<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 37-0911756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
As of October 31, 1998, 42,531,594 shares of Common Stock, par value $0.001
per share, were outstanding, net of 16,739,596 shares of treasury stock.
================================================================================
<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997.................. 1
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997... 2
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1998
and 1997.................................................. 3
Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1998 and 1997... 4
Notes to Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
PART II - OTHER INFORMATION............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES................................................................ 24
</TABLE>
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market
(amortized cost, 1998, $2,518,978; 1997, $2,535,538)........ $2,643,010 $2,638,794
Short-term and other investments............................. 130,421 130,252
Short-term investments, loaned securities collateral......... 77,510 -
---------- ----------
Total investments....................................... 2,850,941 2,769,046
Cash.......................................................... 12,799 353
Accrued investment income and premiums receivable............. 98,670 103,951
Value of acquired insurance in force and goodwill............. 102,383 107,976
Deferred policy acquisition costs............................. 94,166 85,883
Other assets.................................................. 121,897 104,943
Variable annuity assets....................................... 999,545 959,760
---------- ----------
Total assets........................................... $4,280,401 $4,131,912
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Fixed annuity contract liabilities........................... $1,228,206 $1,245,459
Interest-sensitive life contract liabilities................. 392,505 364,205
Unpaid claims and claim expenses............................. 315,148 322,335
Future policy benefits....................................... 179,570 179,562
Unearned premiums............................................ 179,816 166,996
---------- ----------
Total policy liabilities............................... 2,295,245 2,278,557
Other policyholder funds...................................... 125,777 122,107
Other liabilities............................................. 209,300 126,847
Short-term debt............................................... 45,000 42,000
Long-term debt................................................ 99,627 99,599
Variable annuity liabilities.................................. 996,195 956,253
---------- ----------
Total liabilities...................................... 3,771,144 3,625,363
---------- ----------
Warrants, subject to redemption............................... 220 577
---------- ----------
Preferred stock............................................... - -
Common stock.................................................. 59 59
Additional paid-in capital.................................... 336,649 340,564
Retained earnings............................................. 401,911 349,274
Accumulated other comprehensive income (Net
unrealized gains on fixed maturities and equity securities).. 71,664 62,167
Treasury stock, at cost....................................... (301,246) (246,092)
---------- ----------
Total shareholders' equity.............................. 509,037 505,972
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity............... $4,280,401 $4,131,912
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Insurance premiums written and contract deposits.. $209,686 $188,911 $616,705 $563,834
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned........................ $144,536 $135,078 $429,094 $402,385
Net investment income............................ 47,781 49,271 144,458 148,979
Realized investment gains........................ 4,247 1,585 13,599 3,230
-------- -------- -------- --------
Total revenues............................... 196,564 185,934 587,151 554,594
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses......... 96,563 89,925 301,308 271,714
Interest credited................................ 23,495 24,227 71,426 73,082
Policy acquisition expenses amortized............ 11,015 10,937 34,149 33,035
Operating expenses............................... 27,057 27,484 80,684 77,090
Amortization of intangible assets................ 1,856 2,666 5,593 8,077
Interest expense................................. 2,394 1,842 7,098 7,067
-------- -------- -------- --------
Total benefits, losses and expenses.......... 162,380 157,081 500,258 470,065
-------- -------- -------- --------
Income from continuing operations before income
taxes and discontinued operations................ 34,184 28,853 86,893 84,529
Income tax expense................................ 9,251 7,376 23,853 22,756
-------- -------- -------- --------
Income from continuing operations................. 24,933 21,477 63,040 61,773
Discontinued operations:
Loss on discontinuation, net of
applicable income tax benefits................. - (3,481) - (3,481)
-------- -------- -------- --------
Net income........................................ $ 24,933 $ 17,996 $ 63,040 $ 58,292
======== ======== ======== ========
Earnings (loss) per share
Basic
Income from continuing operations.............. $ 0.58 $ 0.48 $ 1.45 $ 1.34
Discontinued operations:
Loss on discontinuation...................... - (0.08) - (0.08)
-------- -------- -------- --------
Net income..................................... $ 0.58 $ 0.40 $ 1.45 $ 1.26
======== ======== ======== ========
Diluted
Income from continuing operations.............. $ 0.57 $ 0.46 $ 1.43 $ 1.31
Discontinued operations:
Loss on discontinuation...................... - (0.07) - (0.07)
-------- -------- -------- --------
Net income..................................... $ 0.57 $ 0.39 $ 1.43 $ 1.24
======== ======== ======== ========
Weighted average number of shares
and equivalent shares (in thousands)
Basic.......................................... 42,811 45,170 43,523 46,222
Diluted........................................ 43,413 45,902 44,141 46,899
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Common stock
Beginning balance.......................................... $ 59 $ 58
Options exercised, 1998, 110,182 shares;
1997, 726,424 shares..................................... - 1
Conversion of Director Stock Plan units,
1997, 2,288 shares....................................... - -
--------- ---------
Ending balance............................................. 59 59
--------- ---------
Additional paid-in capital
Beginning balance.......................................... 340,564 330,234
Options exercised and conversion of
Director Stock Plan units................................ 2,163 11,742
Catastrophe-linked equity put option premium............... (1,475) (1,250)
Purchase of 13,650 warrants................................ (4,603) -
--------- ---------
Ending balance............................................. 336,649 340,726
--------- ---------
Retained earnings
Beginning balance.......................................... 349,274 278,669
Net income................................................. 63,040 58,292
Cash dividends, 1998, $0.24 per share;
1997, $0.2025 per share.................................. (10,403) (9,402)
--------- ---------
Ending balance............................................. 401,911 327,559
--------- ---------
Accumulated other comprehensive income (Net unrealized
gains (losses) on fixed maturities and equity securities)
Beginning balance........................................ 62,167 29,736
Increase (decrease) for the period....................... 9,497 21,178
--------- ---------
Ending balance........................................... 71,664 50,914
--------- ---------
Treasury stock, at cost
Beginning balance, 1998, 14,896,796 shares;
1997, 11,176,196 shares.................................. (246,092) (154,302)
Purchase of 1,706,600 shares in 1998;
2,899,600 shares in 1997 (See note 4).................... (55,154) (68,598)
--------- ---------
Ending balance, 1998, 16,603,396 shares;
1997, 14,075,796 shares.................................. (301,246) (222,900)
--------- ---------
Shareholders' equity at end of period....................... $ 509,037 $ 496,358
========= =========
Comprehensive income
Net income................................................. $ 63,040 $ 58,292
Other comprehensive income................................. 9,497 21,178
--------- ---------
Total.................................................... $ 72,537 $ 79,470
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected............................ $ 158,449 $ 154,356 $ 465,640 $ 462,657
Policyholder benefits paid.................... (122,320) (116,508) (349,063) (353,003)
Policy acquisition and other
operating expenses paid..................... (43,646) (44,727) (135,613) (126,977)
Federal income taxes paid..................... (4,200) (2,626) (24,600) (46,703)
Investment income collected................... 50,655 53,111 150,139 152,853
Interest expense paid......................... (3,549) (3,860) (8,164) (8,423)
Other......................................... (3,678) (1,603) (3,160) (4,354)
--------- --------- --------- ---------
Net cash provided by
operating activities.................... 31,711 38,143 95,179 76,050
--------- --------- --------- ---------
Cash flows from investing activities
Fixed maturities
Purchases................................... (146,416) (189,029) (629,562) (768,418)
Sales....................................... 91,873 191,994 386,322 648,621
Maturities.................................. 85,698 42,679 282,613 173,986
Net cash (used for) received from
short-term and other investments............ (33,857) (30,245) 148 (9,056)
--------- --------- --------- ---------
Net cash provided by
(used in)investing activities........... (2,702) 15,399 39,521 45,133
--------- --------- --------- ---------
Cash flows from financing activities
Purchase of treasury stock.................... (10,059) (7,163) (55,154) (68,598)
Dividends paid to shareholders................ (3,416) (3,047) (10,403) (9,402)
Principal borrowing
on Bank Credit Facility..................... - - 3,000 8,000
Repurchase of common stock warrants........... - - (4,959) -
Exercise of stock options..................... 273 2,270 2,163 11,743
Catastrophe-linked equity put option premium.. - - (1,475) (1,250)
Annuity contracts, variable and fixed
Deposits.................................... 49,914 42,165 167,313 143,947
Maturities and withdrawals.................. (49,127) (51,951) (140,855) (122,061)
Net transfer to variable annuity assets..... (15,454) (29,938) (81,874) (84,005)
Net increase (decrease) in
life policy account balances................ 194 144 (10) 1,137
--------- --------- --------- ---------
Net cash used in financing activities..... (27,675) (47,520) (122,254) (120,489)
--------- --------- --------- ---------
Net increase in cash........................... 1,334 6,022 12,446 694
Cash at beginning of period.................... 11,465 8,376 353 13,704
--------- --------- --------- ---------
Cash at end of period.......................... $ 12,799 $ 14,398 $ 12,799 $ 14,398
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Dollars in thousands)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann
Educators Corporation (the "Company") have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes that these financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly the Company's consolidated financial position as of September 30,
1998 and December 31, 1997 and the consolidated results of operations, changes
in shareholders' equity and cash flows for the three and nine months ended
September 30, 1998 and 1997.
It is suggested that these financial statements be read in conjunction with
the financial statements and the related notes included in the Company's
December 31, 1997 Form 10-K.
The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Debt
Indebtedness outstanding was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, IBOR + 0.325%
(5.6% as of September 30, 1998)............ $ 45,000 $ 42,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $373 and $401 (6.7% imputed rate)....... 99,627 99,599
-------- --------
Total.................................... $144,627 $141,599
======== ========
</TABLE>
5
<PAGE>
Note 3 - Investments
The following table presents the composition and value of the Company's
fixed maturity securities portfolio by rating category. The Company has
classified the entire fixed maturity securities portfolio as available for sale,
which is carried at market value.
<TABLE>
<CAPTION>
Percent of
Carrying Value September 30, 1998
---------------------------- ----------------------
Rating of Fixed September 30, December 31, Carrying Amortized
Maturity Securities(1) 1998 1997 Value Cost
- ------------------------ ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
AAA............... 43.7% 42.7% $1,154,772 $1,097,282
AA................ 7.8 7.1 206,755 194,701
A................. 19.1 20.3 505,207 475,961
BBB............... 23.0 23.3 607,365 579,342
BB................ 1.4 1.6 36,435 34,550
B................. 4.0 4.0 106,144 107,962
CCC or lower...... 0.1 0.1 2,107 4,795
Not rated(2)...... 0.9 0.9 24,225 24,385
----- ----- ---------- ----------
Total........... 100.0% 100.0% $2,643,010 $2,518,978
===== ===== ========== ==========
</TABLE>
(1) Ratings are as assigned primarily by Standard & Poor's Corporation ("S&P")
when available, with remaining ratings as assigned on an equivalent basis
by Moody's Investors Service, Inc. ("Moody's"). Ratings for publicly traded
securities are determined when the securities are acquired and are updated
monthly to reflect any changes in ratings.
(2) This category includes $16.5 million of publicly traded securities not
currently rated by S&P or Moody's and $7.7 million of private placement
securities not rated by either S&P or Moody's. The National Association of
Insurance Commissioners (the "NAIC") has rated 88.9% of these private
placements as investment grade.
The following table presents a maturity schedule of the Company's fixed
maturity securities. 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.
<TABLE>
<CAPTION>
Percent Carrying
of Total Value
--------------------------- -------------
September 30, December 31, September 30,
Scheduled Maturity 1998 1997 1998
- ------------------ ------------ ------------ -------------
<S> <C> <C> <C>
Due in 1 year or less................ 5.1% 5.6% $ 134,324
Due after 1 year through 5 years..... 24.2 24.2 640,728
Due after 5 years through 10 years... 31.7 34.8 836,585
Due after 10 years through 20 years.. 19.2 19.6 508,144
Due after 20 years................... 19.8 15.8 523,229
----- ----- ----------
Total.............................. 100.0% 100.0% $2,643,010
===== ===== ==========
</TABLE>
The Company loans fixed income securities to third parties, primarily major
brokerage firms. As of September 30, 1998 and December 31, 1997, fixed
maturities with a fair value of $77,510 and $60,388, respectively, were loaned.
The Company separately maintains a minimum of 100%
6
<PAGE>
Note 3 - Investments-(Continued)
of the value of the loaned securities as collateral for each loan. Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," requires the securities lending collateral
to be classified as investments beginning in 1998 and does not permit
restatement of prior period financial statements. As of September 30, 1998, the
corresponding liability is included in Other Liabilities in the Company's
consolidated balance sheet.
Note 4 - Shareholders' Equity
Share Repurchase Programs
During 1997, the Company repurchased 3,720,600 shares, 8% of the Company's
outstanding shares at December 31, 1996, at an aggregate cost of $91,790 under a
$100,000 stock repurchase program announced in February 1997. In January 1998,
the Company's Board of Directors authorized an additional repurchase of shares
of the Company's common stock up to $100,000. Based on the market price of the
Company's common shares at the time, $100,000 represented approximately 8% of
the Company's then outstanding shares. Shares of common stock may be purchased
from time to time through open market and private purchases, as available. The
repurchase of shares is financed through use of cash and, if needed, the Bank
Credit Facility.
During the nine months ended September 30, 1998, the Company repurchased
1,706,600 shares at an aggregate cost of $55,154 which was financed with cash
from operations.
Note 5 - Value of Annuity Business Acquired
The value of annuity business acquired was recorded as an asset as a result
of the application of purchase accounting at the time the Company was acquired
in 1989 and that asset is being amortized over 20 years in proportion to
projected future gross profits of that business. Significant appreciation and
the resultant growth in annuity assets and the retention of the Company's
annuity business in recent years have favorably impacted projected future gross
profits for the business. Therefore, scheduled annual amortization of the
December 31, 1997 balance has been revised as follows: 1998, $2,494; 1999,
$2,494; 2000, $3,855; 2001, $3,732; and 2002, $3,523. Such amounts will be
evaluated at least annually and amortization schedules updated as indicated. At
September 30, 1998, the value of annuity business acquired, net of amortization,
was $31,681.
7
<PAGE>
Note 6 - Income Taxes
The Internal Revenue Service (the "IRS") regularly audits the Company's
federal income tax returns and is currently conducting an audit of the Company's
1994 and 1995 tax returns. As a result of this audit, certain tax benefits which
the Company has realized in the past will not be available to the Company after
1998. In addition, in the course of the current audit, the IRS is taking the
position thus far that it is not bound by certain documented understandings
contained in the Revenue Agent's Reports (the "RARs") pertaining to the audits
of the Company's 1989 through 1993 tax returns. The Company is vigorously
contesting the IRS' position and believes the IRS should honor the
understandings documented in the RARs. The Company's tax advisors, KPMG Peat
Marwick LLP, concur with the Company's interpretation of the RARs. The outcome
of this matter is uncertain. Therefore, the Company has not accrued a liability
in its financial statements with regard to this matter. The maximum amount of
additional taxes, with respect to the 1994 through 1998 tax years, if any, that
might be due as a result of the resolution of this matter would be less than 5%
of the Company's shareholders' equity as of June 30, 1998. Such additional
taxes, if any, would increase the Company's effective corporate tax rate only in
the year of payment of such taxes.
Note 7 - Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income. Comprehensive income represents the change in
shareholders' equity during a reporting period from transactions and other
events and circumstances from non-shareholder sources. For the Company,
comprehensive income is equal to net income plus the change in net unrealized
gains and losses on fixed maturities and equity securities for the period as
shown in the Statement of Changes in Shareholders' Equity in prior periods. The
adoption of SFAS No. 130 resulted in revised and additional disclosures but had
no effect on the financial position, results of operations, or liquidity of the
Company.
8
<PAGE>
Note 8 - Reinsurance
The Company recognizes the cost of reinsurance premiums over the contract
periods for such premiums in proportion to the insurance protection provided.
Amounts recoverable from reinsurers for unpaid claims and claim settlement
expenses, including estimated amounts for unsettled claims, claims incurred but
not reported and policy benefits, are estimated in a manner consistent with the
insurance liability associated with the policy. The effect of reinsurance on
premiums written; premiums earned; and benefits, claims and settlement expenses
were as follows:
<TABLE>
<CAPTION>
Ceded to Assumed
Gross Other from State
Amount Companies Facilities Net
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Three months ended
September 30, 1998
------------------------
Premiums written........ $212,259 $ 7,446 $ 4,873 $209,686
Premiums earned......... 147,150 7,068 4,454 144,536
Benefits, claims and
settlement expenses... 104,477 12,244 4,330 96,563
Three months ended
September 30, 1997
------------------------
Premiums written........ $195,463 $ 6,429 $ (123) $188,911
Premiums earned......... 136,904 6,035 4,209 135,078
Benefits, claims and
settlement expenses... 94,065 7,961 3,821 89,925
Nine months ended
September 30, 1998
------------------------
Premiums written........ $622,946 $19,903 $13,662 $616,705
Premiums earned......... 435,145 18,864 12,813 429,094
Benefits, claims and
settlement expenses... 321,819 31,251 10,740 301,308
Nine months ended
September 30, 1997
------------------------
Premiums written........ $572,842 $17,390 $ 8,382 $563,834
Premiums earned......... 402,404 16,011 15,992 402,385
Benefits, claims and
settlement expenses... 280,178 25,169 16,705 271,714
</TABLE>
9
<PAGE>
Note 8 - Reinsurance-(Continued)
The Company maintains an excess and catastrophe treaty reinsurance program
for its property and casualty subsidiaries. The Company reinsures 95% of
catastrophe losses above a retention of $7.5 million up to $80 million for each
catastrophe in 1998. This program is augmented by a $100 million equity put that
provides an option to sell shares of the Company's convertible preferred stock
with a floating rate dividend at a pre-negotiated price in the event losses from
catastrophes, individually or in the aggregate during a calendar year, exceed
the catastrophe reinsurance program coverage limit. Before tax benefits, the
equity put provides a source of capital for up to $154 million of catastrophe
losses above the reinsurance coverage limit. The fee for the equity put has been
charged directly to additional paid-in capital. For liability coverages,
including the educator professional liability policy, the Company reinsures each
loss above a retention of $0.5 million up to $20 million. The Company also
reinsures each property loss above a retention of $0.5 million up to $1.5
million.
Note 9 - Segment Information
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 specifies
the presentation and disclosure of operating segment information reported in the
annual and interim reports issued to shareholders and requires that reported
segment information be consistent with what the Company's management uses to
make operating decisions and assess performance. The adoption of SFAS No. 131
had no effect on the financial position, results of operations, or liquidity of
the Company. Adoption of SFAS No. 131 resulted in no changes in the way the
Company has reported its segment results with the exception of realized
investment gains and losses which are managed in the aggregate and accordingly
have been reclassified to the Corporate and Other segment. Segment information
for prior periods has been restated to conform to this presentation.
The Company's operations include the following operating segments: property
and casualty, annuity and life insurance. The property and casualty insurance
segment includes primarily personal lines automobile and homeowners products.
The annuity segment includes primarily fixed and variable tax-qualified annuity
products. The life insurance segment includes primarily interest-sensitive life
and traditional life products.
10
<PAGE>
Note 9 - Segment Information-(Continued)
Summarized financial information for these segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues
Property and casualty........... $129,254 $121,246 $382,515 $ 363,396
Annuity......................... 30,764 31,538 92,731 94,042
Life............................ 32,554 31,590 98,433 93,673
Corporate and other, including
realized investment gains..... 4,264 1,836 14,290 4,312
Intersegment eliminations....... (272) (276) (818) (829)
-------- -------- -------- ----------
Total..................... $196,564 $185,934 $587,151 $ 554,594
======== ======== ======== ==========
Net income
Operating income
Property and casualty......... $ 15,401 $ 13,967 $ 35,767 $ 42,957
Annuity....................... 5,886 5,137 16,950 13,923
Life.......................... 3,410 3,544 8,944 9,412
Corporate and other,
including interest expense.. (2,524) (2,202) (7,460) (6,619)
-------- -------- -------- ----------
Total operating income.... 22,173 20,446 54,201 59,673
Realized investment gains,
after tax..................... 2,760 1,031 8,839 2,100
Discontinued operations:
Loss on discontinuation....... - (3,481) - (3,481)
-------- -------- -------- ----------
Total..................... $ 24,933 $ 17,996 $ 63,040 $ 58,292
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Property and casualty........... $ 754,804 $ 742,487
Annuity......................... 2,608,594 2,531,309
Life............................ 851,231 777,488
Corporate and other............. 94,472 125,624
Intersegment eliminations....... (28,700) (44,996)
---------- ----------
Total..................... $4,280,401 $4,131,912
========== ==========
</TABLE>
Revenues include insurance premiums and contract charges earned, net
investment income and realized investment gains and losses. Operating income is
equal to income from continuing operations before realized investment gains,
after tax.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions)
Forward-looking Information
Statements made in the following discussion that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements due to, among other risks and uncertainties inherent
in the Company's business, the following important factors:
. Changes in the composition of the Company's assets and liabilities through
acquisitions or divestitures.
. Prevailing interest rate levels, including the impact of interest rates on
(i) unrealized gains and losses on the Company's investment portfolio and
the related after-tax effect on the Company's shareholders' equity and
total capital and (ii) the book yield of the Company's investment
portfolio.
. The impact of fluctuations in the capital markets on the Company's ability
to refinance outstanding indebtedness or repurchase shares of the Company's
outstanding common stock.
. The frequency and severity of catastrophes such as hurricanes, earthquakes
and storms, and the ability of the Company to maintain a favorable
catastrophe reinsurance program.
. Future property and casualty loss experience and its impact on estimated
claims and claim adjustment expenses for losses occurring in prior years.
. The Company's ability to develop and expand its agency force and its direct
product distribution systems, as well as the Company's ability to maintain
and secure product sponsorships by local, state and national education
associations.
. The competitive impact of new entrants such as mutual funds and banks into
the tax deferred annuity products markets, and the Company's ability to
profitably expand its property and casualty business in highly competitive
environments.
. Changes in insurance regulations, including (i) those effecting the ability
of the Company's insurance subsidiaries to distribute cash to the holding
company and (ii) those impacting the Company's ability to profitably write
property and casualty insurance policies in one or more states.
. Changes in federal income tax laws and changes resulting from federal tax
audits effecting corporate tax rates or taxable income, and regulations
changing the relative tax advantages of the Company's life and annuity
products to customers.
. The Company's ability to maintain favorable claims-paying ability ratings.
. Adverse changes in policyholder mortality and morbidity rates.
12
<PAGE>
Nine Months Ended September 30, 1998 Compared With Nine Months Ended September
30, 1997
The combined results of the last four quarters represent a solid 18% return
on equity. Results could have been even better but for a series of severe storms
during the second quarter that produced a record level of catastrophe claims for
that quarter for the property-casualty insurance industry and for Horace Mann.
Insurance Premiums and Contract Charges
Insurance Premiums Written and Contract Deposits
<TABLE>
<CAPTION>
Nine Months Ended Increase (Decrease)
September 30, from Prior Year
----------------- -------------------
1998 1997 Percent Amount
-------- ------- ---------- -------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary).............. $345.3 $321.1 7.5% $24.2
Annuity deposits........... 167.3 143.9 16.3% 23.4
Life insurance............. 83.9 81.9 2.4% 2.0
------ ------ -----
Subtotal - core lines.. 596.5 546.9 9.1% 49.6
Involuntary and other
property & casualty...... 20.2 16.9 19.5% 3.3
------ ------ -----
Total.................. $616.7 $563.8 9.4% $52.9
====== ====== =====
</TABLE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Nine Months Ended Increase (Decrease)
September 30, from Prior Year
----------------- -------------------
1998 1997 Percent Amount
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary).............. $335.4 $312.1 7.5% $23.3
Annuity.................... 11.5 8.9 29.2% 2.6
Life....................... 64.4 61.9 4.0% 2.5
------ ------ -----
Subtotal - core lines.. 411.3 382.9 7.4% 28.4
Involuntary and other
property & casualty...... 17.8 19.5 -8.7% (1.7)
------ ------ -----
Total.................. $429.1 $402.4 6.6% $26.7
====== ====== =====
</TABLE>
Insurance premiums written and contract deposit growth of 9.4% was
principally driven by higher agent productivity and the continuing growth in our
agent force. Bolstering the productivity gains, the number of experienced agents
was 3.9% higher than last September 30. In total, we ended the quarter with
1,059 exclusive full-time agents compared to 1,035 agents 12 months earlier.
The growth in new annuity deposits of 16.3% included a 28.8% increase in new
deposits to variable mutual fund annuities and represented the 13th consecutive
quarter of double-digit growth. Variable annuity accumulated deposits were $1
billion, $63 million more than a year ago, a 6.7% increase. The number of
annuity contracts in force increased 7.3%, or 8,000 contracts,
13
<PAGE>
compared to last September 30. During the first quarter, we introduced new IRA
annuities in response to recent tax legislation. While the 403(b) annuity
remains a better alternative for most educators, initial sales of these IRA
annuities generated 2.9 percentage points of the 16.3% growth in new annuity
deposits. The new IRA retirement options have created heightened customer
interest and an excellent opportunity for agents to meet with both potential and
existing customers. Beginning in March 1997, three additional mutual funds - a
small cap fund, an international equity fund, and a socially responsible fund -
were made available to annuity customers. At September 30, 1998, there were
nearly $60 million of customer deposits in these three new funds.
Voluntary automobile and home insurance premium growth was 7.5% for the
first nine months of the year. Automobile insurance premium increased 6.8%, or
$17.2 million, compared to last year, and home insurance premium increased
10.1%, or $7.0 million. Approximately half of the property and casualty increase
resulted from unit growth of 3.7% bringing quarter end policies in force to
859,000. The number of property and casualty policies in force has shown steady
growth for 12 consecutive quarters. The Company's average annual premium per
policy for both automobile and home insurance increased approximately 4%
compared to a year earlier. For home insurance, the Company's average effective
premium per policy increased 7% compared to the first nine months of 1997
including the impact of increased deductibles and reduced coverage in coastal
areas.
Life premium growth was 2.4% for the first nine months. This growth included
new business from term life products introduced early in 1997.
Retention of business continues to be strong in each of our segments. Over
the last 12 months based on policies in force, the property and casualty
retention rate was 89%, life insurance 95% and annuity 94%. The life retention
rate was equal to last year, while annuity and property and casualty were 0.5
and 0.7 percentage points, respectively, less than a year ago. The annuity
decline was due to retention of 92% on a large block of older contracts that
attained a no-penalty surrender option during the last half of 1997. Property
and casualty retention is less than a year ago influenced by premium rate
increases implemented during the past 12 months.
Net Investment Income
Investment income of $144.5 million for the nine months decreased 3.0%, or
$4.5 million, compared to last year due primarily to a decrease in the
investment portfolio. Average investments (excluding the securities lending
collateral) decreased 2.0% over the past 12 months reflecting the utilization of
capital for the share repurchase program and customers' preference for variable
as opposed to fixed annuity contracts. Approximately $3 million of the
investment income decrease was offset by a decline in interest credited to fixed
annuity deposits, moderating the effect on operating earnings. Excluding the
effect of the share repurchase program, net investment income would have been
$151.1 million, a slight increase compared to the first nine months of 1997. The
pretax yield on average investments was 7.3% (4.8% after tax) for the first nine
months of 1998 compared to a pretax yield of 7.4% (4.9% after tax) last year.
14
<PAGE>
Realized Investment Gains and Losses
The higher level of realized gains in 1998 represents an increase in fixed
maturity security calls and tenders in the current low interest rate
environment.
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Nine Months Ended Increase (Decrease)
September 30, from Prior Year
------------------- ------------------
1998 1997 Percent Amount
--------- -------- ------- ------
<S> <C> <C> <C> <C>
Property and casualty.... $269.2 $243.3 10.6% $25.9
Life..................... 32.1 28.4 13.0% 3.7
------ ------ -----
Total.................. $301.3 $271.7 10.9% $29.6
====== ====== =====
Property and casualty
statutory loss ratio:
Before catastrophes.. 69.0% 71.5% -2.5%
After catastrophes... 76.3% 73.4% 2.9%
</TABLE>
Improvements in non-weather related frequency and severity of claims were
reflected in a lower property and casualty loss ratio before catastrophes
despite a decrease in the favorable development of claims occurring in prior
years of $22.0 million in 1998 compared to $39.2 million in 1997.
Severe weather-related losses in the first nine months of 1998 more than
offset these underwriting improvements. A series of severe storms struck the
Northern Plains, Upper Midwest, Southeast and Northeast during the second
quarter of 1998, with Minnesota being the hardest hit state, resulting in a
record level of weather-related catastrophe claims for the property-casualty
insurance industry and for the Company. Catastrophe losses in Minnesota during
this period were the worst in that state's history for the industry as well as
the Company.
The increase in life benefits reflected higher individual life mortality
experience compared to the first nine months of 1997.
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Nine Months Ended Increase (Decrease)
September 30, from Prior Year
------------------ -------------------
1998 1997 Percent Amount
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Annuity................. $54.4 $57.7 -5.7% $(3.3)
Life.................... 17.0 15.4 10.4% 1.6
----- ----- -----
Total................. $71.4 $73.1 -2.3% $(1.7)
===== ===== =====
</TABLE>
15
<PAGE>
Interest credited to fixed annuity contracts decreased as average
accumulated deposits decreased 2.5% over the 12 months ended September 30, 1998.
The fixed annuity average annual interest rate credited was 5.5% in 1998,
compared to a rate of 5.6% last year. Life insurance interest credited increased
as a result of continued growth in the interest-sensitive whole life insurance
reserves.
Policy Acquisition and Operating Expenses
Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For 1998, policy acquisition and operating expenses
increased $4.8 million, or 4.4%, compared to last year. The property and
casualty expense ratio, one of the best in the industry, was 18.9% for the nine
months ended September 30, 1998, compared to 19.3% last year.
At the beginning of 1998, the Company adopted the accounting treatment
required by the American Institute of Certified Public Accountants' Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." It is anticipated that adoption of this statement
will initially decrease the Company's operating expenses by approximately $2.5
million before income taxes for 1998 as costs incurred to develop internal-use
software are capitalized and depreciated over their expected useful lives. For
the first nine months, capitalized costs were $1.7 million before income taxes,
approximately $0.02 per share.
Income Tax Expense
The effective income tax rate was 27.5% for the first nine months of 1998
compared to 26.9% for the same period last year. Income from investments in tax-
advantaged securities reduced the effective income tax rate 4 and 3 percentage
points in 1998 and 1997, respectively. Acquisition related tax benefits that are
not expected to recur in future years, as explained below, reduced the effective
rate 6 percentage points in the nine months ended September 30, 1998 and 1997.
The Company filed a Current Report on Form 8-K dated October 29, 1998 that
read as follows:
The Internal Revenue Service (the "IRS") regularly audits the
Company's federal income tax returns and is currently conducting
an audit of the Company's 1994 and 1995 tax returns. As a result
of this audit, certain tax benefits which the Company has
realized in the past will not be available to the Company after
1998. Therefore, the Company's effective corporate tax rate is
expected to be approximately 33% in 1999 and beyond (an increase
from approximately 27% in 1998), assuming that the Company's
level of tax-exempt investment income remains about the same.
In addition, in the course of the current audit, the IRS is
taking the position thus far that it is not bound by certain
documented understandings contained in the Revenue Agent's
Reports (the "RARs") pertaining to the audits of the Company's
1989 through 1993 tax returns. The Company is vigorously
contesting the IRS' position and believes the IRS should honor
the understandings documented in the RARs. The Company's tax
advisors, KPMG Peat Marwick LLP, concur with the
16
<PAGE>
Company's interpretation of the RARs. The outcome of this
matter is uncertain. Therefore, the Company has not accrued
a liability in its financial statements with regard to this
matter. The maximum amount of additional taxes, with respect
to the 1994 through 1998 tax years, if any, that might be
due as a result of the resolution of this matter would be
less than 5% of the Company's shareholders' equity as of
June 30, 1998. Such additional taxes, if any, would increase
the Company's effective corporate tax rate only in the year
of payment of such taxes.
Operating Income
For the first nine months of 1998 excluding the impact of catastrophes,
operating income (income from continuing operations before realized investment
gains and losses) increased 11.1%. The Company's after-tax catastrophe losses
through the first nine months exceeded the previous high for a full year -- and
came on the heels of a year in which our catastrophe losses were at near-record
lows. Current year earnings and investment income were also reduced compared to
last year due to the utilization of capital in the Company's share repurchase
programs. Operating income by segment was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Increase (Decrease)
September 30, from Prior Year
------------------ -------------------
1998 1997 Percent Amount
------- -------- ------- -------
<S> <C> <C> <C> <C>
Property & casualty:
Before catastrophe losses......... $ 52.4 $ 47.1 11.3% $ 5.3
Catastrophe losses, after tax..... (16.7) (4.1) -307.3% (12.6)
------ ------ ------
35.7 43.0 -17.0% (7.3)
Annuity............................ 17.1 13.9 23.0% 3.2
Life............................... 8.9 9.4 -5.3% (0.5)
Corporate and other................ (2.9) (2.0) (0.9)
Interest expense................... (4.6) (4.6) -
------ ------ ------
Total............................ $ 54.2 $ 59.7 -9.2% $ (5.5)
====== ====== ======
Total before catastrophe losses.. $ 70.9 $ 63.8 11.1% $ 7.1
====== ====== ======
Property and casualty
statutory combined ratio:
Before catastrophes.............. 87.8% 90.8% -3.0%
After catastrophes............... 95.1% 92.7% 2.4%
</TABLE>
Property and casualty segment operating income was primarily impacted by
the significant increase in weather-related catastrophe losses. The property and
casualty combined loss and expense ratio for 1998 reflected the higher weather-
related claims partially offset by an improvement in underwriting results.
Property and casualty segment operating income was also adversely affected by a
reduction in investment income in the first nine months of 1998 as compared to
the same period in 1997 which resulted from utilization of capital of the
Company in its share repurchase program. Despite higher catastrophe losses,
automobile results for the nine months produced a combined ratio of 87.7%, 3.3
percentage points better than last year. Automobile current year claim severity
is less than last year and rate increases are keeping pace with loss costs. Due
to unprecedented levels of weather-related losses, the property combined ratio
of 123.7% was 28.6 percentage points higher than last year. In the first nine
months of last year, we experienced very little weather-related losses as
unusually mild weather prevailed across the country.
17
<PAGE>
Strong growth in variable annuity deposits produced excellent annuity
earnings which increased compared to last year. The interest margin on fixed
annuity deposits was comparable to a year ago, while fees collected on variable
annuity business have grown by 29.2% compared to the first nine months of 1997
as a result of growth in the variable annuity business. Annuity segment profit
continues to shift from the interest margin on fixed annuity accumulations to
fees on variable mutual fund deposits. Variable annuity deposits were $1.0
billion at September 30, 1998.
Net Income
Net income, which includes realized investment gains and discontinued
operations, for the first nine months of 1998 reflected an 8.1% increase in net
income and a 15.3% increase in net income per diluted share compared to 1997.
The Company's share repurchase program reduced net income by $4.3 million for
1998 but resulted in an increase of $0.03 in earnings per share for the period.
Net income for the three and nine months ended September 30, 1997 included
an after tax charge of $3.5 million, or $0.07 per share, for anticipated
additional losses during the remainder of the phase-out period as a result of
accelerating the timetable for the Company's withdrawal from the group medical
insurance business and higher-than-expected claims. As of August 31, 1998, all
of the group medical business was terminated.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At September 30, 1998, fixed income securities
represented 95.3% of investments excluding the securities lending collateral. Of
the fixed income investment portfolio, 93.6% was investment grade and 99.7% was
publicly traded. The average quality of the total fixed income portfolio was A+
at September 30, 1998.
The duration of the investment portfolio is managed to provide cash flow to
satisfy policyholder liabilities as they become due. The average option adjusted
duration of total investments was 4.2 years at September 30, 1998 and 4.3 years
at December 31, 1997. The Company has included in its annuity products
substantial surrender penalties to reduce the likelihood of unexpected increases
in policy or contract surrenders. All annuities issued since 1982 and
approximately 75% of all outstanding fixed annuity accumulated cash values are
subject in most cases to substantial early withdrawal penalties.
Cash Flow
The short-term liquidity requirements of the Company, within a 12-month
operating cycle, are for the timely payment of claims and benefits to
policyholders, operating expenses, interest payments and federal income taxes.
Cash flow in excess of these amounts has been used to fund business growth,
retire short-term debt, pay dividends to shareholders and repurchase shares of
the Company's common stock. Long-term liquidity requirements, beyond one year,
are principally for the payment of future insurance policy claims and benefits
and retirement of long-term notes.
18
<PAGE>
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal
lines segment of the property and casualty and life insurance industries through
its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium
and investment income, generally well in excess of their immediate needs for
policy obligations, operating expenses and other cash requirements. Net cash
provided by operating activities increased compared to the first nine months of
1997 primarily due to a decrease in federal income tax payments. In both years,
cash provided by operating activities primarily reflected net cash generated by
the insurance subsidiaries.
Payment of principal and interest on debt, fees related to the catastrophe-
linked equity put option, dividends to shareholders and parent company operating
expenses, as well as the share repurchase program, are dependent upon the
ability of the insurance subsidiaries to pay cash dividends or make other cash
payments to HMEC, including tax payments pursuant to tax sharing agreements. The
insurance subsidiaries are subject to various regulatory restrictions which
limit the amount of annual dividends or other distributions, including loans or
cash advances, available to HMEC without prior approval of the insurance
regulatory authorities. Dividends which may be paid by the insurance
subsidiaries to HMEC during 1998 without prior approval are approximately $82
million. Although regulatory restrictions exist, dividend availability from
subsidiaries has been, and is expected to be, more than adequate for HMEC's
capital needs.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed
maturity securities to meet future contractual obligations to policyholders. In
conjunction with its management of liquidity and other asset/liability
management objectives, the Company, from time to time, will sell fixed maturity
securities prior to maturity and reinvest the proceeds in other investments with
different interest rates, maturities or credit characteristics. Accordingly, the
Company has classified the entire fixed maturities portfolio as available for
sale.
Financing Activities
Financing activities include primarily repurchases of the Company's common
stock, payment of dividends, the receipt and withdrawal of funds by annuity
policyholders and borrowings and repayments under the Company's debt facilities.
Fees related to the catastrophe-linked equity put which augments its reinsurance
program were charged directly to additional paid-in capital.
For the first nine months of 1998, receipts from annuity contracts were
greater than contract maturities and withdrawals and net transfers to variable
annuity assets decreased compared to last year. Life policy account balances
were equal to last December.
Through September, the Company repurchased 1,706,600 shares of its common
stock at a cost of $55.2 million, or an average cost of $32.32 per share. $8
million of those purchases completed the $100 million share repurchase
authorization announced in 1997 and the remainder was acquired under an
additional $100 million share repurchase authorization announced in January
1998. Since early 1997, 5,427,200 shares, or 11% of the shares outstanding on
December 31, 1996, have been repurchased at a cost of $146.9 million, an average
cost of $27.08 per share. The repurchase of these shares was financed with cash
from operations. As of September 30, 1998, $53 million remained authorized for
share repurchases. During the nine
19
<PAGE>
months ended September 30, 1998, the Company received $2.2 million related to
the exercise of common stock options including tax benefits. During the second
quarter of 1998, the Company also repurchased 60% of its outstanding common
stock warrants for $5.0 million.
Capital Resources
Historically, the Company's insurance subsidiaries have generated capital in
excess of what has been needed to fund business growth. These excess amounts
have been paid to HMEC through dividends. HMEC has then utilized these dividends
and its access to the capital markets to retire long-term debt, repurchase
shares of its common stock, increase and pay dividends to its shareholders and
for other corporate purposes. Management anticipates that the Company's sources
of capital will continue to generate capital in excess of the needs for business
growth, debt interest payments and shareholder dividends.
The total capital of the Company was $653.8 million at September 30, 1998,
including $99.6 million of long-term debt and $45.0 million of short-term debt.
Total debt represented 22.1% of capital at the end of September, within the
Company's target operating range of 20% to 25%.
Shareholders' equity was $509.0 million at September 30, 1998, including an
unrealized gain in the Company's investment portfolio of $71.7 million after
taxes and the related impact on deferred policy acquisition costs associated
with annuity and interest-sensitive life policies. In December 1997, the
Company's common stock was split two-for-one. The market value of the Company's
common stock and the market value per share were $1,280.0 million and $30,
respectively, at September 30, 1998. Book value per share was $11.93 at
September 30, 1998, $10.25 excluding investment market value adjustments.
In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. Interest on the Senior Notes is payable semi-annually. The
Senior Notes are redeemable in whole or in part, at any time at the Company's
option. The Senior Notes have an investment grade rating from Standard & Poor's
Corporation ("S&P") (A-), Duff & Phelps Credit Rating Co. ("Duff & Phelps") (A),
and Moody's Investors Service, Inc. ("Moody's") (Baa2) and are traded on the New
York Stock Exchange (HMN 6 5/8).
As of September 30, 1998 and December 31, 1997, the Company had short-term
debt of $45.0 million and $42.0 million, respectively, outstanding under the
Bank Credit Facility. The Bank Credit Facility allows unsecured borrowings of up
to $65.0 million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of
America National Trust and Savings Association reference rates. The rate on the
borrowings under the Bank Credit Facility was Interbank Offering Rate plus 0.3%,
or 5.6%, as of September 30, 1998. The commitment for the Bank Credit Facility
terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1998 was 13.2x compared to 12.9x for the same period in 1997.
Total shareholder dividends were $10.4 million for the first nine months of
1998. In February 1997, the Board authorized the fifth consecutive annual
increase in the Company's dividend since the Company's initial public offering
in 1991 and increased the quarterly dividend by 22.7% to $0.0675 per share. In
November 1997, in conjunction with the Company's two-for-one stock split, the
Board of Directors authorized the sixth increase to the Company's quarterly
20
<PAGE>
dividend, the second increase in 1997. The regular quarterly dividend increased
by 19% to $0.08 per share.
The Company's catastrophe reinsurance program is augmented by a $100 million
equity put. This equity put provides an option to sell shares of the Company's
convertible preferred stock with a floating rate dividend at a pre-negotiated
price in the event losses from catastrophes, individually or in the aggregate
during a calendar year, exceed $80 million, the 1998 coverage limit of the
reinsurance program.
Year 2000
In 1990, the Company established programming standards to address the year
2000 for new computer systems. By early 1995, the Company had developed a
comprehensive plan to address the issue and began converting its existing
computer systems to be year 2000 compliant. At September 30, 1998, nearly 85% of
all business applications, representing 70% of all of the Company's program
code, were year 2000 compliant. Management anticipates completing conversion of
the remaining internal business applications by the end of 1998. Vendors that
have not already completed computer systems conversions have indicated their
plans to become year 2000 compliant by the end of 1998. During 1999, additional
testing of all systems and final reviews of individual personal computer
applications will be completed.
Because of the degree to which systems conversion has already been
completed, the worst-case scenario would be limited to a failure to conclude the
remaining conversion plans (i.e., the 15% of unconverted business applications
and vendor conversions that fail to achieve compliance) by Year 2000. In the
event of this worst-case scenario, the resulting impact would be to limit the
Company's abilities to process business transactions and could have a material
effect on it's business, results of operations and financial condition.
If the remaining system conversion plans are not completed by the end of
1998, the Company will prepare contingency plans to address possible worst-case
scenarios. In addition, non-system contingency plans will also be developed
during 1999 for utility suppliers and other third party service providers. All
contingency plans will include efforts to minimize the likelihood of the
occurrence of worst-case scenarios as well as action plans to be invoked which
will encompass back-up processes that utilize alternative suppliers and third
party service providers and/or do not rely on computer systems, where
appropriate.
Costs for this compliance project represent the allocation of existing
internal information technology resources to address year 2000 compliance and
are not expected to be incremental costs to the Company. The total cost of the
compliance project is estimated to be $6 million, before tax benefits, and is
being funded through operating cash flows. The Company is expensing all costs
associated with these system changes and through September 30, 1998 has expensed
$4.8 million before tax benefits, including a cost of $1.5 million for the nine
months ended September 30, 1998.
Recent Accounting Changes
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which will be implemented in
the Company's December 31,
21
<PAGE>
1998 financial statements. SFAS No. 132 will not affect employee benefits
expense or net income. SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits and requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer as useful as they were when SFAS No. 87, 88 and 106 were issued.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in 2000.
This statement does not apply to the Company because it does not have any
derivatives or hedges, as defined within the context of SFAS No. 133.
22
<PAGE>
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
Exhibit
No. Description
------- -----------
(a) The following items are filed as Exhibits.
(10) Material contracts. Management contracts and compensatory
plans are indicated by an asterisk (*).
10.1* Horace Mann Educators Corporation 1991 Stock
Incentive Plan, incorporated by reference to Exhibit
10.4 to HMEC's Annual Report on Form 10-K for the
year ended December 31, 1991, filed with the
Securities and Exchange Commission on March 27,
1992.
10.1(a)* Specimen Employee Stock Option Agreement under the
Horace Mann Educators Corporation 1991 Stock
Incentive Plan, incorporated by reference to Exhibit
10.5(a) to HMEC's Annual Report on Form 10-K for the
year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30,
1998.
10.1(b)* Specimen Director Stock Option Agreement under the
Horace Mann Educators Corporation 1991 Stock
Incentive Plan.
10.1(c)* Amendment to Horace Mann Educators Corporation 1991
Stock Incentive Plan, dated September 11, 1996,
incorporated by reference to Exhibit 10.2(c) to
HMEC's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, filed with the Securities
and Exchange Commission on November 14, 1996.
10.1(d)* Amendment to Horace Mann Educators Corporation 1991
Stock Incentive Plan, dated September 18, 1998.
10.2* Amended and restated agreement entered by and
between HMEC and Paul J. Kardos as of October 6,
1998.
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the third
quarter of 1998.
On October 29, 1998, HMEC filed with the Securities and Exchange
Commission a Current Report on Form 8-K dated October 29, 1998
regarding the effects of a routine Internal Revenue Service audit
of the Company's 1994 and 1995 federal income tax returns on the
Company's effective corporate tax rate in 1999 and beyond. The
complete text of the Form 8-K is included in this Form 10-Q in
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Nine Months Ended September 30, 1998
Compared With Nine Months Ended September 30, 1997 --Income Tax
Expense.
23
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
Date November 12, 1998 /s/ Paul J. Kardos
---------------------------- ----------------------------
Paul J. Kardos, Chairman of the Board,
President and Chief Executive Officer
Date November 12, 1998 /s/ Larry K. Becker
---------------------------- ----------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer
24
<PAGE>
Exhibit 10.1(b)
HORACE MANN EDUCATORS CORPORATION
STOCK OPTION AGREEMENT
(1991 Stock Incentive Plan)
(DIRECTOR VERSION)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between Horace Mann Educators
Corporation, a Delaware corporation (the "Company"), and the person named below
as Director.
WHEREAS, the Company has offered shares of common stock, par value $.001
per share, of the Company (the "Common Stock") to the public;
WHEREAS, the Company wishes to give its Directors an opportunity to acquire
shares of the Common Stock and to provide an incentive for its Directors to join
or remain with the Company; and
WHEREAS, pursuant to the Company's 1991 Employee Stock Incentive Plan (the
"Plan"), the committee of the Board of Directors of the Company administering
the Plan (the "Committee") has approved the grant to Director of an option to
purchase shares of Common Stock, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereby agree as follows:
1. Grant of Option; Certain Terms and Conditions. The Company hereby
grants to Director, and Director hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which option
shall expire at 5:00 o'clock p.m. (local time at the Company's principal
executive office) on the Expiration Date indicated below and shall be subject to
all of the terms and conditions set forth in this Agreement (the "Option"). The
Option shall be Vested as to all of the Option Shares immediately upon the Date
of Grant.
Director:
Date of Grant:
Number of
Option Shares:
Exercise Price
per Option Share:
Expiration Date:
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.
<PAGE>
2. Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, spin-off, extraordinary
distribution, with respect to the Common Stock, such substitution or adjustments
shall be made in the aggregate number of shares subject to other outstanding
Stock Options and Stock Appreciation Rights, and the number of shares subject to
other outstanding Awards granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion; provided, however, that
the number of shares subject to any Award shall always be a whole number.
3. Exercise. The Option shall be exercisable during Director's lifetime
only by Director or by his or her guardian or legal representative, and after
Director's death only by the person or entity entitled to do so under Director's
last will and testament or applicable intestate law, except as otherwise
provided for in this Agreement (see Section 6 Nontransferability.) The Option
may only be exercised by the delivery to the Company of a written notice of such
exercise, which notice shall specify the number of Option Shares to be purchased
(the "Purchased Shares") and the aggregate exercise Price for such shares (the
"Exercise Notice"), together with payment in full of such aggregate Exercise
Price in cash or by bank check payable to the Company; provided, however, that
payment of such aggregate Exercise Price may instead be made, in whole or in
part, by the delivery to the Company of a certificate or certificates
representing shares of Common Stock, duly endorsed and accompanied by a duly
executed stock power, which delivery effectively transfers to the Company good
and valid title to such shares, free and clear of any pledge, commitment, lien,
claim or other encumbrance (such shares to be valued on the basis of the
aggregate Fair Market Value thereof on the date of such exercise), provided that
the Company is not then prohibited from purchasing or acquiring such shares of
Common Stock.
4. Payment of Withholding Taxes. If the Company is obligated to withhold
an amount on account of any federal, state, or local tax imposed as a result of
the exercise of the option, including, without limitation, any federal, state or
other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then Director shall, concurrently with such exercise, pay such
amount to the Company in cash or by check payable to the Company, or by reducing
the number of shares of Common stock to be issued and delivered to Director upon
such exercise (such reduction to be valued on the basis of the aggregate Fair
Market Value (determined on the date of such exercise) of the additional shares
of Common Stock that would otherwise have been issued and delivered upon such
exercise), provided that the Company is not then prohibited from purchasing or
acquiring such additional shares of Common Stock.
5. Stock Exchange Requirements; Applicable Laws. All certificates for
shares of Common Stock or other securities delivered under this Agreement shall
be subject to such stock transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Commission, any stock exchange upon which the Common Stock is then listed and
any applicable Federal or state securities law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
6. Nontransferability. Neither the Option nor any interest therein may be
sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred
in any manner other than by will or the laws of descent and distribution. Any
attempted sale, assignment, conveyance, gift, pledge, or hypothecation or other
disposition of the Option, other than in accordance with the terms set forth
herein, shall be void and of no effect. Notwithstanding the foregoing, the
Option may be transferred to the spouse or lineal descendant of Director or to
the trustee of a trust for the primary benefit of a spouse or lineal descendent.
Such assignee shall be subject to all of the terms and provisions of the Plan
and of this Agreement.
-2-
<PAGE>
7. Plan. The Option is granted pursuant to the Plan, as in effect on the
Date of Grant, and is subject to all the terms and conditions of the Plan, as
the same may be amended from time to time, and the Plan's definitions are hereby
incorporated by reference herein; provided, however, that no such amendment
shall deprive Director, without his or her consent, of the Option or of any of
Director's rights under this Agreement. The interpretation and construction by
the Committee of the Plan, this Agreement, the Option and such rules and
regulations as may be adopted by the Committee for the purpose of administering
the Plan shall be final and binding upon Director. Until the Option shall
expire, terminate or be exercised in full, the Company shall, upon written
request therefor, send a copy of the Plan, in its then-current form, to Director
or any other person or entity then entitled to exercise the Option.
8. Stockholder Rights. No person or entity shall be entitled to vote,
receive dividends, or be deemed for any purpose the holder of any Options Shares
until the Option shall have been duly exercised to purchase such Option Shares
in accordance with the provisions of this Agreement.
9. Service. No provision of this Agreement or of the Option granted
hereunder shall (a) confer upon Director any right to continue in the service of
the Company or any of its subsidiaries or (b) confer upon Director any right to
participate in any employee welfare or benefit plan or other program of the
Company of any of its subsidiaries other than the Plan.
10. Governing Law. This Agreement and the Option granted hereunder shall
be governed by and construed and enforced in accordance with the laws of the
State of Delaware.
11. Investment Representation and Agreement. The Committee may require
Director to furnish to the Company, prior to the issuance of any shares upon the
exercise of all or any part of this option, an agreement (in such form as such
committee may specify) in which Director represents that the shares acquired by
him upon exercise are being acquired for investment and not with a view to the
sale or distribution thereof.
12. Entire Agreement. This Agreement, together with the Plan, constitutes
the entire obligation of the parties hereto with respect to the subject matter
hereof and shall supersede any prior expressions of intent or understanding with
respect to this transaction.
13. Amendment. Any amendment hereto shall be in writing and signed by the
parties hereto.
14. Waiver; Cumulative Rights. The failure or delay of either party to
require performance by the other party of any provision unless and until such
performance has been waived in writing. Each and every right hereunder is
cumulative and may be exercised in part or in whole from time to time.
15. Counterparts. This Agreement may be signed in two counterparts.
16. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company and Director have duly executed this
Agreement as of the Date of Grant.
HORACE MANN EDUCATORS CORPORATION
By
------------------------------------
Name: Paul J. Kardos
Title: Chairman of the Board,
President & Chief
Executive Officer
------------------------------------
Director
-4-
<PAGE>
Exhibit 10.1(d)
HORACE MANN EDUCATORS CORPORATION
1991 STOCK INCENTIVE PLAN
AMENDMENT 2
Effective 18 September 1998, the Horace Mann Educators Corporation 1991 Stock
Incentive Plan ("Plan") is amended in accordance with the terms and conditions
of the Plan as follows. Section 5(e) is restated in its entirety to read:
(e) Non-transferability of Options. No Stock Option shall be transferable
by the optionee other than by will or by the laws of descent and
distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee or by the guardian or legal
representative of the optionee, it being understood that the terms "holder"
and "optionee" include the guardian and legal representative of the
optionee named in the option agreement and any person to whom an option is
transferred by will or the laws of descent and distribution.
Notwithstanding the foregoing, a Stock Option which is granted to a
Director may be transferred to the spouse or lineal descendant of the
Director optionee or to the trustee of a trust for the primary benefit of a
spouse or lineal descendent. Such assignee shall be subject to all of the
terms and provisions of the Plan.
<PAGE>
Exhibit 10.2
Execution Copy
--------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
EMPLOYMENT AGREEMENT ("Agreement"), dated October 6, 1998, by and
between HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the
"Company"), and PAUL J. KARDOS, an individual residing at 709 Clipper Road,
Springfield, IL 62707 (the "Executive").
W I T N E S S E T H
--------------------
WHEREAS, the Executive, who has been serving as President and Chief
Executive Officer of the Company since 1979, wishes to continue to serve the
Company and the Company wishes to secure the services of the Executive under the
terms described below, and
WHEREAS, the Executive and the Company are parties to an Employment
Agreement dated as of August 1, 1996 which they hereby wish to amend and
restate.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained in this Agreement, the parties hereto agree as
follows:
1. Term of Employment. The Company hereby employs the Executive for
a term (the "Term") expiring on July 31, 2001. The obligations and covenants of
the parties hereunder shall be of no further force and effect as of the end of
the Term, except those obligations which shall survive this Agreement as set
forth in Section 11, and except for vested fringe benefits and compensation
earned by the Executive pursuant to Section 3 up to the termination date.
2. Duties of Executive. During the Term, the Executive shall perform
the duties of Chairman of the Board of Directors and Chief Executive Officer of
the Company. Subject to supervision by the Company's Board of Directors, the
Executive shall have overall charge of the business affairs of the Company, with
the duties, responsibilities and authorities normally associated with such
position. The Executive shall also serve as an officer and/or director of such
one or more affiliates and subsidiaries of the Company as the Company's Board of
Directors shall request, and shall be entitled to no additional remuneration for
such service. In addition to such duties, in anticipation of the Executive's
retirement from employment with the Company at the end of the Term, the
Executive will diligently assist the Board of Directors in searching for a
successor Chief Executive Officer of the Company and in managing an orderly
transition of leadership of the Company from the Executive to such successor.
During the Term, the Executive shall devote substantially all of his business
time and efforts to the business and affairs of the Company and will not engage
in any activity which interferes with the performance of his duties hereunder.
1
<PAGE>
3. Compensation.
3.1 Base Salary. In consideration of the Executive's service
hereunder, the Company shall pay to the Executive a base salary at an annual
rate of Four Hundred Ten Thousand Dollars ($410,000) (the "Base Salary"). The
Base Salary shall be payable in accordance with the standard policies of the
Company in existence from time to time, subject to any deductions required by
law.
3.2 Bonus. In addition to the Base Salary, the Executive shall
be entitled to a cash bonus (the "Bonus") within three months after the end of
each fiscal year of the Company, with the amount thereof at the discretion of
the Board of Directors and payable in accordance with the standard policies of
the Company in existence from time to time, subject to any deductions required
by law; provided, however, that (a) each such annual cash bonus shall not be
less than Four Hundred Thousand Dollars ($400,000) and (b) with regard to 2001,
a pro rated portion of such bonus, based on the portion of 2001 during which the
Executive is employed by the Company, shall be paid.
3.3 Additional Benefits. In addition to the compensation
explicitly provided for herein, the Executive shall be entitled to such fringe
benefits as are made available generally to the senior executives of the
Company, including participation in such pension, group life, disability, health
and other similar benefit or insurance programs as are now or hereafter made
available generally to such executives, including any "top hat" pension program
which the Company may adopt for some or all of its senior executives during the
Term. All benefits payable pursuant to this Section 3.3 are herein referred to
as the "Additional Benefits."
3.4 Expenses. The Executive shall be reimbursed by the Company
for all reasonable, out-of-pocket ordinary and necessary business expenses
incurred by the Executive for the purpose of and in connection with the
performance of the Executive's services hereunder. Such reimbursement shall be
made upon presentation of vouchers or other statements itemizing such expenses
in reasonable detail consistent with the Company's policies.
3.5 Vacation. The Executive shall be entitled to such amount
of paid vacation during each year as shall be afforded to the other senior
executives of the Company.
4. Termination.
4.1 Termination Without Cause.
(a) During the Term, the Company may terminate this
Agreement, without Cause, effective upon the occurrence of any of the following
events:
(i) thirty (30) days after written notice is delivered
to
2
<PAGE>
the Executive by the Company of the determination of the permanent disability of
the Executive, defined for purposes of this subparagraph (a) as incapacity of
the Executive to fulfill his normal duties and responsibilities hereunder for a
period of one hundred twenty (120) work days out of one hundred fifty (150)
consecutive work days by reason of physical or mental disability as determined
by a medical doctor selected by the Board of Directors of the Company and
acceptable to the Executive or his personal representative and confirmed in
writing by such doctor, which confirmation shall be submitted to the Board of
Directors of the Company and the Executive or his personal representative;
(ii) the death of the Executive; or
(iii) sixty (60) days after written notice of
termination is delivered to the Executive by the Company for any reason other
than pursuant to subsections (a) (i) or (a) (ii) of this Section or Section 4.3
hereof.
(b) The Executive may terminate this Agreement at any time
during the Term if there is a material adverse change or diminution in the
Executive's duties or responsibilities or if there is any other material breach
of this Agreement by the Company.
(c) Upon termination of this Agreement pursuant to this
Section 4.1, the obligations and covenants of the parties hereunder shall be of
no further force and effect, except those obligations which shall survive this
Agreement as set forth in Section 11 and except for the payment obligations of
the Company set forth in Section 4.2 below.
4.2 Payment Obligations of the Company upon Termination Without
Cause. The Company shall be obligated to the Executive as follows in the event
of any termination of this Agreement as set forth in Section 4.1:
(a) In the event of termination pursuant to Section 4.1(a)
(i) or (ii), the Executive or his estate shall be entitled to receive all
compensation and other benefits, including, without limitation, the Base Salary,
the Bonus and the Additional Benefits to which the Executive is entitled through
the first to occur of (i) the one-year anniversary of the date of such
termination or (ii) the date which would have been the last day of the Term, in
the absence of such termination.
(b) In the event of termination pursuant to Sections 4.1(a)
(iii) or 4.1(b), the Executive shall (i) promptly receive, in cash and without
discount, the aggregate amount of the Base Salary and the Bonus that he would
have been entitled to receive through the date which would have been the last
day of the Term, in the absence of such termination (the "Remaining Term"); and
(ii) receive the Additional Benefits to which the Executive is entitled through
the Remaining Term. In addition, the Executive shall, for purposes
3
<PAGE>
of all pension and related plans maintained by the Company, be treated as having
been employed by the Company through the Remaining Term.
4.3 Termination for Cause. During the Term, this Agreement may
be terminated for Cause effective upon receipt by the Executive of the Company's
written notice specifying a valid basis for termination of the Executive for
Cause. "Cause" shall mean:
(a) the Executive's criminal conviction for fraud,
embezzlement, misappropriation of assets or any other felony (excluding traffic
violations); or
(b) the continuance of willful and repeated failures by the
Executive to perform his obligations under this Agreement which have not been
cured by the Executive within thirty (30) days following receipt of written
notice from the Board of Directors of the Company specifying such failure and
the action required by the Executive to cure such breach of his obligations
hereunder.
Upon termination by the Company for Cause, the obligations
and covenants of the parties hereunder shall be of no further force and effect,
except those obligations which shall survive this Agreement as set forth in
Section 11, and except for vested fringe benefits and compensation earned by the
Executive pursuant to Section 3 up to the termination date.
5. Non-Competition; Confidentiality.
5.1 Non-Competition. At all times during the Term, and for a
period of (a) three (3) years following thereafter in the event of (i) a
termination governed by the provisions of Section 4.1(a)(i) or 4.3 hereof, (ii)
a voluntary termination by the Executive (other than a termination under Section
4.1(b) hereof) before the end of the Term or (iii) employment of the Executive
hereunder for the entire Term, the Executive shall not commit any of the
Prohibited Acts (as defined in Section 5.2 below).
5.2 Definitions. For purposes of this Agreement, "Products"
shall mean any products, as of the date the Executive's employment hereunder
terminates, in the product lines of companies owned by the Company on June 1,
1996 (the "Subsidiaries").
For purposes of this Agreement, "Direct Competitor" shall mean
any company which is or becomes a significant and direct competitor of any of
the Subsidiaries on or after the date of this Agreement.
For purposes of this Agreement, "Prohibited Acts" shall mean
owning, managing, operating, controlling or participating in the ownership,
management, operation or
4
<PAGE>
control of, or being connected as an officer, employee, partner,
director, agent or consultant of, or having any financial interest in, any
Direct Competitor.
5.3 De Minimis Stock Ownership. Notwithstanding any other
provision of this Section 5, ownership of five percent (5%) or less of any class
of voting securities of a company listed on a nationally recognized stock
exchange or for which prices are quoted on the National Association of
Securities Dealers Automated Quotation System shall not constitute a Prohibited
Act.
5.4 Confidentiality. The Executive agrees, at all times during
and after the Executive's employment hereunder, to hold in strictest confidence,
and not to disclose to any person, firm or corporation, without the express
written authorization of the Board of Directors of the Company, any trade
secrets, any financial information or any secret or confidential information
relating to the products, marketing programs, customers, sales or business of
the Company, except as such disclosure or use may be required in connection with
his work for the Company or is published or otherwise readily available to the
public or becomes known to the public other than by breach by him of this
Agreement.
5.5 Remedies. It is recognized that damages in the event of
breach by the Executive of this Section 5 would be difficult, if not impossible,
to ascertain, and it is therefore agreed that the Company, in addition to and
without limiting any other remedy or right it may have, shall have the right to
an injunction or other equitable relief, in any court of competent jurisdiction,
enjoining any such breach, and the Executive hereby waives any and all defenses
he may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this right
shall not preclude or impair any other rights and remedies at law or in equity
that the Company may have.
6. Indemnification. The Company will indemnify the Executive
against all costs, charges and expenses (including reasonable attorneys' fees)
incurred or sustained by him in connection with any claim, action, suit or
proceeding to which he may be made a party by reason of his being an officer,
director or employee of the Company or any of its subsidiaries or affiliates,
provided the Executive acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and with
respect to any criminal action or proceeding had no reasonable cause to believe
his conduct was illegal. In addition, the Company shall indemnify the Executive
for all costs, including reasonable attorneys' fees, incurred by the Executive
in connection with any successful action by the Executive to enforce or
otherwise determine or insure compliance by the Company with the terms of this
Agreement.
7. Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement (a "Payment"), would be
5
<PAGE>
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended, or any interest or penalties with respect to such excise
tax (such excise tax, together with any such interest and penalties,
collectively, the "Excise Tax"), then the Executive shall be entitled to receive
an additional payment (the "Excise Tax Payment") in an amount equal to the
Excise Tax imposed upon the Payments. For purposes of calculating the Excise Tax
Payment due hereunder, Payments shall not include such Excise Tax Payment.
8. Assignabilitv; Binding Nature. This Agreement shall inure to the
benefit of the Company and the Executive and their respective successors, heirs
(in the case of the Executive) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that any such rights or obligations may be assigned or transferred
pursuant to a merger or consolidation in which the Company is not the continuing
entity, or the sale or liquidation of all or substantially all of the assets of
the Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law.
9. Notices. Any notice hereunder shall be properly given if by
personal delivery or registered or certified mail, return receipt requested, as
follows:
If to Executive, at the address first above written,
with a copy to:
Edward F. Michalak, Esq.
McDermott, Will & Emery
227 W. Monroe Street
Chicago, Illinois 60606
If to the Company, to:
Horace Mann Educators Corporation
1 Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: Secretary
with a copy to:
Conor D. Reilly, Esq.
Gibson, Dunn & Crutcher LLP
6
<PAGE>
200 Park Avenue
New York, N.Y. 10166-0193
or to such other addresses as the parties may designate in writing.
10. Integration; Modification. This Agreement shall supersede all
previous negotiations, commitments and writings with respect to the employment
of the Executive, including without limitation the Employment Agreement between
the Executive and the Company dated as of August 1, 1996; provided, however,
that this Agreement will not affect the existence and enforceability of the
change of control severance agreement and the change of control continuation of
employment agreement between the Company and the Executive as they exist on the
date hereof. This Agreement may not be released, discharged, abandoned, changed
or modified in any manner, except by an instrument in writing signed on behalf
of each of the parties hereto. The failure of either party hereto to enforce at
any time any of the provisions of this Agreement shall in no way be construed to
be a waiver of any such provisions, nor in any way to affect the validity of
this Agreement or the right of either party thereafter to enforce each and every
such provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach.
11. Survival of Certain Obligations. Except as otherwise
specifically provided for herein, the obligations of the parties pursuant to
Sections 5, 6 and 7 shall survive the termination of this Agreement.
12. Severability. If any term or provision of this Agreement is
declared invalid by a court of competent jurisdiction, the remaining terms and
provisions of this Agreement shall remain unimpaired. If any term or provision
of Section 5 of this Agreement, or portion thereof, is so broad in scope or
duration as to be unenforceable, such provision or portion thereof shall be
interpreted to be only so broad as is enforceable.
13. Captions. The captions appearing in this Agreement are inserted
only as a matter of convenience and as a reference and in no way define, limit
or describe the scope or intent of this Agreement or any of the provisions
hereof.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic substantive laws of the State of
Illinois without giving effect to any choice or conflict of laws provision or
rule that would cause the application of the domestic substantive laws of any
other jurisdiction.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first above written.
-----------------------------------------
PAUL J. KARDOS
HORACE MANN EDUCATORS CORPORATION
By: _____________________________________
Name: Ralph S. Saul
Title: Director & Chairman of the
Organization Committee
8
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three and Nine Months Ended September 30, 1998 and 1997
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic - assumes no dilution:
Net income for the period $24,933 $17,996 $63,040 $58,292
------- ------- ------- -------
Weighted average number of common
shares outstanding during the period 42,811 45,170 43,523 46,222
------- ------- ------- -------
Net income per share - basic $ 0.58 $ 0.40 $ 1.45 $ 1.26
======= ======= ======= =======
Diluted - assumes full dilution:
Net income for the period $24,933 $17,996 $63,040 $58,292
------- ------- ------- -------
Weighted average number of common
shares outstanding during the period 42,811 45,170 43,523 46,222
Weighted average number of common
equivalent shares to reflect the dilutive
effect of common stock equivalent securities:
Warrants 98 253 99 250
Stock options 456 448 472 396
Common stock units related to Deferred
Equity Compensation Plan for Directors 46 31 46 31
Common stock units related to Deferred
Compensation Plan for Employees 2 - 1 -
------- ------- ------- -------
Total common and common equivalent shares
adjusted to calculate diluted earnings per share 43,413 45,902 44,141 46,899
------- ------- ------- -------
Net income per share - diluted $ 0.57 $ 0.39 $ 1.43 $ 1.24
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 2,643,010<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 27,958
<REAL-ESTATE> 1,278
<TOTAL-INVEST> 2,850,941
<CASH> 12,799
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 94,166
<TOTAL-ASSETS> 4,280,401
<POLICY-LOSSES> 2,115,429<F2>
<UNEARNED-PREMIUMS> 179,816
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 125,777
<NOTES-PAYABLE> 144,627
0
0
<COMMON> 59
<OTHER-SE> 508,978
<TOTAL-LIABILITY-AND-EQUITY> 4,280,401
429,094
<INVESTMENT-INCOME> 144,458
<INVESTMENT-GAINS> 13,599
<OTHER-INCOME> 0
<BENEFITS> 301,308
<UNDERWRITING-AMORTIZATION> 34,149
<UNDERWRITING-OTHER> 80,684
<INCOME-PRETAX> 86,893
<INCOME-TAX> 23,853
<INCOME-CONTINUING> 63,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,040
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.43
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Refer to Note 3-Investments of the Company's Consolidated Notes to
Financial Statements for September 30, 1998.
<F2> Refer to the Company's Consolidated Balance Sheet as of September 30,
1998.
</FN>
</TABLE>