<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q/A
--------------------
_________________________________________________
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-26788
THE GUARANTEE LIFE COMPANIES INC.
(Exact Name of the Registrant as Specified in its Charter)
Delaware 47-0785066
(State of Incorporation) (I.R.S. Employer Identification Number)
8801 Indian Hills Drive, Omaha, Nebraska 68114
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (402) 361-7300
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 [_]
Shares of common stock outstanding as of May 7, 1999: 9,253,059
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
------ 1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $883,777 and $865,597)...... $ 897,296 $ 888,363
Held-to-maturity, at amortized cost (fair value: $169,542 and $158,341)........ 164,665 147,180
------------- -------------
1,061,961 1,035,543
Equity securities, at fair value (cost: $22,262 and $20,643) 25,319 23,835
Mortgage loans, net................................................................. 103,664 103,736
Policy loans........................................................................ 31,972 31,767
Investment real estate, net......................................................... 3,188 3,211
Other invested assets, net.......................................................... 22,544 54,970
Closed Block invested assets........................................................ 308,030 314,108
------------- -------------
Total invested assets.................................................................... 1,556,678 1,567,170
Cash and cash equivalents................................................................ 20,565 23,794
Accrued investment income................................................................ 14,891 13,900
Recoverable from reinsurers.............................................................. 99,284 95,511
Accounts receivable, net................................................................. 25,439 19,641
Deferred policy acquisition costs........................................................ 144,996 144,844
Property, plant and equipment, net....................................................... 19,592 19,929
Other assets............................................................................. 13,343 12,607
Closed Block other assets................................................................ 14,300 16,224
Separate account assets.................................................................. 95,164 78,629
------------- -------------
Total assets............................................................................. $ 2,004,252 $ 1,992,249
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Future policy benefits................................................................... $ 177,343 $ 178,133
Policyholder account balances............................................................ 795,400 795,820
Policy and contract claims............................................................... 83,498 68,701
Other policyholder funds................................................................. 45,397 43,751
Unearned premium revenue................................................................. 13,509 13,149
Payable to reinsurers.................................................................... 10,283 8,670
Notes payable ........................................................................... 113,750 112,500
Other liabilities........................................................................ 43,768 54,846
Closed Block liabilities................................................................. 383,041 386,933
Discontinued operations, net............................................................. 20,526 21,075
Separate account liabilities............................................................. 95,164 78,629
------------- -------------
Total liabilities........................................................................ 1,781,679 1,762,207
------------- -------------
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785 shares
Issued........................................................................... 103 103
Additional paid-in capital.......................................................... 200,988 201,255
Treasury stock, at cost (1,083,580 shares at March 31, 1999 and 1,087,124 shares at
December 31, 1998)............................................................... (24,741) (25,054)
Retained earnings................................................................... 36,877 33,962
Net unrealized investment gain ..................................................... 9,346 19,776
------------- -------------
Total shareholders' equity............................................................... 222,573 230,042
Commitments and contingencies............................................................ - -
------------- -------------
Total liabilities and shareholders' equity............................................... $ 2,004,252 $ 1,992,249
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------------- -------------
<S> <C> <C>
REVENUES:
Direct and assumed premiums and policyholder assessments.............................. $ 112,501 $ 88,205
Reinsurance premiums.................................................................. (18,094) (17,625)
-------------- -------------
Net premiums and policyholder assessments............................................. 94,407 70,580
Investment income, net................................................................ 21,451 16,140
Realized investment gains............................................................. 234 119
Other income.......................................................................... 1,771 -
Contribution from Closed Block........................................................ 735 1,202
-------------- -------------
Total revenues........................................................................ 118,598 88,041
-------------- -------------
POLICYHOLDER BENEFITS:
Direct and assumed benefits........................................................... 88,980 67,022
Reinsurance recoveries................................................................ (14,369) (13,033)
-------------- -------------
Net policyholder benefits............................................................. 74,611 53,989
-------------- -------------
EXPENSES:
Policy acquisition costs.............................................................. 15,655 12,928
Other insurance operating expense..................................................... 22,930 20,571
-------------- -------------
Total expenses........................................................................ 38,585 33,499
-------------- -------------
Income from continuing operations before income taxes 5,402 553
-------------- -------------
Income tax expense.................................................................... 1,891 194
-------------- -------------
Net income from continuing operations................................................. 3,511 359
-------------- -------------
Net income (loss) from discontinued operations........................................ 51 (2)
-------------- -------------
Net income............................................................................ $ 3,562 $ 357
============== =============
Basic Earnings per share:
Weighted average shares outstanding.............................................. 9,231,210 8,853,228
============== =============
Net income from continuing operations............................................ $ 0.38 $ 0.04
============== =============
Net income (loss) from discontinued operations................................... $ 0.01 $ 0.00
============== =============
Net income ...................................................................... $ 0.39 $ 0.04
============== =============
Diluted Earnings per share:
Weighted average shares outstanding.............................................. 9,321,797 9,174,541
============== =============
Net income from continuing operations............................................ $ 0.38 $ 0.04
============== =============
Net income (loss) from discontinued operations................................... $ 0.00 $ 0.00
============== =============
Net income....................................................................... $ 0.38 $ 0.04
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Comprehensive income for the three months ended March 31, 1999 (in thousands) is
as follows:
<TABLE>
<S> <C> <C>
Net income................................................................. $ 3,562
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during period........................... $(10,336)
Less: reclassification adjustment for gains included in net income........ (94) (10,430)
-------- --------
Comprehensive income....................................................... $ (6,868)
========
</TABLE>
Comprehensive income for the three months ended March 31, 1998 (in thousands) is
as follows:
<TABLE>
<S> <C>
Net income................................................................. $ 357
Other comprehensive income, net of tax:
Unrealized losses on securities............................................ (1,680)
--------
Comprehensive income....................................................... $ (1,323)
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ---------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......................................... $ (6,400) $ (17,330)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities........................................................... (86,974) (70,042)
Sales, maturities, calls, and principal reductions of fixed maturities................. 51,682 60,740
Sale of equity securities and short-term investments................................... 29,243 17,609
Purchase of mortgage loans............................................................. (1,200) (1,325)
Proceeds from repayment of mortgage loans.............................................. 1,271 2,415
Change in Closed Block invested assets................................................. 6,078 9,514
Other, net............................................................................. 1,353 (1,253)
---------- ---------
Net cash provided (used) by investing activities..................................... 1,453 17,658
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits to policyholder account balances.............................................. 20,578 16,738
Withdrawals from policyholder account balances......................................... (19,776) (13,935)
Purchase of treasury stock............................................................. - (3,150)
Options exercised...................................................................... 313 507
Proceeds from issuance of notes payable................................................ 5,000 -
Principal payments on long term debt................................................... (3,750) -
Shareholder dividends.................................................................. (647) (619)
---------- ---------
Net cash (used) provided by financing activities.................................... 1,718 (459)
---------- ---------
Net increase (decrease) in cash and cash equivalents...................................... (3,229) (131)
Cash and cash equivalents at beginning of period.......................................... 23,794 8,608
---------- ---------
Cash and cash equivalents at end of period................................................ $ 20,565 $ 8,477
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
include The Guarantee Life Companies Inc. and its direct and indirect
wholly-owned insurance subsidiaries ("Guarantee Life"). These financial
statements have been prepared in conformity with generally accepted
accounting principles for interim financial information and reflect all
adjustments (consisting only of normal recurring items) which are, in the
opinion of management, necessary to present fairly the financial position
and results of operations for the periods presented.
Operating results for the three month periods ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These financial statements and notes thereto
should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended December 31, 1998, contained in
Guarantee Life's annual report on Form 10-K for the year ended December 31,
1998.
(2) INVESTMENTS
Fixed maturities at March 31, 1999 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies............ $ 100,445 $ 826 $ 287 $ 100,984
Obligations of states and political subdivisions.. 7,949 973 - 8,922
Debt securities issued by foreign governments..... 8,449 96 20 8,525
Corporate securities.............................. 487,513 17,872 7,811 497,574
Mortgage-backed securities........................ 212,294 3,006 1,322 213,978
Other asset-backed securities..................... 67,127 695 509 67,313
------------- ------------- -------------- -------------
883,777 23,468 9,949 897,296
Equity securities................................. 22,262 3,900 843 25,319
------------- ------------- -------------- -------------
$ 906,039 $ 27,368 $ 10,792 $ 922,615
============= ============= ============== =============
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies............ $ 3,594 $ 40 - $ 3,634
Obligations of states and political subdivisions.. 7,706 471 - 8,177
Corporate securities.............................. 122,470 7,749 911 129,308
Mortgage-backed securities........................ 19,648 - 2,268 17,380
Other asset-backed securities..................... 11,247 182 386 11,043
------------- ------------- -------------- -------------
$ 164,665 $ 8,442 $ 3,565 $ 169,542
============= ============= ============== =============
</TABLE>
(3) CLOSED BLOCK
Summarized condensed financial information of the Closed Block (in
thousands) is as follows:
<TABLE>
<CAPTION>
Assets March 31, December 31,
------
1999 1998
------------- -------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $212,653 and $210,935)..... $217,885 $220,603
Held-to-maturity, at amortized cost (fair value: $47,142 and $48,460)......... 44,530 44,595
------------- -------------
262,415 265,198
Policy loans..................................................................... 44,999 46,217
Other invested assets, net....................................................... 616 2,693
------------- -------------
Total invested assets................................................................ 308,030 314,108
Cash and cash equivalents............................................................ 884 2,000
Accrued investment income............................................................ 2,438 2,367
Deferred policy acquisition costs.................................................... 9,914 10,476
Other assets......................................................................... 1,065 1,381
------------- -------------
Total Closed Block assets............................................................ $322,331 $ 330,332
============= =============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES March 31, December 31,
-----------
1999 1998
------------- -------------
<S> <C> <C>
Life future policy benefits.......................................................... $298,296 $300,254
Policyholder account balances for annuity contracts.................................. 892 885
Policy and contract claims........................................................... 717 839
Other policyholder funds............................................................. 71,940 71,966
Dividends payable to policyholders................................................... 7,116 7,052
Deferred income taxes................................................................ 1,831 3,384
Other liabilities.................................................................... 2,249 2,553
------------- -------------
Total Closed Block liabilities....................................................... $383,041 $386,933
============= =============
</TABLE>
Condensed statement of income for the Closed Block for the three months
ended March 31 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance.................. $ 4,857 $ 5,236
Investment income, net............................................................... 5,694 5,633
Realized investment gains (losses) .................................................. - 11
Other income......................................................................... - 2
------------- -------------
Total revenues....................................................................... 10,551 10,882
------------- -------------
Policyholder benefits and expenses:
Total policyholder benefits.......................................................... 5,400 6,106
Policy acquisition costs............................................................. 637 439
Other insurance operating expense.................................................... 1,020 107
------------- -------------
Total benefits and expenses.......................................................... 7,057 6,652
Dividends to policyholders........................................................... 2,759 3,028
------------- -------------
Contribution from the Closed Block................................................... $ 735 $ 1,202
============= =============
</TABLE>
The Closed Block includes only those revenues, benefits, expenses, and
dividends resulting from the policies which were included in the Closed
Block on December 26, 1995, the effective date of Guarantee Life Insurance
Company's conversion to a stock life insurance company. The pre-tax income
of the Closed Block is reported as a single line item, Contribution from
Closed Block, in Guarantee Life's condensed consolidated statements of
income. Income tax expense applicable to the Closed Block is reflected as a
component of income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of March
31, 1999 represents the estimated future contribution from Closed Block,
which will be recognized in Guarantee Life's statements of income over the
period the underlying policies and contracts remain in force.
If, over the period the Closed Block remains in existence, the actual
cumulative contribution is greater than the expected cumulative
contribution, only such expected contribution will be recognized in
Guarantee Life's statements of income. The excess will be paid to Closed
Block policyholders as additional policyholder dividends. Alternatively, if
the actual cumulative contribution is less than the expected cumulative
contribution, only such actual contribution will be recognized in Guarantee
Life's statements of income. However, dividends will be changed in the
future, to increase actual contributions until the actual cumulative
contributions equal the expected cumulative contributions.
(4) EARNINGS PER COMMON SHARE
Basic earnings per share of common stock have been computed on the basis of
the weighted average number of shares of common stock outstanding. Diluted
earnings per share is based on the weighted average number of shares and
common stock equivalents outstanding. The Company's common stock
equivalents relate to common stock options.
(5) RESTRICTED COMMON SHARES
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired
Westfield Life Insurance Company. As partial consideration, 371,402 shares
of previously authorized, but unissued, common stock were issued. These
shares have a restriction on transfer and are restricted from sale for a
period of two years. They are also restricted for five years from sale to
any party who would own two percent or more of Guarantee Life's issued and
7
<PAGE>
outstanding stock after transfer. These shares also have restricted voting
rights. For a period of five years, all restricted shares of common stock
will be voted in concurrence with the recommendation of the Board of
Directors of Guarantee Life in matters submitted to the shareholders of
Guarantee Life for vote or consent.
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of Guarantee Life should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included herein.
FORWARD-LOOKING STATEMENTS
This 10-Q report contains certain forward-looking statements. All forward-
looking statements are inherently uncertain as they are based on various
management expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual results to differ materially from those projected. Such statements
reflect the current view of Guarantee Life with respect to future events and are
subject to certain risks, uncertainties and assumptions, including the business
factors described in Guarantee Life's annual report on Form 10-K for the year
ended December 31, 1998. Should one or more of such risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as believed, estimated or
expected.
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The following table presents the consolidated results of operations
combined with the results of operations of the Closed Block. As part of the
conversion to a stock life insurance company in 1995, Guarantee Life Insurance
established a Closed Block to provide for dividends on certain policies that
were in force on December 26, 1995 (the "Effective Date"). After the Effective
Date, the operating results from the Closed Block are reported on one line,
Contribution from Closed Block, in the consolidated statements of income.
Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
COMBINED RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- ----------
<S> <C> <C>
Revenues:
Premiums and policyholder assessments, net.......................................... $ 99,264 $ 75,816
Investment income, net.............................................................. 27,145 21,773
Realized investment gains........................................................... 234 130
Other income........................................................................ 1,771 -
------------ ----------
Total revenues........................................................................... 128,414 97,719
Benefits and expenses:
Policyholder benefits, net of reinsurance........................................... 80,011 60,095
Expenses............................................................................ 40,238 34,043
Dividends to policyholders.......................................................... 2,763 3,028
------------ ----------
Total policyholder benefits and expenses................................................. 123,012 97,166
------------ ----------
Income from continuing operations before income taxes.................................... 5,402 553
Income taxes............................................................................. 1,891 194
------------ ----------
Net income from continuing operations.................................................... $ 3,511 $ 359
============ ==========
Net income excluding realized gains...................................................... $ 3,359 $ 275
============ ==========
</TABLE>
INVESTMENT INCOME, NET. Net investment income increased $5.4 million, or
24.7% for the first quarter of 1999 over 1998. This increase was caused by an
increase in invested assets, which increased $356 million, or 29.6% from
$1,200.7 million as of March 31, 1998, to $1,556.7 million as of March 31, 1999.
The increase in invested assets is primarily due to the acquisition of Westfield
Life Insurance Company in May 1998.
8
<PAGE>
INSURANCE OPERATIONS---EMPLOYEE BENEFITS DIVISION (EBD)
The following table sets forth the results of operations for Guarantee
Life's Employee Benefits Division for the three months ended March 31, 1999 and
1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Insurance premiums.................................................................. $ 53,535 $ 49,193
Reinsurance premiums................................................................ (1,282) (1,130)
------------ -----------
Net earned premiums................................................................. 52,253 48,063
Investment income, net.............................................................. 3,010 2,540
Realized investment gains (losses) ................................................. 88 316
------------ -----------
Total revenues........................................................................... 55,351 50,919
Benefits and expenses:
Gross policyholder benefits......................................................... 36,206 34,524
Recoveries from reinsurers.......................................................... 26 (174)
------------ -----------
Net benefits........................................................................ 36,232 34,350
Acquisition costs and operating expenses............................................ 17,959 20,008
------------ -----------
Total policyholder benefits and expenses................................................. 54,191 54,358
------------ -----------
Income from continuing operations before income taxes.................................... $ 1,160 $ (3,439)
============ ===========
</TABLE>
EBD provides group non-medical products including term life, accidental
death and dismemberment, short-term disability, long-term disability (LTD), and
dental; and voluntary (worksite marketed) products.
EBD net earned premiums increased $4.2 million, or 8.7%, for the first
quarter of 1999 over 1998. The greatest increases in net earned premiums
occurred in the life, dental, and LTD product lines. In comparing the first
quarter of 1999 over first quarter 1998, life net earned premiums increased $1.1
million, or 7.7%; dental net earned premiums increased $1.5 million or 9.4%; and
LTD net earned premiums increased $1.4 million or 13.6%. These increases were
the result of continued new sales growth in excess of policy terminations.
EBD net benefits increased $1.9 million, or 5.5%, for the first quarter of
1999 over 1998. This increase is caused by higher premium volume in all product
lines, particularly in the dental and LTD lines of business, offset somewhat by
more favorable loss ratios. Dental net benefits increased $.9 million, or 7.0%,
and LTD net benefits increased $.8 million, or 13.4%, for the first quarter of
1999 over 1998.
EBD expenses decreased $2.0 million, or 10.2% for the first quarter of 1999
over 1998. Much of this decrease was the result of improved operating unit
expenses due to technology, improved training, internal efforts to reduce
expenses and avoid costs, and a higher deferral of costs associated with the
acquisition of new business which will be amortized over the estimated life of
the associated new policies.
INSURANCE OPERATIONS---GROUP SPECIAL MARKETS DIVISION (GSM)
The following table sets forth the results of operations for Guarantee
Life's Group Special Markets Division for the three months ended March 31, 1999
and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Insurance premiums.................................................................. $ 36,913 $ 25,205
Reinsurance premiums................................................................ (12,909) (13,529)
------------ ------------
Net earned premiums................................................................. 24,004 11,676
Investment income, net.............................................................. 603 640
Realized investment gains (losses) ................................................. - 79
------------ ------------
Total revenues........................................................................... 24,607 12,395
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Benefits and expenses:
Gross policyholder benefits......................................................... 30,670 17,991
Recoveries from reinsurers.......................................................... (10,546) (11,017)
------------ ------------
Net benefits........................................................................ 20,124 6,974
Acquisition costs and operating expenses............................................ 5,718 3,782
------------ ------------
Total policyholder benefits and expenses................................................. 25,842 10,756
------------ ------------
Income from continuing operations before income taxes.................................... $ (1,235) $ 1,639
============= ============
</TABLE>
GSM provides specialty medical products including excess loss insurance,
medical reimbursement insurance for business executives, and group non-medical
products typically sold in conjunction with the excess loss insurance.
GSM net results from continuing operations for the first quarter 1999
decreased $2.9 million over the same period last year. This decrease is due
entirely to significantly higher loss ratios in the excess loss business,
resulting in a loss for the product. The impact of this loss was partially
offset by an improvement in results in the group non-medical products over the
same periods. Net results for the medical reimbursement product were consistent
from first quarter 1999 as compared to first quarter 1998.
INSURANCE OPERATIONS--INDIVIDUAL DIVISION
The following table sets forth the results of operations for Guarantee
Life's Individual Division for the three months ended March 31, 1999 and 1998
(in thousands).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Premiums and policyholder assessments, net of reinsurance premiums.............. $ 23,007 $ 16,077
Investment income, net.......................................................... 23,092 17,792
Realized investment gains (losses).............................................. 278 (222)
Other income.................................................................... 1,750 -
------------- -------------
Total revenues....................................................................... 48,127 33,647
Benefits and expenses:
Policyholder benefits, net of reinsurance....................................... 23,655 18,771
Acquisition costs and operating expenses........................................ 14,816 9,527
Dividends to policyholders...................................................... 2,763 3,028
------------- -------------
Total policyholder benefits and expenses............................................. 41,234 31,326
------------- -------------
Income from continuing operations before income taxes................................ $ 6,893 $ 2,321
============= =============
</TABLE>
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired
Westfield Life Insurance Company (Westfield) from Ohio Farmers Insurance
Company. Westfield's results of operations are included in Guarantee Life's
consolidated results beginning June 1, 1998.
Net premiums and policyholder assessments increased $6.9 million, or 43.1%,
for the first quarter of 1999 over 1998. The increase for the quarter relates
primarily to the acquisition of Westfield which accounts for $6.6 million of the
increase.
10
<PAGE>
Ceding commissions and other income increased $1.75 million, for the first
quarter of 1999 over 1998. The increase for the quarter relates to a $1.75
million death benefit on a director's policy for which PFG, Inc. and
subsidiaries (PFG) was the beneficiary.
Total individual policyholder benefits increased $4.9 million, or 26.0%,
for the first quarter of 1999 over 1998. This increase is due to the Westfield
acquisition which accounts for $6.6 million of total individual policyholder
benefits for first quarter 1999. This increase is partially offset by a decrease
of $1.5 million in claims at Guarantee Life Insurance and a decrease of $.2
million in claims at PFG for the first quarter of 1999 over 1998. Interest
credited on policyholder account balances increased $2.6 million for the first
quarter 1999 over 1998. Of this increase, $3.4 million is due to the inclusion
of Westfield in the first quarter, while a decrease of $.5 million at Guarantee
Life Insurance and a decrease of $.3 million at PFG are due to reductions in
credited rates and lower annuity account balances.
Total individual expenses increased $5.3 million or 55.5% for the first
quarter of 1999 over 1998. This increase relates partially to operating expenses
incurred by Westfield in the first quarter of 1999, which accounts for $2.2
million of the total individual expenses for the first quarter of 1999.
Guarantee Life Insurance Individual Division expenses increased $1.4 million, or
17.7%, for the first quarter of 1999 over 1998 due primarily to new sales
growth. PFG expenses increased $2.1 million, or 105.5%, for the first quarter of
1999 over 1998 due primarily to a write-off of a portion of goodwill and
allocation of management expenses from Guarantee Life Insurance.
Policyholder dividends decreased compared to the first quarter of 1998,
reflecting a reduced dividend scale.
CORPORATE ADMINISTRATION
The three business segments of Guarantee Life share a common need for
various services such as finance and accounting, investment management, agent
licensing and commissions, legal and compliance, and marketing. In an effort to
operate efficiently, these functions are consolidated in the area of corporate
administration ("Corporate"). Corporate's operations include the cost of these
services provided to all of Guarantee Life, as well as those services provided
to its shareholders.
Virtually all costs associated with providing the above services are
allocated to the segments and are reflected in their operating results, with the
exception of debt costs and the costs associated with shareholder services.
The following table sets forth the operating results of Corporate for the
three months ended March 31, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ -----------
<S> <C> <C>
Total revenues........................................................................ $ 329 $ 758
Total expenses........................................................................ 1,745 726
------------ -----------
Income before taxes................................................................... $(1,416) $ 32
============ ===========
</TABLE>
Total revenues decreased $.4 million, or 56.6%, for the first quarter of
1999 over 1998 due primarily to a lower percentage of investment income
allocated to Corporate in the first quarter of 1999 as compared to the first
quarter of 1998.
Total expenses increased $1.0 million, or 140.4%, for the first quarter of
1999 over 1998 due primarily to the interest expense associated with the
outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Guarantee Life initiated three voluntary stock buyback programs during
1997, with the final one being completed in 1998, for oddlot shareholders who
individually owned fewer than 100 shares of the Company's common stock. These
programs resulted in Guarantee Life's purchase of approximately 1.2 million
shares and a reduction of approximately 50% in oddlot shareholder accounts.
Guarantee Life estimates the reduction in oddlot shareholder accounts will save
approximately $350,000 in annual shareholder expenses. The programs were funded
using available cash flows from operations.
The Guarantee Life Companies Inc.'s ability to pay dividends to its
stockholders and meet its obligations, including debt service and operating
expenses, depends primarily upon receiving sufficient funds from its
subsidiaries. The payment of dividends by Guarantee Life Insurance, AGL (a
wholly owned subsidiary of PFG, Inc.), and Westfield are subject to restrictions
set forth in the insurance laws and regulations of Nebraska and Pennsylvania.
Under state law, Guarantee Life Insurance, AGL, and Westfield may pay, within a
twelve-month period, dividends only from the earned
11
<PAGE>
surplus arising from its business and must receive the prior approval of the
state departments to pay a dividend if such dividend would exceed the greater of
(i) 10% of statutory capital and surplus as of the preceding year end and (ii)
the net statutory gain from operations for the previous calendar year. State law
gives the Department of Insurance broad discretion to disapprove requests for
dividends in excess of these limits.
The Board of Directors of Guarantee Life Insurance Company declared a $15
million extraordinary dividend to the Holding Company in November 1997, which
was paid in January 1998. In December 1998, the Board of Directors of Westfield
declared and paid a $20 million extraordinary distribution of excess capital to
the Holding Company. The State of Nebraska approved both of these transactions.
In September 1998, AGL's Board of Directors declared and paid a $2.4 million
dividend to PFG, Inc. In 1999, Guarantee Life insurance can declare a dividend
of up to $12.5 million without permission from the Nebraska Department of
Insurance. AGL can declare a dividend of up to $1.9 million without permission
from the Pennsylvania Department of Insurance. Westfield cannot declare a
dividend in 1999 without permission from the Nebraska Department of Insurance.
Guarantee Life increased its outstanding debt obligations by $1.25 million
to $113.75 million during the three months ended March 31, 1999. The total
obligation consists of $78.75 million under the Company's Senior Secured Term
Loan ("Term Loan") and $35.0 million under the Company's Revolving Credit
Facility.
Management believes that the current amortization of the Term Loan ($3.75
million per quarter) and a lack of significant and sustained improvement in
earnings, particularly in EBD, could create a liquidity constraint at the
Holding Company beyond 1999 unless other actions are taken. Such actions could
include, but are not limited to, the issuance of long-term debt securities,
reinsurance, or other financing alternatives. Management believes these sources
will provide sufficient liquidity for the Holding Company to meet its future
obligations.
YEAR 2000 ISSUES
Guarantee Life recognizes the significance and technological impact that
the Year 2000 (Y2K) challenge will have on organizations world-wide and has
established a comprehensive plan to achieve compliance. Our overall goal is to
ensure that we continue to provide quality products and services with no
interruption to our customers. All of our critical Y2K renovation efforts are
well underway across the company. Our focus is not only on our internal systems,
but also whether or not our key business partners, vendors, and suppliers will
be compliant in the next millennium.
While Y2K-related work had been in process much earlier, formal project
organization and impact assessment activities began in November 1996. A
separate, dedicated corporate team was put in place in March 1997 to lead our
compliance efforts and provide guidance and support to our specific Y2K projects
across the company. Using standard project methodology and management
processes, Guarantee Life is taking a phased approach towards Y2K compliance.
Five major phases have been identified for this effort: Impact Assessment,
Infrastructure & Methods, Renovation, Certification and Implementation.
IMPACT ASSESSMENT
During the assessment phase, mission critical applications impacted were
identified and a high-level budget was developed and approved. The total cost
of Y2K compliance is estimated at approximately $2.9 million through 2000. This
represents approximately 7% of the total Information Technology (IT) budget over
this time period. The Y2K-related expenses incurred by year are as follows:
<TABLE>
<S> <C>
1997 $ 800,000
1998 $ 1,062,000
1999 (through 3/31) $ 114,000
</TABLE>
Correction of the Y2K issues is a high priority project and other IT
projects have been deferred due to Y2K efforts. However, the company does not
believe the deferral of other IT projects has had a material effect on financial
condition or results of operations. The Company's IT staff has continued to work
on other high priority projects concurrent with the Y2K project.
INFRASTRUCTURE
Progress of Guarantee Life's core information technology infrastructure and
application areas is measured for the mainframe, midrange and client/server
environments. Over 250 third party application packages and over 130 custom
applications and external interfaces have been inventoried and are being tracked
for compliance.
RENOVATION
IT Systems - A renovation strategy was defined for each of our mission
----------
critical applications. In some cases, it was decided to upgrade vendor supplied
software with Y2K-compliant releases. In other cases, decisions were made to
12
<PAGE>
replace software altogether taking advantage of new functionality. For most in-
house developed applications, modifications are being made to ensure compliance.
Several of our policy administration and claims processing applications
have either been renovated through vendor-supplied upgrades or replaced with
packages that we believe, based on our testing, are Y2K-compliant. Most of the
system replacements had been planned but were merely accelerated due to the Y2K
issues. In the Individual Division significant model office testing has been
conducted to ensure compliance and the updated systems have been put into
production successfully. We believe that all Y2K issues have been addressed and
completed with respect to all mission critical applications in EBD and GSM. The
existing mainframe administration and claims systems were renovated in 1998 for
contingency purposes. All systems will go through additional certification
testing throughout 1999.
Our existing general ledger and accounts payable applications were replaced
in 1997 with a new vendor-supplied package that we believe, based on our
testing, is Y2K-compliant. Human Resource administration and payroll systems
were successfully upgraded in 1998. These systems and our vendor-supplied
Investment systems have been tested and are believed to be Y2K-compliant. Other
smaller, non-critical applications will either be renovated or replaced in 1999.
Each of our major operating platforms has been upgraded. A complete
inventory of data center hardware and software has been completed and assessed.
Test environments are in place on each platform. A separate network lab is
available for testing business software and end user computing applications.
Over 90% of the applications have been tested to date. In addition, our imaging
and fax software were upgraded successfully in April 1998. A limited number of
third-party, mainframe system software upgrades remain and will be completed by
June 1999. Less than ten non-mission critical workstation upgrades remain, all
of which will be completed in 1999.
PFG's core administrative systems were developed to accommodate a four-
digit year. The operating system software was upgraded in 1998. Key application
systems and infrastructure will continue to undergo further certification
testing in 1999. Other software/hardware components and business partners'
compliance status are currently being validated. Existing Westfield Life
business is administered through a third party administrator, who has indicated
their primary system is Y2K-compliant. New business is administered on the
Guarantee Life Individual administrative system at the home office, which was
renovated in June 1998.
Non-IT Systems - All of our major suppliers and vendors providing services
--------------
related to our facilities have been contacted. Our telephone switch has been
tested and appears to be Y2K-compliant. The voice mail system was upgraded and
tested for Y2K compliance in May 1998. Call accounting software was also
upgraded in October 1998. Our elevators are not impacted by the year 2000. Our
security and climate control software applications passed rollover tests in
March 1999. We have contacted our telecommunications, gas, water and electric
utility companies regarding their Y2K compliance status. They have all
communicated that their renovation efforts are in progress and will be completed
by the year 2000.
CERTIFICATION
Recognizing that over fifty percent of the effort on Y2K projects is spent
in the testing phases, Guarantee Life is committed to ensuring that our
remediation efforts go through thorough unit, integration, regression and end-to
end testing. A testing tool was purchased specifically for this effort. To-date,
rollover tests (i.e. changed the CPU date past 2000) have been performed on our
network servers, AS/400, mainframe and HP UNIX platforms. A Y2K-specific
rollover test was successfully conducted at our Business Recovery test site in
December 1998. Plans have been established to continue testing business cycles
using significant dates (e.g. 12/31/1999, 2/29/2000) on all of our platforms in
1999.
COMPLETING OUR INTERNAL REMEDIATION
Our Impact Assessment and Infrastructure & Methods phases are completed.
Ninety percent of the Renovation and Certification phases are complete.
Additional certification testing (e.g. of third-party providers' systems), final
workstation upgrades and final business partner risk assessment and contingency
planning will take place in 1999.
Guarantee Life is actively monitoring the compliance programs of its key
business partners, vendors and suppliers. Over 345 business partners have been
inventoried and are being tracked for compliance. Electronic interfaces to our
key suppliers have been identified and will be verified by June 1999. The team
is particularly focusing on assessing any Y2K risk associated with our key
administrative and marketing arrangements. In particular, we continue to work
with a major third-party administrator to ensure that they have appropriate
plans.
RISKS AND BUSINESS CONTINGENCY PLANNING
Guarantee Life believes that its most reasonably likely worst case Y2K
scenario will include these elements: (1) one or more of Guarantee Life's third-
party providers will be unable to provide the services expected, and (2) one or
more parts of Guarantee Life's processing software will operate incorrectly. At
this time, we are unable to estimate the
13
<PAGE>
potential loss of revenue due to such a scenario. Guarantee Life believes that
its testing of its critical hardware and software will reveal any significant
Y2K problems, that such problems will be capable of remediation, and that
Guarantee Life's software and hardware will perform substantially as planned
when Year 2000 processing begins.
Guarantee Life will continue to evaluate situations where indicators point
to a potential risk of failure. In these cases, contingency plans are being
developed to identify alternative strategies. We are currently expanding our
business recovery plan to incorporate contingencies for the transition to the
year 2000. Our target date for completing this plan is June 1999. A "mock" Y2K
test will be held in October 1999 to validate these plans.
The foregoing Y2K discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
Guarantee Life expects to substantially complete programming changes,
remediation and testing of systems and the impact of the redeployment of
existing staff, are based on management's best current estimates, which were
derived utilizing numerous assumptions about future events, including the
continued availability of certain resources, representations received from third
party service providers and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to identify and cover all
relevant computer systems, results of Y2K testing, adequate resolution of Y2K
issues by businesses or other third parties who are service providers,
suppliers, customers of Guarantee Life, unanticipated system costs, the need to
replace hardware, the adequacy of and ability to implement contingency plans and
similar uncertainties. The "forward-looking statements" made in the foregoing
Y2K discussion speak only as of the date on which such statements are made, and
Guarantee Life undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be implemented on January 1,
2000, and included in Guarantee Life's December 31, 2000 financial statements.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities and measure them at fair value. The
accounting for changes in the fair value of a derivative will be determined by
the intended use of the derivative. Early implementation of SFAS 133 would have
resulted in an insignificant change in net income.
ITEM 3 -QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in reported market risks faced by Guarantee
Life since the end of the most recent fiscal year end.
PART II OTHER INFORMATION
ITEMS 1, 2, 3, 4 and 5 are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
ITEM 6 Exhibits and Report on Form 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of Form
10-Q.
2(a) Plan of Conversion of Guarantee Mutual Life Company (1)
2(b) Amendment No. 1 to Plan of Conversion (1)
2(c) Merger Agreement among The Guarantee Life Companies Inc.,
Guarantee Subsidiary, Inc. and PFG, Inc., dated as of October
17, 1997 (2)
2(d) Stock Purchase Agreement among The Guarantee Life Companies
Inc., Ohio Farmers Insurance Company, and Westfield Life
Insurance Company dated as of March 19, 1998 (3)
3(a) Amended and Restated Certificate of Incorporation of The
Guarantee Life Companies Inc. (4)
3(b) Amended and Restated Bylaws of The Guarantee Life Companies Inc.
(5)
4(a) Form of Certificate of The Guarantee Life Companies Inc. Common
Stock, par value $0.01 per share (1)
4(b) Rights Agreement (6)
27 Financial Data Schedule
__________________________________________________
14
<PAGE>
(1) Incorporated by reference as an exhibit to Registrant's
Registration Statement on Form S-1, Registration No. 33-92992.
(2) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed December 23, 1997 (Commission File No. 0-26788).
(3) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed March 19, 1998 (Commission File 0-26788).
(4) Incorporated by reference as an exhibit to Registrant's Form 10-K
for the fiscal year ended December 31, 1995 (Commission File No.
0-26788).
(5) Incorporated by reference as an exhibit to Registrant's Form 10-K
filed March 18, 1998 (Commission File No. 0-26788).
(6) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed November 25, 1996 (Commission File 0-26788).
(b) Guarantee Life did not file any reports on Form 8-K during the three
months ended March 31, 1999.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE GUARANTEE LIFE COMPANIES INC.
DATE: November 23, 1999 /s/ WILLIAM L. BAUHARD
------------------------------------------
WILLIAM L. BAUHARD
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999(UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
1999(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 897,296
<DEBT-CARRYING-VALUE> 164,665
<DEBT-MARKET-VALUE> 169,542
<EQUITIES> 25,319
<MORTGAGE> 103,664
<REAL-ESTATE> 3,188
<TOTAL-INVEST> 1,556,678
<CASH> 20,565
<RECOVER-REINSURE> 99,284
<DEFERRED-ACQUISITION> 144,996
<TOTAL-ASSETS> 2,004,252
<POLICY-LOSSES> 260,841
<UNEARNED-PREMIUMS> 13,509
<POLICY-OTHER> 795,400
<POLICY-HOLDER-FUNDS> 45,397
<NOTES-PAYABLE> 113,750
0
0
<COMMON> 103
<OTHER-SE> 222,470
<TOTAL-LIABILITY-AND-EQUITY> 2,004,252
94,407
<INVESTMENT-INCOME> 21,451
<INVESTMENT-GAINS> 234
<OTHER-INCOME> 2,506
<BENEFITS> 74,611
<UNDERWRITING-AMORTIZATION> 15,655
<UNDERWRITING-OTHER> 22,930
<INCOME-PRETAX> 5,402
<INCOME-TAX> 1,891
<INCOME-CONTINUING> 3,511
<DISCONTINUED> 51
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,562
<EPS-BASIC> .39
<EPS-DILUTED> .38
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
