31st. With the approval of the state regulators, JALIC made an
extraordinary dividend distribution of approximately $200 million to HNLIC
during 1997, which in turn distributed approximately $188 million to the
Company. Because of these dividend distributions, any dividends paid by JALIC or
HNLIC before June 21, 1998 would be considered extraordinary and would require
prior approval. On or after that date, approximately $76.7 million is available
for dividend distribution without prior approval.
Risk-Based Capital and Investment Reserve Requirements
The Risk-Based Capital for Life and/or Health Insurers Model Act (the
"Model Act") is used by insurance regulators to monitor the solvency of
insurers. It provides for four different levels of regulatory action, each of
which may be triggered if an insurer's Total Adjusted Capital (as defined in the
Model Act) is less than a corresponding "level" of risk-based capital. The Model
Act establishes capital requirements for four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each category, the
capital requirement is determined by applying factors to various asset, premium
and reserve items, with the factor being higher for those items with greater
underlying risk and lower for less risky items.
Applying the NAIC formula as of December 31, 1997, the Total Adjusted
Capital of the Company's principal life insurance subsidiary, JALIC, was
substantially above the level necessary to trigger any action under the Model
Act.
Assessments Against Insurers
Under insolvency or guaranty laws in most states in which the Company
operates, insurers can be assessed for policyholder losses incurred by insolvent
insurance companies. The timing of any future assessments on the Company under
these laws cannot be reasonably estimated and is beyond the control of the
Company. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's financial strength, and
some assessments paid by the Company pursuant to these laws may be used as
credits for a portion of the Company's premium taxes. The Company has recorded
an assessment liability of $3.3 million at December 31, 1997.
EMPLOYEES
The Company had approximately 1,790 employees as of March 1, 1998, and
considers its employee relations to be good. The Company's employees are not
represented by labor unions.
9
<PAGE> 13
RATINGS
JALIC is currently rated "A- (Excellent)" by A.M. Best, "BBB+ (Adequate)"
by Standard & Poor's Rating Group ("S & P") for claim-paying ability and "Baa2"
by Moody's Investors Service ("Moody's") for income financial strength. Upon the
announcement of the proposed sale of the Company, A.M. Best announced that its
current rating of JALIC is under review with developing implications. In
addition, S & P announced that it has revised its CreditWatch implications on
JALIC's rating to positive from developing and Moody's announced that it has
placed JALIC's rating on review for possible upgrade.
ITEM 2. PROPERTIES
The Company's headquarters are located in Miami, Florida, where it owns
approximately 55 acres of an office park with the following improvements: (i) a
seven-story office building containing approximately 231,000 rentable square
feet of office space, (ii) three six-story office buildings containing
approximately 130,000 rentable square feet per building and (iii) five
single-story buildings and two mid-rise buildings containing, in the aggregate,
approximately 384,000 rentable square feet of office and warehouse space. The
Company occupies the entire seven-story building, a portion of the space in one
of the six-story buildings, and space in two of the single-story buildings.
The Company currently owns an office building in Boise, Idaho containing
50,000 rentable square feet of office space. During 1998, the Company entered
into an agreement to sell this property and intends to enter into a ten year
lease with the buyer. The Company also leases approximately forty sales offices
and three service centers throughout the United States. The Company believes
that its present facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. While it is not possible to determine the ultimate
disposition of each of these proceedings, the Company believes that the ultimate
disposition of such proceedings, individually and in the aggregate (including
the lawsuits discussed below), will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
During the period of April 1995 through May 1995, the Company and certain
of its officers and directors were named as defendants in a series of putative
class actions alleging violations of the federal securities laws. The actions,
Christopher W. Aronson, et. al. v. John Alden Financial Corporation, et. al.; In
Re: John Alden Financial Corporation Securities Litigation, all of which were
filed in the United States District Court for the Southern District of Florida
(the "Court"), have been consolidated. In October 1995, the plaintiffs filed a
Consolidated Amended Complaint purportedly on behalf of a class of persons who
purchased the Company's common stock, par value $.01 per share (the "Common
Stock") during the period of October 27, 1994 through May 3, 1995 seeking
unspecified damages, fees, costs and interest. The first of the original
complaints was filed after the Company revised its previously announced earnings
for the fourth quarter of 1994 to reflect an unanticipated increase in claims
received in 1995 for medical services rendered in 1994. The remainder of the
original complaints were filed after the Company increased reserves during the
first quarter of 1995 to reflect a further increase in such claims. On September
30, 1996, the Court denied the defendants' motion to dismiss the Consolidated
Amended Complaint and the Court certified a class of those persons who purchased
the Company's Common Stock during the period between October 27, 1994 through
May 3, 1995. Discovery in this lawsuit is ongoing. The Company and individual
defendants deny any wrongdoing, believe they have meritorious defenses against
the claims asserted, and intend to vigorously defend the lawsuit.
The Company and certain of its officers and directors have been named as
defendants in actions entitled Hanf v. Johnson, et al., C.A. No. 16241NC, filed
on March 10, 1998, and Abramsky v. Johnson, et al., C.A. No. 16235NC, filed
March 9, 1998, in the Court of Chancery of the State of Delaware. The plaintiffs
allege that they are owners of the Company's common stock and that they are
bringing the actions as class actions. Plaintiffs challenge the proposed sale of
the Company to Fortis and allege that the Company is not being sold for the
highest price possible. For relief, plaintiffs seek an injunction against
10
<PAGE> 14
consummation of the proposed transaction with Fortis and an award of damages.
The Company and individual defendants deny any wrongdoing, believe they have
meritorious defenses against the claims asserted, and intend to vigorously
defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL MARKETS AND SALES PRICES
The Company's Common Stock is listed and principally traded on the New
York Stock Exchange ("NYSE") under the ticker symbol "JA". The Company's Common
Stock is also traded on the following regional exchanges: the Boston Stock
Exchange, the Philadelphia Stock Exchange, the Midwest Stock Exchange and the
Pacific Stock Exchange.
The following table sets forth the price range of the Company's Common
Stock and the cash dividends per share of Common Stock declared for the periods
shown. The Common Stock prices are the closing sale price as reported on the
NYSE.
<TABLE>
<CAPTION>
PRICE RANGE
---------------------------- DIVIDENDS
HIGH LOW DECLARED
------------- ------------- ------------
<S> <C> <C> <C>
1996
----
First Quarter............. $21-5/8 $17-5/8 $0.11
Second Quarter............ 24-1/8 18-3/8 0.11
Third Quarter............. 22-1/8 18-1/4 0.12
Fourth Quarter............ 20-1/2 16-5/8 0.12
1997
----
First Quarter............. 20-1/8 16-3/4 0.12
Second Quarter............ 22-1/8 16-3/8 0.12
Third Quarter............. 31-3/4 20-7/8 0.12
Fourth Quarter............ 31-5/16 22-5/16 0.12
</TABLE>
On March 9, 1998, the Company entered into an agreement to merge with a
wholly-owned subsidiary of Fortis as a result of which, among other things, the
Company will become a wholly-owned subsidiary of Fortis and each outstanding
share of the Company's common stock will be converted into the right to receive
$22.50 in cash.
HOLDERS
As of March 16, 1998, the approximate number of record holders of the
Company's Common Stock was 560 and the approximate number of beneficial owners
was 7,200.
DIVIDENDS
On March 8, 1998, the Board of Directors of the Company declared a
dividend of $0.12 per share of Common Stock to holders of record on March 31,
1998, aggregating approximately $2.9 million and declared a preferred stock
dividend in the amount of approximately $0.7 million, both payable on April 20,
1998.
The Company's 9% cumulative preferred stock ranks prior to the Common
Stock as to payment of dividends and, therefore, no payment of dividends can be
made to the holders of the Common Stock unless all accrued dividends have been
paid to the holders of the 9% cumulative preferred stock. As an insurance
holding company, the Company depends on dividends and other permitted payments
from its insurance subsidiaries to pay cash dividends to stockholders. The
payment of dividends and such other payments by the insurance subsidiaries are
restricted by the laws of each insurance subsidiary's state of domicile and each
state where the subsidiary conducts business. State insurance regulators have
authority in certain circumstances to block payments of dividends and other
amounts by the insurance subsidiaries that would otherwise be permitted without
regulatory approval. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --
12
<PAGE> 16
Liquidity and Capital Resources" and "Business -- Government Regulation". In
addition, the Company's credit agreement prohibits it from declaring cash
dividends on its Common Stock in an annual aggregate amount in excess of certain
specified limits.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial data for the ten years ended December
31, 1997 have been derived from the Consolidated Financial Statements of the
Company audited by Price Waterhouse LLP, independent accountants. The following
selected financial data of the Company should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's audited Consolidated Financial Statements appearing
elsewhere herein.
On March 27, 1996, the Board of Directors of the Company authorized the
sale of its Annuity Operations and the Western Diversified Group. As a result of
this action, beginning in 1996, the Company has reported the results of
operations of the Annuity Operations and Western Diversified Group as
discontinued operations. The Consolidated Statements of Income for the years
ended December 31, 1995 and 1994 have been restated to reflect the results of
these operations as discontinued operations. Accordingly, the Statement of
Income Data for the years ended December 31, 1995 and 1994 has also been
restated.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share". In accordance with this
statement, per share amounts for each year presented have been restated to
comply with the provisions of the statement.
13
<PAGE> 17
SELECTED FINANCIAL DATA
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------- -----------
ACTUAL
(In thousands, except per share ------------------------------------------------------------------ PRO FORMA
and ratio data) 1997 1996 1995 1994 1993 1992 (1)
- ----------------------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross insurance premiums and
contract charges earned $ 1,531,663 $ 1,838,254 $ 1,936,262 $ 1,792,087 $ 1,661,229 $ 1,380,634
Net insurance premiums and
contract charges earned 928,901 1,024,574 1,053,035 939,913 930,588 753,744
Net investment income 69,293 45,460 50,388 38,145 353,869 329,494
Total revenues 1,050,049 1,114,682 1,156,464 1,071,198 1,406,784 1,185,063
Gross claims incurred on insurance
products 1,141,307 1,396,695 1,458,365 1,226,531 1,039,693 872,269
Net claims incurred on insurance
products 670,192 749,051 763,099 609,767 555,517 456,688
Interest expense 5,332 6,615 8,413 6,067 6,096 6,886
Total benefits and expenses 1,058,799 1,116,353 1,186,984 1,000,971 1,279,204 1,082,850
Net (loss) income before cumulative effect
of change in accounting principle:
Continuing operations (7,791) (1,711) (18,900) 48,625 -- --
Discontinued operations 29,679 32,647 25,308 27,690 -- --
Total 21,888 30,936 6,408 76,315 80,044 64,523
Net income (loss) 21,888 30,936 6,408 75,774 83,126 64,523
Net income (loss) applicable to
common stock 20,538 29,586 5,058 74,424 81,776 63,176
Per common share:
Net income (loss) before cumulative
effect of change in accounting principle:
Continuing operations (0.36) (0.12) (0.80) 1.92 -- --
Discontinued operations 1.17 1.29 1.00 1.12 -- --
Total 0.81 1.17 0.20 3.04 3.36 2.71
Net income (loss) 0.81 1.17 0.20 3.02 3.49 2.71
Average common shares outstanding 25,400 25,295 25,328 24,623 23,422 23,308
Cash dividends declared per
common share $ 0.48 $ 0.46 $ 0.44 $ 0.40 $ 0.27 N/A
BALANCE SHEET DATA:
Total invested assets $ 1,016,346 $ 5,962,932 $ 6,114,770 $ 5,675,743 $ 4,988,946 $ 4,366,105
Total assets 1,479,932 7,671,249 7,696,030 6,962,133 6,131,288 5,553,481
Short-term debt 41,500 25,000 15,063 22,679 30,875 19,676
Long-term debt 35,000 76,500 92,000 102,399 92,754 105,966
Redeemable securities 15,286 18,687 19,416 20,181 23,776 51,114
Stockholders' equity 450,910 465,211 477,231 406,724 344,197 198,561
OTHER DATA:
Operating income (loss) applicable to
common stock $ (4,313) $ 32,832 $ 4,100 $ 83,278 $ 82,767 $ 71,214
Operating income (loss) per common share (0.17) 1.30 0.16 3.38 3.53 3.05
Operating income before interest,
taxes and preferred stock dividends 3,528 59,295 19,159 133,631 139,949 121,303
Group gross medical loss ratio 75.4% 76.3% 75.0% 69.7% 64.9% 65.0%
Group gross combined ratio 103.1% 100.0% 100.2% 94.8% 90.6% 90.1%
</TABLE>
(1) The pro forma statement of income data and other related data for the
year ended December 31, 1992 were prepared assuming the Company's
initial public offering of its common stock (the "IPO") occurred on
January 1, 1992. The pro forma balance sheet data as of December 31,
1992 and related other data were prepared assuming the IPO occurred
on December 31, 1992.
14
<PAGE> 18
SELECTED FINANCIAL DATA
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ACTUAL
(In thousands, except per share ----------------------------------------------------------------------------------
and ratio data) 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross insurance premiums and
contract charges earned $1,380,634 $1,205,796 $ 982,464 $ 734,630 $ 567,827
Net insurance premiums and
contract charges earned 753,744 931,900 897,786 666,197 490,611
Net investment income 329,494 332,294 332,015 301,790 282,473
Total revenues 1,185,063 1,338,916 1,228,949 969,124 778,895
Gross claims incurred on insurance
products 872,269 788,975 651,906 467,089 357,501
Net claims incurred on insurance
products 456,688 579,172 590,145 426,068 324,342
Interest expense 15,226 24,316 32,093 35,637 30,411
Total benefits and expenses 1,092,230 1,260,578 1,202,616 949,479 779,351
Net (loss) income before cumulative effect
of change in accounting principle:
Continuing operations -- -- -- -- --
Discontinued operations -- -- -- -- --
Total 57,856 49,134 12,073 11,186 (2,181)
Net income (loss) 57,856 55,904 12,073 11,186 (2,181)
Net income (loss) applicable to
common stock 54,829 51,772 9,814 9,012 (4,341)
Per common share:
Net income (loss) before cumulative
effect of change in accounting principle:
Continuing operations -- -- -- -- --
Discontinued operations -- -- -- -- --
Total 3.08 2.83 0.62 0.57 (0.27)
Net income (loss) 3.08 3.25 0.62 0.57 (0.27)
Average common shares outstanding 17,786 15,930 15,930 15,930 15,930
Cash dividends declared per
common share $ 0.06 -- -- -- --
BALANCE SHEET DATA:
Total invested assets $4,359,992 $4,003,019 $3,171,096 $3,165,005 $2,662,832
Total assets 5,543,489 5,208,575 4,502,069 4,075,482 3,429,552
Short-term debt 21,154 97,089 18,891 18,609 8,592
Long-term debt 94,496 115,586 214,213 259,986 247,653
Redeemable securities 51,114 64,834 58,585 50,890 48,420
Stockholders' equity 198,561 73,227 14,694 10,321 1,592
OTHER DATA:
Operating income (loss) applicable to
common stock $ 62,870 $ 20,728 $ 16,144 $ 13,306 $ (2,260)
Operating income (loss) per common share 3.53 1.32 1.01 0.83 (0.14)
Operating income before interest,
taxes and preferred stock dividends 120,263 65,792 68,035 61,800 33,105
Group gross medical loss ratio 65.0% 67.8% 67.0% 68.5% 72.4%
Group gross combined ratio 90.1% 92.9% 93.3% 94.9% 98.8%
</TABLE>
15
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
ANTICIPATED SALE OF COMPANY
On March 9, 1998, the Company entered into an agreement to merge with a
wholly-owned subsidiary of Fortis as a result of which, among other things, the
Company will become a wholly-owned subsidiary of Fortis and each outstanding
share of the Company's common stock will be converted into the right to receive
$22.50 in cash. Consummation of the merger is subject to regulatory and
stockholder approvals, as well as other customary terms and conditions. It is
anticipated that the merger will be consummated during 1998. In connection
with and as a condition to Fortis entering into the agreement to merge, the
Company granted an option to Fortis to acquire, under certain circumstances,
common stock of the Company representing up to 19.9% of the Company's
outstanding common stock at an exercise price of $22.50 per share. See Note 2
to the Company's Consolidated Financial Statements. Further description of the
merger agreement is set forth in the Company's current report on Form 8-K dated
March 9, 1998 filed with the Securities and Exchange Commission.
SALE OF DISCONTINUED OPERATIONS
On March 31, 1997, the Company sold its Annuity Operations to SunAmerica.
The transaction included the sale of all of the common stock of JANY and the
coinsurance of substantially all of the annuity business of JALIC. This
coinsurance was initially on an indemnity basis and the parties agreed to
transition the business to an assumption basis as soon as practical. In certain
states, the transition to an assumption basis is subject to policyholder
approval. To the extent that such transition does not take place with respect to
any particular policy, the policy will remain reinsured on an indemnity basis.
As of December 31, 1997, approximately 70% of the ceded annuity reserves have
either transitioned to an assumption basis or lapsed. The majority of
the remaining policies are expected to be assumed by December 31, 1998.
As consideration for the Annuity Operations, SunAmerica paid the Company
approximately $238.2 million. The consideration represented an approximately
$162.3 million premium paid to acquire the business and approximately $75.9
million of adjusted capital and surplus of JANY. It did not include any capital
and surplus used to support the annuity business in JALIC, which remained in
JALIC.
On September 30, 1997, the Company sold all of the common stock of
substantially all of the subsidiaries which comprise the Western Diversified
Group (the principal subsidiaries of the Company that market credit life and
disability and retail service warranty coverage) to Protective Life Insurance
Company.
As a result of the sales of the Annuity Operations and Western Diversified
Group, the Company recorded a net deferred gain of approximately $45.0 million.
This amount was net of estimated transaction expenses, taxes, goodwill and other
adjustments relating to these transactions. During the three months ended
December 31, 1997, the Company recognized approximately $24.0 million of the net
deferred gain in income as a result of the assumption of policy reserves by
SunAmerica. The Company expects to recognize the majority of the remainder of
the net deferred gain by December 31, 1998.
The Company's available capital was enhanced by both the after-tax gain
generated from the transactions and by the release of the net capital previously
allocated to support these businesses. The Company continues to evaluate the
best uses of its capital, including the approximately $200 million of excess
capital generated from the sale of the Company's annuity and credit businesses.
In the event that the sale of the Company does not occur, this capital may be
used to repurchase common stock, pay dividends, reduce debt, acquire blocks of
business or for general corporate purposes, or for a combination of two or more
of such uses. During December 1997 and January 1998, the Company repurchased
approximately 1.1 million shares of common stock for a total purchase price of
approximately $25.9 million.
16
<PAGE> 20
ACCOUNTING CHANGES
See Note 3 to the consolidated financial statements for a complete
discussion of the impact of the adoption of new accounting pronouncements.
During 1997, the Company adopted Statement of Financial Accounting Standards No.
128 "Earnings per Share", effective January 1, 1997. The Company has restated
prior years' earnings per share data in accordance with this
statement.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
RESULTS SUMMARY
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
---------- ---------- ---------
(In millions, except per share data)
<S> <C> <C> <C>
Operating income (loss) (1):
Continuing operations ........................ $(12.3) $(5.0) $(18.7)
Discontinued operations ...................... 8.0 37.8 22.8
Total ...................................... (4.3) 32.8 4.1
Net income (loss):
Continuing operations ........................ (7.8) (1.7) (18.9)
Discontinued operations (2) .................. 29.7 32.6 25.3
Total ...................................... 21.9 30.9 6.4
Net income applicable to common stock .......... 20.5 29.6 5.1
Operating income (loss) per common share (1):
Continuing operations ........................ (0.48) (0.20) (0.74)
Discontinued operations ...................... 0.31 1.50 0.90
Total ...................................... (0.17) 1.30 0.16
Net income per common share .................... 0.81 1.17 0.20
Average common shares outstanding .............. 25,400 25,295 25,328
Average common and potentially dilutive
shares outstanding ........................... 25,759 25,651 25,721
</TABLE>
- -------------------
(1) Applicable to common stock excluding net realized investment gains (losses)
and is after preferred stock dividends.
(2) Net income from discontinued operations for the year ended December 31, 1997
includes $24.0 million of recognition of the deferred gain on the sale of
the discontinued operations.
Operating loss from continuing operations increased to $12.3 million, or
$0.48 per common share, for the year ended December 31, 1997 from $5.0 million,
or $0.20 per common share, for the year ended December 31, 1996. The increase in
operating loss was primarily due to $38.5 million of pre-tax severance and
related charges and other expenses attributable to discontinued product lines
incurred during the year ended December 31, 1997 as a result of the Company's
reduction in force and continued strategic evaluation of its operations. During
the year ended December 31, 1996, $6.7 million of pre-tax severance and other
charges were incurred. Excluding these charges, continuing operations improved
to operating income of $12.7 million, or $0.51 per common share, for the year
ended December 31, 1997 from an operating loss of $0.6 million, or $0.03 per
common share, for the year ended December 31, 1996. This improvement was
primarily attributable to increased investment income earned on the proceeds
from the sale of the Annuity Operations on March 31, 1997, the discontinuance of
certain products included in the Company's stop-loss reinsurance product line in
1996 and a reduction in corporate expenses. See further discussion below
regarding these variances. These improvements were partially offset by a
reduction in income earned from the Company's group division resulting primarily
from a decrease in gross earned premiums to $1,105.6 million in 1997 from
$1,523.4 million in 1996. The group gross medical loss ratio decreased to 75.4%
for the year ended December 31, 1997 from 76.3% for the year ended December 31,
1996 and the group gross expense ratio, excluding the severance and other
charges discussed above, increased to 26.0% from 24.5% during these periods.
17
<PAGE> 21
Operating loss from continuing operations decreased to $5.0 million, or
$0.20 per common share, for the year ended December 31, 1996 from $18.7 million,
or $0.74 per common share, for the year ended December 31, 1995. Included in the
operating loss for the year ended December 31, 1995 is a pre-tax charge of $10.0
million for claims incurred in relation to the group product in 1994, as
discussed below. In addition, the 1995 operating loss includes $26.2 million of
pre-tax charges related to intangible asset write-offs, severance and other
charges related to the Company's strategic evaluation of operations including
additional losses related to a discontinued product in the stop-loss reinsurance
product line. Excluding these charges and the 1996 charges discussed above,
continuing operations decreased to an operating loss of $0.6 million, or $0.03
per common share, for the year ended December 31, 1996 from operating income of
$4.8 million, or $0.19 per common share, for the year ended December 31, 1995.
This decrease was primarily attributable to an increase in the group gross
medical loss ratio to 76.3% in 1996 from 74.3% in 1995, excluding the $10.0
million charge relating to claims incurred in 1994, as discussed above, and a
decrease in group gross earned premiums to $1,523.4 million in 1996 from
$1,680.6 million in 1995. See further discussion below regarding these
variances. These items were partially offset by a decrease in the group gross
expense ratio to 24.5% for the year ended December 31, 1996 from 25.5% for the
year ended December 31, 1995, excluding the charges discussed above.
STATEMENT OF INCOME DATA
The Company's continuing operations primarily consist of its group health
business, its joint venture HMO and its stop-loss reinsurance business. The
Company reports the results of operations of the Annuity Operations and the
Western Diversified Group as discontinued operations.
18
<PAGE> 22
The following tables recast the accompanying Consolidated Statements of
Income for continuing operations for the years ended December 31, 1997, 1996 and
1995 as a percent of net insurance premiums and contract charges earned ("net
premiums") and provide other relevant information:
<TABLE>
<CAPTION>
POINT CHANGE
------------------------
POSITIVE (NEGATIVE)
YEAR ENDED DECEMBER 31, EFFECT
---------------------------------------- ------------------------
1997 (1) 1996 1995 1997 1996
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gross insurance premiums and contract charges earned..... 167.5% 179.4% 183.9% (11.9)% (4.5)%
Ceded insurance premiums and contract charges earned..... (67.5) (79.4) (83.9) 11.9 4.5
----------- ---------- ----------- ---------- ----------
Net insurance premiums and contract charges earned.... 100.0 100.0 100.0 -- --
Net investment income.................................... 7.7 4.4 4.8 3.3 (0.4)
Other income............................................. 5.3 4.1 5.3 1.2 (1.2)
Net realized investment gains (losses)................... 0.5 0.3 (0.2) 0.2 0.5
----------- ---------- ----------- ---------- ----------
Total revenues........................................ 113.5 108.8 109.9 4.7 (1.1)
----------- ---------- ----------- ---------- ----------
Benefits and expenses:
Gross claims incurred on insurance products.............. 127.7 136.3 138.5 8.6 2.2
Ceded claims incurred on insurance products.............. (52.7) (63.2) (66.0) (10.5) (2.8)
----------- ---------- ----------- ---------- ----------
Net claims incurred on insurance products............. 75.0 73.1 72.5 (1.9) (0.6)
----------- ---------- ----------- ---------- ----------
Universal life and investment-type contract benefits:
Interest credited to account balances................. 1.5 1.3 1.2 (0.2) (0.1)
Benefit claims incurred in excess of account balances. 0.5 0.5 0.4 -- (0.1)
Decrease in life insurance reserves...................... (0.5) -- (0.2) 0.5 (0.2)
----------- ---------- ----------- ---------- ----------
Total benefits........................................ 76.5 74.9 73.9 (1.6) (1.0)
----------- ---------- ----------- ---------- ----------
Commissions.............................................. 7.1 7.5 7.9 0.4 0.4
General expenses......................................... 28.2 24.0 28.4 (4.2) 4.4
Amortization of purchased intangibles.................... 0.5 0.5 0.5 -- --
Amortization of deferred policy acquisition costs........ 1.6 1.4 1.3 (0.2) (0.1)
Interest expense......................................... 0.6 0.6 0.8 -- 0.2
----------- ---------- ----------- ---------- ----------
Total expenses........................................ 38.0 34.0 38.9 (4.0) 4.9
----------- ---------- ----------- ---------- ----------
Total benefits and expenses........................... 114.5 108.9 112.8 (5.6) 3.9
----------- ---------- ----------- ---------- ----------
Loss from continuing operations before
benefit for income taxes and minority
interest in joint venture's (income) loss................ (1.0) (0.1) (2.9) (0.9) 2.8
Benefit for income taxes.................................... (0.2) (0.2) (0.9) -- (0.7)
Minority interest in joint venture's (income) loss.......... (0.1) (0.2) 0.2 0.1 (0.4)
----------- ---------- ----------- ---------- ----------
Net loss from continuing operations......................... (0.9)% (0.1)% (1.8)% (0.8)% 1.7%
=========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
-------------------------------
YEAR ENDED DECEMBER 31, POSITIVE (NEGATIVE) EFFECT
--------------------------------------------- -------------------------------
1997 1996 1995 1997 1996
------------ ------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Other relevant information:
Group insured data:
Employers (2)............................ 110,000 183,000 235,000 (39.9)% (22.1)%
Employee lives........................... 284,000 474,000 620,000 (40.1) (23.5)
Group covered lives (3).................. 544,000 901,000 1,190,000 (39.6) (24.3)
HMO covered lives........................ 111,000 81,000 43,000 37.0 88.4
Total covered lives................... 655,000 982,000 1,233,000 (33.3) (20.4)
Group gross medical loss ratio.............. 75.4% 76.3% 75.0% 0.9 (1.3)
</TABLE>
- ------------------
(1) For the year ended December 31, 1997, the effects of the assumption of a
block of life insurance under a reinsurance treaty, which increased gross
premiums and contract charges earned ("gross premiums") and benefits by
approximately $35.9 million, have been excluded from this table. The
transaction resulted in no net income or loss.
(2) Includes 22,000, 32,000 and 40,000 groups, each group made up of one
individual, as of December 31, 1997, 1996 and 1995, respectively, marketed
through an association trust.
(3) For the year ended December 31, 1997, group covered lives includes 45,000
lives insured under the Company's new product introduced in April 1997, as
discussed below.
19
<PAGE> 23
During the year ended December 31, 1997, the Company assumed a block of
life insurance, which had the effect of increasing gross premiums and benefits
by approximately $35.9 million. This reinsurance treaty had no effect on the net
results of operations for the year ended December 31, 1997. All subsequent
discussion of results of operations will exclude the effects of this reinsurance
treaty. Excluding the effects of this treaty, gross premiums decreased 18.6% to
$1,495.7 million for the year ended December 31, 1997 from $1,838.3 million for
the year ended December 31, 1996 and 5.1% to $1,838.3 million in 1996 from
$1,936.3 million for the year ended December 31, 1995. These decreases were
primarily attributable to a decrease in group covered lives during these
periods, partially offset by premium rate increases and growth in the premiums
earned in the Company's joint venture HMO. Group covered lives have declined
from 1,190,000 at December 31, 1995 to 901,000 at December 31, 1996 and to
544,000 at December 31, 1997. The NHP joint venture was formed in the third
quarter of 1994 with a physician hospital organization. Covered lives in the HMO
have increased from 43,000 at December 31, 1995 to 81,000 at December 31, 1996
and to 111,000 at December 31, 1997. The Company's 50% share of the net income
(loss) of NHP was $1.0 million, $2.1 million and ($2.0) million for the years
ended December 31, 1997, 1996 and 1995, respectively. As discussed below, net
income of NHP for the year ended December 31, 1996 included release of a
valuation allowance relating to prior year tax losses.
Consistent with the Company's objective of maintaining profit margins at
the risk of reducing market share, the Company began to significantly increase
rates on its new and renewal business effective January 1, 1995, with larger
increases targeted to the higher risk business. The Company raised its 1995
premium rates higher than the majority of the competition as it believes it was
among the first major participants in the small group market to recognize the
increased level of utilization and the rising medical cost trends. The Company
also began to take additional actions that were designed to enable it to better
control the future medical loss ratios on its group business with a strong
emphasis on the high risk business. These actions included, where appropriate or
available, improving discounts from providers, redesigning benefits, improving
underwriting techniques, implementing a lower commission structure and
discontinuing portions of such business, if warranted.
During 1996, the Company continued to experience relatively high gross
medical loss ratios. The group gross medical loss ratio increased to 76.3% for
the year ended December 31, 1996 from 75.0% for the year ended December 31,
1995. In response, the Company significantly increased premium rates, improved
provider discount arrangements, redesigned benefit packages, modified commission
structures and discontinued portions of the business as deemed advisable. In
1996, the Company ceased marketing in the State of Kentucky and terminated
certain other marketing arrangements. While the number of group covered lives
decreased 24.3% to 901,000 at December 31, 1996 from 1,190,000 at December 31,
1995, the rate increases offset, in part, the decline in covered lives.
Additionally, gross premiums from the Company's HMO joint venture increased
191.8% in 1996 to $107.4 million from $36.8 million in 1995.
In the first quarter of 1997, the Company decided to stop selling small
group insurance plans in California, Maryland, and New Jersey and to terminate
existing small group insurance plans in these states. In addition, the Company
began the introduction of a new product in April 1997 and as of December 1997 is
offering this product in 31 states which represents most of the states in which
the Company expects to focus its marketing efforts. These various actions
contributed to a 39.6% decrease in group covered lives to 544,000 at December
31, 1997 from 901,000 at December 31, 1996, which resulted in the decrease in
group earned premium noted above. Partially offsetting this decrease was an
87.9% increase in gross premiums from the Company's HMO joint venture to $201.8
million in 1997 from $107.4 million in 1996.
Net investment income increased 52.3% to $69.3 million for the year ended
December 31, 1997 from $45.5 million for the year ended December 31, 1996. As a
percentage of net premiums, net investment income increased to 7.7% for the year
ended December 31, 1997 from 4.4% for the year ended December 31, 1996. This
increase was primarily attributable to the proceeds of the sale of the Annuity
Operations as discussed above.
Other income consists primarily of profit sharing provisions in accordance
with a Group Reinsurance Agreement with London Life Insurance Company and
Transamerica Occidental Life Insurance Company (the "Group Reinsurance
Agreement"). See further discussion in "Liquidity and Capital Resources --
Reinsurance".
20
<PAGE> 24
The amount of these profit sharing provisions has fluctuated between these
periods due primarily to changes in the group gross medical loss ratio.
Total benefits decreased 10.9% to $683.6 million for the year ended
December 31, 1997 from $767.6 million for the year ended December 31, 1996 and
1.4% to $767.6 million for 1996 from $778.3 million for the year ended December
31, 1995. During 1995, the Company received sufficient information to enable it
to conclude that the initial premium rates on its provider excess stop-loss
reinsurance product line were insufficient to pay the anticipated claims on
pre-1995 business. Accordingly, the Company recorded charges of $5.8 million
relating to its 50% exposure in this business. In 1996, the Company increased
premium rates, revised benefits and coverage allowances, raised the amount of
business ceded to 100% and ultimately reached a decision to discontinue this
product line. Estimated losses during the run-off period were accrued for in
1996. Also, in the first quarter of 1995, the Company recorded a charge of $10.0
million for claims incurred in 1994 relating to the group product. As a
percentage of net premiums, total benefits were 76.5%, 74.9% and 73.9% for the
years ended December 31, 1997, 1996 and 1995, respectively. These increases are
primarily attributable to the decrease in the size of the group division
relative to the other product lines of the Company which generally incur a
higher ratio of benefits to net premiums than the group division. The group
gross medical loss ratio was 75.4%, 76.3% and 74.3% (excluding the $10.0 million
charge discussed above) for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in the medical loss ratio from 1996 to 1997 is
generally attributable to the premium rate increases and other actions which
have been taken by the Company during the past two years. Much of the gross
medical loss ratio improvement over the prior year is recorded as an experience
refund under the Group Reinsurance Agreement and is included in other income, as
discussed above.
Commissions, as a percent of net premiums, were 7.1%, 7.5% and 7.9% for
the years ended December 31, 1997, 1996 and 1995, respectively. These decreases
were primarily due to the relative decrease in new group product sales, which
incur a higher commission rate than renewals. In addition, the decrease has been
affected by the increase in sales of the HMO product, which incur a lower
commission rate than group products.
General expenses increased 2.2% to $251.6 million for the year ended
December 31, 1997 from $246.1 million for the year ended December 31, 1996 and
decreased 17.6% to $246.1 million for 1996 from $298.6 million for the year
ended December 31, 1995. As a percentage of net premiums, general expenses were
28.2%, 24.0% and 28.4% for the years ended December 31, 1997, 1996 and 1995,
respectively. During the year ended December 31, 1997, the Company restructured
its operations in conjunction with the closing of the sales of the Annuity
Operations and Western Diversified Group and anticipated reduced premium volume
in its group operations. Accordingly, the Company reduced its workforce by
approximately 1,000 employees or 36% during 1997. In addition, during the three
months ended December 31, 1997, the Company recognized an impairment of
intangible assets relating to operations to be disposed of and severance and
other charges relating to further reductions in workforce resulting from the
continued decrease in premium volume in the group operations. Accordingly, the
Company incurred a total pre-tax charge to continuing operations of $35.0
million during 1997. During the years ended December 31, 1996 and 1995, the
Company incurred pre-tax charges of $6.7 million and $20.4 million,
respectively, related to its strategic evaluation of operations. Excluding these
charges for all periods, general expenses decreased 9.5% to $216.6 million for
the year ended December 31, 1997 from $239.4 million for the year ended December
31, 1996, which was a 13.9% decrease from $278.2 million for the year ended
December 31, 1995. These decreases are primarily due to the reduction in
workforce and other expense reductions which have been implemented during 1997
and 1996.
The Company's income tax provisions differ from the amounts determined by
multiplying total income before income taxes by the statutory federal income tax
rate of 35% primarily due to permanent differences including goodwill
amortization, non-taxable investment income, non-deductible expenses, changes in
tax valuation allowances and other items. During 1995, the Company increased its
valuation allowance for the tax losses from NHP by $1.5 million, bringing the
total for such valuation allowance to $3.7 million at December 31, 1995. During
1996, the Company determined that the valuation allowance was no longer
necessary.
21
<PAGE> 25
BUSINESS DEVELOPMENT
On March 9, 1998, the Company entered into an agreement to merge with a
wholly-owned subsidiary of Fortis as a result of which, among other things, the
Company will become a wholly-owned subsidiary of Fortis and each outstanding
share of the Company's common stock will be converted into the right to receive
$22.50 in cash. Consummation of the merger is subject to regulatory and
stockholder approvals, as well as other customary terms and conditions. It is
anticipated that the merger will be consummated during 1998. In connection
with and as a condition to Fortis entering into the agreement to merge, the
Company granted an option to Fortis to acquire, under certain circumstances,
common stock of the Company representing up to 19.9% of the Company's
outstanding common stock at an exercise price of $22.50 per share. See Note 2
to the Company's Consolidated Financial Statements. Further description of the
merger agreement is set forth in the Company's current report on Form 8-K dated
March 9, 1998 filed with the Securities and Exchange Commission.
In January 1997, the Company announced that it would be focusing its
marketing efforts and resources in those markets and states in which it believes
it can best increase profitability and market share. In connection with this
strategy, in the first quarter of 1997, the Company decided to stop selling
small group insurance plans in California, Maryland and New Jersey and to
terminate existing small group insurance plans in these states. The Company
began the introduction of a new product in April 1997 and as of December 1997 is
offering this product in 31 states which represents most of the states in which
the Company expects to focus its marketing efforts. As the Company exits the
states noted above and possibly other states, and until the new product is sold
in sufficient quantities to exceed lapses of the existing inforce product, the
Company may experience further reductions in group covered lives, and as a
result, in gross premiums. If gross premiums decline at a faster rate than the
Company is able to reduce general expenses, the group gross expense ratio could
increase. It is also possible that the Company could experience an increase in
the group medical loss ratio for existing business in additional exit states, if
any.
The Company has generally experienced a higher gross medical loss ratio in
the fourth quarter versus other quarters of the year. The Company believes that
these higher medical loss ratios are primarily due to increased incidence of
claims associated with the colder, winter climate and the fact that insureds
generally exceed the calendar year deductible and out-of-pocket expense limits
of their policies by that time of year. The Company has also generally
experienced relatively higher gross medical loss ratios with groups that have
been inforce for a longer period of time. New business has generally provided
relatively lower gross medical loss ratios compared to the renewing inforce
business. The Company cannot predict the extent to which these historical
patterns will continue, increase or decrease in the future.
Historically, group insurance business has been subject to pricing and
profitability cycles that are driven by competitive price pressures within the
industry. These pressures and other factors make it difficult to predict with
certainty the effect pricing changes will have on the Company's profitability.
Traditionally, the cycle has been characterized by a period of higher
profitability, which has fostered intense price competition and aggressive
marketing by new entrants and existing companies striving to increase market
share, thereby resulting in lower profitability. The lower profitability
typically resulted in a withdrawal of competitors and a firming of prices,
resulting once again in increased profitability and a renewal of the cycle.
There are factors in the current cycle that were not present in previous cycles.
One significant factor is small group and individual healthcare legislative
reform and its effect on medical underwriting and pricing. Small group and
individual healthcare reforms, primarily at the state level and increasingly at
the federal level, include legislation on matters such as guaranteed issue,
mandated benefits, premium rate limits (including community rating and modified
community rating), guaranteed renewability, minimum loss ratio mandates, risk
adjustment mechanisms which allocate losses of individual carriers to group
carriers, and other reforms. Additionally, managed care providers, the most
significant of which are HMO's, now represent a more significant source of
competition than in previous cycles.
In 1996, Congress enacted HR 3103 ("Health Insurance Portability and
Accountability Act", or "HIPAA"), also commonly referred to as the
Kennedy-Kassenbaum Bill. HIPAA provisions applicable to both insured and
self-funded employer group coverage include minimum standards for pre-existing
condition exclusions, waiver of pre-existing condition exclusions for
individuals meeting minimum prior coverage requirements and prohibition of
health related exclusion of individuals from employer group coverage. HIPAA also
provides guaranteed acceptance of small employers with 2 to 50 employees for
insured coverage. In other respects, HIPAA's group and small group provisions
are largely in line with state small group reform laws already enacted by the
large majority of states. In the individual market, HIPAA requires guaranteed
acceptance for eligible individuals moving out of group plans who have at least
18 months of prior coverage. However, most states have or are expected
to amend their laws to alleviate any inconsistencies with the federal minimum
standards. States which
22
<PAGE> 26
have not already enacted all of the HIPAA group and small group standards may
enact state reforms consistent with HIPAA. The final outcome of state amendments
or new legislation, as well as federal regulations addressing these provisions,
cannot be predicted.
YEAR 2000
The Company uses a variety of data processing hardware and software
systems to process its business. Many of these systems utilize a two-digit field
to identify a year, as has been standard in most data processing systems. A
two-digit year field will not process correctly once a change in century occurs
in the year 2000. The Company, in common with most organizations that use
automated systems, must transition its systems to a four-digit year field by the
year 2000 or arrange for other processing alternatives. In order to process
certain calculations correctly, in some instances this transition must be
completed by January 1, 1999. To date, the Company has identified certain
existing systems that will be modified to be year 2000 compliant and
modifications are currently being made to such systems. Certain other systems
have been identified to be replaced and the Company is currently proceeding with
replacing these systems. The Company is currently evaluating which other systems
will be modified to be year 2000 compliant, and which systems will be the
subject of other processing alternatives. However, if such modifications and
conversions are not completed on a timely basis, the year 2000 problem may have
a material impact on the operations of the Company. Further, even if the Company
timely completes such modifications and conversions, there can be no assurance
that the failure by vendors or other third parties to solve the year 2000
problem will not have a material impact on the operations of the Company. During
1997, the Company expended approximately $2.7 million related to the year 2000
project. The Company currently expects to incur between approximately $15.0
million and $20.0 million during 1998 and 1999 relating to the year 2000
project.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS
The Company maintains a Credit Agreement with The Chase Manhattan Bank
which was amended in July 1994 to increase the commitment amount of the term
loan to $110.0 million and to establish a revolving credit loan with a
commitment amount of $40.0 million and an expiration of July 1998 (the "Credit
Agreement"). As of December 31, 1997, the Company has $23.5 million available
under the revolving credit loan. In April 1997, the Company made a scheduled
principal payment under the Credit Agreement of $25.0 million. The principal
amount of outstanding indebtedness of the Company was $76.5 million as of
December 31, 1997 as compared to $101.5 million and $107.1 million as of
December 31, 1996 and 1995, respectively. Future required principal payments as
of December 31, 1997 are $41.5 million in 1998 and $35.0 million in 1999. As of
December 31, 1997, the Company's ratio of debt and redeemable securities to
stockholders' equity was 0.20 to 1 as compared to 0.26 and 0.27 to 1 as of
December 31, 1996 and 1995, respectively. The weighted average interest rates on
the Company's indebtedness were approximately 6.4%, 6.3% and 6.9% for 1997, 1996
and 1995, respectively.
DIVIDENDS
The Credit Agreement restricts dividends and other distributions payable
by the Company. In any period of 12 consecutive months, the Company may pay cash
dividends on, or repurchase for cash, capital stock in an amount not to exceed
15% of net worth (representing stockholders' equity excluding net unrealized
gains (losses) on investments plus redeemable securities) as of the end of the
fiscal quarter ending on or most recently prior to the last day of such 12 month
period ($67.3 million for the 12 months ended December 31, 1997).
23
<PAGE> 27
The Company paid preferred stock dividends of approximately $0.7 million
in each April and October of 1997, 1996 and 1995. On March 8, 1998, the Company
declared a preferred stock dividend in the amount of approximately $0.7 million
and a common stock dividend of approximately $2.9 million which are both to be
paid in April 1998. A summary of common stock dividends declared or paid during
1996, 1997 and 1998 is as follows (dollars in millions, except per share
amounts):
<TABLE>
<CAPTION>
AMOUNT OF DIVIDEND
------------------------------
MONTH OF DECLARATION PAYMENT MONTH PER SHARE AGGREGATE
- ------------------------- ------------------- ------------ ---------------
<S> <C> <C> <C>
December 1995 January 1996 $ 0.11 $ 2.8
March 1996 April 1996 0.11 2.8
June 1996 July 1996 0.11 2.8
September 1996 October 1996 0.12 3.0
December 1996 January 1997 0.12 3.0
March 1997 April 1997 0.12 3.0
June 1997 July 1997 0.12 3.0
September 1997 October 1997 0.12 3.1
December 1997 January 1998 0.12 3.0
March 1998 April 1998 0.12 2.9
</TABLE>
CASH FLOWS
The Company's sources of cash are payments of principal and interest on
the Surplus Debentures of, and dividends from, its direct life insurance
subsidiary, HNLIC, and dividends, management fees and tax allocation payments
from the Company's principal non-insurance subsidiary, JA Services, Inc.
("JASI") and JASI's subsidiaries. HNLIC's primary sources of cash are dividends
from its subsidiary, JALIC, and tax allocation payments from JALIC and its
subsidiaries. The Surplus Debentures require HNLIC to make a principal payment
to the Company of $11.0 million in 1998 and $32.0 million in 1999. JALIC paid
cash dividends to HNLIC of $225.0 million in 1997, $12.0 million in 1996 and
$30.0 million in 1995.
Principal sources of funds at the insurance company level are insurance
premiums, contract charges earned, annuity considerations collected, net
investment income received and proceeds from investments that have been sold,
called or matured, or from loans that have been repaid. The principal uses of
these funds are the payment of operating expenses, the payment of claims and
benefits on insurance policies, the purchase of investments and the payment of
indebtedness. Net cash provided by operating activities (reflecting principally
(i) premiums and contract charges collected less claims and benefits on
insurance products plus (ii) interest collected on invested assets less (iii)
commissions and other general expenses paid, together with (iv) the inflows or
outflows from the purchases or sales of trading account securities) was $5.0
million, $301.7 million and $383.0 million in 1997, 1996 and 1995, respectively.
The net decrease in cash flows from operating activities from 1996 to 1997 was
generally due to the sale of the Annuity Operations and the reduction in the
volume of the group business, partially offset by decreased operating expenses.
Net cash provided by (used in) investing activities (reflecting
principally investments purchased and loans made, less investments sold or
matured, and loans repaid) was $21.0 million, $36.6 million and $(186.5) million
in 1997, 1996 and 1995, respectively. In conjunction with the Company's
announcement in March 1996 that it was selling its Annuity Operations, the
Company reduced production of new mortgages in 1996 while experiencing increased
repayments. In anticipation of cash needs relating to the sale of the Annuity
Operations and the possible use of the proceeds as discussed below, the Company
maintained the additional cash generated from the mortgage repayments in cash
equivalents, as opposed to reinvesting these funds in other instruments. This
resulted in the increase in cash provided by investing activities in 1996.
In addition to the $238.2 million purchase price for the Annuity
Operations, SunAmerica paid $33.1 million to the Company for accrued interest
and related items. In turn, the Company paid SunAmerica $360.4 million of cash
and cash equivalents because policy reserves transferred exceeded invested
assets transferred. Additionally, the Company's cash and cash equivalent
position was decreased by JANY's cash and cash equivalent balance at the time
of the sale of $88.5 million, which was retained by JANY. Therefore, the
Company incurred a net outflow of cash and cash equivalents due to the sale of
the Annuity Operations of $177.6 million, as reflected in the accompanying
consolidated statement of cash flows. Additionally, the Company increased its
cash position by $23.3 million as a result of the sale of the Western
Diversified Group.
Cash flow from financing activities consists of net proceeds from exercise
of stock options, purchases of treasury shares, dividend payments on preferred
and common stock, additions to and repayments of indebtedness, as well as
receipts and payments on the Company's annuity and universal life products. Net
cash used in financing
24
<PAGE> 28
activities was $161.8 million, $270.4 million and $155.4 million in 1997, 1996
and 1995, respectively. The Company purchased shares of common stock for
aggregate purchase prices of $22.7 million and $3.2 million during 1997 and
1995, respectively. Deposits received from universal life and investment-type
contracts were $81.7 million, $453.2 million and $886.3 million in 1997, 1996
and 1995, respectively. Payments to contract holders of these products consist
of surrenders, partial withdrawals, death claims and annuitized benefits. Such
payments for these same periods aggregated $184.7 million, $705.6 million and
$666.7 million, respectively. During 1995, the Company paid $342.0 million
pursuant to a reinsurance agreement to cede 90% of certain annuity contracts.
The amount of cash and cash equivalents at December 31, 1997, 1996 and 1995 was
$31.7 million, $167.5 million and $99.6 million, respectively.
During the year ended December 31, 1997, the Company sold sufficient
available-for-sale securities, along with existing cash and cash equivalents, to
aggregate $188.0 million, which was dividended by the insurance subsidiaries to
the holding company. A portion of these funds were used to acquire shares of
common stock, as discussed above. In the event that the sale of the Company does
not occur, the remainder of this cash may be used to repurchase additional
common stock, pay dividends, reduce debt, acquire blocks of business or for
general corporate purposes, or for a combination of two or more of such uses.
The Annuity Operations historically represented a significant source of
cash flows to the Company. Historically, the Annuity Operations were profitable,
generating a positive cash flow from operations. As the annuity business grew,
the considerations received historically exceeded the payments on these
contracts, producing positive cash flows from financing activities. In 1996 and
during 1997 prior to the sale of the Annuity Operations on March 31, 1997,
surrenders or other payments exceeded receipts from these contracts, producing
negative cash flows from financing activities. The operating cash flows and the
financing cash flows from the Annuity Operations provided the funds for the
majority of the investing activities of the Company. Now that the sale of the
Annuity Operations is complete, the Company no longer has the positive cash
flows from operations or negative cash flows from financing activities in
connection with this business. The Company realized net positive cash flows from
operations for the three months ended March 31, 1997 of $100.1 million, but
experienced net negative cash flows from operations of $95.1 million for the
nine months ended December 31, 1997. This decrease was primarily attributable to
the sale of the Annuity Operations, a reduction in operating income and the
timing of settlements of accruals previously established for severance and
related charges. In addition, the majority of the net negative cash flows from
financing activities of $161.8 million for the year ended December 31, 1997,
which includes payments on investment contracts, will no longer be experienced.
Future cash flows from investing activities will be reduced from historical
levels as the Company's investment portfolio has been reduced from approximately
$6.0 billion at December 31, 1996 to approximately $1.0 billion at December 31,
1997 following the sale of the Annuity Operations.
During 1997, the Company expended approximately $2.7 million for the Year
2000 project. The Company currently expects to incur between approximately $15.0
million and $20.0 million during 1998 and 1999 relating to the year 2000
project.
The Company believes that sufficient sources of cash flow exist which will
be available in the foreseeable future to allow the Company to fund operations
and to service its debt, redeem preferred stock and meet anticipated dividend
requirements. See Notes 6, 12, 13 and 15 to the Consolidated Financial
Statements for a discussion of liquidity, quality, composition and fair values
of the Company's invested asset portfolio.
REINSURANCE
Substantially all of the group accident and health insurance business has
been reinsured under the Group Reinsurance Agreement which provides for the
Company and the reinsurers to share on a 50-50 basis all premiums and claims
expense. Annually, the Company receives profit sharing payments from the
reinsurers equal to the excess of reinsurers' profits over contractual floor
amounts. For years where such profits fall short of floor amounts, the
shortfalls are carried forward with interest to be applied as reductions against
future profit sharing payments. In addition, under the Group Reinsurance
Agreement, to the extent the combined ratio of the group accident and health
25
<PAGE> 29
insurance business for a rolling 12-month period exceeds contractual amounts,
the Company receives a reduced profit sharing payment.
As discussed above, in conjunction with the sale of the Annuity
Operations, the Company entered into a coinsurance agreement with SunAmerica
relating to substantially all of the JALIC annuity business. This coinsurance
was initially on an indemnity basis and the parties agreed to transition the
business to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, the policy will remain reinsured on an indemnity basis. As of December
31, 1997, approximately 70% of the ceded annuity reserves have either
transitioned to an assumption basis or lapsed. The majority of the
remaining policies are expected to be assumed by December 31, 1998. At December
31, 1997, there are assets held in trust directly or indirectly available for
payments to policyholders supporting the remainder of the ceded reserves.
SunAmerica is rated "A+ (Superior)" by A.M. Best and Company.
Receivables from reinsurers and investment deposits recoverable were
$187.1 million at December 31, 1997. Additionally, included in other assets at
December 31, 1997 in the accompanying consolidated balance sheet was
approximately $1.4 billion of investment contract deposits recoverable on the
JALIC coinsurance, net of a similar amount of contract holder liabilities
related to the discontinued operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the report
thereon of Price Waterhouse LLP dated March 20, 1998, are filed as part of this
Report, beginning on page F-1. Unaudited quarterly financial information is
filed as a part of this Report on page F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glendon E. Johnson 74 President, Chairman of the Board
and Chief Executive Officer
Scott L. Stanton 42 Director, Senior Vice President
and Chief Financial Officer
Gary F. Kadlec 50 Senior Vice President -- Sales and
Marketing
Mark A. Schoder 45 Senior Vice President -- Business
Development and Communications
</TABLE>
Glendon E. Johnson has served as Chairman of the Board and Chief Executive
Officer of the Company since 1987 and of JALIC since 1984. He also served as
President of the Company from 1987 to March 1993 and since May 1995 and of JALIC
from 1984 to March 1993. Mr. Johnson is also a director of each of the 13
investment companies comprising the United Group of Mutual Funds, as well as the
following investment companies: United Funds, Inc., TMK/United Funds, Inc., and
Waddell & Reed Funds, Inc., all of which are based in Overland Park, Kansas. Mr.
Johnson has been a Director of the Company since 1987.
26
<PAGE> 30
Scott L. Stanton has served as Senior Vice President and Chief Financial
Officer of the Company since 1994. He has been a Director of the Company since
1994, a Vice President of the Company since 1987 and has been with JALIC since
1984.
Gary F. Kadlec has served as Senior Vice President of Sales and Marketing
of the Company since June 1995. He has been a Vice President of the Company
since 1973 and has been President of North Star Marketing Corporation since
1984.
Mark A. Schoder has served as Senior Vice President of Business
Development and Communications of the Company since September 1995. Prior to
joining the Company, he was an analyst with Alex. Brown & Sons, where he
followed the Company, as well as other life and health insurance companies.
All executive officers hold office until their respective successors are
elected and qualified, or until their earlier resignation or removal. The
Company's executive officers devote substantially all of their business efforts
to the affairs of the Company.
27
<PAGE> 31
PART III
The Proxy Statement for the 1998 Annual Meeting of Stockholders (other
than the portions thereof not deemed to be "filed" for the purposes of Section
18 of the Securities Exchange Act of 1934), which, when filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, will be incorporated
by reference in this Annual Report on Form 10-K pursuant to General Instruction
G(3) of Form 10-K, will provide the information required under Part III (Items
10, 11, 12 and 13), except for the information regarding the executive officers
of the Company, which is included in Part II of this Annual Report on Form 10-K
beginning on page 12.
28
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following report and consolidated financial statements are filed as
part of this Report beginning on Page F-1:
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
Report of Independent Accountants.....................................F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996.....................................F-3
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995.........................F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...........F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995...............................F-6
Notes to Consolidated Financial Statements............................F-7
</TABLE>
(a)(2) The following is a list of financial statement schedules filed as part of
this Report beginning on page S-2:
<TABLE>
<CAPTION>
Schedule Number Description
--------------- -----------
<S> <C>
Schedule I Summary of Investments Other than Investments in Related Parties
Schedule II Condensed Financial Information (Parent Company Only)
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
(a)(3) See accompanying Index to Exhibits at 14(c) below.
(b) Reports on Form 8-K.
None.
(c) The following is a list of all Exhibits filed as part of this Report:
29
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
3.1 Amended and Restated By-laws of the Registrant dated as of
May 17, 1995. Filed as Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995 (Commission File No. 1-11396) and
incorporated herein by reference.
3.2 Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of Delaware
on September 23, 1992. Filed as Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
3.3 Certificate of Amendment to Amended and Restated Certificate
of Incorporation of Registrant as filed with the Secretary
of State of Delaware on October 2, 1992. Filed as Exhibit
3.5 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
3.4 Amended and Restated By-laws of the Registrant dated as of
September 12, 1996, filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (Commission File No. 1-11396) and
incorporated herein by reference.
4.1 Amended and Restated Certificate of Designation of 150,000
shares of 9% Cumulative Preferred Stock. Filed as Exhibit
4.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
4.2 Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and The Chase Manhattan
Bank (National Association) dated February 17, 1993. Filed
as Exhibit 4.8 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 (Commission
File No. 1-11396) and incorporated herein by reference.
4.3 Pledge Agreement among the Registrant, John Alden Systems
Company, JA Services, Inc. and The Chase Manhattan Bank
(National Association) dated February 17, 1993. Filed as
Exhibit 4.9 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
4.4 Sister Company Guarantee among John Alden Systems Company,
JAFCO, Western Diversified Services, Inc., JA Services,
Inc., John Alden Asset Management Company, Anchor Benefit
Consulting, Inc., LensCard Systems Corporation and The Chase
Manhattan Bank (National Association) dated February 17,
1993. Filed as Exhibit 4.10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.1 Compensation Letter Agreement between the Registrant and the
Management Stockholders dated October 30, 1987. Filed as
Exhibit 10.5 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by reference.
10.2 Loan Agreement between the Registrant and General Electric
Capital Corporation dated October 30, 1987. Filed as Exhibit
10.7 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by reference.
10.3 Term Note dated October 30, 1987 in the principal amount of
$87,000,000. Filed as Exhibit 10.8 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.4 Intermediate Term Note dated October 30, 1987 in the
principal amount of $76,350,000. Filed as Exhibit 10.9 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.5 Bridge Note dated October 30, 1987 in the principal amount
of $75,000,000. Filed as Exhibit 10.10 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.6 Revolving Credit Note dated October 30, 1987 in the
principal amount of $15,000,000. Filed as Exhibit 10.11 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.7 Surplus Debenture dated October 30, 1987 in the principal
amount of $155,000,000. Filed as Exhibit 10.12 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.8 Subordinated Surplus Debenture dated October 30, 1987 in the
principal amount of $72,000,000. Filed as Exhibit 10.13 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.9 Pledge and Security Agreement dated October 30, 1987, made
by the Registrant to General Electric Capital Corporation.
Filed as Exhibit 10.14 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated herein
by reference.
10.10 Employment Agreement dated December 13, 1988, between the
Registrant and Lloyd E. Gearhart. Filed as Exhibit 10.20 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.11 John Alden Retirement Plan as Amended and Restated effective
January 1, 1989. Filed as Exhibit 10.21 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.12 John Alden Senior Executive Supplemental Retirement Plan
effective January 1, 1990. Filed as Exhibit 10.22 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.13 Supplemental Executive Retirement Plan effective December 1,
1984. Filed as Exhibit 10.22 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.14 Indemnity Coinsurance Agreement between JALIC and Oxford
Life Insurance Company, dated January 1, 1989. Filed as
Exhibit 10.24 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.15 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated June 30, 1990. Filed
as Exhibit 10.25 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.16 Indemnity Coinsurance Agreement between JALIC and Reliance
Standard Life Insurance Company dated October 31, 1990.
Filed as Exhibit 10.26 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated herein
by reference.
10.17 Indemnity Coinsurance Agreement between JANY and The
Franklin Life Insurance Company dated March 31, 1991. Filed
as Exhibit 10.27 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.18 Reinsurance Agreement among JALIC, London Life Insurance
Company and Transamerica Occidental Life Insurance Company
dated October 1, 1991. Filed as Exhibit 10.28 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.19 Reinsurance Agreement between Western Diversified Life
Insurance Company and ITT Lyndon Property Insurance Company
dated December 1, 1991. Filed as Exhibit 10.29 to the
Registrant's Registration Statement (No. 33-47644) on Form
S-1 and incorporated herein by reference.
10.20 Reinsurance Agreement between JALIC and Lincoln National
Reassurance Company dated December 31, 1991. Filed as
Exhibit 10.30 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.21 Letter Agreement among Merrill Lynch Capital Partners, Inc.,
GE Capital, ERC, the Management Stockholders and the
Registrant dated August 26, 1992. Filed as Exhibit 10.31 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No. 1-11396)
and incorporated herein by reference.
10.22 Employment Agreement between the Registrant and Glendon E.
Johnson dated October 2, 1992. Filed as Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.23 John Alden Financial Corporation Employee Stock Purchase
Plan. Filed as Exhibit 4.3 to the Registrant's Registration
Statement (No. 33-55230) on Form S-8 and incorporated herein
by reference.
10.24 John Alden Financial Corporation Long-Term Incentive Plan.
Filed as Exhibit 4.5 to the Registrant's Registration
Statement (No. 33-56656) on Form S-8 and incorporated herein
by reference.
10.25 Amended and Restated Registration Rights Agreement between
the Registrant and General Electric Capital Corporation
dated as of October 2, 1992. Filed as Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.26 Amended and Restated Registration Rights Agreement between
the Registrant and Merrill Lynch Capital Partners, Inc.
dated as of October 2, 1992. Filed as Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.27 Amended and Restated Registration Rights Agreement among the
Registrant and Management Stockholders dated as of October
2, 1992. Filed as Exhibit 10.37 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.28 Consent and Amendment to Loan Agreement between the
Registrant and General Electric Capital Corporation dated
September 22, 1992. Filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
</TABLE>
32
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.29 Agreement to Amend Warrant between the Registrant and
General Electric Capital Corporation dated September 22,
1992. Filed as Exhibit 10.39 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992 (Commission File No. 1-11396) and incorporated herein
by reference.
10.30 Agreement to Amend Warrant between the Registrant and
Employers Reinsurance Corporation dated September 22, 1992.
Filed as Exhibit 10.40 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
10.31 Amended and Restated Management Stockholders Agreement among
the Management Stockholders and the Registrant dated
February 17, 1993. Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.32 North Star Marketing Organization Long-Term Incentive Plan.
Filed as Exhibit 4.3 to the Registrant's Registration
Statement (No. 33-56544) on Form S-8 and incorporated herein
by reference.
10.33 John Alden Financial Corporation Employee Savings Incentive
Plan, as amended, together with Amendments 1 through 5
thereto. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-56656) on Form S-8 and
incorporated herein by reference.
10.34 Letter agreement among the Registrant and the Management
Stockholders dated October 2, 1992. Filed as Exhibit 10.50
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.35 Stock and Warrant Purchase Agreement among Emperion
Corporation, Electronic Data Systems Corporation and JA
Services, Inc. dated December 17, 1991. Filed as Exhibit
10.51 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.36 Amendment to Stock and Warrant Purchase Agreement dated
December 30, 1992. Filed as Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Commission File No. 1-11396) and
incorporated herein by reference.
10.37 Revolving Credit Agreement among John Alden Systems Company
and The Chase Manhattan Bank (National Association), Barnett
Bank of South Florida, N.A. and Shawmut Bank Connecticut,
N.A. dated December 31, 1993. Filed as Exhibit 10.53 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (Commission File No. 1-11396) and
incorporated herein by reference.
10.38 Amended and Restated Credit Agreement among the Registrant,
Certain Commercial Lending Institutions (named therein) and
the Chase Manhattan Bank (National Association) dated as of
July 27, 1994. Filed as Exhibit 10.42 to the Registrant's
Registration Statement (No. 33-78662) on Form S-3 and
incorporated herein by reference.
10.39 Agreement dated July 27, 1994 to Amended and Restated
Management Stockholders Agreement among the Management
Stockholders and the Registrant dated February 17, 1993.
Filed as Exhibit 10.54 to the Registrant's Registration
Statement (No. 33-78662) on Form S-3 and incorporated herein
by reference.
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.40 Plan of Complete Liquidation and Dissolution of Emperion
Corporation. Filed as Exhibit 10.56 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-11396) and
incorporated herein by reference.
10.41 Articles of Dissolution of Emperion Corporation dated
December 29, 1994. Filed as Exhibit 10.57 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (Commission File No. 1-11396) and
incorporated herein by reference.
10.42 Reinsurance Agreement between JALIC and Lincoln National
Reinsurance Company Limited dated as of September 30, 1995.
Filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1995 (Commission File No. 1-11396) and incorporated herein
by reference.
10.43 Trust Agreement among JALIC, Lincoln National Reinsurance
Company Limited and The Chase Manhattan Bank, N.A. dated as
of October 9, 1995. Filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995 (Commission File No.
1-11396) and incorporated herein by reference.
10.44 Amendment dated March 8, 1996 to Amended and Restated Credit
Agreement among the Registrant, Certain Commercial Lending
Institutions (named therein) and the Chase Manhattan Bank
(National Association) dated as of July 27, 1994. Filed as
Exhibit 10.44 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 (Commission File No.
1-11396) and incorporated herein by reference.
10.45 Rights Agreement, dated as of December 13, 1996, between
John Alden Financial Corporation and Chase Mellon
Shareholder Services, L.L.C. Filed as Exhibit 2 to the
Registrant's Form 8-K dated December 13, 1996 (Commission
File No. 1-11396) and incorporated herein by reference.
10.46 Amendment dated November 1, 1996 to reinsurance agreement
among JALIC, London Life Insurance Company and TransAmerica
Occidental Life Insurance Company dated October 1, 1991.
10.47 Amendment dated February 28, 1997 to Employment Agreement
between the Registrant and Glendon E. Johnson dated October
2, 1992.
10.48 Stock Purchase and Sale Agreement by and between JALIC and
SunAmerica Life Insurance Company ("SunAmerica") dated
November 29, 1996. Filed as Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed April 15, 1997 (Commission
File No. 1-11396) and incorporated herein by reference.
10.49 Asset Purchase and Sale Agreement by and between JALIC and
SunAmerica dated November 29, 1996. Filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated herein
by reference.
10.50 Indemnity Reinsurance Agreement by and between JALIC and
SunAmerica dated as of March 31, 1997. Filed as Exhibit 10.3
to the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.51 Assumption Reinsurance Agreement dated as of March 31, 1997
by and between JALIC and SunAmerica. Filed as Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
</TABLE>
34
<PAGE> 38
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.52 Trust Agreement by and among SunAmerica as Grantor and JALIC
as Beneficiary and Bankers Trust Company as Trustee dated
March 31, 1997. Filed as Exhibit 10.5 to the Registrant's
Current Report on Form 8-K filed April 15, 1997 (Commission
File No. 1-11396) and incorporated herein by reference.
10.53 Transition Services Agreement between JALIC and SunAmerica
dated March 31, 1997. Filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.54 Transition Services Agreement between JALIC and JANY dated
March 31, 1997. Filed as Exhibit 10.7 to the Registrant's
Current Report on Form 8-K filed April 15, 1997 (Commission
File No. 1-11396) and incorporated herein by reference.
10.55 Administrative Services Agreement between JALIC and
SunAmerica dated March 31, 1997. Filed as Exhibit 10.8 to
the Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated herein
by reference.
10.56 Interim Servicing Agreement between John Alden Asset
Management Company, SunAmerica and JANY dated as of March
31, 1997. Filed as Exhibit 10.9 to the Registrant's Current
Report on Form 8-K filed April 15, 1997 (Commission File No.
1-11396) and incorporated herein by reference.
10.57 Asset Repurchase Agreement by and between JALIC and
SunAmerica dated March 31, 1997. Filed as Exhibit 10.10 to
the Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated herein
by reference.
10.58 Marketing Agreement dated March 28, 1997 by and between
SunAmerica and NSM Sales Corporation. Filed as Exhibit 10.11
to the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.59 Amendment No. 1 dated March 31, 1997 to the Stock Purchase
and Sale Agreement dated November 29, 1996 by and between
JALIC and SunAmerica. Filed as Exhibit 10.12 to the
Registrant's Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.60 Amendment No. 1 dated March 31, 1997 to the Asset Purchase
and Sale Agreement dated November 29, 1996 by and between
JALIC and SunAmerica. Filed as Exhibit 10.13 to the
Registrant's Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.61 Amendment No. 1 to Marketing Agreement between SunAmerica
and NSM Sales Corporation. Filed as Exhibit 10.14 to the
Registrant's Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.62 Deferred Compensation Agreement dated April 2, 1997, by and
between John Alden Financial Corporation and Glendon E.
Johnson. Filed as Exhibit 10.62 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
</TABLE>
35
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.63 Amended and Restated Employment Agreement dated November 5,
1997, by and between John Alden Financial Corporation and
Glendon E. Johnson. Filed as Exhibit 10.63 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 (Commission File No.
1-11396) and incorporated herein by reference.
10.64 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Marvin H.
Assofsky. Filed as Exhibit 10.64 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.65 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Glen A.
Spence. Filed as Exhibit 10.65 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.66 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Scott L.
Stanton. Filed as Exhibit 10.66 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.67 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Michael P.
Andersen. Filed as Exhibit 10.67 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.68 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Lonnie R.
Wright, Jr. Filed as Exhibit 10.68 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.69 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Kerry D.
Clemmons. Filed as Exhibit 10.69 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.70 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Mark A.
Schoder. Filed as Exhibit 10.70 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.71 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Anne V.
Wardlow. Filed as Exhibit 10.71 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.72 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and William S.
Wilkins. Filed as Exhibit 10.72 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
</TABLE>
36
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
10.73 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and William H.
Mauk, Jr. Filed as Exhibit 10.73 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.74 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and James H.
Srite. Filed as Exhibit 10.74 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.75 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Patsy
Campola. Filed as Exhibit 10.75 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.76 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Gary F.
Kadlec. Filed as Exhibit 10.76 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.77 Agreement and Plan of Merger, dated as of March 9, 1998, by
and among John Alden Financial Corporation, Fortis, Inc.
and JAFCO Acquisition Corp. Filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed
March 19, 1998 (Commission File No. 1-11396) and
incorporated herein by reference.
10.78 Stock Option Agreement, dated as of March 9, 1998, by and
between John Alden Financial Corporation, as issuer, and
Fortis, Inc., as grantee. Filed as Exhibit 2.2 to the
Registrant's Current Report on Form 8-K filed
March 19, 1998 (Commission File No. 1-11396) and
incorporated herein by reference.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Accountants.
*27.1 Financial Data Schedule.
*99.1 Financial Statements of the John Alden Financial Corporation
Employee Stock Purchase Plan for the year ended December 31,
1997.
</TABLE>
- -----------------------
* Filed herewith.
37
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida, on the 23rd day of March 1998.
JOHN ALDEN FINANCIAL CORPORATION
By: /s/ Scott L. Stanton
---------------------------------------
Scott L. Stanton
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated on
March 23, 1998.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Glendon E. Johnson President, Chairman of the Board and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Glendon E. Johnson
/s/ Scott L. Stanton Director, Senior Vice President and Chief Financial Officer
- ---------------------------- (Principal Financial Officer and Principal Accounting Officer)
Scott L. Stanton
/s/ Norman E. Crocker Director
- ----------------------------
Norman E. Crocker
/s/ David P. Gardner Director
- ----------------------------
David P. Gardner
/s/ Edwin J. Garn Director
- ----------------------------
Edwin J. Garn
/s/ Carl F. Geuther Director
- ----------------------------
Carl F. Geuther
/s/ Linda Jenckes Director
- ----------------------------
Linda Jenckes
/s/ Lynn G. Merritt Director
- ----------------------------
Lynn G. Merritt
/s/ James L. Moorefield Director
- ----------------------------
James L. Moorefield
</TABLE>
38
<PAGE> 42
/s/ Marvin Assofsky Director
- --------------------------
Marvin Assofsky
/s/ Lonnie R. Wright Director
- --------------------------
Lonnie R. Wright
39
<PAGE> 43
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 44
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
John Alden Financial Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material
respects, the financial position of John Alden Financial Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 20, 1998
F-2
<PAGE> 45
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Debt securities:
Held-to-maturity securities, at amortized cost (market $46,464 and $46,884) ....... $ 44,780 $ 45,357
Available-for-sale securities, at market (cost $518,018 and $4,185,263) ........... 550,585 4,248,774
Trading account securities, at market (cost $3,411 and $4,435) .................... 3,504 4,518
Equity securities, at market (cost $8 and $73,692) ................................... 23 82,098
Mortgage loans ....................................................................... 145,770 1,449,242
Investment in real estate, at cost, less accumulated depreciation of $3,621 and $2,008 40,354 39,903
Real estate owned .................................................................... 3,021 11,483
Policy loans and other notes receivable .............................................. 32,091 75,186
Short-term investments ............................................................... 196,218 6,371
----------- -----------
Total invested assets ........................................................... 1,016,346 5,962,932
Cash and cash equivalents ............................................................ 31,663 167,511
Accrued investment income ............................................................ 15,525 65,727
Deferred policy acquisition costs .................................................... 32,161 239,622
Property and equipment, at cost, less accumulated depreciation of $15,316 and $23,976 70,962 69,856
Reinsurance receivables .............................................................. 169,588 204,379
Investment deposits recoverable ...................................................... 17,537 766,286
Other assets ......................................................................... 126,150 194,936
----------- -----------
Total assets .................................................................. $ 1,479,932 $ 7,671,249
=========== ===========
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Contract holder liabilities:
Contract holder deposit funds .................................................. $ 341,954 $ 6,271,779
Other benefit and claim reserves ............................................... 397,486 458,929
Unearned premium reserves ...................................................... 29,065 156,924
Short-term debt .................................................................... 41,500 25,000
Accounts payable and other liabilities ............................................. 102,906 120,888
Funds payable under reinsurance treaties ........................................... 44,787 77,331
Long-term debt ..................................................................... 35,000 76,500
Deferred gain on sale of discontinued operations ................................... 21,038 -
----------- -----------
Total liabilities ............................................................ 1,013,736 7,187,351
----------- -----------
Redeemable securities:
Series A 9% cumulative preferred stock, $.01 par value; 150,000 shares
authorized, issued and outstanding; mandatory redemption value of $100 per
share; including accrued dividends of $286; $101.91 per share ................. 15,286 15,286
Common stock, $.01 par value; -- and 667,430 shares
authorized, issued and outstanding .............................................. - 3,401
----------- -----------
Total redeemable securities .................................................. 15,286 18,687
----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 75,000,000 and 74,332,570 shares authorized;
25,953,525 and 25,055,843 shares issued; 24,655,856
and 24,668,108 shares outstanding .............................................. 259 250
Paid-in capital .................................................................... 187,422 181,863
Net unrealized gain on investments, net of income taxes ............................ 17,706 26,977
Retained earnings .................................................................. 276,552 268,109
Redemption value of common stock in excess of cost ................................. - (2,669)
Unearned compensation .............................................................. (357) (643)
Treasury stock, at cost; 1,297,669 and 387,735 shares .............................. (30,672) (8,676)
----------- -----------
Total stockholders' equity .................................................... 450,910 465,211
----------- -----------
Total liabilities, redeemable securities and stockholders' equity ............. $ 1,479,932 $ 7,671,249
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 46
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross insurance premiums and contract charges earned ....................... $ 1,531,663 $ 1,838,254 $ 1,936,262
Ceded insurance premiums and contract charges earned ....................... (602,762) (813,680) (883,227)
----------- ----------- -----------
Net insurance premiums and contract charges earned .................... 928,901 1,024,574 1,053,035
Net investment income ...................................................... 69,293 45,460 50,388
Other income, including experience refunds and expense allowances
on reinsurance ceded of $37,401, $32,172 and $46,204 ................... 47,050 41,596 55,434
Net realized investment gains (losses) ..................................... 4,805 3,052 (2,393)
----------- ----------- -----------
Total revenues ................................................. 1,050,049 1,114,682 1,156,464
----------- ----------- -----------
Benefits and expenses:
Gross claims incurred on insurance products ............................... 1,141,307 1,396,695 1,458,365
Ceded claims incurred on insurance products ............................... (471,115) (647,644) (695,266)
----------- ----------- -----------
Net claims incurred on insurance products ............................. 670,192 749,051 763,099
Universal life and investment-type contract benefits:
Interest credited to account balances ................................. 13,753 13,562 12,959
Benefit claims incurred in excess of account balances ................. 4,735 4,895 3,962
Increase (decrease) in life insurance reserves ............................ 30,775 132 (1,717)
----------- ----------- -----------
Total benefits ................................................ 719,455 767,640 778,303
----------- ----------- -----------
Commissions, net of commissions ceded of $52,257, $73,537 and $75,643 ..... 63,347 77,318 83,362
General expenses, net of expenses ceded of $51,615, $78,927 and $78,518 ... 251,637 246,140 298,618
Amortization of purchased intangibles ..................................... 4,218 4,786 4,833
Amortization of deferred policy acquisition costs ......................... 14,810 13,854 13,455
Interest expense .......................................................... 5,332 6,615 8,413
----------- ----------- -----------
Total expenses ................................................ 339,344 348,713 408,681
----------- ----------- -----------
Total benefits and expenses ................................... 1,058,799 1,116,353 1,186,984
----------- ----------- -----------
Loss from continuing operations before benefit for income taxes and
minority interest in joint venture's (income) loss ........................ (8,750) (1,671) (30,520)
Benefit for income taxes ...................................................... (1,915) (2,096) (9,637)
Minority interest in joint venture's (income) loss ............................ (956) (2,136) 1,983
----------- ----------- -----------
Net loss from continuing operations ........................................... (7,791) (1,711) (18,900)
Net income from discontinued operations:
Income from Annuity Operations and Western Diversified Group (net of income
taxes of $3,541, $18,840 and $15,451) .................................. 5,693 32,647 25,308
Gain on disposal of Annuity Operations and Western Diversified Group (net of
income taxes of $28,828, $--, and $--) ................................. 23,986 - -
----------- ----------- -----------
Net income .................................................................... $ 21,888 $ 30,936 $ 6,408
=========== =========== ===========
Net income applicable to common stock ......................................... $ 20,538 $ 29,586 $ 5,058
=========== =========== ===========
Net income per common share (see Note 3):
Net loss from continuing operations ..................................... ($0.36) ($0.12) ($0.80)
Net income from discontinued operations ................................. 1.17 1.29 1.00
----------- ----------- -----------
Net income .............................................................. $ 0.81 $ 1.17 $ 0.20
=========== =========== ===========
Net income per common share - assuming dilution (see Note 3):
Net loss from continuing operations ..................................... ($0.35) ($0.12) ($0.78)
Net income from discontinued operations ................................. 1.15 1.27 0.98
----------- ----------- -----------
Net income .............................................................. $ 0.80 $ 1.15 $ 0.20
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 47
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
NUMBER OF UNREALIZED
SHARES COMMON PAID-IN GAIN (LOSS) ON RETAINED
OUTSTANDING STOCK CAPITAL INVESTMENTS EARNINGS
------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994....................... 24,246,161 $ 245 $ 180,401 $ (20,348) $ 256,252
Net income....................................... 6,408
Change in net unrealized gain (loss)............. 78,389
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock..................................
Common stock dividends ($0.44 per share)......... (11,143)
Exercise of stock options ....................... 91,340 1 329
Treasury stock acquired.......................... (165,000)
Stock option compensation expense................ 256
Adjustment of put holder shares to market value..
Transfer from redeemable common stock............ 225,638 2 168
------------- ------------ ------------ -------------- --------------
Balance, December 31, 1995....................... 24,398,139 248 181,154 58,041 250,167
Net income....................................... 30,936
Change in net unrealized gain (loss)............. (31,064)
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock..................................
Common stock dividends ($0.46 per share)......... (11,644)
Exercise of stock options ....................... 50,425 1 268
Unearned compensation - treasury stock grant..... 36,000 95
Compensation expense recognized..................
Adjustment of put holder shares to market value..
Transfer from redeemable common stock............ 183,544 1 346
------------- ------------- ----------- -------------- --------------
Balance, December 31, 1996....................... 24,668,108 250 181,863 26,977 268,109
Net income....................................... 21,888
Change in net unrealized gain (loss)............. (9,271)
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock..................................
Common stock dividends ($0.48 per share)......... (12,095)
Exercise of stock options ....................... 262,018 2 4,834
Treasury stock acquired.......................... (941,700)
Compensation expense recognized..................
Adjustment of put holder shares to market value..
Transfer from redeemable common stock............ 667,430 7 725
------------- ----------- ----------- ----------- --------------
Balance, December 31, 1997....................... 24,655,856 $ 259 $ 187,422 $ 17,706 $ 276,552
============= =========== =========== =========== ==============
<CAPTION>
VALUE OF
COMMON
STOCK IN
EXCESS OF UNEARNED TREASURY STOCKHOLDERS'
COST COMPENSATION STOCK EQUITY
-------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994....................... $ (3,645) $ - $ (6,181) $ 406,724
Net income....................................... 6,408
Change in net unrealized gain (loss)............. 78,389
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock.................................. 922 922
Common stock dividends ($0.44 per share)......... (11,143)
Exercise of stock options ....................... 55 385
Treasury stock acquired.......................... (3,203) (3,203)
Stock option compensation expense................ 256
Adjustment of put holder shares to market value.. (1,489) (1,489)
Transfer from redeemable common stock............ 1,162 1,332
-------------- -------------- ------------ --------------
Balance, December 31, 1995....................... (3,050) -- (9,329) 477,231
Net income....................................... 30,936
Change in net unrealized gain (loss)............. (31,064)
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock.................................. 401 401
Common stock dividends ($0.46 per share)......... (11,644)
Exercise of stock options ....................... 10 279
Unearned compensation - treasury stock grant..... (738) 643 --
Compensation expense recognized.................. 95 95
Adjustment of put holder shares to market value.. (24) (24)
Transfer from redeemable common stock............ 4 351
-------------- -------------- ------------ --------------
Balance, December 31, 1996....................... (2,669) (643) (8,676) 465,211
Net income....................................... 21,888
Change in net unrealized gain (loss)............. (9,271)
Redeemable preferred stock
dividends ($9.00 per share)................... (1,350)
Change in redemption value of
common stock.................................. (2,941) (2,941)
Common stock dividends ($0.48 per share)......... (12,095)
Exercise of stock options ....................... 707 5,543
Treasury stock acquired.......................... (22,703) (22,703)
Compensation expense recognized.................. 286 286
Adjustment of put holder shares to market value.. (3,181) (3,181)
Transfer from redeemable common stock............ 8,791 9,523
----------- ----------- ---------- -----------
Balance, December 31, 1997....................... $ - $ (357) $ (30,672) $ 450,910
=========== =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 48
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 21,888 $ 30,936 $ 6,408
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized investment (gains) losses .............................................. (1,322) 5,000 (1,476)
Depreciation and amortization ....................................................... 3,319 (7,123) 7,455
Policy acquisition costs deferred, net of amortization .............................. 9,686 7,789 (30,975)
Amortization of purchased intangibles ............................................... 7,035 12,451 17,380
Inflows from net sales, maturities, calls and purchases of trading account securities -- 1,000 6,570
Interest credited on universal life and investment type contracts ................... 81,139 302,756 324,071
Surrender and other contract charges ................................................ (19,521) (28,548) (27,563)
Recognition of net deferred gain on sale of discontinued operations ................. (23,986) -- --
(Decrease) increase in contract holder liabilities .................................. (29,496) 904 119,106
Increase in accrued investment income ............................................... (1,837) (1,284) (4,175)
Decrease (increase) in reinsurance receivables and investment deposits recoverable .. 7,249 (18,163) (39,935)
Increase in other assets ............................................................ (9,570) (1,253) (10,402)
Minority interest in joint venture's income ......................................... 956 2,136 (1,983)
(Decrease) increase in accounts payable and other liabilities ....................... (28,886) (1,991) 8,863
(Decrease) increase in federal income taxes payable ................................. (29,646) 8,816 1,263
Increase (decrease) in funds payable under reinsurance treaties ..................... 18,016 (11,693) 8,430
--------- --------- ---------
Net cash provided by operating activities .............................................. 5,024 301,733 383,037
--------- --------- ---------
Cash flows from investing activities:
Proceeds from investments sold:
Available-for-sale ............................................................ 281,756 527,346 512,997
Equity securities ............................................................. 120 1,383 72,883
Real estate owned ............................................................. 12,672 11,327 10,514
Maturities, calls and scheduled loan payments:
Held-to-maturity .............................................................. 1,396 88,693 74,515
Available-for-sale ............................................................ 91,304 159,574 105,458
Mortgage loans and other notes receivable ..................................... 178,485 365,869 189,036
Investments purchased:
Held-to-maturity .............................................................. -- (121,418) (128,138)
Available-for-sale ............................................................ (57,599) (634,821) (576,858)
Equity securities ............................................................. (50) (346) (27,179)
Mortgage loans and other notes receivable ..................................... (131,779) (319,155) (420,355)
Investment in real estate ..................................................... (2,066) (19,904) (1,117)
(Outflows) inflows from net sales and purchases of short-term investments ............ (192,478) (266) 9,134
Sales of property, equipment and capitalized software projects ....................... -- -- 28,429
Sale of Annuity Operations ........................................................... (177,616) -- --
Sale of Western Diversified Group .................................................... 23,289 -- --
Purchases of property, equipment and other ........................................... (6,482) (21,701) (35,794)
--------- --------- ---------
Net cash provided by (used in) investing activities .................................... 20,952 36,581 (186,475)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings of short-term and long-term debt ............................ -- 26,000 27,000
Repayments of borrowings of short-term and long-term debt ............................ (25,000) (31,563) (45,015)
Receipts from universal life and investment-type contracts ........................... 81,716 453,185 886,270
Payments on universal life and investment-type contracts ............................. (184,718) (705,579) (666,663)
Purchase of treasury stock .......................................................... (22,703) -- (3,203)
Payment of dividends ................................................................. (13,527) (12,731) (12,248)
Exercises of stock options ........................................................... 4,488 279 385
Payments made under reinsurance agreement ............................................ (2,080) -- (341,956)
--------- --------- ---------
Net cash used in financing activities .................................................. (161,824) (270,409) (155,430)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ...................................... (135,848) 67,905 41,132
Cash and cash equivalents, beginning of period ............................................ 167,511 99,606 58,474
--------- --------- ---------
Cash and cash equivalents, end of period .................................................. $ 31,663 $ 167,511 $ 99,606
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 49
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND HISTORY OF THE COMPANY
The consolidated financial statements include the accounts of John
Alden Financial Corporation ("JAFCO"), a holding company established in 1987
for the purpose of acquiring John Alden Life Insurance Company ("JALIC") and
certain of its affiliates and its consolidated subsidiaries (collectively "John
Alden" or the "Company"). Prior to 1996, John Alden operated in three
segments: Healthcare, Asset Accumulation and Credit and Other. In addition, a
Corporate Segment included certain activities that were not directly related to
any operating division. On March 27, 1996, the Board of Directors of the
Company authorized the sale of its Asset Accumulation Segment, which includes
the annuity business, (the "Annuity Operations"), and the Western Diversified
Group, the principal businesses included in the Credit and Other Segment and
which market credit life and disability and retail service warranty coverage
(see Note 5). As a result of this action, beginning in 1996, the Company
reported the results of operations of the Annuity Operations and Western
Diversified Group as discontinued operations. In addition, the Company
discontinued the reporting of segment information of its remaining continuing
operations which are primarily related to healthcare product lines and other
continuing operations. The current healthcare operations primarily include
indemnity and managed indemnity products, Health Maintenance Organization
("HMO") and HMO-like products and healthcare stop-loss reinsurance products.
The Company also has certain product lines which are no longer being actively
marketed (run-off operations).
NOTE 2 -- ANTICIPATED SALE OF THE COMPANY
On March 9, 1998, the Company entered into an agreement to merge with a
wholly-owned subsidiary of Fortis, Inc. ("Fortis"), a wholly-owned subsidiary
of Fortis Amev, Netherlands, and Fortis AG, Belgium, as a result of which,
among other things, the Company will become a wholly-owned subsidiary of Fortis
and each outstanding share of the Company's common stock will be converted into
the right to receive $22.50 in cash. Consummation of the merger is subject to
regulatory and stockholder approvals, as well as other customary terms and
conditions. It is anticipated that the merger will be consummated during 1998.
In connection with and as a condition to Fortis entering into the agreement to
merge, the Company granted an option to Fortis to acquire, under certain
circumstances, common stock of the Company representing up to 19.9% of the
Company's outstanding common stock at an exercise price of $22.50 per share.
Under certain circumstances and subject to certain limitations, John Alden may
be required to repurchase the option granted to Fortis and any of the shares
acquired by Fortis pursuant to the exercise of the option at an aggregate price
equal to the amount paid by Fortis for any shares acquired pursuant to any
exercise of the option plus $20.0 million and an additional amount up to $2.5
million for expenses. If the anticipated sale of the Company is consummated,
the Company may be required to make payments to certain officers under
change in control employment agreements costing the Company approximately $20.8
million after-tax. Further, all non-vested common stock options and restricted
performance award shares currently outstanding would become fully vested.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") and
include management estimates and assumptions that affect the recorded amounts.
All significant intercompany balances and transactions have been eliminated.
The following accounting policies describe the accounting principles used in
the preparation of the consolidated financial statements:
Investments
Investments in debt securities are classified into one of three
categories: held-to-maturity, available-for-sale or trading. Investments in
debt securities which the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and carried at amortized cost,
with premiums amortized to call dates and discounts amortized to maturity
dates. In certain limited circumstances, such as individual issuer credit
deterioration or requirements of insurance regulators, the Company may dispose
of such investments prior to their scheduled maturities. Investments in debt
securities which are held principally for the purpose of resale in the near
term are classified as trading securities and carried at market value with
unrealized gains and losses included in earnings. Investments in debt
securities not classified as held-to-maturity or trading are classified as
available-for-sale and carried at market value, with resulting unrealized gains
and losses, net of applicable income taxes and deferred policy acquisition
costs, credited or charged to stockholders' equity.
F-7
<PAGE> 50
Equity securities are reported at market value, with the resulting
unrealized gains and losses, net of applicable income taxes and deferred policy
acquisition costs, credited or charged to stockholders' equity. Investments in
common stocks of entities in which the Company maintains control are
consolidated. Gain or loss on the sale of securities is computed on the
specific identification method. Policy loans are carried at the unpaid
principal balance. Mortgage loans are carried at the unpaid principal balance
less unamortized discounts, write-downs and a valuation reserve. The valuation
reserve is determined by both a historical analysis and specific loan analysis.
Mortgage discounts are deferred and amortized to call dates. The Company's
policy of placing mortgage loans on non-accrual status (i.e., no longer
accruing investment income) is at the earlier of 90 days past due or at the
commencement of foreclosure. Investment in real estate represents land and
buildings and is carried at cost, less accumulated depreciation. Real estate
owned represents foreclosed mortgage loan collateral and is held for sale and
carried at cost less allowances for selling costs and impairments in value.
Short-term investments, comprised primarily of U.S. Treasury notes, are carried
at amortized cost, which approximates market value. The investment portfolio is
continuously reviewed for investments that may have experienced a decline in
value considered to be other than temporary. Provisions for impairments that are
considered other than temporary are included in net realized investment gains
(losses).
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Premium and Other Contract-Related Revenues, Contract Holder Liabilities and
Deferred Policy Acquisition Costs
Single Payment Deferred Annuities and Flexible Payment Annuities.
Contract charges earned for investment-type contracts consist of service
charges and surrender charges assessed against account balances. Expenses
related to these products include interest credited to account balances.
Contract holder liabilities are recorded at accumulated value without reduction
for surrender charges. Policy acquisition costs (principally excess first year
commissions) are deferred and amortized over an initial policy period,
generally ten years, in relation to expected profits. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from a group of
products, including realized and unrealized gains and losses from investments.
Universal Life Insurance. Contract charges earned consist of cost of
insurance assessments, service charges and surrender charges assessed against
account balances. Expenses consist of interest credited to account balances
and benefit claims incurred in excess of policyholder account balances.
Contract holder liabilities are recorded at accumulated value without reduction
for surrender charges. Policy acquisition costs (principally excess first year
commissions) are deferred and amortized over a period of 20 or 25 years in
proportion to an expected profit stream emerging from the assumed margins
implicit in the product. This amortization is reviewed annually and adjusted
retrospectively when the Company revises its estimate of current or future
gross profits to be realized from a group of products, including realized and
unrealized gains and losses from investments.
Group Life and Health. Premiums are recorded as revenue when due.
Unearned premiums are earned pro rata over the applicable premium period.
Policy acquisition costs are generally expensed as incurred. Policy
acquisition costs (excess first year commissions and other incremental issue
costs) on certain group products are deferred and amortized generally over
seven years relative to the expected revenue stream. Aggregate deferred policy
acquisition costs of the group life and health business are monitored for
purposes of assessing recoverability. The liability for policy claims
represents management's estimate of the ultimate liability associated with
reported claims. Liabilities for incurred-but-not-reported claims are
estimated based on Company experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to operations periodically as the
estimates are revised.
Reinsurance and Risk Management Services. Premiums are earned pro rata
over the term of the policy. Reinsurance fees and third-party administration
fees are recorded as revenue when due. The liability for policy claims
represents management's estimate of the ultimate liability associated with
reported claims. Liabilities for
F-8
<PAGE> 51
incurred-but-not-reported claims are estimated based on Company experience.
Changes in the estimated cost to settle unpaid claims are charged or credited
to operations periodically as the estimates are revised.
Other Annuities and Ordinary Life Insurance. Premiums are recorded as
revenue when due. Policy and contract benefit reserves generally are
calculated using the same assumptions as to interest, mortality, lapses and
expenses used in pricing, plus additional margins for adverse deviation.
Policy acquisition costs (principally excess first year commissions) are
deferred and amortized over the premium-paying period using the same
assumptions as to interest, mortality and lapses used in calculating benefit
reserves.
Credit Life, Credit Accident and Health and Extended Service Contracts.
Insurance premiums on credit life policies are deferred and amortized to income
over the term of the policy (on the pro rata method for level coverage and
principally on the Rule of 78's method for decreasing coverage). Accident and
health insurance premiums are deferred and amortized to income principally on
the mean of the pro rata and Rule of 78's methods. Premiums on extended service
contracts are deferred and amortized into income in relation to historical
claims experience. Policy acquisition costs (principally commissions) are
deferred and amortized over the term of the contracts in relation to premiums
earned.
Property and Equipment
Property and equipment consists primarily of the headquarters
buildings, land, office furniture and equipment, leasehold improvements,
microcomputers and other data processing equipment and is stated at cost, less
accumulated depreciation. Expenditures for new property are capitalized, while
maintenance and repairs are charged to income as incurred. Depreciation is
computed on the straight-line method over the estimated useful lives of the
depreciable assets ranging from four to 39 years.
Other Assets
The excess of cost over the fair values of net assets of companies
acquired is amortized on a straight-line basis over lives ranging from 15 to 25
years. At December 31, 1997, the balances of such net goodwill and accumulated
amortization were approximately $38.0 million and $24.8 million, respectively.
The corresponding amounts at December 31, 1996 were $86.3 million and $48.1
million, respectively. The Company periodically reviews the recoverability of
goodwill from future cash flows, and adjusts the carrying value as required. At
December 31, 1997 and 1996, the Company determined that goodwill, net of
accumulated amortization, was not impaired. At December 31, 1997 and 1996,
value of insurance in force was approximately $5.7 million and $9.2 million,
respectively.
The Company capitalizes certain software development costs related to
major systems conversions and enhancements. The unamortized amounts of
capitalized software costs were approximately $10.7 million and $7.5 million as
of December 31, 1997 and 1996, respectively. Such costs are being amortized on
the straight-line method over a three to five-year period.
Stock-based Compensation Plans
The Company periodically grants stock options and restricted stock
awards as compensation to certain key executives and employees. Under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), the
Company determines stock-based compensation expense by the intrinsic value
method.
Income Taxes
Tax expense is the amount of income taxes expected to be payable for
the current year plus (or minus) the change from the beginning of the year in
deferred tax liabilities or assets. Deferred income taxes are provided in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". The tax effect of future taxable temporary
differences (liabilities) and future deductible temporary differences (assets)
F-9
<PAGE> 52
are separately calculated and recorded. A valuation allowance reducing the
asset recognized must be recorded if it is determined that it is more likely
than not that the asset will not be realized.
The Company has elected to file a Life/Non-Life consolidated federal
income tax return which includes all subsidiaries. Income tax expense is
generally calculated on a consolidated basis, although there are limitations on
the utilization of losses of one group against the other group's income.
Changes in Accounting Principles
The Company adopted SFAS No. 128, "Earnings Per Share" ("SFAS 128")
effective January 1, 1997. SFAS 128 addresses the standards for computing and
presenting earnings per share and replaces the presentation of primary and
fully diluted earnings per share required under APB 15 with a presentation of
basic and diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the period.
Diluted earnings per share is computed similarly to fully diluted earnings per
share. There was no effect on the Company's results of operations or financial
position upon adoption of this statement.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", effective
January 1, 1996. SFAS No. 121 addresses the recognition and measurement of
impairments of long-lived assets, certain identifiable intangible assets and
goodwill related to those assets to be held as well as impairments of
long-lived assets and certain identifiable intangibles to be disposed of. There
was no effect on the Company's results of operations or financial position upon
adoption of this statement.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", for the year ended December 31, 1996. SFAS No. 123 establishes
a fair value based accounting method of accounting for stock-based compensation
plans. As permitted under the statement, the Company has elected to continue
to apply the provisions of APB 25 and to comply with the disclosure
requirements of SFAS No. 123. There was no effect on the Company's results of
operations or financial position upon adoption of the statement. SFAS No. 123
disclosures of the pro forma effects of stock options and awards granted in
1995, 1996 and 1997 are provided in Note 17.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures" effective January 1, 1995. SFAS
No. 114 addresses the accounting by creditors for the measurement and
recognition of loan impairments. SFAS No. 118 amends certain provisions of
SFAS No. 114. There was no effect on the Company's results of operations or
financial position upon adoption of these statements. It is the Company's
policy to discontinue accrual of interest income on loans at the earlier of 90
days past due or at the commencement of foreclosure. Cash receipts on such
loans are recognized as interest income, including recognition of amounts
previously not accrued. Receipts in excess of all past due interest are
recognized as reductions of principal. Loan impairments are generally
considered to be other than temporary declines in value and therefore are
reported as realized investment losses. As of December 31, 1997, investments
in impaired mortgage loans totaled $19.0 million, and impairment reserves due
to other than temporary declines in value of $13.9 million have been recognized
as realized investment losses in relation to such loans.
F-10
<PAGE> 53
Net Income Per Common Share
Net income per common share is determined by dividing net income, as
adjusted below, by applicable average common shares outstanding (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $ 21,888 $ 30,936 $ 6,408
Preferred stock dividends . . . . . . . . . . . . . . (1,350) (1,350) (1,350)
-------- -------- --------
Net income applicable to common stock . . . . . . . . $ 20,538 $ 29,586 $ 5,058
======== ======== ========
Average common shares outstanding . . . . . . . . . . 25,400 25,295 25,328
Potentially dilutive securities . . . . . . . . . . . 359 356 393
-------- -------- --------
Average common and potentially dilutive
shares outstanding . . . . . . . . . . . . . . . . 25,759 25,651 25,721
======== ======== ========
</TABLE>
Reclassifications
Certain reclassifications have been made to the prior year
consolidated financial statements to conform with the current year
presentation.
NOTE 4 -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as the change in equity during the financial reporting period
of a business enterprise resulting from non-owner sources. SFAS 131
establishes standards for the reporting of operating segment information in
both annual financial reports and interim financial reports issued to
shareholders. Operating segments are components of an entity for which
separate financial information is available and is evaluated regularly by the
entity's chief operating management. Both statements are effective for fiscal
years beginning after December 15, 1997 and are not expected to have a material
impact on the Company.
NOTE 5 -- DISCONTINUED OPERATIONS
On March 31, 1997, the Company sold substantially all of its annuity
business (the "Annuity Operations") to SunAmerica Life Insurance Company
("SunAmerica"). The transaction included the sale of all of the common stock
of JANY and the coinsurance of substantially all of the annuity business of
JALIC. This coinsurance was initially on an indemnity basis and the parties
agreed to transition the business to an assumption basis as soon as practical.
In certain states, the transition to an assumption basis is subject to
policyholder approval. To the extent that such transition does not take place
with respect to any particular policy, the policy will remain reinsured on an
indemnity basis. As of December 31, 1997, approximately 70% of the ceded
annuity reserves have either transitioned to an assumption basis or lapsed.
The majority of the remaining policies are expected to be assumed by
December 31, 1998.
As consideration for the Annuity Operations, SunAmerica paid the
Company approximately $238.2 million. The consideration represented
approximately $162.3 million of premium paid to acquire the business and
approximately $75.9 million of adjusted capital and surplus of JANY. It did
not include any capital and surplus used to support the annuity business in
JALIC, which remained in JALIC.
F-11
<PAGE> 54
On September 30, 1997, the Company sold all of the common stock of
substantially all of the subsidiaries which comprise the Western Diversified
Group to Protective Life Insurance Company.
As a result of the sales of the Annuity Operations and Western
Diversified Group, the Company recorded a net deferred gain of approximately
$45.0 million. This amount was net of estimated transaction expenses, taxes,
goodwill and other adjustments relating to these transactions. During the
year ended December 31, 1997, the Company recognized approximately $24.0 million
of the net deferred gain in income as a result of the assumption of policy
reserves by SunAmerica. The Company expects to recognize the majority of the
remainder of the net deferred gain by December 31, 1998.
In addition to the $238.2 million purchase price for the Annuity
Operations, SunAmerica paid $33.1 million to the Company for accrued interest
and related items. In turn, the Company paid SunAmerica $360.4 million of cash
and cash equivalents because policy reserves transferred exceeded invested
assets transferred. Additionally, the Company's cash and cash equivalent
position was decreased by JANY's cash and cash equivalent balance at the time of
the sale of $88.5 million, which was retained by JANY. Therefore, the Company
incurred a net outflow of cash and cash equivalents due to the sale of the
Annuity Operations of $177.6 million, as reflected in the accompanying
consolidated statement of cash flows. Additionally, the Company increased its
cash position by $23.3 million as a result of the sale of the Western
Diversified Group.
The Company's available capital was enhanced by both the after-tax
gain generated from the transactions and by the release of the net capital
previously allocated to support these businesses. The Company continues to
evaluate the best uses of its capital, including the approximately $200 million
of excess capital generated from the sale of the Company's annuity and credit
businesses. In the event that the sale of the Company does not occur, this
capital may be used to repurchase common stock, pay dividends, reduce debt,
acquire blocks of business or for general corporate purposes, or for a
combination of two or more of such uses. During December 1997 and January
1998, the Company repurchased approximately 1.1 million shares of common stock
for a total purchase price of approximately $25.9 million.
Total revenues for the discontinued operations for the years ended
December 31, 1997, 1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Annuity Operations . . . . . . . . . . . . . . $102,909 $432,615 $459,894
Western Diversified Group . . . . . . . . . . . 52,935 62,240 54,595
</TABLE>
Included in other assets at December 31, 1997 in the accompanying
consolidated balance sheet was approximately $1.4 billion of investment
contract deposits recoverable on the JALIC coinsurance, net of a similar amount
of contract holder liabilities related to the discontinued operations.
F-12
<PAGE> 55
NOTE 6 -- INVESTMENTS
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities as of December 31, 1997 and
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
HELD-TO-MATURITY
- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 4,513 $ 42 $ -- $ 4,555
Corporate securities . . . . . . . . . . . . . 20,940 948 -- 21,888
Mortgage-backed securities . . . . . . . . . . 19,327 694 -- 20,021
------- ------ --------- -------
Total . . . . . . . . . . . . . . . . . . $44,780 $1,684 $ -- $46,464
======= ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
HELD-TO-MATURITY
- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 5,090 $ 63 $ -- $ 5,153
Corporate securities . . . . . . . . . . . . . 21,049 1,026 -- 22,075
Mortgage-backed securities . . . . . . . . . . 19,218 547 (109) 19,656
------- ------ -------- -------
Total . . . . . . . . . . . . . . . . . . $45,357 $1,636 $ (109) $46,884
======= ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
AVAILABLE-FOR-SALE
- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 39,478 $ 1,060 $ (49) $ 40,489
Debt securities issued by foreign governments . 1,073 155 (1) 1,227
Corporate securities . . . . . . . . . . . . . 329,026 24,516 (16) 353,526
Mortgage-backed securities . . . . . . . . . . 132,161 6,773 (24) 138,910
Asset-backed securities . . . . . . . . . . . . 16,280 212 (59) 16,433
-------- ------- ----- --------
Total . . . . . . . . . . . . . . . . . . $518,018 $32,716 $(149) $550,585
======== ======= ===== ========
</TABLE>
F-13
<PAGE> 56
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $1,037,987 $ 16,703 $(11,806) $1,042,884
Obligations of state and local governments . . 25,854 1,705 (63) 27,496
Debt securities issued by foreign governments . 15,625 663 (22) 16,266
Corporate securities . . . . . . . . . . . . . 1,443,202 49,490 (4,541) 1,488,151
Mortgage-backed securities . . . . . . . . . . 1,207,351 19,879 (13,058) 1,214,172
Asset-backed securities . . . . . . . . . . . . 455,244 6,765 (2,204) 459,805
---------- -------- -------- ----------
Total . . . . . . . . . . . . . . . . . . $4,185,263 $ 95,205 $(31,694) $4,248,774
========== ======== ======== ==========
</TABLE>
The amortized cost and estimated market value of investments in
held-to-maturity and available-for-sale securities at December 31, 1997, by
contractual maturity, are shown below (dollars in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Securities which will be collected over multiple periods have been
allocated based upon the ultimate maturities of the securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Due in one year or less . . . . . . . . . . . . $ -- $ -- $ 30,326 $ 30,680
Due after one year through five years . . . . . 17,829 18,395 125,200 133,132
Due after five years through ten years . . . . 9,557 10,006 244,094 262,412
Due after ten years . . . . . . . . . . . . . . 17,394 18,063 118,398 124,361
--------- -------- --------- ---------
Total . . . . . . . . . . . . . . . . . . $ 44,780 $ 46,464 $ 518,018 $ 550,585
========= ======== ========= =========
</TABLE>
At December 31, 1997, the Company held no unrated or less than
investment grade (i.e., with a Standard & Poor's Corporation rating below BBB)
debt securities.
F-14
<PAGE> 57
The Company's mortgage loan investments are diversified by property
type, location and loan size. Generally, loans do not exceed 75% of the
property's value at the time the loan is made. At December 31, 1997, mortgage
loan investments were concentrated in the following property types (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
PROPERTY TYPE: CARRYING VALUE MORTGAGES
-------------- ---------
<S> <C> <C>
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,697 15.5%
Commercial:
Retail space . . . . . . . . . . . . . . . . . . . . . . . . 69,784 47.9
Office buildings . . . . . . . . . . . . . . . . . . . . . . 33,022 22.7
Multi-family apartments . . . . . . . . . . . . . . . . . . 5,981 4.1
Warehouses . . . . . . . . . . . . . . . . . . . . . . . . . 14,223 9.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 --
--------- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,770 100.0%
========= =====
</TABLE>
At December 31, 1997, contractual commitments to extend credit under
mortgage loan agreements amounted to approximately $1.3 million. These
commitments generally expire within one year and are diversified by property
type and geographic region.
The following is a summary of activity relating to the mortgage loan
impairment reserves as of and for the years ended December 31, 1997, 1996 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Impairment reserves balance, beginning of year . . . . . . . . $ 17,682 $14,274 $ 13,161
Additions to impairment reserves . . . . . . . . . . . . . . . 2,575 9,681 15,046
Amounts charged off or transferred to real estate owned . . . . (6,406) (6,273) (13,933)
-------- -------- --------
Impairment reserves balance, end of year . . . . . . . . . . . $ 13,851 $17,682 $ 14,274
======== ======= ========
</TABLE>
As of December 31, 1997 and 1996, the Company held no investments in
debt securities or preferred stock which were non-income producing for the
previous twelve months. Non-income producing mortgage loans aggregating
approximately $0.6 million and $3.2 million were held as of December 31, 1997
and 1996, respectively. The Company held no investments in a single entity
(other than United States government agencies and authorities) which exceeded
10% of stockholders' equity as of December 31, 1997.
At December 31, 1997, the Company held assets in trust for the benefit
of reinsurers aggregating $112.8 million. At December 31, 1997, securities
with a carrying value of approximately $8.6 million were on deposit with
governmental agencies, as required by law in various states in which the
insurance subsidiaries of JAFCO conduct business. These amounts are included
in total invested assets in the Company's consolidated balance sheets.
See Note 15 for fair value of investment disclosures.
F-15
<PAGE> 58
NOTE 7 -- NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Major categories of investment income for continuing operations for
the years ended December 31, 1997, 1996 and 1995 are summarized below (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Debt securities and short-term investments . . . . . . . . . . . $ 61,350 $ 49,487 $ 51,756
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . 2 -- 1,915
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . 10,813 5,536 6,950
Trading account securities . . . . . . . . . . . . . . . . . . . 253 257 714
Investment income ceded to reinsurers . . . . . . . . . . . . . . (9,310) (12,141) (12,098)
Policy loans, other notes receivable and other invested assets . 11,071 4,876 2,804
--------- --------- ---------
Total gross investment income . . . . . . . . . . . . . . . . 74,179 48,015 52,041
Less investment expenses . . . . . . . . . . . . . . . . . . . . (4,886) (2,555) (1,653)
-------- --------- ---------
Net investment income . . . . . . . . . . . . . . . . . . . . $ 69,293 $ 45,460 $ 50,388
========= ========= =========
</TABLE>
Net investment income from discontinued operations was $106.3 million,
$412.4 million and $410.5 million for the years ended December 31, 1997, 1996
and 1995, respectively.
Proceeds from sales and calls of investments in debt securities for
the years ended December 31, 1997, 1996 and 1995 were $2,439.4 million, $568.5
million and $604.0 million, respectively. Proceeds from sales and calls of
available-for-sale securities for the years ended December 31, 1997, 1996 and
1995 were $2,439.4 million, $567.3 million and $583.4 million, respectively.
These proceeds for the year ended December 31, 1997 include $2,143.1 million
from securities liquidated in connection with the sale of the Annuity
Operations. Such proceeds are included in the net cash outflow due to the sale
of Annuity Operations in the accompanying consolidated statement of cash flows.
Gross unrealized investment gains (losses) related to available-for-sale
securities (decreased) increased stockholders' equity by $(30.9) million,
$(95.9) million and $198.7 million for the years ended December 31, 1997, 1996
and 1995, respectively.
The components of net realized investment gains (losses) for
continuing operations for the years ended December 31, 1997, 1996 and 1995 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Realized gains (losses) from sales, calls and prepayments:
Gross realized investment gains from sales and calls . . . . . . $ 8,606 $ 5,113 $ 6,815
Gross realized investment losses from sales and calls . . . . . . (1,947) (1,433) (5,806)
Prepayments of mortgage loans and other . . . . . . . . . . . . . 133 502 (19)
-------- -------- --------
Realized gains (losses) from sales, calls and prepayments . . 6,792 4,182 990
Impairments in value . . . . . . . . . . . . . . . . . . . . . . . (2,080) (910) (3,627)
Change in net unrealized gains and losses on trading account
securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 (220) 244
-------- -------- --------
Net realized investment gains (losses) . . . . . . . . . . . . . $ 4,805 $ 3,052 $ (2,393)
======== ======== =========
</TABLE>
Net realized investment (losses) gains from discontinued operations
were $(3.5) million, $(8.1) million and $3.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Additionally, the Company
recognized $24.0 million of its net deferred gain on the sale of its
discontinued operations during 1997.
F-16
<PAGE> 59
NOTE 8 -- DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of
and for the years ended December 31, 1997, 1996 and 1995 are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- ----------- ---------
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . . . . . . . . . . $239,622 $197,667 $295,716
Capitalization of commissions, sales and issue expenses . . 22,672 56,003 83,961
Amortization . . . . . . . . . . . . . . . . . . . . . . . (32,359) (63,419) (52,986)
Commission allowance on reinsurance ceded (see Note 11) . . -- -- (40,188)
Effect of change in unrealized gains (losses) on
available-for-sale securities . . . . . . . . . . . . . . 25,475 49,371 (57,787)
Effect of implementation of subsequent SFAS No. 115
guidance . . . . . . . . . . . . . . . . . . . . . . . . -- -- (31,049)
Sale of discontinued operations . . . . . . . . . . . . . . (221,001) -- --
Amounts reclassified to net asset held for sale . . . . . . (2,248) -- --
-------- -------- --------
Balance, end of year . . . . . . . . . . . . . . . . . . . $32,161 $239,622 $197,667
======== ======== ========
</TABLE>
NOTE 9 -- CONTRACT HOLDER LIABILITIES
The composition of contract holder liabilities at December 31, 1997
and 1996 and the more significant assumptions as to future investment yield,
mortality and withdrawals, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
DECEMBER 31, ---------------------------------------
------------------------ INTEREST MORTALITY/
1997 1996 RATES MORBIDITY
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Contract holder deposit funds:
Deferred and immediate annuities
and guaranteed investment contracts . $122,047 $6,025,769 3.5-10.0% 1971 IAM and 1983 IAM
Universal life insurance . . . . . . . . 219,907 246,010 4.5- 7.0% 1980 CSO Table
Other benefit reserves, including individual
life insurance and credit insurance . . 92,361 58,239 2.0-6.0% 1941, 1958 and 1980 CSO
and 1941 SI and SSI
Tables; 1985 CIDA and
1985 Nursing Home Study
Claim reserves . . . . . . . . . . . . . . 305,125 400,690
Unearned premium reserves . . . . . . . . . 29,065 156,924
-------- ----------
Total contract holder liabilities . . . $768,505 $6,887,632
======== ==========
</TABLE>
Contract holder deposit funds for deferred annuities and universal
life contracts are recorded at their accumulated values using the retrospective
deposit approach. Interest rates shown for these contracts are current
credited rates. Mortality rates are contractual guarantees for monthly term
charges (universal life insurance) or settlement rates (deferred annuities).
F-17
<PAGE> 60
NOTE 10 -- LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and
ending reserve balances for unpaid claims and claims adjustment expenses, on a
gross-of-reinsurance basis for the years ended December 31, 1997, 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 before acquisition of insurance $400,690 $428,342 $332,741
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at January 1 of acquired insurance subsidiary . . . . -- -- 1,453
Less reinsurance recoverables . . . . . . . . . . . . . . . . 193,263 214,998 154,811
-------- -------- --------
Net balance at January 1 . . . . . . . . . . . . . . . . . . 207,427 213,344 179,383
-------- -------- --------
Incurred claims related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . 884,390 816,630 776,054
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . (12,894) (17,353) 8,594
-------- -------- --------
Total incurred . . . . . . . . . . . . . . . . . . . . . . . 871,496 799,277 784,648
-------- -------- --------
Paid claims related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . 699,435 608,150 570,213
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . 197,613 197,044 180,474
-------- -------- --------
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . 897,048 805,194 750,687
-------- -------- --------
Reserve reduction due to sale of discontinued operations . . 16,231 -- --
-------- -------- --------
Net balance at December 31 . . . . . . . . . . . . . . . . . 165,644 207,427 213,344
Plus reinsurance recoverables . . . . . . . . . . . . . . . . 139,481 193,263 214,998
-------- -------- --------
Balance at December 31 . . . . . . . . . . . . . . . . . . . $305,125 $400,690 $428,342
======== ======== ========
</TABLE>
The total incurred claims above include claims adjustment expenses net
of reinsurance, which are included in general expenses in the accompanying
consolidated statements of income for the years ended December 31, 1997, 1996
and 1995.
NOTE 11 -- REINSURANCE
In the ordinary course of business, the Company assumes and cedes
business with other insurance companies. Ceding reinsurance is used by the
Company to limit its risk on new and unproven products, to meet certain
regulatory, rating agency or debt covenant leverage ratios or to limit its risk
up to its retention limits. The Company is not relieved of its primary
obligation to the policyholder as a result of these reinsurance transactions.
The maximum amount of life insurance retained on any one life is generally
$150,000 or $500,000, depending upon the plan of insurance. At December 31,
1997, life insurance in force aggregated approximately $7.8 billion, after a
reduction of approximately $1.7 billion for reinsurance ceded.
Substantially all of the group accident and health insurance business
has been reinsured under a Group Reinsurance Agreement with London Life
Insurance Company and Transamerica Occidental Life Insurance Company (the
"Group Reinsurance Agreement"). The Group Reinsurance Agreement provides for
the Company and the reinsurers to share on a 50-50 basis all premiums and
claims expense. Annually, the Company receives profit sharing payments from
the reinsurers equal to the excess of reinsurers' profits over contractual
floor amounts. For years where such profits fall short of floor amounts, the
shortfalls are carried forward with interest to be applied as reductions
against future profit sharing payments. In addition, under the Group
Reinsurance Agreement, to the extent the combined ratio of the group accident
and health insurance business for a rolling 12-month period exceeds contractual
amounts, the Company receives a reduced profit sharing payment.
F-18
<PAGE> 61
As discussed above, in conjunction with the sale of the Annuity
Operations, the Company entered into a coinsurance agreement with SunAmerica
relating to substantially all of the JALIC annuity business. This coinsurance
was initially on an indemnity basis and the parties agreed to transition the
business to an assumption basis as soon as practical. In certain states, the
transition to an assumption basis is subject to policyholder approval. To the
extent that such transition does not take place with respect to any particular
policy, the policy will remain reinsured on an indemnity basis. As of December
31, 1997, approximately 70% of the contracts have either transitioned to an
assumption basis or lapsed. The majority of the remaining policies are
expected to be assumed by December 31, 1998. At December 31, 1997, there
are assets held in trusts directly or indirectly available for payments to
policyholders. SunAmerica is rated "A+ (Superior)" by A.M. Best and Company.
The effects of reinsurance on short duration contracts for insurance
premiums and for long duration contracts for insurance premiums and contract
charges earned, the majority of which relates to continuing operations, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995
Premiums from short ---------------------- ---------------------- ---------------------
duration contracts WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
------------------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C>
Direct business . . . $1,479,602 $1,465,840 $1,847,828 $1,834,634 $1,882,188 $1,916,807
Reinsurance assumed . 50,576 48,511 50,451 45,726 67,280 65,505
Reinsurance ceded . . (613,227) (606,531) (862,456) (831,451) (892,436) (911,312)
---------- ---------- ---------- ---------- ---------- ----------
Net . . . . . . . $ 916,951 $ 907,820 $1,035,823 $1,048,909 $1,057,032 $1,071,000
========== ========== ========== ========== ========== ==========
Insurance premiums
and contract charges YEAR ENDED DECEMBER 31,
earned from long --------------------------------------
duration contracts 1997 1996 1995
-------------------- -------- -------- --------
Direct business ...... $45,263 $55,393 $55,168
Reinsurance assumed .. 40,665 11,995 12,383
Reinsurance ceded .... (23,071) (11,804) --
------- ------- -------
Net ................ $62,857 $55,584 $67,551
======= ======= =======
</TABLE>
The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions
or economic characteristics of the reinsurers. The Company generally requires
that its reinsurers be rated "A (Excellent)" or better by A.M. Best and
Company. At December 31, 1997, significant reinsurance recoverables on paid
and unpaid losses are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PAID UNPAID
LOSSES LOSSES
------ ------
<S> <C> <C>
London Life Insurance Company . . . . . . . . . . . . . . . . $ -- $ 58,056
Swiss Re Life & Health Limited . . . . . . . . . . . . . . . 5,008 11,710
Transamerica Occidental Life Insurance Company . . . . . . . 88 38,934
-------- ---------
$ 5,096 $108,700
======== =========
</TABLE>
Effective October 1, 1995, the Company entered into a reinsurance
agreement with Lincoln National Reinsurance Company Limited ("Lincoln") to cede
90% of certain annuity contracts. Under the agreement, the Company ceded
approximately $403.5 million of annuity contracts. Associated with the ceded
policies was unamortized deferred policy acquisition costs and value of
insurance in force aggregating approximately $43.0 million. The Company
received approximately $40.2 million for these assets and, accordingly,
recorded accelerated amortization of $2.8 million. Under the terms of the
agreement, the policy loans outstanding on the ceded annuity contracts were
retained by the Company. Accordingly, a funds payable under reinsurance
treaties liability of
F-19
<PAGE> 62
approximately $21.3 million was established. The Company liquidated
available-for-sale securities to fund the $342.0 million payment made to
Lincoln. This liquidation generated $13.8 million of net realized investment
gains in 1995, which resulted in $1.6 million of additional accelerated
amortization of deferred policy acquisition costs.
As of December 31, 1997, receivables from reinsurers and investment
deposits recoverable were approximately $187.1 million.
NOTE 12 -- INDEBTEDNESS
Indebtedness of the Company as of December 31, 1997 and 1996 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,500 $101,500
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . (41,500) (25,000)
-------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,000 $ 76,500
======== ========
</TABLE>
In July 1994, the Company amended its credit agreement (the "Credit
Agreement") to increase the commitment amount of the term loan to $110.0
million and to establish a revolving credit loan with a commitment amount of
$40.0 million and an expiration of July 1998. As of December 31, 1997, the
Company has $23.5 million available under the revolving credit loan. The
Credit Agreement is collateralized by the capital stock and the surplus
debentures of Houston National Life Insurance Company ("HNLIC"), as well as the
stock of all of the Company's other direct and indirect non-insurance
subsidiaries, other than those owned through an insurance subsidiary. The
Credit Agreement contains restrictive covenants which, among other things,
limit additional indebtedness, payment of dividends, sale of assets and
reinsurance arrangements. It also requires the Company to satisfy certain
financial covenants. The Credit Agreement's interest rate per annum, at the
Company's option, is based on certain economic indices. Future required
principal payments are $41.5 million in 1998 and $35.0 million in 1999.
Interest payments for the years ended December 31, 1997, 1996 and 1995
on the total indebtedness aggregated approximately $5.3 million, $6.1 million
and $9.3 million, respectively.
NOTE 13 -- STOCKHOLDER SECURITIES
The holders of Cumulative Preferred Stock are entitled to receive
cumulative accrued dividends, payable semi-annually on April 15th and October
15th. The Cumulative Preferred Stock ranks prior to the common stock upon
liquidation, dissolution or winding up of the Company and is not convertible.
The Cumulative Preferred Stock is required to be redeemed for $100 per share
plus accrued and unpaid dividends in three equal annual installments in each of
2000, 2001 and 2002. The Company, at its option, may elect to redeem the
Cumulative Preferred Stock at any time. If the proposed sale is consummated,
the Cumulative Preferred Stock will be redeemed at closing.
Pursuant to the terms of a stockholder agreement, the Company had an
option to purchase and/or each of the management stockholders had an option to
sell his or her common stock subject to this agreement to the Company in
certain circumstances (death, complete disability, termination of employment
without cause or retirement at or beyond the early retirement date). Shares
held by management stockholders which were estimated to be exercisable by the
expiration date were carried at the closing fair market value of the Company's
common stock as of December 31 of the respective years. Shares held by other
management stockholders were carried at cost. Such options expired on October
30, 1997. Accordingly, the remaining shares were reclassified to common
stockholders' equity at the cost value. As of December 31, 1997 and 1996, the
redeemable common stock carrying values were zero and $3.4 million,
respectively.
F-20
<PAGE> 63
During the fourth quarter of 1996, the Company adopted a shareholder
rights plan (the "Shareholder Rights Plan"). Under the Shareholder Rights
Plan, each shareholder received a dividend distribution of one preferred share
purchase right for each outstanding share of common stock. The purchase rights
distributed to the shareholders entitled them to buy one one-hundredth of a
share of a new series of junior participating preferred stock at an exercise
price of $75. The rights are exercisable only if a person or group acquires
10% or more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership of 10% or more of the Company's
common stock. If the Company is acquired in a merger or other business
combination or after a person has acquired 10% or more of the Company's common
stock, each right will entitle the holder to purchase a number of the acquiring
company's common shares or the Company's common shares having a market value of
twice the purchase price. In conjunction with the anticipated sale of the
Company as discussed in Note 2, the Shareholder Rights Plan was amended to
exempt the proposed merger with Fortis from causing such rights to become
exercisable and to provide for the termination of the Shareholder Rights Plan
upon completion of the merger.
NOTE 14 -- INCOME TAXES
The components of the (benefit) provision for income taxes for the
years ended December 31, 1997, 1996 and 1995 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current tax provision (benefit) . . . . . . . . . . . . . . . . . $ 37,219 $ 13,708 $ (1,270)
Deferred tax (benefit) provision . . . . . . . . . . . . . . . . (6,765) 3,036 7,084
-------- -------- -------
Total provision for income taxes . . . . . . . . . . . . . . 30,454 16,744 5,814
Less provision for income taxes from discontinued operations . . 32,369 18,840 15,451
-------- -------- -------
Benefit for income taxes from continuing operations . . . . . . . $ (1,915) $ (2,096) $(9,637)
======== ======== =======
</TABLE>
A reclassification of approximately $3.8 million was made during 1997,
reducing current tax expense and increasing deferred tax expense, to reflect
the actual 1996 tax liability. Current tax expense was reduced by $1.3 million
and $3.7 million from the utilization of net operating loss carryovers in 1997
and 1996, respectively. Current tax benefits of $1.1 million relating to the
exercise of nonqualifying stock options were credited to paid-in capital during
1997.
The income tax provisions differ from the amounts determined by
multiplying total income before income taxes by the statutory federal income
tax rate of 35%. Reconciliations between the actual tax provisions and
expected tax provisions for the years ended December 31, 1997, 1996 and 1995
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes at statutory rate . . . . . . . . . . . . . . . . . $ 18,654 $ 17,437 $ 3,583
Amortization and writedown of goodwill . . . . . . . . . . . . 10,306 1,945 1,877
Basis difference in subsidiaries sold . . . . . . . . . . . . 1,807 -- --
Non-deductible travel and entertainment . . . . . . . . . . . 331 564 607
Non-taxable dividends and interest . . . . . . . . . . . . . . (40) (129) (563)
Net (decrease) increase in valuation allowance . . . . . . . . -- (3,359) 1,492
Decrease in tax reserves . . . . . . . . . . . . . . . . . . . (360) (600) (1,164)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (244) 886 (18)
-------- ------- -------
Provision for income taxes . . . . . . . . . . . . . . . . . . . $ 30,454 $16,744 $ 5,814
======== ======= =======
</TABLE>
The income tax provisions from discontinued operations for the years
ended December 31, 1997, 1996 and 1995 differ from the amounts determined by
multiplying total income before income taxes by the statutory rate primarily
due to non-deductibility of goodwill writedowns and amortization, the
difference between the book basis and tax basis in subsidiaries sold, and other
expenses and the reduction in the valuation allowance, as discussed below.
F-21
<PAGE> 64
The significant temporary differences included in the net deferred
income tax asset as of December 31, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Policy reserves and other insurance items . . . . . . . . . . . . . . . . . $ 20,028 $108,680
Bad debt reserves and non-deductible liabilities . . . . . . . . . . . . . . 10,811 8,019
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 1,567
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,435 2,884
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . 3,370 4,756
Capital loss carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 --
Employee benefits and severance . . . . . . . . . . . . . . . . . . . . . . 3,517 2,863
Tax deductible intangible assets . . . . . . . . . . . . . . . . . . . . . . 1,477 959
Other deductible temporary differences . . . . . . . . . . . . . . . . . . . 4,194 2,420
-------- --------
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . 48,978 132,148
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs and value of insurance in force . . . . . (15,739) (85,269)
Net unrealized gain on trading account securities . . . . . . . . . . . . . (33) (29)
Market discount on bonds and other investment items . . . . . . . . . . . . (6,166) (9,450)
Other taxable temporary differences . . . . . . . . . . . . . . . . . . . . (2,882) (397)
-------- --------
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . (24,820) (95,145)
-------- --------
Net unrealized gains and related deferred acquisition costs allocated to equity (9,534) (14,576)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,092) (1,092)
-------- --------
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . $ 13,532 $ 21,335
======== ========
</TABLE>
These amounts are included in other assets in the accompanying
consolidated balance sheets.
Approximately $9.6 million of net operating loss carryforwards
("NOL's") remain as of December 31, 1997 which expire through the year 2010.
Of this amount, the utilization of $0.1 million of NOL's is limited to the
taxable earnings of the non-life insurance group and the utilization of $2.2
million is limited to the taxable earnings of NHP Holding Company, Inc.
("NHP"), a 50% owned joint venture. Of these NOL's, $0.7 million were
generated by the non-life insurance group and are available, with certain
statutory limitations, to offset the taxable earnings of the life insurance
group. The utilization of the remaining NOL's of $6.6 million, which were
acquired in connection with the purchase of a life insurance company domiciled
in New York, is limited to the taxable earnings of JALIC and is further subject
to an annual limitation of $0.6 million.
During 1997, in connection with the disposition of the discontinued
operations of the Company, a non-life insurance subsidiary generated a capital
loss carryover of $8.8 million which will expire in the year 2002. Capital
loss carryovers can only be utilized against capital gains generated during the
carryover period.
Management believes that the Company will have sufficient taxable
income of the appropriate character in future years to realize the net deferred
income tax asset. In evaluating the expectation of sufficient future taxable
income, management considered the future reversal of temporary differences and
available tax planning strategies that could be implemented, if required.
Except as noted below, a valuation allowance was not required as of December
31, 1997 and 1996 as it was management's assessment that, based on available
information, it is not more likely than not that any or all of the deferred tax
asset will not be realized. A valuation allowance will be established if there
is a change in management's assessment of the amount of the net deferred income
tax asset that is expected to be realized. However, a valuation allowance of
$1.6 million was established in 1995 in order to reflect uncertainties
associated with the utilization of certain tax benefits acquired in connection
with the
F-22
<PAGE> 65
purchase of the life insurance company discussed above. During 1996, the
valuation allowance was reduced by $0.5 million as a result of management's
reevaluation of the uncertainties associated with the utilization of certain
tax benefits acquired in connection with the purchase of the life insurance
company. The reduction in the valuation allowance for this item was applied to
reduce the provision for income taxes from discontinued operations.
In addition, a valuation allowance of $3.7 million was established in
1995 for that portion of the net deferred tax asset which is attributed to the
operations of NHP. During 1996, the valuation allowance was reduced by $1.0
million for temporary differences that reversed during the year. In addition,
the valuation allowance at December 31, 1996 was reduced by $2.7 million to
reflect management's reevaluation of its ability to realize the portion of the
deferred tax asset which is attributed to NHP. Of this amount, $0.9 million
was applied to reduce goodwill and $1.8 million was applied to reduce the
provision for income taxes from continuing operations.
Prior to 1984, JALIC was permitted to exclude from taxable income
those amounts determined under a formula established by provisions of the
Internal Revenue Code of 1954, as amended. At December 31, 1997, JALIC had
accumulated untaxed income of approximately $57.2 million (tax effect of $20.0
million). Although such amount is taxable under certain circumstances,
management does not intend to take, or fail to take, any action that would
cause all or part of this amount to be included in taxable income; accordingly,
deferred income taxes have not been provided on this amount. At December 31,
1997, JALIC had approximately $232.8 million in its "shareholder's surplus" tax
account from which dividend distributions can be made without incurring federal
income taxes.
The Company made federal income tax payments of approximately $30.7
million, $7.9 million and $4.5 million for the years ended December 31, 1997,
1996 and 1995, respectively.
F-23
<PAGE> 66
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
assets and financial liabilities at December 31, 1997 and 1996 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR VALUATION
VALUE VALUE VALUE VALUE METHOD
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Financial assets:
Held-to-maturity securities:
Publicly traded . . . . . . . . . $ 29,131 $ 30,169 $ 29,908 $ 30,744 (1)
Private placements . . . . . . . . 15,649 16,295 15,449 16,140 (2)
Available-for-sale securities:
Publicly traded . . . . . . . . . 539,349 539,349 3,913,833 3,913,833 (1)
Private placements . . . . . . . . 11,236 11,236 325,628 325,628 (2)
Non-investment grade . . . . . . . -- -- 9,313 9,313 (2)
Trading account securities . . . . . 3,504 3,504 4,518 4,518 (1)
Equity securities . . . . . . . . . 23 23 82,098 82,098 (1)
Mortgage loans:
Performing . . . . . . . . . . . . 126,703 130,683 1,409,252 1,482,976 (3)
Non-performing . . . . . . . . . . 4,248 4,248 8,366 8,366 (4)
Restructured on other than market
terms . . . . . . . . . . . . . 14,819 14,819 31,624 31,624 (4)
Policy loans and other notes
receivable . . . . . . . . . . . . . . 32,091 32,091 75,186 75,186 (5)
Short-term investments . . . . . . . 196,218 196,218 6,371 6,371 (5)
Cash and cash equivalents . . . . . 31,663 31,663 167,511 167,511 (5)
Accrued investment income . . . . . 15,525 15,525 65,727 65,727 (5)
Financial liabilities:
Investment contracts with defined
maturities . . . . . . . . . . . . 119 120 294,605 294,762 (6)
Investment contracts with no defined
maturities . . . . . . . . . . . . 19,219 18,428 5,606,694 5,285,370 (7)
Short-term debt . . . . . . . . . . 41,500 41,500 25,000 25,000 (5)
Long-term debt . . . . . . . . . . . 35,000 35,000 76,500 76,500 (5)
</TABLE>
- -----------------
(1) Fair value is based on publicly quoted market prices.
(2) Fair value is estimated using publicly quoted market prices for
similar securities and adjusting by a spread which is reevaluated
monthly, and approximates the spread on similar securities which the
Company has purchased.
(3) Fair value is estimated using the discounted cash flow method, using
interest rates currently offered for similar loans to borrowers with
similar credit ratings.
(4) Fair value is based on external and internal appraisals less an
allowance for estimated sales costs.
(5) Carrying value approximates fair value.
(6) Fair value is estimated based upon the discounted cash flow method,
using interest rates currently offered for similar contracts.
(7) Fair value is defined as the amount payable on demand.
F-24
<PAGE> 67
NOTE 16 -- STOCKHOLDERS' EQUITY
Each of the life insurance companies is limited by various state
insurance department regulations as to the amount of dividends and other
payments that may be paid to its parent or affiliates. Dividends in excess of
prescribed amounts require regulatory approval. Loans and advances are limited
to certain prescribed maximums in various jurisdictions and, in any event,
require "arms-length" terms. Dividends may generally be paid without prior
regulatory approval if their fair market value, together with that of other
dividends or distributions made within the preceding 12 months, does not exceed
the greater of: (i) 10% of the insurer's surplus as regards policyholders as of
the 31st day of December next preceding; or (ii) the net gain from operations
of the insurer, not including realized investment gains, for the 12-month
period ending the 31st day of December next preceding. In addition, payments
of dividends are limited to statutory unassigned surplus less 25% of unassigned
surplus attributable to unrealized capital gains as determined in accordance
with accounting practices prescribed or permitted by state insurance regulatory
authorities. With the approval of state regulators, JALIC made an
extraordinary dividend distribution of approximately $200 million to HNLIC
during 1997, who in turn distributed approximately $188 million to JAFCO.
Because of these dividend distributions, any dividends paid by JALIC or HNLIC
before June 21, 1998 would be considered extraordinary and would require prior
approval. On or after that date, approximately $76.7 million is available for
dividend distribution without prior approval.
Accounting practices used to prepare statutory financial statements
for regulatory filings of stock life insurance companies differ from GAAP.
Material differences in these accounting practices include: value of insurance
in force, deferred policy acquisition costs, goodwill, statutory non-admitted
assets and deferred federal income taxes are recognized under GAAP accounting,
while asset valuation and interest maintenance reserves are not; surplus
debentures are reported as surplus up to statutory limits for statutory
purposes and as debt under GAAP; certain reinsurance agreements are accounted
for as reinsurance for statutory purposes and as financing transactions under
GAAP; premiums for universal life and investment-type products are recognized
as revenues for statutory purposes and as deposits to policyholders' accounts
under GAAP; investments in the Company's trading and available-for-sale
accounts are carried at market value under GAAP and amortized cost under
statutory reporting; and different assumptions are used in calculating future
policyholders' benefits for statutory and GAAP purposes.
F-25
<PAGE> 68
The following reconciles capital and surplus and net income determined
in accordance with accounting practices prescribed or permitted by the state
insurance departments (statutory accounting practices) with stockholders'
equity and net income on a GAAP basis (dollars in thousands). Included in the
amounts stated in accordance with statutory accounting practices are amounts
recorded in accordance with GAAP for the non-insurance subsidiaries.
Stockholders' Equity
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
--------- ----------
<S> <C> <C>
Capital and surplus, on basis of statutory accounting practices, as filed with
insurance regulatory authorities . . . . . . . . . . . . . . . . . . . . . . $423,295 $339,040
Value of insurance in force . . . . . . . . . . . . . . . . . . . . . . . . 5,687 9,230
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . 37,503 269,988
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,037 80,379
Net unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . 17,706 26,542
Adjustment in policy and claim liabilities . . . . . . . . . . . . . . . . . (34,203) (257,149)
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . 14,157 28,185
Statutory investment reserves . . . . . . . . . . . . . . . . . . . . . . . 22,607 50,797
Surplus debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,358) (78,071)
Deferred gain on sale of discontinued operations . . . . . . . . . . . . . . (21,038) --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,483) (3,730)
-------- --------
Stockholders' equity, on basis of generally accepted accounting principles..... $450,910 $465,211
======== ========
</TABLE>
Net Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss), on basis of statutory accounting practices,
as filed with insurance regulatory authorities ....................... $116,566 $ 36,579 $ (5,796)
Amortization of purchased intangibles ................................ (4,840) (10,137) (15,829)
Capitalization and amortization of deferred policy acquisition costs.. (9,686) (7,416) (9,213)
Adjustment of policy and claim liabilities ........................... 6,158 29,198 32,170
Effect of statutory investment reserves .............................. 8,668 (8,175) 5,367
Deferred income taxes ................................................ 6,215 (3,392) (379)
Change in mortgage delinquency reserves .............................. (1,783) (2,657) 702
Gain on sale of discontinued operations .............................. (98,163) -- --
Other, net ........................................................... (1,247) (3,064) (614)
--------- -------- --------
Net income, on basis of generally accepted accounting principles ..... $ 21,888 $ 30,936 $ 6,408
========= ======== ========
</TABLE>
F-26
<PAGE> 69
Treasury Stock
The Company has acquired treasury shares of stock as a result of the
exercise of put or call options on the redeemable common stock (see Note 13).
The Company has also acquired treasury stock in consideration for the cost of
stock option exercises. During 1997, the Company also acquired treasury shares
pursuant to a common stock repurchase program. During 1996, restricted
treasury shares were granted to an employee (see Note 17). The following is a
summary of treasury stock activity, accounted for under the cost method, for
the years ended December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996
------------------------ -----------------------
SHARES COST SHARES COST
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, beginning of year . . . . . . . . . . . . 387,735 $ 8,676 424,183 $9,329
Stock repurchase program . . . . . . . . . . . . 941,700 22,703 -- --
Treasury stock option exercises (see Note 17) . (31,766) (707) (448) (10)
Restricted stock granted . . . . . . . . . . . . -- -- (36,000) (643)
--------- ------- ------- ------
Balance, end of year . . . . . . . . . . . . . . . 1,297,669 $30,672 387,735 $8,676
========= ======= ======= ======
</TABLE>
NOTE 17 -- STOCK PLANS
The Company maintains various stock-based compensation plans, which
are described below, and applies APB 25 and related interpretations in
accounting for such plans. As permitted under SFAS No. 123, no compensation
cost has been recognized for these plans. Had compensation expense been
determined using the alternative principles provided under SFAS No. 123, the
Company's net income and net income per common and common equivalent share
would have been reduced to the pro forma amounts indicated below (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Net income:
As reported . . . . . . . . . . . . . . . . . . . . . . $ 21,888 $ 30,936
Pro forma . . . . . . . . . . . . . . . . . . . . . . . 19,022 28,720
Net income per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . 0.81 1.17
Pro forma . . . . . . . . . . . . . . . . . . . . . . . 0.70 1.09
</TABLE>
Long-Term Incentive Plan
The Company has reserved a maximum of 2,618,428 shares of common stock
to be available for options or grants during the term of the John Alden
Financial Corporation Long-Term Incentive Plan. The Company is also authorized
to grant up to 500,000 options under this plan from available treasury
shares. The exercise price of options granted under this plan equals the
market value of the Company's common stock at the date of grant. Such options
generally vest ratably over a three-year period and have a maximum term of ten
years.
North Star Incentive Plan
The Company maintains a compensation plan for certain employees of its
captive marketing organization, North Star Marketing Corporation. A portion of
the shares granted under this plan were issued with an option price of $1.00
and vest ratably over three years. The remaining shares were issued with an
option price equal to the market value of the Company's common stock at the
date of grant and were fully vested on that date. The shares granted under
this plan have a maximum term of ten years.
F-27
<PAGE> 70
Treasury Stock Options
The common stock acquired by the Company pursuant to a stockholder
agreement (see Note 16) is reserved for sale or transfer to certain designated
full-time employees of the Company or to management stockholders at a price not
less than the price paid by the Company to acquire the shares. The exercise
price of options granted under this plan equals the market value of the
Company's common stock at the date of grant. Such options are fully vested at
the date of grant and have a maximum term of ten years.
Other Stock Plans
On January 1, 1997, January 1, 1996 and January 1, 1995, the Company
granted 45,875, 61,390 and 46,400 restricted shares of common stock to certain
management employees. These shares vest over a three-year period from the date
of grant. As of December 31, 1997, 117,460 restricted shares were outstanding.
During 1996, the Company granted an employee 36,000 shares of its
common stock held in treasury subject to certain restrictions, principally
stating that the individual remain employed by the Company. These shares vest
in three equal installments in April 1997, 1998 and 1999. Unearned
compensation of $0.7 million was recognized as a separate component of
stockholders' equity at the date of grant. The unearned compensation is being
amortized over the three-year vesting period.
The Company has established an Employee Stock Purchase Plan and
Employee Savings Incentive Plan ("ESIP") for employees who have met certain
eligibility requirements. Employees may designate a portion of their
contributions to the ESIP to be invested in the common stock of the Company.
The fair value of each option and stock grant during 1997, 1996 and
1995 is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in 1997,
1996 and 1995, respectively: dividend yield of 2.1%, 2.1% and 2.0%, expected
volatility of 43.2%, 45.8% and 49.0%, risk-free interest rates of 6.4%, 6.6%
and 6.2%, and expected lives of six years.
A summary of the Company's option plans as of and for the years ended
December 31, 1997, 1996 and 1995 is as follows (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 2,582 $19.71 2,305 $19.36 1,739 $17.87
year . . . . . . . . . . . . .
Granted . . . . . . . . . . 361 27.51 390 20.50 725 21.50
Exercised . . . . . . . . . (262) 17.13 (50) 5.51 (91) 4.21
Forfeited . . . . . . . . . (152) 21.91 (63) 22.91 (68) 24.57
----- ----- -----
Outstanding at end of year . . 2,529 20.96 2,582 19.71 2,305 19.36
===== ===== =====
Options exercisable at
year-end ..................... 1,798 1,652 1,370
Weighted-average fair value of
options granted during
the year ..................... $9.68 $9.05 $9.38
Weighted-average fair value of
restricted stock granted
during the year .............. 17.23 18.20 23.34
</TABLE>
F-28
<PAGE> 71
The following table summarizes information about stock options
outstanding at December 31, 1997 (options in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------------
WEIGHTED-AVG.
RANGE OF EXERCISE CONTRACTUAL WEIGHTED-AVG. WEIGHTED-AVG.
PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
------ ------ -------------- -------------- ------ ------------------
<S> <C> <C> <C> <C> <C>
$1 - $20 880 5.2 years $15.48 847 $15.32
20 - 22 788 8.1 years 21.21 421 21.40
22 - 36 861 7.9 years 26.35 530 25.30
----- -----
1 - 36 2,529 7.0 years 20.96 1,798 19.68
===== =====
</TABLE>
NOTE 18 -- LEASES
The Company leases office space, principally for regional
administration and sales, office equipment and computer equipment under various
operating leases with terms ranging up to 20 years. The Company has no
material capital leases. Under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year, approximate aggregate annual
minimum rentals are as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS
RENTALS
-------
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,528
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,682
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,634
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,227
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,705
Later years . . . . . . . . . . . . . . . . . . . . . . . 10,463
-------
Total minimum future rentals . . . . . . . . . . . . . $56,239
=======
</TABLE>
Rental expense, which includes operating expenses associated with
leased office space, for the years ended December 31, 1997, 1996, and 1995 is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Office space . . . . . . . . . . . . . . . . . . . $ 8,023 $10,438 $11,903
Computer and related items . . . . . . . . . . . . 8,126 11,871 19,909
Other (principally office equipment) . . . . . . . 4,493 16,382 4,883
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . $20,642 $38,691 $36,695
======= ======= =======
</TABLE>
NOTE 19 -- BENEFIT PLANS
Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and compensation levels near retirement. The Company's policy is to fund the
Plan's current statutory requirements. Net pension cost for the years ended
December 31, 1997, 1996 and 1995 was $2.0 million, $3.0 million and $2.7
million, respectively.
F-29
<PAGE> 72
The following sets forth the funded status of the Plan at December 31,
1997 and 1996 and the amount of prepaid pension cost included in the Company's
consolidated balance sheets at December 31, 1997 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
A.Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . $23,951 $ 22,880
======= ========
B.Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . $26,259 $ 24,984
======= ========
C.Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . $30,596 $ 30,692
Plan assets at fair value, primarily listed stocks and bonds . . . . . . . 35,291 30,892
------ --------
Plan assets greater than projected benefit obligation . . . . . . . . . . . 4,695 200
Unrecognized prior service costs . . . . . . . . . . . . . . . . . . . . . (713) (794)
Unrecognized net loss from past experience different from that assumed . . 1,739 5,082
Unrecognized net asset at January 1, 1987 being recognized over 15 years . (307) (384)
-------- --------
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,414 $ 4,104
======== ========
Assumptions used were:
Discount rate for actuarial present value of benefit obligations . . . . . 7.25% 7.5%
Rate of increase in compensation . . . . . . . . . . . . . . . . . . . . . 3.25%-7.25% 4%-8%
Expected long-term rate of return on assets . . . . . . . . . . . . . . . . 8% 8%
</TABLE>
Other Benefit Plans
The Company maintains an unfunded benefit plan to provide life
insurance and medical postretirement benefits to certain of its retired
employees. The unfunded accumulated postretirement benefit obligation was $7.6
million and $6.6 million at December 31, 1997 and 1996, respectively. The
Company also maintains certain unfunded defined benefit supplemental retirement
plans. The accrued unfunded projected benefit obligations for the supplemental
plans as of December 31, 1997 and 1996 aggregated approximately $5.9 million
and $6.2 million, respectively.
The Company provides certain benefits for former or inactive employees
and their dependents during the time period following employment but before
retirement. As of December 31, 1997 and 1996, the Company has accrued $18.5
million and $2.2 million, respectively, of benefits owed under this plan.
NOTE 20 -- COMMITMENTS AND CONTINGENCIES
During the period of April 1995 through May 1995, the Company and
certain of its officers and directors were named as defendants in a series of
putative class actions alleging violations of the federal securities laws.
During March 1998, the Company and certain of its officers and directors were
named as defendants in putative class actions alleging that the Company is not
being sold for the highest price possible. For relief, plaintiffs seek an
injunction against consummation of the proposed transaction with Fortis and an
award of damages. While it is not possible to determine the ultimate
disposition of these proceedings, the Company believes that the ultimate
dispositions will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
The Company is routinely involved in litigation incidental to its
businesses. It is management's opinion that the aggregate liability arising
from the disposition of all such pending litigation will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
F-30
<PAGE> 73
NOTE 21 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1997 and
1996 are as follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1997 QUARTER
---- ----------------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net insurance premiums and contract charges earned $271,620 $230,074 $217,557 $209,650
Revenues . . . . . . . . . . . . . . . . . . . . . 312,487 275,589 244,107 217,866
Benefits and expenses . . . . . . . . . . . . . . . 303,495 244,910 238,832 271,562
Income (loss) from continuing operations before
provision (benefit) for income taxes . . . . . . . 8,607 30,226 5,044 (53,583)
Operating income (loss) . . . . . . . . . . . . . . 10,495 17,364 2,790 (34,962)
Net income (loss) from continuing operations . . . 4,703 19,246 3,104 (34,844)
Net income from discontinued operations . . . . . . 5,693 -- -- 23,986
Net income (loss) . . . . . . . . . . . . . . . . . 10,396 19,246 3,104 (10,858)
Per common share:
Net income (loss) from continuing operations . . 0.17 0.75 0.11 (1.39)
Net income from discontinued operations . . . . 0.22 -- -- 0.95
Net income (loss) . . . . . . . . . . . . . . . 0.39 0.75 0.11 (0.44)
Average shares outstanding . . . . . . . . . . . . 25,336 25,353 25,392 25,516
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER
---- ------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Net insurance premiums and contract charges $267,628 $262,484 $249,227 $245,235
earned . . . . . . . . . . . . . . . . . . . .
Revenues . . . . . . . . . . . . . . . . . . . 300,012 289,543 272,304 252,823
Benefits and expenses . . . . . . . . . . . . . 289,909 276,755 274,822 274,867
Income (loss) from continuing operations before
provision (benefit) for income taxes . . . . . 10,270 11,846 (2,574) (23,349)
Operating income (loss) . . . . . . . . . . . . 13,808 14,503 7,817 (3,296)
Net income (loss) from continuing operations . 6,183 7,548 (2,498) (12,944)
Net income from discontinued operations . . . . 7,653 5,843 8,236 10,915
Net income (loss) . . . . . . . . . . . . . . . 13,836 13,391 5,738 (2,029)
Per common share:
Net income (loss) from continuing
operations . . . . . . . . . . . . . . . . 0.23 0.29 (0.11) (0.53)
Net income from discontinued operations . . 0.30 0.23 0.33 0.43
Net income (loss) . . . . . . . . . . . . . 0.53 0.52 0.22 (0.10)
Average shares outstanding . . . . . . . . . . 25,258 25,289 25,303 25,332
</TABLE>
In conjunction with the disposition of the Annuity Operations
and Western Diversified Group as discussed in Note 5 and the reduced premium
volume in the group operations, the Company reduced its work force and
recognized impairments of certain intangible assets relating to operations to be
disposed of. Accordingly, severance and other related charges of approximately
$23.0 million and $15.5 million were recognized in continuing operations during
the first and fourth quarters of 1997, respectively.
F-31
<PAGE> 74
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants on Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . F-2
Schedule I - Summary of Investments Other than Investments in Related Parties . . . . . . . . . . . . . . . S-2
Schedule II - Condensed Financial Information (Parent Company Only) . . . . . . . . . . . . . . . . . . . . S-3
Schedule III - Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Schedule IV - Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Schedule V - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
</TABLE>
S-1
<PAGE> 75
SCHEDULE I
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
AMOUNT AT
WHICH CARRIED
TYPE OF INVESTMENT MARKET ON BALANCE
COST VALUE SHEET
---------- --------------- -------------
Held-to-maturity securities:
<S> <C> <C> <C>
U.S. Government and government agencies and
authorities ............................ $ 4,513 $ 4,555 $ 4,513
Public utilities .......................... 3,354 3,476 3,354
All other corporate bonds ................. 36,913 38,433 36,913
---------- ---------- ----------
Total held-to-maturity securities ...... 44,780 46,464 44,780
---------- ---------- ----------
Available-for-sale securities:
U.S. Government and government agencies and
authorities ............................ 39,478 40,489 40,489
Foreign governments ....................... 1,073 1,227 1,227
Public utilities .......................... 10,990 11,787 11,787
All other corporate bonds ................. 466,477 497,082 497,082
---------- ---------- ----------
Total available-for-sale securities .... 518,018 550,585 550,585
---------- ---------- ----------
Trading account securities .................. 3,411 3,504 3,504
Equity securities ........................... 8 23 23
Mortgage loans .............................. 145,770 149,750 145,770
Real estate owned ........................... 3,021 3,021 3,021
Investment in real estate ................... 40,354 40,354 40,354
Policy loans and other notes receivable ..... 32,091 32,091 32,091
Short-term investments ...................... 196,218 196,218 196,218
---------- ---------- ----------
Total investments ...................... $ 983,671 $1,022,010 $1,016,346
========== ========== ==========
</TABLE>
S-2
<PAGE> 76
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cash and cash equivalents ...................................................................... $ 10,574 $ 554
Short-term investments ......................................................................... 152,338 -
Investments in subsidiaries .................................................................... 334,793 511,583
Surplus debentures receivable from subsidiary .................................................. 43,000 76,600
Accrued investment income ...................................................................... 6,419 2,472
Other assets ................................................................................... 2,520 4,497
--------- ---------
Total assets ................................................................................ $ 549,644 $ 595,706
========= =========
LIABILITIES, REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities ..................................................... $ 3,408 $ 5,192
Amounts payable to subsidiaries ............................................................ 3,540 5,116
Short-term debt ............................................................................ 41,500 25,000
Long-term debt ............................................................................. 35,000 76,500
--------- ---------
Total liabilities ...................................................................... 83,448 111,808
--------- ---------
Redeemable securities:
Series A 9% cumulative preferred stock, $.01 par value; 150,000 shares
authorized, issued and outstanding; mandatory redemption value of $100 per
share; including accrued dividends of $286; $101.91 per share............................. 15,286 15,286
Common stock, $.01 par value; -- and 667,430 shares authorized, issued and outstanding ..... - 3,401
--------- ---------
Total redeemable securities ............................................................ 15,286 18,687
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 75,000,000 and 74,332,570 shares authorized;
25,953,525 and 25,055,843 shares issued; 24,655,856
and 24,668,108 shares outstanding ....................................................... 259 250
Paid-in capital ............................................................................ 187,422 181,863
Net unrealized gain on investments, net of income taxes .................................... 17,706 26,977
Retained earnings .......................................................................... 276,552 268,109
Redemption value of common stock in excess of cost ......................................... - (2,669)
Unearned compensation ...................................................................... (357) (643)
Treasury stock, at cost; 1,297,669 and 387,735 shares ...................................... (30,672) (8,676)
--------- ---------
Total stockholders' equity ........................................................... 450,910 465,211
--------- ---------
Total liabilities, redeemable securities and stockholders' equity .................... $ 549,644 $ 595,706
========= =========
</TABLE>
See accompanying Note to Condensed Financial Information.
S-3
<PAGE> 77
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- -------- --------
Revenues:
<S> <C> <C> <C>
Net investment income ........................... $ 12,368 $ 12,097 $ 16,335
Net realized investment gains ................... -- -- 1,945
-------- -------- --------
Total revenues .............................. 12,368 12,097 18,280
-------- -------- --------
Expenses:
Interest expense ............................... 5,332 6,615 6,614
Other .......................................... 4,820 7,622 8,527
-------- -------- --------
Total expenses ............................... 10,152 14,237 15,141
-------- -------- --------
Income (loss) before income taxes and equity in net
earnings of subsidiaries ....................... 2,216 (2,140) 3,139
Provision (benefit) for income taxes .............. 809 (734) 587
-------- -------- --------
Income (loss) before equity in net earnings of
subsidiaries ................................... 1,407 (1,406) 2,552
Equity in net earnings of subsidiaries ............ 20,481 32,342 3,856
-------- -------- --------
Net income ........................................ $ 21,888 $ 30,936 $ 6,408
======== ======== ========
</TABLE>
See accompanying Note to Condensed Financial Information.
S-4
<PAGE> 78
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ...................................................... $ 21,888 $ 30,936 $ 6,408
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net earnings of subsidiaries ....................... (20,481) (32,342) (3,856)
Net realized investment gains ................................ -- -- (1,945)
Amortization of purchased intangibles ........................ 1,025 1,320 959
(Increase) decrease in accrued investment income ............. (3,947) 751 506
Increase (decrease) in amounts payable to subsidiaries ....... 742 (1,032) 612
Decrease (increase) in other assets .......................... 2,051 (280) (202)
Stock option compensation expense ............................ 286 -- 256
(Decrease) increase in accounts payable and other liabilities (1,746) 1,167 3,401
--------- --------- ---------
Net cash (used in) provided by operating activities ..... (182) 520 6,139
--------- --------- ---------
Cash flows from investing activities:
Collections of surplus debentures receivable
from subsidiary ........................................... 33,600 26,880 22,080
Outflows from net sales and purchases of short-term investments (152,338) -- --
Receipt of dividend from subsidiary ........................... 188,000 -- --
Capital contributions to subsidiaries ......................... -- (22,200) (46,302)
Sales of equity securities .................................... -- -- 37,012
--------- --------- ---------
Net cash provided by investing activities ................. 69,262 4,680 12,790
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings of short-term and long-term debt ..... -- 26,000 27,000
Repayments of borrowings of short-term and long-term debt ..... (25,000) (31,500) (15,000)
(Payments) receipts of borrowings (to) from subsidiaries ...... (2,318) 11,455 (16,966)
Purchase of treasury stock .................................... (22,703) -- (3,203)
Exercises of stock options .................................... 4,488 279 385
Payment of dividends .......................................... (13,527) (12,731) (12,248)
--------- --------- ---------
Net cash used in financing activities ..................... (59,060) (6,497) (20,032)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .............. 10,020 (1,297) (1,103)
Cash and cash equivalents, beginning of year ...................... 554 1,851 2,954
--------- --------- ---------
Cash and cash equivalents, end of year ............................ $ 10,574 $ 554 $ 1,851
========= ========= =========
</TABLE>
See accompanying Note to Condensed Financial Information.
S-5
<PAGE> 79
SCHEDULE II
JOHN ALDEN FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
NOTE TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in this Form 10-K.
S-6
<PAGE> 80
SCHEDULE III
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Deferred policy acquisition costs ...................... $ 32,161 $ 239,622 $ 197,667
Future policy benefits, losses, claims and loss expenses 739,440 6,730,708 6,731,849
Unearned premiums ...................................... 29,065 156,924 135,954
Net premium revenues and contract charges earned ....... 928,901 1,024,574 1,053,035
Net investment income .................................. 69,293 45,460 50,388
Benefits, claims, losses and expenses .................. 719,455 767,640 778,303
Amortization of deferred policy acquisition costs ...... 14,810 13,854 13,455
Other operating expenses ............................... 324,534 334,859 395,226
Net premiums written ................................... 916,951 1,035,823 1,057,032
</TABLE>
S-7
<PAGE> 81
SCHEDULE IV
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
REINSURANCE
(Dollars in thousands)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
DIRECT OTHER FROM OTHER NET ASSUMED
BUSINESS COMPANIES COMPANIES AMOUNT TO NET
----------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
- ----------------------------
Life insurance in force $ 9,341,859 $ 1,673,464 $ 167,318 $ 7,835,713 2.1%
Premiums .............. 1,513,818 629,800 90,906 974,924 9.3%
Year Ended December 31, 1996
- ----------------------------
Life insurance in force $15,055,957 $ 2,967,777 $ 653,840 $12,742,020 5.1%
Premiums .............. 1,893,176 843,513 62,293 1,111,956 5.6%
Year Ended December 31, 1995
- ----------------------------
Life insurance in force $16,837,893 $ 3,158,977 $ 720,168 $14,399,084 5.0%
Premiums .............. 1,980,949 911,564 77,888 1,147,273 6.8%
</TABLE>
S-8
<PAGE> 82
SCHEDULE V
JOHN ALDEN FINANCIAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
- ----------------------------
Reserve for impairment of mortgage loans .... $ 17,682 $ 2,575 $ 6,406 $ 13,851
Write-down for impairment of real estate .... -- 306 306 --
Allowance for agents balances ............... 1,366 126 1,363 129
Valuation allowance on deferred tax asset ... 1,092 -- -- 1,092
---------- --------- --------- ----------
Total .............................. $ 20,140 $ 3,007 $ 8,075 $ 15,072
========== ========= ========= ==========
Year ended December 31, 1996
- ----------------------------
Reserve for impairment of mortgage loans .... $ 14,274 $ 9,681 $ 6,273 $ 17,682
Write-down for impairment of real estate .... -- 829 829 --
Allowance for agents balances ............... 1,248 118 -- 1,366
Valuation allowance on deferred tax asset ... 5,313 -- 4,221 1,092
---------- --------- --------- ----------
Total .............................. $ 20,835 $ 10,628 $ 11,323 $ 20,140
========== ========= ========= ==========
Year ended December 31, 1995
- ----------------------------
Reserve for impairment of mortgage loans .... $ 13,161 $ 15,046 $ 13,933 $ 14,274
Write-down for impairment of real estate .... -- 3,157 3,157 --
Allowance for agents balances ............... 2,505 -- 1,257 1,248
Valuation allowance on deferred tax asset (1) -- 5,313 -- 5,313
---------- --------- --------- ----------
Total .............................. $ 15,666 $ 23,516 $ 18,347 $ 20,835
========== ========= ========= ==========
</TABLE>
(1) Includes approximately $3.7 million which was established upon the
consolidation of a joint venture previously accounted for under the
equity method.
S-9
<PAGE> 83
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
3.1 Amended and Restated By-laws of the Registrant dated as
of May 17, 1995. Filed as Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission
File No. 1-11396) and incorporated herein by reference.
3.2 Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of
Delaware on September 23, 1992. Filed as Exhibit 3.4 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
3.3 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Registrant as filed with
the Secretary of State of Delaware on October 2, 1992.
Filed as Exhibit 3.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
3.4 Amended and Restated By-laws of the Registrant dated as
of September 12, 1996, filed as Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 (Commission
File No. 1-11396) and incorporated herein by reference.
4.1 Amended and Restated Certificate of Designation of
150,000 shares of 9% Cumulative Preferred Stock. Filed
as Exhibit 4.3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
4.2 Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and The Chase
Manhattan Bank (National Association) dated February 17,
1993. Filed as Exhibit 4.8 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992 (Commission File No. 1-11396) and incorporated
herein by reference.
4.3 Pledge Agreement among the Registrant, John Alden Systems
Company, JA Services, Inc. and The Chase Manhattan Bank
(National Association) dated February 17, 1993. Filed as
Exhibit 4.9 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
4.4 Sister Company Guarantee among John Alden Systems
Company, JAFCO, Western Diversified Services, Inc., JA
Services, Inc., John Alden Asset Management Company,
Anchor Benefit Consulting, Inc., LensCard Systems
Corporation and The Chase Manhattan Bank (National
Association) dated February 17, 1993. Filed as Exhibit
4.10 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.1 Compensation Letter Agreement between the Registrant and
the Management Stockholders dated October 30, 1987.
Filed as Exhibit 10.5 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.2 Loan Agreement between the Registrant and General
Electric Capital Corporation dated October 30, 1987.
Filed as Exhibit 10.7 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.3 Term Note dated October 30, 1987 in the principal amount
of $87,000,000. Filed as Exhibit 10.8 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.4 Intermediate Term Note dated October 30, 1987 in the
principal amount of $76,350,000. Filed as Exhibit 10.9
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.5 Bridge Note dated October 30, 1987 in the principal
amount of $75,000,000. Filed as Exhibit 10.10 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.6 Revolving Credit Note dated October 30, 1987 in the
principal amount of $15,000,000. Filed as Exhibit 10.11
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.7 Surplus Debenture dated October 30, 1987 in the principal
amount of $155,000,000. Filed as Exhibit 10.12 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.8 Subordinated Surplus Debenture dated October 30, 1987 in
the principal amount of $72,000,000. Filed as Exhibit
10.13 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by
reference.
10.9 Pledge and Security Agreement dated October 30, 1987,
made by the Registrant to General Electric Capital
Corporation. Filed as Exhibit 10.14 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.10 Employment Agreement dated December 13, 1988, between the
Registrant and Lloyd E. Gearhart. Filed as Exhibit
10.20 to the Registrant's Registration Statement (No.
33-47644) on Form S-1 and incorporated herein by
reference.
10.11 John Alden Retirement Plan as Amended and Restated
effective January 1, 1989. Filed as Exhibit 10.21 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.12 John Alden Senior Executive Supplemental Retirement Plan
effective January 1, 1990. Filed as Exhibit 10.22 to the
Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.13 Supplemental Executive Retirement Plan effective December
1, 1984. Filed as Exhibit 10.22 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.14 Indemnity Coinsurance Agreement between JALIC and Oxford
Life Insurance Company, dated January 1, 1989. Filed as
Exhibit 10.24 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.15 Indemnity Coinsurance Agreement between JALIC and
Reliance Standard Life Insurance Company dated June 30,
1990. Filed as Exhibit 10.25 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
10.16 Indemnity Coinsurance Agreement between JALIC and
Reliance Standard Life Insurance Company dated October
31, 1990. Filed as Exhibit 10.26 to the Registrant's
Registration Statement (No. 33-47644) on Form S-1 and
incorporated herein by reference.
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.17 Indemnity Coinsurance Agreement between JANY and The
Franklin Life Insurance Company dated March 31, 1991.
Filed as Exhibit 10.27 to the Registrant's Registration
Statement (No. 33-47644) on Form S-1 and incorporated
herein by reference.
10.18 Reinsurance Agreement among JALIC, London Life Insurance
Company and Transamerica Occidental Life Insurance
Company dated October 1, 1991. Filed as Exhibit 10.28 to
the Registrant's Registration Statement (No. 33-47644) on
Form S-1 and incorporated herein by reference.
10.19 Reinsurance Agreement between Western Diversified Life
Insurance Company and ITT Lyndon Property Insurance
Company dated December 1, 1991. Filed as Exhibit 10.29
to the Registrant's Registration Statement (No. 33-47644)
on Form S-1 and incorporated herein by reference.
10.20 Reinsurance Agreement between JALIC and Lincoln National
Reassurance Company dated December 31, 1991. Filed as
Exhibit 10.30 to the Registrant's Registration Statement
(No. 33-47644) on Form S-1 and incorporated herein by
reference.
10.21 Letter Agreement among Merrill Lynch Capital Partners,
Inc., GE Capital, ERC, the Management Stockholders and
the Registrant dated August 26, 1992. Filed as Exhibit
10.31 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.22 Employment Agreement between the Registrant and Glendon
E. Johnson dated October 2, 1992. Filed as Exhibit 10.32
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.23 John Alden Financial Corporation Employee Stock Purchase
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-55230) on Form S-8 and
incorporated herein by reference.
10.24 John Alden Financial Corporation Long-Term Incentive
Plan. Filed as Exhibit 4.5 to the Registrant's
Registration Statement (No. 33-56656) on Form S-8 and
incorporated herein by reference.
10.25 Amended and Restated Registration Rights Agreement
between the Registrant and General Electric Capital
Corporation dated as of October 2, 1992. Filed as
Exhibit 10.35 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
10.26 Amended and Restated Registration Rights Agreement
between the Registrant and Merrill Lynch Capital
Partners, Inc. dated as of October 2, 1992. Filed as
Exhibit 10.36 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11396) and incorporated herein by
reference.
10.27 Amended and Restated Registration Rights Agreement among
the Registrant and Management Stockholders dated as of
October 2, 1992. Filed as Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.28 Consent and Amendment to Loan Agreement between the
Registrant and General Electric Capital Corporation dated
September 22, 1992. Filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.29 Agreement to Amend Warrant between the Registrant and
General Electric Capital Corporation dated September 22,
1992. Filed as Exhibit 10.39 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992 (Commission File No. 1-11396) and incorporated
herein by reference.
10.30 Agreement to Amend Warrant between the Registrant and
Employers Reinsurance Corporation dated September 22,
1992. Filed as Exhibit 10.40 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992 (Commission File No. 1-11396) and incorporated
herein by reference.
10.31 Amended and Restated Management Stockholders Agreement
among the Management Stockholders and the Registrant
dated February 17, 1993. Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.32 North Star Marketing Organization Long-Term Incentive
Plan. Filed as Exhibit 4.3 to the Registrant's
Registration Statement (No. 33-56544) on Form S-8 and
incorporated herein by reference.
10.33 John Alden Financial Corporation Employee Savings
Incentive Plan, as amended, together with Amendments 1
through 5 thereto. Filed as Exhibit 4.3 to the
Registrant's Registration Statement (No. 33-56656) on
Form S-8 and incorporated herein by reference.
10.34 Letter agreement among the Registrant and the Management
Stockholders dated October 2, 1992. Filed as Exhibit
10.50 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.35 Stock and Warrant Purchase Agreement among Emperion
Corporation, Electronic Data Systems Corporation and JA
Services, Inc. dated December 17, 1991. Filed as Exhibit
10.51 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File
No. 1-11396) and incorporated herein by reference.
10.36 Amendment to Stock and Warrant Purchase Agreement dated
December 30, 1992. Filed as Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (Commission File No.
1-11396) and incorporated herein by reference.
10.37 Revolving Credit Agreement among John Alden Systems
Company and The Chase Manhattan Bank (National
Association), Barnett Bank of South Florida, N.A. and
Shawmut Bank Connecticut, N.A. dated December 31, 1993.
Filed as Exhibit 10.53 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(Commission File No. 1-11396) and incorporated herein by
reference.
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.38 Amended and Restated Credit Agreement among the
Registrant, Certain Commercial Lending Institutions
(named therein) and the Chase Manhattan Bank (National
Association) dated as of July 27, 1994. Filed as Exhibit
10.42 to the Registrant's Registration Statement (No.
33-78662) on Form S-3 and incorporated herein by
reference.
10.39 Agreement dated July 27, 1994 to Amended and Restated
Management Stockholders Agreement among the Management
Stockholders and the Registrant dated February 17, 1993.
Filed as Exhibit 10.54 to the Registrant's Registration
Statement (No. 33-78662) on Form S-3 and incorporated
herein by reference.
10.40 Plan of Complete Liquidation and Dissolution of Emperion
Corporation. Filed as Exhibit 10.56 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-11396) and
incorporated herein by reference.
10.41 Articles of Dissolution of Emperion Corporation dated
December 29, 1994. Filed as Exhibit 10.57 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (Commission File No.
1-11396) and incorporated herein by reference.
10.42 Reinsurance Agreement between JALIC and Lincoln National
Reinsurance Company Limited dated as of September 30,
1995. Filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995 (Commission File No. 1-11396)
and incorporated herein by reference.
10.43 Trust Agreement among JALIC, Lincoln National Reinsurance
Company Limited and The Chase Manhattan Bank, N.A. dated
as of October 9, 1995. Filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission
File No. 1-11396) and incorporated herein by reference.
10.44 Amendment dated March 8, 1996 to Amended and Restated
Credit Agreement among the Registrant, Certain Commercial
Lending Institutions (named therein) and the Chase
Manhattan Bank (National Association) dated as of July
27, 1994. Filed as Exhibit 10.44 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1995 (Commission File No. 1-11396) and incorporated
herein by reference.
10.45 Rights Agreement, dated as of December 13, 1996, between
John Alden Financial Corporation and Chase Mellon
Shareholder Services, L.L.C. Filed as Exhibit 2 to the
Registrant's Form 8-K dated December 13, 1996 (Commission
File No. 1-11396) and incorporated herein by reference.
10.46 Amendment dated November 1, 1996 to reinsurance agreement
among JALIC, London Life Insurance Company and
TransAmerica Occidental Life Insurance Company dated
October 1, 1991.
10.47 Amendment dated February 28, 1997 to Employment Agreement
between the Registrant and Glendon E. Johnson dated
October 2, 1992.
10.48 Stock Purchase and Sale Agreement by and between JALIC and
SunAmerica Life Insurance Company ("SunAmerica") dated
November 29, 1996. Filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated
herein by reference.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.49 Asset Purchase and Sale Agreement by and between JALIC and
SunAmerica dated November 29, 1996. Filed as Exhibit 10.2
to the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.50 Indemnity Reinsurance Agreement by and between JALIC and
SunAmerica dated as of March 31, 1997. Filed as Exhibit
10.3 to the Registrant's Current Report on Form 8-K filed
April 15, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.51 Assumption Reinsurance Agreement dated as of March 31,
1997 by and between JALIC and SunAmerica. Filed as
Exhibit 10.4 to the Registrant's Current Report on Form
8-K filed April 15, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.52 Trust Agreement by and among SunAmerica as Grantor and
JALIC as Beneficiary and Bankers Trust Company as Trustee
dated March 31, 1997. Filed as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.53 Transition Services Agreement between JALIC and SunAmerica
dated March 31, 1997. Filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated herein
by reference.
10.54 Transition Services Agreement between JALIC and JANY dated
March 31, 1997. Filed as Exhibit 10.7 to the Registrant's
Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.55 Administrative Services Agreement between JALIC and
SunAmerica dated March 31, 1997. Filed as Exhibit 10.8 to
the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.56 Interim Servicing Agreement between John Alden Asset
Management Company, SunAmerica and JANY dated as of March
31, 1997. Filed as Exhibit 10.9 to the Registrant's
Current Report on Form 8-K filed April 15, 1997
(Commission File No. 1-11396) and incorporated herein by
reference.
10.57 Asset Repurchase Agreement by and between JALIC and
SunAmerica dated March 31, 1997. Filed as Exhibit 10.10
to the Registrant's Current Report on Form 8-K filed April
15, 1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.58 Marketing Agreement dated March 28, 1997 by and between
SunAmerica and NSM Sales Corporation. Filed as Exhibit
10.11 to the Registrant's Current Report on Form 8-K filed
April 15, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.59 Amendment No. 1 dated March 31, 1997 to the Stock Purchase
and Sale Agreement dated November 29, 1996 by and between
JALIC and SunAmerica. Filed as Exhibit 10.12 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated
herein by reference.
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------
<S> <C>
10.60 Amendment No. 1 dated March 31, 1997 to the Asset Purchase
and Sale Agreement dated November 29, 1996 by and between
JALIC and SunAmerica. Filed as Exhibit 10.13 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated
herein by reference.
10.61 Amendment No. 1 to Marketing Agreement between SunAmerica
and NSM Sales Corporation. Filed as Exhibit 10.14 to the
Registrant's Current Report on Form 8-K filed April 15,
1997 (Commission File No. 1-11396) and incorporated herein
by reference.
10.62 Deferred Compensation Agreement dated April 2, 1997, by
and between John Alden Financial Corporation and Glendon
E. Johnson. Filed as Exhibit 10.62 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.63 Amended and Restated Employment Agreement dated November
5, 1997, by and between John Alden Financial Corporation
and Glendon E. Johnson. Filed as Exhibit 10.63 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997 (Commission File
No. 1-11396) and incorporated herein by reference.
10.64 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Marvin
H. Assofsky. Filed as Exhibit 10.64 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.65 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Glen A.
Spence. Filed as Exhibit 10.65 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.66 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Scott L.
Stanton. Filed as Exhibit 10.66 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.67 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Michael
P. Andersen. Filed as Exhibit 10.67 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.68 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Lonnie
R. Wright, Jr. Filed as Exhibit 10.68 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.69 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Kerry D.
Clemmons. Filed as Exhibit 10.69 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------
<S> <C>
10.70 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Mark A.
Schoder. Filed as Exhibit 10.70 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.71 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Anne V.
Wardlow. Filed as Exhibit 10.71 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.72 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and William
S. Wilkins. Filed as Exhibit 10.72 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.73 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and William
H. Mauk, Jr. Filed as Exhibit 10.73 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.74 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and James H.
Srite. Filed as Exhibit 10.74 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.75 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Patsy
Campola. Filed as Exhibit 10.75 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.76 Change of Control Employment Agreement dated November 5,
1997 between John Alden Financial Corporation and Gary F.
Kadlec. Filed as Exhibit 10.76 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997 (Commission File No. 1-11396) and
incorporated herein by reference.
10.77 Agreement and Plan of Merger, dated as of March 9, 1998, by
and among John Alden Financial Corporation, Fortis, Inc.
and JAFCO Acquisition Corp. Filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed
March 19, 1998 (Commission File No. 1-11396) and
incorporated herein by reference.
10.78 Stock Option Agreement, dated as of March 9, 1998, by and
between John Alden Financial Corporation, as issuer, and
Fortis, Inc., as grantee. Filed as Exhibit 2.2 to the
Registrant's Current Report on Form 8-K filed
March 19, 1998 (Commission File No. 1-11396) and
incorporated herein by reference.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Independent Accountants.
*27.1 Financial Data Schedule.
*99.1 Financial Statements of the John Alden Financial
Corporation Employee Stock Purchase Plan for the year
ended December 31, 1997.
</TABLE>
- -------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<S> <C>
JOHN ALDEN
FINANCIAL CORPORATION
(DELAWARE)
59-2840712
|-------------------------------------|--------------------------------------------------------------------------------
| | |
| | John Alden
| Houston National Health,
| Life Insurance Inc.
| Company (Delaware)
| (Texas) 65-0568696
| 74-2080029 |
| NAIC # 90379 -----------------------------------
| | | | |
| | John Alden John Alden John Alden
| | Health Health NevadaPlus
JA Services, John Alden of Florida, Inc. Systems, Inc. Health Plan
Inc. Life Insurance (Florida) (Ohio) (Nevada)
(Delaware) Company * 2,000,000 HNL 65-0640575 65-0593968 65-0568703
65-0040859 (Minnesota) NAIC # 95347 NAIC # 95183
| 41-0999752
| NAIC # 65080
| |
| |
| ------------------------------------------------
| | | |
| Alden Risk North Star
| Management LifeMark, Inc. Marketing
| Services, Inc. (Nevada) Corporation
| (Nevada) 59-2334646 (Ohio)
| 59-2261315 59-2394461
|
|
|
|
ADMARK John Alden Asset John Alden John Alden John Alden John Alden
Marketing JAF CO. 1 Management Horizon International Neighborhood Service Warranty
Company, Inc.-- (Delaware) -- Company -- Health, Inc.--- Insurance ----Health Corporation ---- Corporation ------
(New Jersey) 51-0015810 (Delaware) (Nevada) Company, Ltd. (Florida) (Delaware) |
22-2901991 59-1561399 65-0457005 (Bermuda) 65-0478869 65-0362333 |
98-0150492 |
|
Provider Funding NSM Sales NHP Holding Jones, Hill & Mercer John Alden John Alden |
Corporation ----- Corporation --- Company, Inc. ** ------- Employee ---------- Systems Company --- Service Warranty-- |
(Delaware) (Nevada) (Florida) Benefits, Inc. (Minnesota) Corporation
65-0486851 65-0416844 65-0508983 (Nevada) 41-0946005 of Florida
| 65-0167355 (Florida)
| 65-0362330
|
Neighborhood Health
Partnership, Inc.
(Florida)
a Non-Profit Organization
65-0391735
NAIC # 95123
</TABLE>
All ownership is 100% of Common Stock unless otherwise noted.
* Preferred Stock: number of shares issued and preferred stockholder name
** 50% ownership
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-56656, No. 33-56544, No. 33-55230, No. 33-84506,
No. 33-84508 and No. 33-95598) of John Alden Financial Corporation of our report
dated March 20, 1998 appearing on page F-2 of the Annual Report on Form 10-K for
the year ended December 31, 1997.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 554,089
<DEBT-CARRYING-VALUE> 44,780
<DEBT-MARKET-VALUE> 46,464
<EQUITIES> 23
<MORTGAGE> 145,770
<REAL-ESTATE> 43,375
<TOTAL-INVEST> 1,016,346
<CASH> 31,663
<RECOVER-REINSURE> 187,125
<DEFERRED-ACQUISITION> 32,161
<TOTAL-ASSETS> 1,479,932
<POLICY-LOSSES> 434,315
<UNEARNED-PREMIUMS> 29,065
<POLICY-OTHER> 305,125
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 76,500
15,286
0
<COMMON> 187,681
<OTHER-SE> 263,229
<TOTAL-LIABILITY-AND-EQUITY> 1,479,932
928,901
<INVESTMENT-INCOME> 69,293
<INVESTMENT-GAINS> 4,805
<OTHER-INCOME> 47,050
<BENEFITS> 719,455
<UNDERWRITING-AMORTIZATION> 14,810
<UNDERWRITING-OTHER> 4,218
<INCOME-PRETAX> (8,750)
<INCOME-TAX> (1,915)
<INCOME-CONTINUING> (7,791)
<DISCONTINUED> 29,679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,888
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.80
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
JOHN ALDEN FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
<PAGE> 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Plan Participants of the John Alden Financial Corporation
Employee Stock Purchase Plan and the Compensation Committee
of the Board of Directors of John Alden Financial Corporation
In our opinion, the accompanying statement of net assets available for plan
benefits and the related statement of changes in net assets available for plan
benefits present fairly, in all material respects, the net assets available for
plan benefits of the John Alden Financial Corporation Employee Stock Purchase
Plan at December 31, 1997 and 1996, and the changes in net assets available for
plan benefits for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the plan's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 3, on March 9, 1998, John Alden Financial Corporation
entered into an agreement for the sale of the Company to a wholly-owned
subsidiary of Fortis, Inc. which may result in the termination of the Plan.
These financial statements do not reflect any adjustments that may result from
the termination of the Plan.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 17, 1998
3
<PAGE> 3
JOHN ALDEN FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
TABLE OF CONTENTS
Page No.
Report of Independent Certified Public Accountants 3
Financial Statements:
Statements of Net Assets Available for Plan
Benefits as of December 31, 1997 and 1996 4
Statements of Changes in Net Assets
Available for Plan Benefits for the Years
Ended December 31, 1997, 1996 and 1995 5
Notes to Financial Statements 6
Consent of Independent Certified Public Accountants 10
Supplemental schedules have been omitted since they are not applicable or the
required information is shown in the financial statements or related notes.
<PAGE> 4
JOHN ALDEN FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Common stock of John Alden Financial
Corporation, at market (cost $152,695 and $195,041) $ 130,008 $ 200,652
Contributions receivable:
Employee 36,440 71,353
Employer 7,507 14,723
------------------- ------------------
Total contributions receivable 43,947 86,076
------------------- ------------------
Total assets 173,955 286,728
Distributions of common stock payable, at market value (123,984) (194,620)
------------------- ------------------
Net assets available for plan benefits $ 49,971 $ 92,108
=================== ==================
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
4
<PAGE> 5
JOHN ALDEN FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Contributions:
Employee $ 729,121 $ 1,087,321 $ 1,640,586
Employer 115,896 184,789 288,012
------------------- ------------------- -------------------
Total contributions 845,017 1,272,110 1,928,598
Change in unrealized appreciation/depreciation
of common stock (28,298) 4,996 (8,214)
Distributions of common stock, at cost (855,117) (1,313,067) (1,928,620)
Plan expenses (3,739) (4,005) (5,658)
------------------- ------------------- -------------------
Net decrease in net assets (42,137) (39,966) (13,894)
Beginning of year 92,108 132,074 145,968
------------------- ------------------- -------------------
End of year $ 49,971 $ 92,108 $ 132,074
=================== =================== ===================
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
5
<PAGE> 6
JOHN ALDEN FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PLAN
The following description of the John Alden Financial Corporation Employee Stock
Purchase Plan (the "Plan") provides general information. Interested parties
should refer to the Plan agreement for a more complete description of the Plan's
provisions.
General
The Plan, which became effective January 1, 1993 and was amended and restated as
of December 31, 1997, was established to provide the employees of John Alden
Financial Corporation ("JAFCO") and its subsidiaries (collectively, the
"Company") who meet certain eligibility requirements the opportunity to purchase
shares of common stock of JAFCO. The number of shares of common stock of JAFCO
which may be acquired pursuant to the Plan may not exceed 746,966 shares, except
as may be equitably adjusted in certain circumstances. Shares purchased through
the Plan are held by Alex. Brown & Sons, Incorporated, the firm utilized by the
Plan to acquire the shares or distribute shares to participants upon request.
Full-time employees are eligible to participate in the Plan on the first day of
any calendar quarter following completion of one year of service.
Shares of common stock are purchased in round lots at the beginning of each
month. Although the Plan may purchase shares directly from the Company, to date
it has purchased shares solely on the open market. The number of shares to be
purchased and the estimated purchase price are generally based upon the amount
of employee contributions withheld during the previous month and the trading
price of the common stock on the day preceding the actual purchase date. The
actual purchase price may differ due to changes in the trading price. The
estimated cost of shares to be purchased is split between the employees (85%)
and the Company (15%). See further discussion of contributions below.
The Plan is administered by the Compensation Committee appointed by the Board of
Directors of JAFCO.
6
<PAGE> 7
Tax Status
The Plan is designed as an Employee Stock Purchase Plan as defined in Section
423 of the Internal Revenue Code of 1986 as amended. In accordance with Section
423, Plan participants cannot dispose of their stock within the later of two
years after the date an option is granted to purchase the stock or one year
after the purchase date (the "Statutory Holding Period") without adverse tax
consequences. A participant who sells his stock within the Statutory Holding
Period will recognize ordinary income in an amount equal to the difference
between the fair market value on the purchase date and the participant's share
of the cost of the common stock.
The tax basis of a participant's shares is equal to the participant's share of
the purchase price of the stock, plus any ordinary income recognized upon the
sale of the stock. Thus, for a sale during the Statutory Holding Period, any
excess of the sale proceeds received upon disposition of the shares by the
participant over the tax basis in such shares sold is considered a capital gain.
Similarly, if the tax basis of the participant's shares exceeds the sales
proceeds received by the participant, after adjustment for any required
recognition of ordinary income, the excess is considered a capital loss. If the
participant recognized ordinary income during the Statutory Holding Period, then
the Company has a matching deduction equal to the amount of ordinary income
recognized by the participant.
If the stock is sold after the Statutory Holding Period for more than the
participant's share of the purchase price, a special rule under Section 423 for
options granted with prices between 85% and 100% of the value of the stock
applies (the "Special Rule"). The Special Rule requires that the participant
recognize ordinary income upon the disposition of such stock in an amount equal
to the lesser of (i) the excess of the fair market value of the stock at the
time of disposition over the amount paid by the participant for the stock or
(ii) the excess of the fair market value of the stock at the time the option was
granted over the price the participant would have paid under the Plan to
purchase the stock at that time. Any gain realized in excess of this amount will
be considered a long-term capital gain. If the stock is sold for less than the
participant's share of the purchase price after the Statutory Holding Period,
the resulting loss will be considered a long-term capital loss.
Contributions
Eligible employees may elect to contribute from 1% to 10% of compensation
through payroll deductions, subject to certain limits. Employee contributions
constitute 85% of the cost of shares of JAFCO common stock to be purchased at
the beginning of each month.
Employer contributions consist of (i) 15% of the cost of shares of JAFCO common
stock to be purchased by the Plan at the beginning of each month, (ii)
reimbursement of Plan expenses and, (iii) differences between the actual and
estimated cost of shares acquired.
7
<PAGE> 8
Employee contributions receivable as of the end of the Plan year represent
amounts withheld from employees in the month of December and employee
contributions carried forward from the preceding purchase date. Employer
contributions receivable represent employer contributions as described above to
be used to acquire shares of common stock.
Vesting
Employees acquire title to the shares of common stock at the time of purchase
and, therefore, vest 100% at purchase date.
Basis of Accounting
The accounting records of the Plan are maintained on the accrual basis. The
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and include management estimates and
assumptions that affect the recorded amounts.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
Plan Termination
In accordance with the Plan agreement as amended and restated as of December 31,
1997, the Plan will be in effect for seven years, ending December 31, 2004.
Although it has not expressed any intent to do so, the Board of Directors of
JAFCO has the right under the Plan agreement to terminate the Plan before that
date.
NOTE 2 - COMMON STOCK OF JAFCO
Shares of common stock are purchased at the beginning of each month and
distributed to employees each quarter in the month following quarter end. In
addition, the Plan purchases shares of common stock in round lots and,
therefore, maintains a balance of excess shares to be used for future
distribution to employees. As of December 31, 1997 and 1996, the Plan held 5,417
and 10,846 shares, respectively, of JAFCO common stock which are carried at
market value in the accompanying statements of net assets available for plan
benefits. Of these shares, 5,166 and 10,520 shares, respectively, were
distributed subsequent to year end in relation to the quarterly distribution
described above and are reflected as distributions of common stock payable in
the accompanying statements of net assets available for plan benefits.
8
<PAGE> 9
NOTE 3 - ANTICIPATED SALE OF THE COMPANY
On March 9, 1998, the Company entered into an agreement with a wholly-owned
subsidiary of Fortis, Inc. ("Fortis"), a wholly-owned subsidiary of Fortis
Amev, Netherlands, and Fortis, AG, Belgium, as a result of which, among other
things, the Company will become a wholly-owned subsidiary of Fortis and each
outstanding share of the Company's common stock will be converted into the
right to receive $22.50 in cash. Consummation of the merger is subject to
regulatory and stockholder approvals, as well as other customary terms and
conditions. It is anticipated that the merger will be consummated during 1998.
If the merger with Fortis is consummated, the Plan may be terminated.
9
<PAGE> 10
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-55230) of John Alden Financial Corporation of our
report dated March 17, 1998 appearing on page 3 of the Financial Statements of
the John Alden Financial Corporation Employee Stock Purchase Plan in Exhibit
99.1 to this Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ PRICE WATERHOUSE LLP
- -----------------------------
PRICE WATERHOUSE LLP
Miami, Florida
March 17, 1998
10