Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Equitable of Iowa Companies and BTV Variable, Inc.
The following pro forma condensed consolidated balance sheet as of March 31,
1996, and the pro forma condensed consolidated statements of income for the
year ended December 31, 1995 and the three months ended March 31, 1996 give
the estimated effect to: (1) the pending acquisition of the outstanding
shares of BT Variable, Inc. ("BTV") by Equitable of Iowa Companies ("EIC")
pursuant to a Stock Purchase Agreement dated May 3, 1996 ("Stock Purchase
Agreement") and (2) the proposed issuance of $125,000,000 of Company-obligated
mandatorily-redeemable preferred securities of subsidiary, Equitable of Iowa
Companies Capital Trust ("Trust"), holding solely debt securities of EIC
("Preferred Securities") to fund, in part, the pending acquisition (the
"Transactions"). The pro forma condensed consolidated balance sheet assumes
the Transactions had occurred as of March 31, 1996 and the pro forma condensed
consolidated statements of income assume the Transactions had occurred as of
January 1, 1995. The pro forma information is based on the historical
financial statements of EIC and BTV giving effect to the proposed Transactions
under the purchase method of accounting and the assumptions and adjustments
in the accompanying notes to the pro forma condensed consolidated financial
statements.
The pro forma statements have been prepared by EIC's management based upon the
financial statements of BTV. The pro forma statements may not be indicative
of the results that actually would have occurred if the Transactions had been
in effect on the dates indicated or which may be obtained in the future. The
pro forma financial statements should be read in conjunction with EIC's
audited financial statements and notes included in its 1995 Form 10-K and the
unaudited financial statements and notes included in its March 31, 1996 Form
10-Q (not included herein).
PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED)
March 31, 1996
As Reported Pro forma
----------------------- --------------------------
EIC BTV Adjustments Consolidated
----------------------- ---------- ------------
(Dollars in thousands)
ASSETS
Investments:
Fixed maturities
available for sale,
at market $7,279,727 $105,793 ($8,536)(C) $7,376,984
Mortgage loans on
real estate 1,344,824 -- -- 1,344,824
Other 271,207 20,698 (15,674)(C) 276,231
----------------------- ---------- ------------
TOTAL INVESTMENTS 8,895,758 126,491 (24,210) 8,998,039
Deferred policy acquisition
costs 672,012 76,766 (76,766)(B) 672,012
Present value of future
profits -- 7,029 88,481 (B) 95,510
Goodwill and other
intangibles 3,677 -- 25,193 (C) 28,870
Other assets 238,316 11,018 (439)(B) 248,895
Separate account assets 208,635 1,100,781 -- 1,309,416
----------------------- ---------- ------------
TOTAL ASSETS $10,018,398 $1,322,085 $12,259 $11,352,742
======================= ========== ============
LIABILITIES
Policy liabilities, accruals
and other policyholders'
funds $8,498,572 $110,373 ($7,849)(B) $8,601,096
Income taxes 46,948 1,267 (1,009)(B) 47,206
Debt 258,000 51,439 (51,439)(B) 258,000
Other liabilities 224,353 5,351 430 (B) 230,134
Separate account liabilities 208,635 1,100,781 -- (B) 1,309,416
----------------------- ---------- ------------
TOTAL LIABILITIES 9,236,508 1,269,211 (59,867) 10,445,852
Company-obiligated manda-
torily-redeemable preferred
securities of subsidiary,
Equitable of Iowa Companies
Capital Trust, holding solely
debt securities of the
company -- -- 125,000 (C) 125,000
TOTAL STOCKHOLDERS' EQUITY 781,890 52,874 (52,874)(B) 781,890
----------------------- ---------- ------------
TOTAL LIABILITIES &
STOCKHOLDER'S EQUITY $10,018,398 $1,322,085 $12,259 $11,352,742
======================= ========== ============
<FN>
See notes to unaudited pro forma condensed consolidated financial statements
PROFORMA CONDENSED CONSOLIDATED
INCOME STATEMENT (UNAUDITED)
Year ended December 31, 1995
As Reported Pro forma
---------------------- --------------------------
EIC BTV Adjustments Consolidated
---------------------- ---------- ------------
(Dollars in thousands, except per share)
REVENUES:
Annuity and universal life
product charges $51,466 $18,405 $3,467 (D) $73,338
Traditional life insurance
premiums 43,425 -- -- 43,425
Net investment income 641,094 3,028 (1,504)(D) 642,618
Realized gains on investments 9,524 297 -- 9,821
Other income 19,353 9,429 -- 28,782
---------------------- ---------- ------------
764,862 31,159 1,963 797,984
INSURANCE BENEFITS AND EXPENSES:
Annuity, universal life and
other policy benefits 487,031 3,146 -- 490,177
Underwriting, acquisition and
insurance expenses:
Commissions, general expenses
and insurance taxes 232,470 30,071 821 (D) 263,362
Policy acquisition costs
deferred (178,133) (10,423) 666 (D) (187,890)
Amortization of deferred
acquisition costs 72,537 2,736 (2,506)(D) 72,767
Amortization of present value
of future profits -- 1,862 8,179 (D) 10,041
---------------------- ---------- ------------
613,905 27,392 7,160 648,457
Interest expense 13,779 3,042 (2,949)(D) 13,872
Other expenses 8,672 -- -- 8,672
---------------------- ---------- ------------
636,356 30,434 4,211 671,001
---------------------- ---------- ------------
128,506 725 (2,248) 126,983
Income taxes 43,633 (1,109) (4,678)(D) 37,846
---------------------- ---------- ------------
84,873 1,834 2,430 89,137
Equity income, net of related
income taxes 17 -- -- 17
PROFORMA CONDENSED CONSOLIDATED
INCOME STATEMENT (UNAUDITED) (Continued)
Year ended December 31, 1995
As Reported Pro forma
---------------------- --------------------------
EIC BTV Adjustments Consolidated
---------------------- ---------- ------------
(Dollars in thousands, except per share)
Dividends on Company-obligated
mandatorily-redeemable pre-
ferred securities of subsidiary,
Equitable of Iowa Companies
Capital Trust, holding solely
debt securities of the
company -- -- 10,625 (D) 10,625
---------------------- ---------- ------------
Net income $84,890 $1,834 ($8,195) $78,529
====================== ========== ============
Net income per common share $2.68 $2.48
============ ============
Weighted average common
shares outstanding 31,709,032 31,709,032
============ ============
<FN>
See notes to unaudited pro forma condensed consolidated financial statements
PROFORMA CONDENSED CONSOLIDATED
INCOME STATEMENT (UNAUDITED)
Three months ended March 31, 1996
As Reported Pro forma
---------------------- --------------------------
EIC BTV Adjustments Consolidated
---------------------- ---------- ------------
(Dollars in thousands, except per share)
REVENUES:
Annuity and universal life
product charges $14,717 $2,694 $283 (D) $17,694
Traditional life insurance
premiums 10,151 -- -- 10,151
Net investment income 171,212 511 (376)(D) 171,347
Realized gains (losses) on
investments 5,150 (327) -- 4,823
Other income 4,346 2,766 -- 7,112
---------------------- ---------- ------------
205,576 5,644 (93) 211,127
INSURANCE BENEFITS AND EXPENSES:
Annuity, universal life and
other policy benefits 126,916 394 -- 127,310
Underwriting, acquisition and
insurance expenses:
Commissions, general expenses
and insurance taxes 46,533 11,560 205 (D) 58,298
Policy acquisition costs
deferred (39,681) (8,414) 254 (D) (47,841)
Amortization of deferred
acquisition costs 18,123 293 (672)(D) 17,744
Amortization of present value
of future profits -- 248 1,781 (D) 2,029
---------------------- ---------- ------------
151,891 4,081 1,568 157,540
Interest expense 3,326 699 (685)(D) 3,340
Other expenses 3,571 -- -- 3,571
---------------------- ---------- ------------
158,788 4,780 883 164,451
---------------------- ---------- ------------
46,788 864 (976) 46,676
Income taxes (benefits) 16,468 (172) (1,057)(D) 15,239
---------------------- ---------- ------------
30,320 1,036 81 31,437
Equity loss, net of related
income taxes (115) -- -- (115)
PROFORMA CONDENSED CONSOLIDATED
INCOME STATEMENT (UNAUDITED) (Continued)
Three months ended March 31, 1996
As Reported Pro forma
---------------------- --------------------------
EIC BTV Adjustments Consolidated
---------------------- ---------- ------------
(Dollars in thousands, except per share)
Dividends on Company-obligated
mandatorily-redeemable pre-
ferred securities of subsidiary,
Equitable of Iowa Companies
Capital Trust, holding solely
debt securities of the
company -- -- 2,656 (D) 2,656
---------------------- ---------- ------------
Net income $30,205 $1,036 ($2,575) $28,666
====================== ========== ============
Net income per common share $0.95 $0.90
============ ============
Weighted average common
shares outstanding 31,816,700 31,816,700
============ ============
<FN>
See notes to unaudited pro forma condensed consolidated financial statements
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
EIC has agreed to purchase all of the outstanding shares of BTV, including its
subsidiaries, Golden American Life Insurance Company ("Golden American") and
Directed Services, Inc. ("DSI"), for a cash payment of $144,000,000, including
the repayment of debt of $51,000,000. Closing of the transaction is subject
to certain regulatory approvals and other customary closing conditions and is
expected to occur during the third quarter of 1996. The company expects to
incur additional costs relating to professional fees and other expenses of
$550,000 which are to be included as part of the cost of acquisition. The
pro forma condensed consolidated financial statements were prepared assuming
the transaction will be accounted for as a purchase.
(A) The cost of the acquisition is comprised of the following:
Cost of acquisition: (Dollars in thousands)
Cash $ 93,000
Repayment of debt 51,000
--------
Purchase price 144,000
Professional fees and
other expenses 550
--------
Total acquisition cost $144,550
========
Certain of the above costs are estimated and could vary at the actual
date of acquisition.
(B) Under purchase accounting, BTV's assets and liabilities are required
to be adjusted to their estimated fair values. The estimated fair
value adjustments have been determined by EIC based upon available
information set forth in BTV's financial statements and an independent
appraisal of BTV obtained from BTV's management. EIC cannot be sure
that such estimated fair values represent fair values that would
ultimately be determined at the acquisition date anticipated to occur
in the third quarter of 1996.
Reconciliation of BTV equity to cost of acquisition
(Dollars in thousands)
Equity as reported by BTV $52,874
Fair value adjustments:
Elimination of BTV's deferred
policy acquisition costs (76,766)
Elimination of BTV's present value
of future profits (7,029)
Present value of future profits on
business acquired 95,510 88,481
--------
Cash received from Bankers Trust
for Escrow Balance net of Note 3,789
Elimination of Escrow Balance (4,228) (439)
--------
Elimination of BTV's unearned
revenue reserve 7,849
Elimination of BTV's deferred tax
liability 1,009
Repayment of BTV short term debt 51,000
Elimination of Golden American Note 439 51,439
--------
Establishment of liability for
severance pay to BTV employees
related to the acquisition (430)
Cost in excess of net assets of
company acquired (goodwill) 20,533
---------
Cost of acquisition $144,550
=========
Certain amounts on BTV's balance sheet as of March 31, 1996 relating
to an Exchange Agreement have been eliminated. The Exchange Agreement
related to the acquisition of Golden American and DSI by Bankers Trust
Company ("Bankers Trust") from Mutual Benefit Life Insurance Company
in Rehabilitation ("Mutual Benefit") on September 30, 1992. Under the
Exchange Agreement (which is described in detail in Note 1 to Golden
American's financial statements included in Form 10-K filed by Golden
American for the year ended December 31, 1995), Bankers Trust settled
certain pre-existing claims against Mutual Benefit by exchanging such
claims for the outstanding common stock of Golden American and DSI.
Because the ultimate value of Bankers Trust's claims against Mutual
Benefit had not been determined by the Superior Court of New Jersey
(in which the rehabilitation proceeding was pending), Golden American
was required to execute in connection with the Exchange Agreement an
adjustable principal amount promissory note, 7.5% due 1997 ("Note"),
under which Golden American has been required to make periodic
payments into an escrow account in which such funds are to be held
until the value of Bankers Trust's claims is determined in accordance
with the rehabilitation proceedings. As of March 31, 1996, the escrow
account ("Escrow Balance") established by Golden American was
$4,228,000. Bankers Trust has estimated that the contingent liability
due from Golden American with respect to the Note amounted to $439,000
as of March 31, 1996.
Under the terms of the Stock Purchase Agreement, Bankers Trust has
agreed at closing to make a cash payment to Golden American in an
amount equal to the Escrow Balance less the sum of the $439,000 Note
and to either prepay the maximum potential amount remaining due under
the Note or to deliver to Golden American an irrevocable undertaking
to make all such payments as they become due under the terms of the
Note. In exchange, Golden American has agreed to irrevocably assign
to Bankers Trust all of Golden American's rights to receive any
amounts to be disbursed from the Escrow Account in accordance with the
terms of the agreement governing the Escrow Account. As a result,
other assets reflects a net reduction of $439,000 for the elimination
of the Escrow Balance of $4,228,000 less cash received at closing of
$3,789,000 and debt has been reduced by $439,000 for the elimination
of the liability relating to the obligation of Golden American under
the terms of the Note.
The carrying values of BTV's fixed maturity investments are at market
value since all such investments are reported as available for sale.
Accordingly, no fair value adjustments for investments are required.
The present value of future profits ("PVFP") of the insurance inforce
at the date of the acquisition is determined by estimating the gross
profits to be realized from the insurance contracts inforce at the
time the acquisition occurs and discounting the profits back to the
acquisition date. The discount rate utilized in calculating the PVFP
was 10%.
The "As Reported" amounts established by BTV for PVFP, unearned
revenue reserves and deferred policy acquisition costs (the cost
associated with generating sales of insurance policies) are eliminated
and replaced by the PVFP determined as of the acquisition date. BTV's
"As Reported" amounts for policy liabilities, accruals and other
policyholder funds are held at account values and, accordingly,
reflect the fair value of such liabilities. As a result, no fair
market value adjustment is required for such liabilities. "As
Reported" amounts for separate account assets and liabilities are
carried at their fair value and, accordingly, no fair value adjustment
is required. EIC has elected to step-up the tax basis of the assets
associated with BTV at the acquisition date, and as a result, BTV's
deferred income tax liability and expense have been eliminated.
(C) The costs associated with the issuance of the $125,000,000 of
Preferred Securities are estimated to approximate $4,660,000 which
will be deferred and amortized over 30 years to the date of required
redemption of the Preferred Securities, excluding any optional
election by EIC to extend such redemption for up to an additional 19
years. Accordingly, the net proceeds from the sale of the Preferred
Securities will approximate $120,340,000. EIC intends to use the net
proceeds from the sale of Preferred Securities ($120,340,000), which
will be loaned to EIC in exchange for EIC debt securities to be issued
to the Trust, to fund most of the cost of the acquisition of
approximately $144,550,000. EIC and its subsidiaries will fund the
remainder of the acquisition cost by reducing short-term investments
($15,674,000) and selling fixed maturity securities ($8,536,000).
Funds generated by subsidiaries for this purpose will be passed to EIC
in the form of dividends. The total amount of goodwill and other
intangibles deferred relating to the Transactions ($25,193,000), is
comprised of goodwill of $20,533,000 and $4,660,000 of estimated costs
of issuance of the Preferred Securities.
(D) For purposes of determining the pro forma effect of the BTV
acquisition on EIC's consolidated statement of income, the following
pro forma adjustments have been made:
Year ended Three months
December ended March
31, 1995 31, 1996
------------------------
Increase (Decrease)
Income
(Dollars in thousands)
Elimination of BTV's amortization of the unearned
revenue reserve relating to policies issued prior
to January 1, 1995 $5,067 $1,068
Deferral and amortization of sales loads on policies
acquired after the acquisition date (1,600) (785)
------------------------
3,467 283
Decrease in investment income resulting from reduction
of short-term investments and fixed maturities used
for the acquisition of BTV (1,504) (376)
Amortization over a period of 25 years of cost in
excess of net assets of company acquired (goodwill) (821) (205)
Elimination of deferred policy acquisition costs on
business issued prior to January 1, 1995 (666) (254)
Elimination of BTV's amortization of policy acquisition
costs relating to policies issued prior to January
1, 1995 2,506 672
Elimination of BTV's amortization of PVFP 1,862 248
Amortization of PVFP established at acquisition date (10,041) (2,029)
------------------------
(8,179) (1,781)
Elimination of interest expenses on $51,000 of short-
term debt of BTV paid off at acquisition date 3,104 724
Amortization of expenses deferred with the issuance
of the $125,000 of Preferred Securities (155) (39)
------------------------
2,949 685
------------------------
Pro forma income effect before income taxes and
dividends on Preferred Securities (2,248) (976)
Decrease in income taxes associated with above
adjustments and dividends on Preferred Securities 4,506 1,271
Elimination of BTV's deferred income taxes 172 (214)
------------------------
Pro forma tax benefit 4,678 1,057
------------------------
Pro forma income effect before dividends on Preferred
Securities 2,430 81
Dividends on Preferred Securities (10,625) (2,656)
------------------------
Pro forma income effect ($8,195) ($2,575)
========================
The allocation of the purchase price at the date of acquisition which is
expected to occur in the third quarter of 1996, will vary from those
reflected above, due, in part, to the following items: 1) The present
value of future profits and corresponding amortization thereof, will be
based upon the in force of Golden American at the date of the acquisition
and not the in force at March 31, 1996 as reflected on the pro forma
consolidated balance sheet, or January 1, 1995 utilized to determine the
adjustments on the pro forma consolidated income statements. 2) As Golden
American continues to write business in 1996, the amortized cost of fixed
maturities will increase, however, the market values of the fixed
maturities could vary based upon the changes in the level of interest
rates. 3) The level of goodwill established will be adjusted by the items
previously discussed and the ultimate market value of the assets and
liabilities at the acquisition date. Additionally, the pro forma income
statements reflect the issuance of $125,000,000 of Preferred Securities at
8.5%. The actual dividend rate established at issuance could vary, and the
corresponding dividend payment would be adjusted accordingly.
The actual effect on earnings is forecasted to be less than reflected above
based upon higher anticipated production levels by Golden American in 1996
and 1997 compared to the levels achieved in 1995 as well as anticipated
cost savings from consolidation which are not reflected in the pro forma
financial statements. Premium levels in the first quarter of 1996 for BTV
were $116,000,000 compared to $125,000,000 for all of 1995. The above
contains a forward looking statement. Actual results for BTV may vary
materially from forecasted results and will depend, among other things, on
interest rates, stock market performance, tax and regulatory changes,
investment performance of the underlying portfolios of the variable annuity
product, variable annuity product design and sales volume by significant
sellers of BTV's variable annuities.