1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 3, 1997
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA
(State of Incorporation)
NO. 1-7255 NO. 59-1219710
(Commission File No.) (IRS Employer Identification No.)
1776 AMERICAN HERITAGE LIFE DRIVE
JACKSONVILLE, FLORIDA 32224
(Address of Principal Executive Offices)
904/992-1776
(Registrant's Telephone No.)
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Listed below are the financial statements, pro forma financial
information and exhibits, if any, filed as part of this report.
(a) Financial statements of the business acquired.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Columbia Universal Corporation:
We have audited the accompanying consolidated balance sheets of
Columbia Universal Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Columbia Universal Corporation and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations, and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1.6 to the consolidated financial statements, in
1994 the Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
Coopers & Lybrand L.L.P.
Austin, Texas
February 18, 1997
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COLUMBIA UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
ASSETS
Investments:
Securities available-for-sale:
Debt securities $302,933,944 $293,796,113
Equity securities 2,360,390 2,955,307
Mortgage loans on real estate 2,335,997 2,920,850
Policy loans 18,334,100 18,460,493
Short-term investments 2,236,958 3,583,780
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 328,201,389 321,716,543
- ---------------------------------------------------------------------------------------------------
Cash 1,375,751 1,338,482
Accrued investment income 5,204,750 4,897,000
Policy acquisition costs 28,475,572 26,060,830
Acquisition related goodwill 1,657,637 1,709,067
Property and equipment 532,811 542,098
Other assets 3,025,530 3,315,489
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $368,473,440 $359,579,509
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities:
Life and annuity reserves $303,496,563 $287,776,591
Health reserves 3,395,933 3,603,508
Policy claims and benefits payable 1,362,046 2,245,930
Other policyholder funds 5,697,611 5,108,091
- ---------------------------------------------------------------------------------------------------
313,952,153 298,734,120
- ---------------------------------------------------------------------------------------------------
Federal income taxes 4,097,907 7,011,175
Note payable 6,969,662 8,352,790
Other liabilities 5,517,490 3,887,880
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 330,537,212 317,985,965
- ---------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- --
Common stock (issued and outstanding:
1996 - 4,478,403 shares; 1995 - 4,478,403 shares) 44,784 44,784
Additional Paid-in capital 11,444,042 11,444,042
Net unrealized capital gains 1,990,443 7,826,071
Retained earnings 24,456,959 22,278,647
- ---------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 37,936,228 41,593,544
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $368,473,440 $359,579,509
===================================================================================================
See accompanying notes to consolidated financial statements.
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COLUMBIA UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance revenues:
Interest-sensitive life and annuity $ 6,209,669 $ 6,483,385 $ 6,184,787
Traditional life and annuity 5,842,052 5,274,670 4,104,264
Health insurance 2,410,003 2,681,796 7,928,777
Reinsurance premiums (1,928,487) (2,006,267) (2,409,117)
Net investment income 23,996,272 23,554,314 20,371,884
Net realized investment gains 1,080,224 1,539,511 1,217,321
- -------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 37,609,733 37,527,409 37,397,916
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Life and annuity benefits 8,687,804 9,187,452 10,099,826
Health insurance benefits 1,576,943 2,190,837 4,863,053
Reinsurance recoveries (1,680,938) (1,716,046) (2,191,823)
Interest credited to policyholder funds 14,278,100 13,834,156 11,675,659
Decrease in policy reserves (660,481) (821,371) (1,149,879)
Amortization of policy acquisition costs 4,504,880 3,594,099 3,015,626
Commissions 725,633 758,689 1,222,016
Other operating expenses 5,110,202 4,693,056 5,414,469
Interest 660,254 831,395 755,251
Adjustment to sales price on health business 1,329,572 -- --
Terminated merger/public offering expenses 441,488 -- --
- -------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 34,973,457 32,552,267 33,704,198
- -------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 2,636,276 4,975,142 3,693,718
Federal income taxes 457,964 942,661 564,584
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,178,312 $ 4,032,481 $ 3,129,134
===================================================================================================================
Net income per share $ .48 $ .90 $ .70
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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COLUMBIA UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Net Unrealized Total
Common Stock Paid-in Investment Retained Shareholders'
For the Years Ended December 31, Shares Amount Capital Gains (Losses) Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 4,478,103 44,781 11,442,620 (51,927) 15,117,032 26,552,506
Adjustment arising from
application of SFAS 115 3,375,938 3,375,938
Issuance of common stock 200 2 948 950
Change in net unrealized
investment gains (losses) (4,556,291) (4,556,291)
Net income 3,129,134 3,129,134
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,478,303 44,783 11,443,568 (1,232,280) 18,246,166 28,502,237
Issuance of common stock 100 1 474 475
Adjustment arising from
application of Guide 115 3,801,762 3,801,762
Change in net unrealized
investment gains (losses) 5,256,589 5,256,589
Net income 4,032,481 4,032,481
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,478,403 44,784 11,444,042 7,826,071 22,278,647 41,593,544
Change in net unrealized
investment gains (losses) (5,835,628) (5,835,628)
Net income 2,178,312 2,178,312
==============================================================================================================================
Balance, December 31, 1996 4,478,403 $ 44,784 $11,444,042 $ 1,990,443 $24,456,959 $37,936,228
=============================================================================================================================
See accompanying notes to consolidated financial statements.
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COLUMBIA UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,178,312 $ 4,032,481 $ 3,129,134
Adjustments to reconcile net income to cash
provided by operating activities:
Interest credited to policyholder funds 14,278,100 13,834,156 11,675,659
Charges against policyholder funds (6,209,669) (6,483,385) (6,204,533)
Net realized investment gains (1,080,224) (1,539,511) (1,217,321)
Depreciation and amortization 280,771 268,503 281,115
Federal income taxes 92,965 374,388 (459,354)
Accrued investment income and accrual of discounts
and amortization of premiums on investments (482,340) (1,719,433) (1,472,380)
Policy acquisition costs (526,510) (438,286) (662,919)
Policy reserves (660,481) (821,371) (1,149,879)
Accrued benefits and general expenses 59,173 (312,057) (1,593,967)
Other 1,057,683 248,950 223,819
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,987,780 7,444,435 2,549,374
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments sold:
Available-for-sale 24,517,617 24,623,159 8,730,632
Held-to-maturity -- 1,079,570 --
Other -- -- 189,878
Investments called or matured:
Available-for-sale 19,659,840 16,935,849 17,156,136
Held-to-maturity -- 197,057 186,970
Other 612,143 631,123 2,166,211
Investments acquired (62,189,322) (60,178,100) (69,162,482)
Decrease (increase) in short-term investments 1,346,822 (148,529) 2,945,037
Increase (decrease) in policy loans 126,393 (258,666) (293,787)
Purchase of property and equipment (198,776) (260,291) (252,886)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (16,125,283) (17,378,828) (38,334,291)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interest-sensitive life and annuity premiums 30,826,057 34,432,935 47,448,138
Interest-sensitive life and annuity withdrawals (22,251,285) (23,313,005) (18,686,912)
Cash received in assumption reinsurance transactions -- 1,352,470 7,279,309
Repayment of note payable (1,400,000) (1,200,000) (1,250,000)
Note payable refinancing costs -- -- (76,626)
Proceeds from issuance of common stock -- 475 950
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,174,772 11,272,875 34,714,859
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 37,269 1,338,482 (1,070,058)
Cash at beginning of year 1,338,482 -- 1,070,058
- -------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,375,751 $ 1,338,482 $ --
=========================================================================================================================
See accompanying notes to consolidated financial statements.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
1.1 Principles of Consolidation and Basis of Presentation
The consolidated financial statements have been prepared according to
generally accepted accounting principles ("GAAP"). The Financial
Accounting Standards Board ("the FASB") and the American Institute of
Certified Public Accountants ("the AICPA") are the primary standards
setting authorities for GAAP. The preparation of financial statements
according to GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ
from those estimates.
The consolidated financial statements include the accounts of Columbia
Universal Corporation ("CUC") and its wholly-owned subsidiaries,
Columbia Universal Life Insurance Company ("CULIC") and Columbia
Universal Financial Corporation ("CUFC"), collectively referred to as
the "Company". In preparing the consolidated financial statements, all
material intercompany balances and transactions have been eliminated.
CULIC is required to file financial statements with the National
Association of Insurance Commissioners ("NAIC") and with various
insurance regulatory authorities in the states in which it is licensed
to conduct business. Those financial statements are prepared according
to accounting principles that are prescribed or permitted by the NAIC
or the Texas Department of Insurance, which is the regulatory authority
in CULIC's home state. Statutory accounting principles differ from
those used in the accompanying consolidated financial statements.
Reconciliations of net income and shareholders' equity from the basis
of accounting used for statutory reporting purposes to the basis used
in the accompanying consolidated financial statements are included in
Note 15.
Certain amounts for the years ended December 31, 1995 and 1994, have
been reclassified to conform with current year classifications.
1.2 Proposed Sale of Company
On January 2, 1997, the Company entered into an agreement with American
Heritage Life Investment Corporation, a Florida corporation (AHL), and
an affiliate of AHL, whereby the affiliate of AHL will merge into CUC.
Pursuant to the agreement, approximately $44 million will be paid for
all of the outstanding common stock of CUC and to fund the cancellation
of options to purchase common stock of CUC. The transaction is subject
to regulatory approval and is expected to close on or about March 1,
1997. Under the terms of the agreement, the transaction must close
prior to April 15, 1997. No adjustments have been made to these
financial statements as a result of this transaction.
1.3 Insurance and Investment Contracts
Insurance products are generally classified either as short-duration or
long-duration.
Short-duration contracts typically provide insurance coverage for a
period of one year or less and allow the insurance company to cancel
the contract or adjust its provisions at the end of the contract
period. Certain term life insurance products are classified as
short-duration contracts. Accident and health insurance products may be
short-duration or long-duration, depending upon whether the contracts
are expected to remain in force for an extended time.
Long-duration contracts include products such as whole-life, universal
life, guaranteed renewable term life and annuities that are expected to
remain in force for a period exceeding one year.
Long-duration contracts whose terms are fixed and guaranteed throughout
the contract period are further classified as traditional contracts.
Long-duration contracts whose terms are not fixed or guaranteed are
classified as universal life insurance policies.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-duration contracts that do not subject an insurance company to
risk of loss arising from policyholder mortality or morbidity are
classified as investment products. Mortality or morbidity risk is
present if, according to the terms of the contract, an insurance
company is required to make payments or forego premiums contingent upon
the death, disability or continued survival of a specific individual.
1.4 Recognition of Insurance Revenues
Premiums from short-duration contracts are recorded in the income
statement as revenue over the life of the contract in proportion to the
amount of insurance protection provided.
Premiums from traditional contracts are recorded as revenue when they
become due from the policyholder.
Premiums from universal life insurance policies and investment products
are not reported as revenue in income statements prepared according to
GAAP. Instead, revenues from these products consist of amounts deducted
from policy account balances for the cost of insurance, policy
administration fees and surrender charges and are generally reported in
the period deducted. If such amounts represent compensation for future
services however, they are recorded as an unearned revenue liability in
the balance sheet and are taken into income over the periods benefited
using the same assumptions and factors used to amortize policy
acquisition costs. Revenues from universal life insurance policies and
investment contracts are reported in the income statement under the
caption "interest sensitive life and annuity."
1.5 Policy Liabilities, Benefits and Expenses
Reserves for future policy benefits for universal life insurance
policies and investment products represent policy account balances
without reduction for surrender charges. Interest is credited to the
account balances at variable rates of interest, which ranged between
2.5% and 12.30% during the three year period ended December 31, 1996.
Reserves for future policy benefits for all other traditional life
insurance products are computed using a net level premium method based
upon estimated investment yields, mortality, persistency and other
assumptions appropriate at the time the policies are issued. These
estimates are based upon expected company experience adjusted to
provide for possible adverse deviation. Estimated investment yields
range from 9.7% to 6.5%. Estimated mortality is based upon select and
ultimate tables common in the industry.
Reserves for future policy benefits for accident and health insurance
include unearned premiums, additional reserves based upon tables common
in the industry with a level 3% interest assumption and the present
value of amounts not yet due discounted at 3%. Unearned premium
reserves totaled $307,453 at December 31, 1996, and $369,874 at
December 31, 1995. The present value of amounts not yet due totaled
$322,116 and $388,872, respectively.
1.6 Debt and Equity Securities
Effective December 31, 1995, all of the Company's investments in debt
and equity securities have been classified as available-for-sale and
are reported at their estimated market values.
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" was adopted on
January 1, 1994. Under Statement 115, companies are required to
classify securities as "available-for-sale", "held-to-maturity", or
"trading." The Company classified approximately 47% of its
fixed-maturity securities portfolio as available-for-sale, with the
remainder classified as held-to-maturity. Securities classified as
available-for-sale are carried at market value with unrealized gains or
losses, net of offsetting effects on deferred policy acquisitions costs
and present value of future profits and deferred income taxes recorded
as a component of shareholders' equity. Securities classified as
held-to-maturity are carried at amortized cost. As a result of such
classifications, the January 1, 1994 balance of shareholders' equity
was increased by $3,375,938 (net of $2,003,920 allowance against
deferred policy acquisition costs and net of deferred taxes of
$1,739,120) to reflect the net unrealized gains on securities
classified as available-for-sale that were previously carried at
amortized cost. Prior to the adoption of Statement 115, the Company
carried all of its fixed-maturity securities at amortized cost.
Adoption of Statement 115 had no effect on net income.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1995, the FASB issued, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (Guide 115). Guide 115 permits companies to make a one-time
reassessment of their allocation of securities between "trading,"
"available-for-sale," or "held-to-maturity" without calling into
question the ability or intent of companies to hold their securities to
maturity. Effective December 31, 1995, the company elected to
reclassify all of its assets previously classified as held-to-maturity
to available-for-sale. As a result of this reclassification, the
reported balance of shareholders' equity increased $3,801,762.
Application of Guide 115 had no effect on operations.
1.7 Mortgage Loans
Mortgage loans are reported at amortized cost, less an allowance for
possible losses.
1.8 Policy Loans
Policy loans, which are collateralized by cash surrender values on the
underlying insurance contracts, are reported at their unpaid principal
balance.
1.9 Short-term Investments
Investments that mature in one year or less are classified as
short-term investments and are reported at cost which approximates
their estimated market values.
1.10 Investment Gains and Losses
Realized investment gains and losses are recognized using the specific
identification method and include losses due to the decline in the
estimated fair market value of investments that are considered to be
permanent. Realized investment gains and losses are reported in the
income statement as a component of total revenues.
Unrealized investment gains and losses, which arise from changes in the
estimated fair market values of available-for-sale securities are
recorded as a separate component of shareholders' equity, after
adjustment for the offsetting effects of policy acquisition costs,
unearned revenues and deferred income taxes.
1.11 Policy Acquisition Costs
The costs of selling an insurance policy, including agents'
commissions, underwriting and issue expenses and other expenses
directly associated with the selling process are capitalized and
included in the balance sheet under the caption "policy acquisition
costs." These costs are commonly called "deferred policy acquisition
costs." Also included in policy acquisition costs are costs associated
with the purchase of groups of insurance policies from other insurance
companies, called the "present value of future profits."
Policy acquisition costs associated with universal life insurance
policies and investment products are charged to expense over the lives
of the contracts in relation to the estimated gross profits from those
contracts, including realized investment gains and losses.
Policy acquisition costs related to traditional insurance contracts are
charged to expense over the lives of the contracts as the premiums are
earned.
The company periodically reviews the carrying value of policy
acquisition costs for indications that the balance may not be
recoverable. At December 31, 1996, the reported value of policy
acquisition costs is considered appropriate. See Note 4 for an analysis
of the changes in the balance of policy acquisition costs.
1.12 Acquisition-Related Goodwill
Acquisition-related goodwill is amortized on the straight-line basis
over 40 years. Accumulated amortization was $385,724 at December 31,
1996 and $334,293 at December 31, 1995. The carrying value of goodwill
is regularly reviewed for any indication of a permanent impairment in
value. At December 31, 1996, the reported value and remaining life of
acquisition-related goodwill were considered appropriate.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.13 Property and Equipment
Property and equipment is carried at cost less allowances for
accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line basis over the estimated
useful lives of the assets, or in the case of leasehold improvements,
over the lease term. Maintenance and repairs are charged to expense
when incurred. Profits or losses resulting from the disposal of
property and equipment are included in earnings.
1.14 Income Taxes
Beginning December 31, 1996, CUC files a life/non-life consolidated
federal income tax return with CUFC and CULIC. The tax liability of the
affiliated group is allocated based upon a ratio of each affiliate's
taxable income to the taxable income of the group. At December 31,
1995, CUC filed a consolidated federal income tax return with CUFC, and
CULIC filed a separate tax return.
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recorded for
temporary differences between the tax basis and financial reporting
basis of assets and liabilities, using enacted tax rates expected to be
in effect when the temporary differences reverse.
Deferred income taxes have not been provided for that portion of
CULIC's retained earnings designated as "policyholders' surplus"
because such taxes would become payable only to the extent that such
retained earning should be distributed as dividends or exceed certain
limitations prescribed by federal law. Distributions are not
contemplated from this portion of retained earnings, which totaled
$2,067,300 at December 31, 1996.
1.15 Statement of Cash Flows
For purposes of the statement of cash flows, "cash" includes cash on
hand and demand deposits.
1.16 New Accounting Standards
In October 1995, the FASB issued Statement 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. Statement 123 encourages, but does
not require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments based on new fair
value accounting rules outlined in the statement. Companies electing
not to adopt the new rules will continue to apply existing accounting
rules contained in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." While application of the
new accounting rules contained in Statement 123 is not mandatory,
companies that choose not to adopt Statement 123 must disclose the pro
forma effects of the new rules on net income and earnings per share.
The company has chosen to adopt the disclosure requirements of
Statement 123, effective for the year ended December 31, 1996. See Note
8.2.
2. Acquisitions and Divestitures
2.1 Acquisitions
The company has, from time to time, purchased blocks of life, health
and annuity policies in assumption reinsurance transactions. The
difference between the assets received and the liabilities assumed, or
"present value of future profits," is recorded as an asset in the
consolidated balance sheet under the caption "policy acquisition
costs." See Note 4.
2.2 Divestitures
Effective April 30, 1994, the Company sold all of its directly written
major medical business in an assumption reinsurance transaction. The
effect of the transaction on net income and shareholders' equity net of
certain restructuring costs, was insignificant. In accordance with the
Agreement of Reinsurance (Agreement) related to such sale, a subsequent
adjustment to the sales price was to occur on the "consummation date",
as defined in the Agreement no later than 15 months after the date of
sale. On the consummation date the Company and the purchaser did not
agree on the subsequent adjustment and in accordance with the
Agreement, any dispute would be settled through Arbitration. In
November 1996, the purchaser was granted an arbitration award of
approximately $1.2 million. The Company recognized costs and expenses
of $1,329,572 in conjunction with this revision to the 1994 sales price
during the year ended December 31, 1996.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investments
3.1 Net Investment Income
Net investment income earned during the years ended December 31, by
category of investment is summarized as follows:
1996 1995 1994
===================================================================================================================
Fixed maturities $ 22,275,972 $ 21,732,239 $ 18,443,774
Equity securities 236,294 233,156 249,298
Mortgage loans 287,590 340,305 440,713
Policy loans 1,243,433 1,182,122 1,156,341
Short=term investments 319,001 328,778 232,233
Other 13,837 16,273 317,290
==================================================================================================================
Gross investment income 24,376,127 23,832,873 20,839,649
===================================================================================================================
Investment expenses (379,855) (278,559) (467,765)
===================================================================================================================
Net investment income $ 23,996,272 $ 23,554,314 $ 20,371,884
===================================================================================================================
The reported value of investments that have produced no investment
income for the year ended December 31, 1996, is not material to the
company's consolidated financial position.
3.2 Realized Investment Gains and Losses
Investment gains and losses realized during the years ended December 31
are presented below.
1996 1995 1994
----------------------------------------------------------------------------------------------------
From sale or redemption:
Securities available-for-sale:
Fixed maturities:
Gross realized gains $ 1,483,037 $ 1,628,137 $ 1,113,038
Gross realized losses (402,677) (27,415) (18,928)
Equity securities:
Gross realized gains 70,600 21,957 34,253
Gross realized losses (62,500) (18,318) (16,523)
Securities held-to-maturity:
Gross realized gains -- 85 53,194
Gross realized losses -- (64,975) (51,231)
Mortgage loans, real estate and other (8,236) 40 115,518
----------------------------------------------------------------------------------------------------
1,080,224 1,539,511 1,229,321
From permanent declines in estimated fair market values -- -- (12,000)
----------------------------------------------------------------------------------------------------
Net realized gains $ 1,080,224 $ 1,539,511 $ 1,217,321
====================================================================================================
During 1995, certain securities classified as held-to-maturity were
sold due to concerns about the continued credit worthiness of the
issuers. At the time of sale, the securities had an aggregate book
value of $1,144,147 and the company recognized aggregate losses of
$64,577.
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.3 Available-for-Sale Securities
A summary of investments classified as available-for-sale at December
31, 1996 and 1995, is presented below.
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
Fixed-maturities:
U.S. government and government
agencies and authorities $ 8,854,226 $ 381,493 $ 64,666 $ 9,171,053
States, municipalities and political
subdivisions 345,900 22,556 -0- 368,456
Foreign governments 1,729,063 10,819 20,302 1,719,580
Public utilities 80,070,818 1,993,921 1,236,780 80,827,959
All other corporate bonds 118,980,335 3,558,862 1,441,831 121,097,366
Collateralized mortgage obligations 48,244,051 750,596 553,102 48,441,545
Mortgage backed securities 40,712,902 725,278 130,195 41,307,985
---------------------------------------------------------------------------------------------------------------------
298,937,295 7,443,525 3,446,876 302,933,944
Equity securities 2,406,644 14,204 60,458 2,360,390
---------------------------------------------------------------------------------------------------------------------
Total $301,343,939 $ 7,457,729 $ 3,507,334 $305,294,334
=====================================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
Fixed-maturities:
U.S. government and government
agencies and authorities $ 6,916,606 $ 746,772 $ -- $ 7,663,378
States, municipalities and political
subdivisions 828,442 66,484 -- 894,926
Foreign governments 1,739,528 47,957 -- 1,787,485
Public utilities 66,063,428 3,689,731 503,509 69,249,650
All other corporate bonds 100,499,686 7,426,462 416,777 107,509,371
Collateralized mortgage obligations 59,085,433 2,631,857 72,384 61,644,906
Mortgage backed securities 43,897,842 1,163,167 14,612 45,046,397
---------------------------------------------------------------------------------------------------------------------
279,030,965 15,772,430 1,007,282 293,796,113
Equity securities 3,055,405 41,673 141,771 2,955,307
---------------------------------------------------------------------------------------------------------------------
Total $282,086,370 $ 15,814,103 $ 1,149,053 $296,751,420
=====================================================================================================================
3.4 Unrealized Investment Gains and Losses
Changes in unrealized investment gains and (losses) during the years
ended December 31, are summarized below.
1996 1995 1994
---------------------------------------------------------------------------------------------
Debt Securities $(10,768,499) $ 17,354,882 $ (9,708,716)
Equity securities 53,844 330,320 (294,668)
---------------------------------------------------------------------------------------------
(10,714,655) 17,685,202 (10,003,384)
Policy acquisition costs and unearned revenue 1,872,796 (3,960,709) 3,082,674
Deferred income taxes 3,006,231 (4,666,142) 2,364,419
---------------------------------------------------------------------------------------------
Total $ (5,835,628) $ 9,058,351 $ (4,556,291)
=============================================================================================
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.5 Contractual Maturities
The amortized cost and estimated market value of the company's
investments in debt securities at December 31, 1996, are summarized by
contractual maturity below.
Estimated
Amortized Market
Available-for-Sale Cost Value
---------------------------------------------------------------------------
Securities due on a single maturity date:
Due in one year or less $ 695,974 $ 705,554
Due after one year through five years 11,461,907 11,735,755
Due after five years through ten years 45,538,622 45,204,455
Due after ten years 152,283,839 155,538,650
Securities not due on a single maturity date:
Collateralized mortgage obligations 48,244,051 48,441,545
Mortgage backed securities 40,712,902 41,307,985
---------------------------------------------------------------------------
Total $298,937,295 $302,933,944
===========================================================================
Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay their obligations. In
addition, changes in corporate investment strategies or other
requirements may result in the sale of investments prior to their
contractual maturity date.
3.6 Deposits with State Insurance Departments
Life insurance companies are required to maintain a certain amount of
assets on deposit with state insurance departments. CULIC had assets
with a total carrying value of $5,092,642 on deposit at December 31,
1996.
4. Policy Acquisition Costs
An analysis of policy acquisition costs for each of the years ended
December 31, is presented below:
1996 1995 1994
---------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs:
Balance at January 1, $ 17,124,034 $ 18,441,301 $ 18,781,108
Acquisition costs deferred 5,031,389 4,032,385 3,678,545
Amortization (3,068,083) (2,011,499) (3,130,235)
Amortization related to capital gains (322,331) (416,389) (138,342)
Adjustment arising from sale of major medical business -- -- (1,682,360)
Adjustment arising from unrealized (gains) and losses 1,231,662 (2,023,644) 2,111,532
Accounting change (SFAS 115 and Guide 115) -- (898,120) (1,178,947)
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 19,996,671 17,124,034 18,441,301
---------------------------------------------------------------------------------------------------------------------
Present value of future profits:
Balance at January 1, 8,936,796 11,216,417 11,827,991
Acquisitions -- -- 174,421
Interest added 737,855 872,990 943,946
Amortization (1,799,006) (1,916,919) (1,732,320)
Amortization related to capital gains (53,314) (122,282) (143,790)
Adjustment arising from unrealized
investment (gains) and losses 656,570 (618,324) 971,142
Effects of SFAS115 and Guide 15 -- (495,086) (824,973)
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 8,478,901 8,936,796 11,216,417
---------------------------------------------------------------------------------------------------------------------
Total $ 28,475,572 $ 26,060,830 $ 29,657,718
-14-
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest is added to the balance of present value of future profits
("PVFP") at rates that range from 6.15% to 18.0%. The December 31,
1996, the balance of PVFP is expected to amortize according to the
following rates in each of the next five years: 1997 - 6.8%; 1998 -
6.2%; 1999 - 5.7%; 2000 - 5.2% and 2001 - 4.7%.
As a result of a reevaluation of costs included with the production of
new business during 1996, the Company increased deferred policy
acquisition costs capitalized by approximately $774,000.
5. Property and Equipment
A summary of property and equipment at December 31, is as follows:
1996 1995
-----------------------------------------------------------------------------
Furniture and equipment $2,222,023 $2,175,557
Leasehold improvements 42,998 42,998
-----------------------------------------------------------------------------
2,265,021 2,218,555
Less accumulated depreciation and amortization 1,732,210 1,676,457
-----------------------------------------------------------------------------
Net property and equipment $ 532,811 $ 542,098
=============================================================================
6. Long-term Debt
Long-term debt consists of a bank note due on July 1, 2000. The note
bears interest at 1/2% above the bank's "general reference rate of
interest," which was 8.25% at December 31, 1996. The note is
collateralized by all of the outstanding common stock of CULIC.
The note is subject to a loan agreement that, among other things,
prohibits the payment of dividends or issuance or repurchase of common
stock by CUC without the prior consent of the bank, requires that any
distributions exceeding an aggregate of $250,000 to CUC from any of its
subsidiaries be used to prepay the note, and requires that the Company
meet certain debt coverage ratios and maintain adjusted statutory
capital and surplus of at least $9,000,000.
The following is a schedule of principal maturities under the note as
of December 31, 1996:
---------------------------------------------------------------
1997 1,600,000
1998 1,800,000
1999 1,800,000
2000 1,800,000
---------------------------------------------------------------
7,000,000
Unamortized refinancing costs (30,338)
---------------------------------------------------------------
Total $6,969,662
===============================================================
7. Federal Income Taxes
7.1 Federal Income Tax Expense
Federal income tax expense (benefits) at December 31, was as follows:
1996 1995 1994
---------------------------------------------------------------------------------------
Current tax expense $325,740 $615,815 $919,257
Deferred tax expense (benefit) 132,224 326,846 (354,673)
---------------------------------------------------------------------------------------
Total $457,964 $942,661 $564,584
-15-
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company's effective income tax rate is lower than the statutory
corporate federal income tax rate of 34%. A reconciliation of the
difference for the years ended December 31, is as follows:
1996 1995 1994
----------------------------------------------------------------------------------
Expected income tax at 34% $ 896,334 $ 1,691,548 $ 1,255,864
Small life insurance company deduction (469,226) (587,102) (508,154)
Valuation allowance -- (172,343) --
Other 30,856 10,558 (183,126)
----------------------------------------------------------------------------------
Provision for federal income taxes $ 457,964 $ 942,661 $ 564,584
==================================================================================
Effective tax rate 17% 19% 15.3%
==================================================================================
Federal income taxes for 1995 were reduced by $172,343 as a result of a
reversal of deferred tax asset valuation allowances which were
established in prior years due to uncertainties about the Company's
ability to realize its net operating loss carryforwards. Management has
identified certain tax planning strategies that will, more likely than
not, enable the Company to realize the net operating loss
carryforwards.
7.2 Federal Income Tax Liabilities
Federal income tax liabilities (assets) at December 31, were as
follows:
1996 1995
----------------------------------------------------------------------------
Current tax $ (350,154) $ (310,894)
Deferred tax applicable to:
Income 3,497,273 3,365,049
Net unrealized gains and losses on securities 950,788 3,957,020
----------------------------------------------------------------------------
Net deferred tax liabilities 4,448,061 7,322,069
----------------------------------------------------------------------------
Total federal income tax liabilities $ 4,097,907 $ 7,011,175
============================================================================
The components of deferred tax (assets) and liabilities at December 31,
were as follows:
1996 1995
----------------------------------------------------------------------
Deferred tax assets:
Policy liabilities and accruals (3,594,450) (3,480,994)
Unearned investment income (161,795) (161,976)
Net operating loss carryforwards (354,807) (205,750)
Other (238,508) (172,378)
----------------------------------------------------------------------
Deferred tax assets (4,349,560) (4,021,098)
----------------------------------------------------------------------
Deferred tax liabilities:
Investments 1,372,448 4,983,703
Policy acquisition costs 7,399,673 6,333,964
Other 25,500 25,500
----------------------------------------------------------------------
Deferred tax liabilities 8,797,621 11,343,167
----------------------------------------------------------------------
Net deferred tax liabilities $ 4,448,061 $ 7,322,069
======================================================================
-16-
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.3 Federal Income Taxes Paid
The company paid federal income taxes of $365,000 in 1996, $568,274 in
1995, and $1,122,500 in 1994.
7.4 Net Operating Loss Carryforwards
At December 31, 1996, CUC and CUFC had net operating loss carryforwards
of $1,043,551 that expire in 1999 through 2010. The utilization of
these carryforwards is dependent upon CUC and CUFC generating taxable
income. Additionally, certain limitations will result if the proposed
sale described in Note 1.2 is consummated.
8. Capital Stock
8.1 Classes of Capital Stock
The authorized capital stock of CUC consists of 5,000,000 shares of
preferred stock and 10,000,000 shares of common stock, both of which
have a par value of $.01 per share. The preferred stock may be issued
in one or more series with the respective designations, rights and
preferences of each series determined by the Board of Directors. None
of the preferred stock has been issued. At December 31, 1996, 4,478,403
shares of common stock were held by shareholders of record.
8.2 Stock Options
The Company maintains an incentive stock option plan under which
certain officers and key employees may be granted options to purchase
shares of common stock. The Company applies APB Opinion 25 and related
interpretations in accounting for its plan. Typically, the Company has
not recognized compensation cost for its plan because the difference
between the exercise price of each option has not been significantly
different than the estimated face value of the Company's stock at the
date of grant. Had compensation costs for the Company's plan been
determined based on the fair value at the grant dates for awards under
the plan consistent with the method of SFAS No. 123, net income would
not have been reduced by a material amount. The fair value of each
option is estimated on the date of grant using the minimum value method
prescribed by SFAS No. 123 assuming a risk free interest rate of 7% and
a brief discount period given the probability that the merger explained
in Note 1.2 will close in the first quarter of 1997.
The Compensation and Benefits Committee of the Company determines
participation eligibility and the number of options to be awarded. No
options may be awarded to any person who owns more than 5% of the
Company's outstanding common stock. The options are 20% vested
immediately with the balance vesting at a rate of 20% per year. The
options expire six years from the date of grant.
-17-
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the stock option plan is as follows:
Shares Options Outstanding
Available Option
for Grant Shares Price
-------------------------------------------------------------------------------------
Balance at January 1, 1994 11,750 188,250 $4.75-$7.00
Options:
Granted (5,000) 5,000 4.75
Exercised -- (200) 4.75
Forfeited 2,800 (2,800) 4.75
Expired 6,750 (6,750) 7.00
-------------------------------------------------------------------------------------
Balance at December 31, 1994 16,300 183,500 4.75-7.00
Options:
Granted (5,000) 5,000 4.75
Exercised -- (100) 4.75
Forfeited 40,000 (40,000) 4.75-7.00
Expired 20,000 (20,000) 7.00
-------------------------------------------------------------------------------------
Balance at December 31, 1995 71,300 128,400 4.75-7.00
Options:
Granted (55,500) 55,500 5.25
Exercised -- -- --
Forfeited 29,000 (29,000) 4.75-7.00
Expired 28,500 (28,500) 7.00
-------------------------------------------------------------------------------------
Balance at December 31, 1996 73,300 126,400 $4.75-$7.00
=====================================================================================
In addition to options granted under the incentive stock option plan,
51,500 options were granted to the company's chairman during 1995. The
options are immediately exercisable at a price of $4.75 and expire six
years from the date of grant. At December 31, 1996, there were 152,100
exercisable options outstanding at an average price of $5.19 per share.
8.3 Earnings Per Share
Earnings per share common share is computed by dividing net income by
the weighted average number of common shares outstanding. Weighted
average common shares outstanding include common share equivalents from
assumed exercise of stock options and are determined by application of
the treasury stock method.
Weighted average common shares outstanding, including common share
equivalents, used in computing earnings per share were 4,532,802 for
1996, 4,483,283 for 1995 and 4,478,204 for 1994.
9. Employee and Agent Benefit Plans
9.1 Self-Insured Health Plan
The Company maintains a self-insured health plan for all full-time
employees. Premiums are only collected from those employees who elect
to have dependents covered by the plan. The plan is reinsured with the
Company's retention being $100,000 per year, per person. Benefit costs
under the plan net of premiums collected, which are recorded in the
consolidated income statement under the caption "other operating
expenses", were $209,100 in 1996, $239,896 in 1995 and $115,513 in
1994.
9.2 Retirement Plans
The Company has a 401(k) incentive savings plan that covers all
employees after a one-year service period. The
-18-
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COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company is required to make an annual fixed contribution into the plan
of 1.5% of each participant's salary. In addition, the Company is
required to match a percentage of the first 6% of each participant's
contribution to the plan. This matching percentage is determined each
year by the Compensation and Benefits Committee and is required to
range between 25% and 75%. The matching percentage was 50% in 1996, 25%
in 1995 and 75% in 1994. The expense for contributions by the Company
to the incentive savings plan, net of non-vested balances recovered
from terminated employees, was $66,365 in 1996, $19,440 in 1995 and
$83,919 in 1994.
The Company also has a non-contributory defined benefit pension plan.
The plan was frozen effective December 31, 1994, and as a result, all
accumulated plan benefits became fully vested. No additional benefits
will accrue under the plan.
The expense of the plan for the years ended December 31, was as
follows:
1996 1995 1994
-----------------------------------------------------------------------
Annual pension expense:
Service cost $ -- $ -- $ 94,629
Interest cost 55,112 57,749 59,858
Return on assets (56,254) (127,276) 5,966
Net amortization and deferral 5,287 195,711 (48,529)
-----------------------------------------------------------------------
Net periodic cost $ 4,145 $ 126,184 $ 111,924
=======================================================================
A reconciliation of the funded status of the plan at December 31, is as
follows:
1996 1995
------------------------------------------------------------------
Projected benefit obligation $ 823,813 $ 827,451
Plan assets available for benefits (750,934) (768,240)
------------------------------------------------------------------
Funded status 72,879 59,211
Unrecognized net (gain) loss (1,492) 8,031
Unrecognized transition amount -- --
Additional minimum liability 1,492 --
------------------------------------------------------------------
Accrued pension liability $ 72,879 $ 67,242
==================================================================
The expected long-term rate of return on assets was 7.0% in 1996, 1995,
1994. The average assumed discount rate was 7.0% in 1996 and 1995 and
7.5% in 1994. Plan assets are held primarily in various publicly-traded
investment funds unrelated to the Company. These funds invest in
stocks, bonds and money market instruments.
9.3 Incentive Compensation Plan
The Company has an incentive compensation plan in effect that
compensates key employees for both company and personal performance
during a calendar year. Expense under the plan was $92,300, $107,000
and $72,500 for the plan years ended December 31, 1996, 1995 and 1994,
respectively.
9.4 Postretirement and Postemployment Benefits Other Than Pensions
The Company has a non-contributory group term life insurance plan which
covers all employees who retire after reaching age 65 with 5 years of
service or employees who are totally and permanently disabled and have
completed 10 years of service. Benefits terminate upon early
retirement, or other separation from service. The plan provides for a
death benefit of an employee's final salary up to age 70. The benefit
grades downward 10% per year until the amount is 50% of the final
salary after age 75. The accumulated post retirement benefit obligation
of $103,700 for retirees and $65,300 for actives was expensed during
1996. The average assumed discount rate was 7% and the assumed salary
progression was 5% per year.
-19-
20
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments, Contingencies Restrictions, Risks and Uncertainties
10.1 Reinsurance
As is customary in the insurance industry, CULIC reinsures a portion of
its life and health insurance risk with unaffiliated insurance carriers
under traditional indemnity reinsurance arrangements (called "ceded
reinsurance"). Under these arrangements, the other carriers agree to
accept responsibility for some of the risks underwritten by CULIC. The
primary purpose of ceded reinsurance is to protect the company from
potential losses in excess of amounts it is willing to accept.
CULIC's retention limits for life insurance range up to a maximum of
$125,000 per life. The maximum retention for health insurance is
$100,000 per individual, per year. Reinsurance premiums paid for life
insurance were $1,895,631 in 1996, $1,974,380 in 1995 and $1,997,795 in
1994. The face amount of life insurance in force ceded to other
companies was $431,396,470 at December 31, 1996 and $468,771,664 at
December 31, 1995 and $482,137,029 at December 31, 1994. Reinsurance
premiums paid for health insurance were $32,856 in 1996, $31,887 in
1995 and $411,322 in 1994.
Reinsurance assets, which include amounts recoverable from reinsurers
for paid and unpaid claims and reserve credits on ceded business were
$1,947,345 and $2,176,967 at December 31, 1996 and 1995.
CULIC's reinsurance assets at December 31, 1996, relate to
approximately 21 reinsurers. Four major insurance companies
individually account for 10% or more of total reinsurance assets, and
approximately 53% in total. One company which reinsures health
business, accounts for 13.2% of reinsurance assets and is rated "B".
The other three major companies are each rated "A" or better. Ratings
are provided by AM Best, a recognized insurance company rating agency.
In the event that the reinsuring companies were unable to meet their
responsibilities under the reinsurance arrangements, CULIC would be
liable for that portion of the risk ceded to those companies.
10.2 Lease Commitments
The company leases its home office facilities under a five-year
non-cancelable lease agreement, which expires in December of 1998. The
lease provides a renewal option for one five year period at prevailing
market rates. Minimum rentals under the terms of the lease, including
rent escalations, are as follows:
=======================================================================
1997 468,312
1998 477,311
-----------------------------------------------------------------------
Total $945,623
=======================================================================
Total rental expense was $524,488 in 1996, $462,199 in 1995 and
$524,965 in 1994.
10.3 Litigation
The company is the defendant in several lawsuits that have arisen in
the normal course of its insurance operations. These lawsuits primarily
represent claims for policy benefits that are in excess of amounts
provided for by the terms of the underlying insurance contracts. The
company has established claim liabilities for the amount of such
benefits management believes will ultimately be paid. Management does
not believe that any material settlements in excess of the liabilities
already established will be made.
10.4 Guaranty Association Assessments
Over the past several years, the number of insurance companies that
have been placed under regulatory supervision has increased. To
effectively deal with the increasing number of insurance company
insolvencies and to protect the policyholders of those companies, a
system of state insurance guaranty associations has developed. These
quasi-
-20-
21
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
governmental bodies have been given limited authority to assess
financially sound insurance companies to mitigate the losses to
policyholders arising from the insolvencies. These assessments are
generally recoverable in most states through a reduction in future
premium taxes. The accompanying consolidated financial statements
include a provision for estimated assessments, net of amounts expected
to be recovered through future premium tax offsets.
10.5 Investment Concentrations
At December 31, 1996, the Company's investment portfolio consisted of
securities issued by the U.S. government or U.S. government agencies
which are fully guaranteed by the full faith and credit of the U.S.
government (13%); U.S. government agencies which are not fully
guaranteed (15%); state and municipal governments (1%);
investment-grade corporate bonds (58%); below investment-grade
corporate bonds (4%); equity securities (1%); mortgage loans (1%);
policy loans (6%); and short-term investments (1%).
The following industries or security types accounted for 5% or more of
investments in debt and equity securities at December 31, 1995:
Electric utilities (13%); Diversified utilities (10%); Financial
services (6%); Insurance carriers (5%); Telephone communication (5%);
mortgage-backed pass-thru securities (12%); and collateralized mortgage
obligations (16%). No other industry or security type accounted for
more than 4% of the total investment securities portfolio.
The Company's investment in below investment-grade corporate bonds had
an aggregate amortized cost of $13,418,148 and estimated market value
of $13,533,144 at December 31, 1996. The average quality of rating of
these assets was "BB" (based on Standard & Poor's bond ratings).
All of the Company's investments in mortgage loans were acquired in
connection with acquisitions of blocks of insurance business from other
companies. At December 31, 1996, Wyoming, Texas and Louisiana accounted
for 71%, 10% and 19%, respectively, of the reported value of mortgage
loans.
With the exception of investments in securities issued by the U.S.
government or U.S. government agencies, no investment in any person or
its affiliates exceeded 10% of the Company's shareholders' equity at
December 31, 1996.
10.6 Business Concentrations
Significant concentrations of business in any one marketing or
geographic area could negatively impact the Company's operations as the
result of regional economic downturns or adverse regulatory action.
Also, concentrations of new business production in any one agent or
agency could negatively impact the Company's operations in the event of
a deterioration in the business relationship. Management believes the
possibility of such events having a negative effect upon the Company's
financial condition to be remote.
CULIC is licensed to sell life insurance, annuities and health
insurance products in thirty-seven states and jurisdictions. For the
year ended December 31, 1996, life insurance accounted for 37%,
annuities 57% and health insurance 6% of total statutory collected
premiums. States which accounted for 5% or more of life insurance
premiums were: California (7%); Louisiana (5%) and Texas (54%). Texas
accounted for 90% of annuity premiums, with no other state accounting
for more than 2%. States which accounted for 5% or more of health
insurance premiums were: Florida (6%); Illinois (6%); Indiana (6%);
Louisiana (13%); Oklahoma (7%); and Texas (23%). States which accounted
for 5% or more of new life insurance production for 1996 were: Alabama
(7%); California (21%); Oklahoma (6%); Tennessee (5%); and Texas (25%).
No other state accounted for more than 4% of new life insurance
production. Texas accounted for approximately 93% of new annuity
production, with no other state accounting for more than 1%. CULIC
currently offers only one health insurance product which does not
account for a significant amount of its total new business production.
CULIC's products are sold through a network of over 3,300 independent
agents. Three agents or agencies accounted for 14%, 11% and 6%,
respectively, of new life insurance production for 1996. Five agents or
agencies accounted for 35%, 8%, 8%, 6% and 6%, respectively, of new
annuity production for 1996.
-21-
22
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.7 Statutory Capital and Surplus and Dividend Limitations
The activities of insurance companies are regulated by state insurance
authorities which require companies to maintain minimum levels of
statutory capital and surplus to ensure their ability to meet their
obligations to policyholders. At December 31, 1996, CULIC had statutory
capital and surplus in excess of the minimum required by its
domiciliary insurance department.
The NAIC and the Texas Department of Insurance have adopted risk-based
capital formulas for life insurance companies that establish minimum
capital requirements relating to insurance risk, asset credit risk,
interest rate risk and business risk. The formulas are used by the NAIC
and state insurance regulators as early warning tools to identify
companies that require additional scrutiny or regulatory action. At
December 31, 1996, CULIC's RBC ratio exceeded the level at which
regulatory action would be required.
Statutory regulations limit the payment of dividends by insurance
companies. In Texas, the domiciliary state of CULIC, dividends are
limited to the greater of the net gain from operations for the
preceding year or 10% of net surplus at the end of the preceding year,
as further restricted by the balance of "unassigned surplus" from which
dividends are paid. Payment of dividends in excess of such amounts
would require approval of regulatory authorities. Pursuant to minimum
capital and surplus requirements in a loan agreement, CULIC is further
restricted in the amount of dividends that it may pay to its parent.
On the basis of reporting prescribed by insurance regulatory
authorities, CULIC had a net gain from operations of $2,932,852 for the
year ended December 31, 1996, and net surplus of $14,162,330 at
December 31, 1996. Unassigned surplus was $6,492,593 at December 31,
1996.
11. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
values of financial instruments:
Debt securities - Fair values for debt securities are based upon quoted
market prices, where available. For debt securities that are not
actively traded, fair values are estimated using values obtained from
independent pricing services, quoted market prices of similar
securities or discounted future flows using a current market rate of
interest applicable to the credit quality and maturity of the
investments.
Equity securities - Fair values for equity securities are based upon
quoted market prices.
Mortgage loans - Fair values for fixed-rate mortgage loans are
estimated using discounted cash flow analyses using current rates of
interest for similar loans to borrowers with similar credit ratings.
The outstanding principal balance of adjustable-rate mortgage loans is
assumed to approximate their fair values.
Policy loans - It is not practicable to estimate the fair value of
policy loans as they have no stated maturity. Policy loans are fully
collateralized by the cash surrender values of the underlying insurance
contracts. Interest accrues on the outstanding principal balance at
rates which range from 4.8% to 8%.
Cash and Short-term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment-type insurance contracts - Fair values for liabilities under
investment-type insurance contracts, which are included in the balance
sheet caption "reserves for future policy benefits," are estimated to
equal their cash surrender values.
Note payable - The outstanding principal balance of the note payable,
which is subject to variable rates of interest, approximates its fair
value.
-22-
23
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 1995
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------------------------------------------------------------------------------------------
Investments:
Securities available-for-sale:
Debt securities $302,933,944 $302,933,944 $293,796,113 293,796,113
Equity securities 2,360,390 2,360,390 2,955,307 2,955,307
Mortgage loans on real estate 2,637,250 2,335,997 3,300,934 2,920,850
Policy loans 18,334,100 18,334,100 18,460,493 18,460,493
Short-term investments 2,236,958 2,236,958 3,583,780 3,583,780
Cash 1,375,751 1,375,751 1,338,482 1,338,482
Investment-type insurance contracts 152,717,989 159,782,071 137,247,504 143,965,470
Note payable 6,969,662 6,969,662 8,352,790 8,352,790
----------------------------------------------------------------------------------------------
12. Related Party Transactions
The company receives investment management and legal services from
firms affiliated with certain of the Company's directors. Total fees
paid for those services were $656,700 in 1996, $272,232 in 1995 and
$180,745 in 1994.
13. Supplemental Cash Flow Information
Interest of $652,065, $841,817 and $530,776 was paid in 1996, 1995 and
1994, respectively.
14. Business Segment Information
CUC operates in one industry segment, life insurance. Operations within
this segment involve the sale and administration of three product
lines, life insurance, annuities and health insurance. Corporate and
other includes transactions which are nonoperating in nature and are
not related to the activities of a product line. The more significant
items included in this caption are parent company interest expense,
goodwill amortization and investment earnings on statutory capital and
surplus not allocable to product lines.
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24
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial information by product line for revenues, income before
income taxes, income from operations and identifiable assets for the
years ended December 31, are summarized as follows:
1996 1995 1994
----------------------------------------------------------------------------
Total revenues:
Life insurance $ 21,309,014 $ 22,009,389 $ 20,105,226
Annuities 12,662,006 11,234,181 8,364,955
Health insurance 2,624,513 2,956,740 7,862,655
Corporate and other 1,014,200 1,327,099 1,065,080
-----------------------------------------------------------------------------
$ 37,609,733 $ 37,527,409 $ 37,397,916
=============================================================================
Income before income taxes:
Life insurance $ 2,425,112 $ 2,627,449 $ 2,506,457
Annuities 1,926,802 2,147,931 670,665
Health insurance (1,191,706) (129,375) 300,520
Corporate and other (523,932) 329,137 216,076
-----------------------------------------------------------------------------
$ 2,636,276 $ 4,975,142 $ 3,693,718
=============================================================================
Income from operations (1):
Life insurance $ 2,022,889 $ 1,972,575 $ 2,209,455
Annuities 1,618,524 1,808,475 352,863
Health insurance (1,202,811) (136,802) 261,932
Corporate and other 136,323 1,137,215 854,697
-----------------------------------------------------------------------------
$ 2,574,925 $ 4,781,463 $ 3,678,947
=============================================================================
Identifiable Assets:
Life insurance $ 175,610,509 $ 177,930,697 $175,757,498
Annuities 171,920,950 158,445,392 130,123,357
Health insurance 5,122,014 5,096,806 5,272,271
Corporate and other 15,819,967 18,106,614 14,244,030
-----------------------------------------------------------------------------
$ 368,473,440 $ 359,579,509 $325,397,156
=============================================================================
(1) Income before income taxes, interest expense and capital
gains, net of related adjustments to policy acquisition costs
and unearned revenues
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25
COLUMBIA UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Reconciliation of GAAP and Statutory Accounting
A reconciliation from the basis of accounting followed by CULIC as
prescribed or permitted by state insurance regulatory authorities
to the basis of generally accepted accounting principles is as
follows:
Net income for the years ended December 31, 1996 1995 1994
--------------------------------------------------------------------------------------------------------------------
STATUTORY NET INCOME $ 2,772,696 $ 3,982,262 $ 3,192,932
Adjustments for:
Insurance revenues (24,954,439) (28,258,074) (42,080,826)
Realized investment gains 1,055,337 1,190,457 1,030,960
Policy benefits and change in reserves 24,984,415 27,387,745 41,567,475
Amortization of policy acquisition costs net of costs deferred 526,511 438,286 662,919
Gain on sale of health business -- -- (1,946,454)
Federal income taxes (90,435) (466,468) 255,119
Purchase price on health business sold (1,329,572) -- --
Other, including adjustments for CUC and CUFC (786,201) (241,727) 447,009
--------------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME AS REPORTED HEREIN $ 2,178,312 $ 4,032,481 $ 3,129,134
====================================================================================================================
Stockholders' equity at December 31, 1996 1995
-----------------------------------------------------------------------------
STATUTORY CAPITAL AND SURPLUS $ 14,162,330 $ 14,006,995
Adjusted for:
Differences in asset valuation methods 4,014,703 14,773,073
Policy acquisition costs 28,475,572 26,060,830
Acquisition related goodwill 1,657,637 1,709,067
Due and deferred premiums (2,434,542) (2,058,777)
Policy liabilities (6,184,996) (6,759,756)
Federal income taxes (4,436,057) (7,297,325)
Securities valuation reserves 7,800,888 6,874,629
Surplus debenture (6,039,662) (7,522,790)
Other, including adjustments for CUC and CUFC 920,355 1,807,598
-----------------------------------------------------------------------------
CONSOLIDATED STOCKHOLDERS' EQUITY
AS REPORTED HEREIN $ 37,936,228 $ 41,593,544
=============================================================================
-25-
26
(b) Pro forma consolidated financial information of American Heritage
Life Investment Corporation.
American Heritage Life Investment Corporation (the "Company" or
"AHLIC") through its principal subsidiary American Heritage Life Insurance
Company ("Heritage"), acquired by merger Columbia Universal Corporation
("Columbia"), whose principal subsidiary is Columbia Universal Life Insurance
Company ("Columbia Universal"). The acquisition and merger was closed on March
3, 1997, for $44 million cash paid by Heritage.
The unaudited pro forma consolidated balance sheet as of December 31,
1996 presents the historical consolidated balance sheets of the Company and
Columbia. The purchase accounting and other pro forma adjustments, as described
in the related notes, are calculated as if the Columbia acquisition had been
effective at December 31, 1996.
The unaudited pro forma consolidated statement of income for the year
ended December 31, 1996 presents the consolidated results of operations of the
Company and Columbia. The purchase accounting and other pro forma adjustments,
as described in the related notes, are calculated as if the Columbia acquisition
had been effective January 1, 1996.
The pro forma consolidated financial statements are based on the
historical financial statements of the Company and Columbia and should be read
in conjunction with their respective financial statements and notes. The pro
forma data are not necessarily indicative of the results of operations or
financial condition of the Company had these transactions occurred on January 1,
1996, nor the results of future operations. The Company anticipates cost savings
and additional benefits as a result of certain of the transactions contemplated
in the pro forma financial statements. Such benefits and any other changes that
might have resulted from management of the combined companies have not been
included as adjustments to the pro forma consolidated financial statements.
Certain amounts from the prior periods have been reclassified to conform to the
current presentation.
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27
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,1996
HISTORICAL
AHLIC COLUMBIA PRO FORMA PRO FORMA
12/31/96 12/31/96 ADJUSTMENTS TOTAL
ASSETS
Investments:
Debt securities available for sale $ 521,916 302,934 (14,200)(4) 820,650
10,000 (9)
Equity securities available for sale 34,520 2,360 36,880
First mortgage loans on real estate 53,736 2,336 56,072
Real estate, at cost, less accumulate 453 0 453
Policy loans 399,608 18,334 417,942
Short-term investments 1,216 2,237 3,453
----------- -------- -------- ----------
Total investments 1,011,449 328,201 (4,200) 1,335,450
----------- -------- -------- ----------
Cash 21,672 1,376 4,200 (10) 27,248
Agents' balances and prepaid commission 35,730 35,730
Premiums receivable 40,989 40,989
Accrued investment income 24,958 5,205 30,163
Deferred acquisition costs 173,699 28,476 (28,476)(1) 173,699
Property, software, furniture and equip 28,926 533 29,459
Reinsurance receivables 13,423 245 13,668
8,827 (8)
Acquisition related goodwill 1,658 (1,658)(1) 8,827
Value of business purchased 29,976 (7) 29,976
Other assets 19,271 3,130 22,401
----------- -------- -------- ----------
Total assets $ 1,370,117 368,824 8,669 1,747,610
=========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 203,396 64,329 267,725
Policyholder account balances 681,098 247,947 929,045
Unearned premiums 52,279 315 52,594
Policy and contract claims 51,261 1,362 1,200 (2) 53,823
Notes payable to banks 85,459 6,970 (6,970)(3) 132,759
47,300 (11)
Deferred income taxes 32,344 4,448 36,792
4,200 (10)
Other liabilities 35,337 5,517 875 (5) 45,929
----------- -------- -------- ----------
Total liabilities 1,141,174 330,888 46,605 1,518,667
----------- -------- -------- ----------
Stockholders' equity:
Common stock 13,967 45 (45)(6) 13,967
Paid-in and contributed capital 42,644 11,444 (11,444)(6) 42,644
Retained earnings 163,460 24,457 (24,457)(6) 163,460
Unrealized investment gains, net of taxes 12,158 1,990 (1,990)(6) 12,158
Less cost common shares in treasury (3,286) 0 -- (3,286)
----------- -------- -------- ----------
Total stockholders' equity 228,943 37,936 (37,936) 228,943
----------- -------- -------- ----------
Total liabilities and stockholders' equity $ 1,370,117 368,824 8,669 1,747,610
=========== ======== ======== ==========
Pro Forma Adjustments:
(1) Elimination of deferred acquisition cost and acquisition related goodwill
(2) Record acquisition at fair value.
(3) Pay off of subordinated debenture.
(4) Acquisition funding to extent of statutory surplus of Columbia Universal
(5) Other acquisition costs
(6) Elimination of investment in Columbia
(7) Record value of business purchased
(8) Record acquisition related goodwill
(9) Additional capital contribution to Columbia Universal
(10) Unsettled cash transactions at Balance Sheet date
(11) Acquisition funding
See accompanying notes to pro forma consolidated financial statements.
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28
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
HISTORICAL
AHLIC COLUMBIA PRO FORMA PRO FORMA
12/31/96 12/31/96 ADJUSTMENTS TOTALS
-------- ------ -------- --------
Income:
Insurance revenues $258,519 12,533 271,052
Net investment income 77,035 23,996 775 (2) 100,990
(816)(3)
Realized investment gains, net 420 1,080 1,500
-------- ------ -------- --------
Total income 335,974 37,609 (41) 373,542
-------- ------ -------- --------
Benefits, claims and expenses:
Benefits and claims 148,887 22,201 171,088
Amortization of deferred acquisition costs 25,628 4,505 30,133
Other expenses 121,600 8,267 225 (5) 132,741
(189)(4)
2,838 (1)
-------- ------ -------- --------
Total benefits, claims and expenses 296,115 34,973 2,874 333,962
-------- ------ -------- --------
Earnings before income taxes 39,859 2,636 (2,915) 39,580
Income taxes 12,827 458 (423) 12,862
-------- ------ -------- --------
Net earnings $ 27,032 2,178 (2,492) 26,718
======== ====== ======== ========
Net earnings per share of common stock $ 1.96 n/a n/a 1.93
======== ========
Pro Forma Adjustments:
(1) Interest expense on bank borrowings of $47.3 million at 6%.
(2) Interest income on capital infusion of $10.0 million at 7.75%
(3) Lost investment income on portion of purchase price ($14.2 million) funded
with internal funds at 5.75%.
(4) Interest savings on refinancing note payable of $8.4 million at savings
of 225 basis points (equivalent to prime + 50 basis points vs. LIBOR + 55 basis
points).
(5) Amortization of excess purchase price.
See accompanying notes to pro forma consolidated financial statements.
-28-
29
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. BASIS OF PRESENTATION
AHLIC and Columbia announced an agreement in principle on December 10,
1996 for a subsidiary of AHLIC to acquire all of the outstanding common stock of
Columbia for $44 million in cash. The Executive Committee of AHLIC and the Board
of Directors of Columbia each approved the definitive agreement in meetings on
December 27, 1997, and on January 2, 1997 a definitive purchase agreement was
executed. The transaction closed on March 3, 1997. The purchase method of
accounting will be followed and is assumed in the accompanying pro forma
financial information.
The acquisition was financed in part by AHLIC borrowing against a $100
million acquisition line of credit it has with three major banks. Additionally,
AHLIC through a subsidiary made a capital contribution of $10.0 million to
Columbia Universal a wholly-owned subsidiary of Columbia. The source of these
funds was bank borrowings against the acquisition line of credit. At December
31, 1996 Columbia had outstanding bank debt of $7.0 million which had been used
to fund a surplus debenture with Columbia Universal. AHLIC borrowed against
the acquisition line to refinance this debt at a more favorable interest rate.
American Heritage Life Insurance Company, a wholly-owned subsidiary of AHLIC,
is the direct parent of Columbia and funded the purchase price with internal
funds to the extent of the statutory capital and surplus of Columbia
Universal. The following table summarizes the amount borrowed by AHLIC for
this acquisition and related transactions:
($ amounts in millions)
-----------------------
Purchase price $ 44.0
Capital contribution 10.0
Payoff outstanding bank debt 7.0
Other expenses (estimated) .5
Less Columbia Universal statutory equity at 12/31/96 (14.2)
------
Net amount to borrow $ 47.3
======
NOTE B. PURPOSE
The accompanying pro forma balance sheet presents the historical
balance sheets of AHLIC and Columbia and the purchase accounting and other pro
forma adjustments as if the acquisition had been made as of December 31, 1996.
The accompanying pro forma statement of earnings presents the
historical operating results of AHLIC and Columbia for the year ended December
31, 1996 and the necessary purchase accounting and pro forma adjustments as if
the acquisition had been effective January 1, 1996.
The unaudited pro forma consolidated financial statements may change
due to certain changes in the purchase accounting adjustments included in the
pro formas once all valuations of assets and liabilities assumed are finalized.
NOTE C. NET ASSETS ACQUIRED
The audited consolidated financial statements of Columbia are included
herein and reference is made to the footnotes to such financial statements. Such
footnotes set forth the current value of all significant assets to be used for
purchase accounting purposes. The liabilities assumed of Columbia were assumed
to be stated at fair value based on their amounts in the December 31, 1996
balance sheet subject to certain adjustments as presented herein.
-29-
30
Following is an allocation of the purchase price:
($ Amounts in millions)
-----------------------
Net assets purchased $ 37.9
Increase in policyholder liabilities
to estimated fair value (1.2)
Transaction costs (1.5)
Excess purchase price 8.8
------
Purchase price $ 44.0
======
NOTE D. VALUE OF BUSINESS ACQUIRED
Pursuant to purchase accounting, the deferred acquisition costs and acquisition
related goodwill on Columbia's historical balance sheet are eliminated since
these amounts are reflected in the determination of the cost of business
acquired. In the accompanying pro forma consolidated balance sheet the amounts
for value of business acquired and acquisition related goodwill may change
based upon the final determination of values. The amount of goodwill related
to this acquisition will not be material to the consolidated balance sheet of
AHLIC.
NOTE E. INCOME TAXES
The pro forma total effective income tax rate was assumed to be 32.5%.
NOTE F. ADJUSTED PRO FORMA OPERATIONS
Included as a charge to Columbia Universal's operating expenses for the year
ended December 31, 1996 was $1.3 million related to an adjustment in the sales
price of a health block of business Columbia had sold in 1994. Also included as
a charge to Columbia's operating earnings in 1996 were $1.0 million related to
terminated merger/initial public offering expenses and other unusual one time
expenses. Excluding the effect of these items on the pro forma consolidated
statement of earnings, net consolidated pre-tax earnings would have been $41.9
million and after tax pro forma consolidated net earnings would have been $28.3
million resulting in pro forma consolidated net earnings per share of $2.05.
Operating earnings (excluding realized investment gains and losses) for AHLIC
for the year ended December 31, 1996 were $26.8 million or $1.94 per share. On
a pro forma consolidated basis, excluding the two items discussed in the
preceding paragraph, the consolidated operating earnings for the consolidated
operations would have been $27.6 million, or $2.00 per share.
(c) Exhibits
NONE
SIGNATURE
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 who is duly authorized.
---------------------------------------------
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION
Date: March 27, 1997 By: /s/ C. Richard Morehead
------------------------------------------
C. Richard Morehead
Executive Vice President, Treasurer and
Chief Financial Officer
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