SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported: December 19, 1997)
AMERUS LIFE HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
IOWA 0-21459 42-1459712
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
699 WALNUT STREET, DES MOINES, IOWA 50309-3948
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (515) 362-3600
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
INDEX PAGE
- ----- ----
ITEM 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired 2
AmVestors Financial Corporation Unaudited Consolidated
Financial Statements as of September 30, 1997 and for the
nine months ended September 30,1 997 and 1996.
AmVestors Financial Corporation Audited Financial 47
Statements as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994.
(b) Pro Forma Financial Information 95
Unaudited Pro Forma Condensed Consolidated Financial
Information of AmerUs Life Holdings, Inc. as of
September 30, 1997 and for the nine months ended
September 30, 1997 and the year ended December 31, 1996.
SIGNATURE 110
EXHIBIT 111
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(000's Omitted)
(Unaudited)
ASSETS 1997 1996
---- ----
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,773,931 and
$2,547,658) $2,850,133 $2,594,293
Trading (cost: $33,563 and $12,198) 34,830 12,291
---------- ----------
2,884,963 2,606,584
---------- ----------
Equity securities:
Common stock:
Available-for-sale (cost: $1,159 and $1,396) 2,800 2,440
Trading (Cost: $1,334 and $-0-) 1,463 -
Preferred stock:
Available-for-sale (cost: $27,894 and $27,742) 31,620 30,694
Trading (cost: $2,124 and $2,516) 2,198 2,539
--------- ---------
38,081 35,673
--------- ---------
Other long-term investments 40,065 41,152
Short-term investments 488 371
--------- ---------
Total investments 2,963,597 2,683,780
Cash and cash equivalents 32,882 132,574
Amounts receivable under reinsurance agreements 225,104 241,458
Amounts receivable on securities settlements in process 22,344 2,395
Accrued investment income 40,800 36,676
Deferred cost of policies produced 195,609 175,837
Deferred cost of policies purchased 30,806 39,865
Goodwill 11,345 11,644
Other assets 24,942 21,246
---------- ----------
Total assets $3,547,429 $3,345,475
========== ==========
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(000's Omitted)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
Liabilities:
Policy liabilities:
Future policy benefits $3,190,796 $3,037,005
Other policy liabilities 12,718 6,709
---------- ----------
3,203,514 3,043,714
Subordinated debentures payable 65,000 65,000
Amounts due on securities settlements in process 8,320 11,301
Deferred income taxes 24,190 13,302
Accrued expenses and other liabilities 11,818 7,811
---------- ----------
Total liabilities 3,312,842 3,141,128
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized -
2,000,000 shares - -
Common stock, no par value, authorized -
25,000,000 shares; issued - 13,347,295
shares in 1997 and 13,167,372 shares in 1996 16,984 16,755
Paid in capital 100,374 98,678
Unrealized investment gains (net of amortization of
deferred cost of policies produced of $29,029 and
$18,175 and net amortization of deferred cost of
policies purchased of $8,463 and $5,112 and deferred
income tax expense of $15,360 and $9,643) 28,717 17,701
Retained earnings 91,248 73,949
---------- ----------
237,323 207,083
Less treasury stock (234) (234)
Less leveraged employee stock ownership trust
(LESOP) (2,502) (2,502)
---------- ----------
Total stockholders' equity 234,587 204,347
---------- ----------
Total liabilities and stockholders' equity $3,547,429 $3,345,475
========== ==========
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine months ended September 30, 1997 and 1996
(000's Omitted, except per share data)
(Unaudited)
1997 1996
---- ----
Revenue:
Insurance premiums and policy charges $ 14,314 $ 10,451
Net investment income 157,544 139,704
Net investment gains 11,993 4,792
Other revenue 2,279 1,473
------- -------
Total revenue 186,130 156,420
------- -------
Benefits and expenses:
Benefits, claims and interest credited to
policyholder. 117,938 104,500
Amortization of deferred cost of policies produced 15,536 11,467
Amortization of deferred cost of policies purchased 5,707 3,516
General insurance expenses 11,976 9,084
Premium and other taxes, licenses and fees 2,218 1,879
Other expenses 164 165
------- -------
Total benefits and expenses 153,539 130,611
------- -------
Operating earnings 32,591 25,809
Interest expense 4,289 2,107
------- -------
Earnings before income tax expense and extraordinary item 28,302 23,702
Income tax expense 9,906 8,414
------- -------
Earnings before extraordinary item 18,396 15,288
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $148) - (269)
------- -------
Net Earnings $18,396 $15,019
======= =======
Earnings per share of common stock:
Primary:
Net earnings $1.31 $1.19
Fully diluted:
Net earnings $1.17 $1.15
Average shares outstanding:
Primary 14,038 12,584
Fully diluted 18,113 13,755
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended September 30, 1997 and 1996
(000's Omitted, except per share data)
(Unaudited)
1997 1996
---- ----
Revenue:
Insurance premiums and policy charges $ 5,228 $ 4,098
Net investment income 54,406 50,547
Net investment gains 8,078 2,258
Other revenue 718 760
------- -------
Total revenue 68,430 57,663
Benefits and expenses:
Benefits, claims and interest credited to policyholders 41,467 37,735
Amortization of deferred cost of policies produced 7,250 4,054
Amortization of deferred cost of policies purchased 2,136 1,400
General insurance expenses 4,426 3,548
Premium and other taxes, licenses and fees 594 779
Other expenses 60 52
------- -------
Total benefits and expenses 55,933 47,568
------- -------
Operating earnings 12,497 10,095
Interest expense 1,426 1,373
------- -------
Earnings before income tax expense and extraordinary item 11,071 8,722
Income tax expense 3,875 3,171
------- -------
Earnings before extraordinary item 7,196 5,551
Extraordinary item: Loss on early extinguishment of
debt (net of income tax benefit of $123) - (222)
------- -------
Net earnings $ 7,196 $ 5,329
======= =======
Earnings per share of common stock:
Primary:
Net earnings $.50 $.39
Fully diluted:
Net earnings $.45 $.36
Average shares outstanding:
Primary 14,404 13,636
Fully diluted 18,200 16,939
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
(Unaudited)
Unrealized
Common Paid-in Investment Retained Treasury
Stock Capital Gains Earnings Stock LESOP Total
------- ------------------ -------- -------- ------ -----
Balance as of January 1,
1996 12,904 64,284 45,372 54,714 - (2,829)174,445
Net earnings - - - 20,862 - - 20,862
Change in unrealized invest-
ment gains - - (27,671) - - -(27,671)
Cash dividends to stockholders
($.1425 per share on common
stock) - - - (1,627) - - (1,627)
Issuance of common stock:
upon acquisition of
company 3,464 28,865 - - - - 32,329
upon exercise of options 387 585<F1> - - - - 972
Issuance of warrants:
upon acquisition of company - 5,201 - - - - 5,201
Purchase of warrants - (257) - - - - (257)
Acquisition of treasury shares - - - - (234) - (234)
Allocation of LESOP shares - - - - - 327 327
------ ------ ------ ------ ----- ----- -----
Balance as of December 31,
1996 16,755 98,678 17,701 73,949 (234) (2,502) 204,347
Net earnings - - - 18,396 - - 18,396
Change in unrealized invest-
ment gains - - 11,016 - - - 11,016
Cash dividends to stockholders
($.0825 per share on common
stock) - - - (1,097) - - (1,097)
Issuance of common stock:
upon exercise of options 229 1,696<F1> - - - - 1,925
------ ------- ------- ------ ------ ------- -------
Balance as of September 30,
1997 $16,984 $100,374 $28,717 $91,248 $(234) $(2,502)$234,587
======= ======== ======= ======== ====== ======== =======
<FN>
<F1> Net of income tax benefit of $548 and $242 for the period ended
September 30, 1997 and December 31, 1996, respectively.
</FN>
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Nine Months ended September 30, 1997 and 1996
(000's Omitted)
(Unaudited)
1997 1996
---- ----
Operating Activities:
Net earnings $ 18,396 $15,019
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Interest credited to policyholders 121,415 109,925
Amortization of (discounts) premiums
on debt securities, net (3,342) (798)
Amortization of deferred cost of policies
produced 15,536 11,467
Amortization of deferred cost of policies
purchased 5,707 3,516
Net investment (gains) losses (11,993) (4,797)
Investment trading activity (21,202) (44,572)
Accrued investment income (4,124) (2,396)
Deferred income taxes 5,223 3,413
Other, net 2,717 802
-------- --------
Net cash provided by operating activities 128,333 91,579
-------- --------
Investing Activities:
Purchases of securities:
Available-for-sale (627,786) (631,813)
Proceeds from sale of securities:
Available-for-sale 336,290 407,285
Proceeds from maturity or redemption:
Available-for-sale 78,198 120,727
Other long-term investments, net 1,091 4,324
Short-term investments, net (117) 219
Capitalization of deferred cost of policies
produced (46,161) (30,408)
Capitalization of goodwill - (341)
Acquisition, net of cash received - (2,314)
Construction of home office (4,507) (7,691)
Other, net 198 (271)
--------- ---------
Net cash used in investing activities (262,794) (140,283)
--------- ---------
Financing Activities:
Premiums received 442,137 317,991
Surrender and death benefits paid (414,303) (344,339)
Surrender and risk charges collected 12,276 8,801
Securities settlements in process (22,929) 8,118
Acquisition of treasury stock - (234)
Cash dividends to stockholders (1,097) (1,333)
Issuance of common stock 1,925 483
Purchase of warrants - (257)
Notes payable - (22,500)
Debentures payable - 65,000
Reinsurance reimbursements 18,486 11,510
Other, net (1,726) 619
--------- --------
Net cash provided by (used in)
financing activities 34,769 43,859
--------- --------
Increase (Decrease) in Cash and Cash Equivalents (99,692) (4,845)
Cash and Cash Equivalents:
Beginning of year 132,574 48,281
--------- --------
End of year $32,882 $43,436
========= ========
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
Nine months ended September 30, 1997 and 1996
(000's Omitted)
(Unaudited)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: 1997 1996
---- ----
Income tax payments (refunds) $3,093 $2,590
Interest payments $975 $805
NON-CASH ACTIVITIES:
Change in net unrealized investment gains
(losses) $30,938 $(80,016)
Less: Associated (increase) reduction in
amortization of deferred cost of policies
Produced (10,854) 22,764
Purchased (3,351) (508)
Deferred income tax (expense) benefit (5,717) 20,207
------- ---------
Net change in net unrealized gains (losses) $11,016 $(37,553)
Investing activities:
Purchase of securities:
Available-for-sale $55,953 $-
Sales of securities:
Available-for-sale $55,953 $-
Details of acquisition:
Fair value of assets acquired $- $722,388
Liabilities assumed - (673,611)
Common stock and warrants issued - (37,531)
--------- --------
Cash paid - 11,246
Less: Cash acquired - (8,932)
--------- --------
Net cash paid for acquisition $- $2,314
========= =======
The above represents transactions involving the exchange of one security for
another. For additional information see Note 2 of Notes to Consolidated
Financial Statements.
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
- -----------------------------------------------
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of AmVestors
and its wholly-owned subsidiaries American Investors Life Insurance Company,
Inc. (American), American Investors Sales Group, Inc. (American Sales),
AmVestors Acquisition Subsidiary, Inc. (AAS), successor through merger with
Financial Benefit Group, Inc. (FBG), AmVestors CBO II Inc. (CBO II), AmVestors
Investment Group, Inc. (AIG), Annuity International Marketing Corporation
(AIMCOR), Financial Benefit Life Insurance Company (FBL), Annuity Warehouse,
Inc. (AW), formerly The Insurance Mart, Inc., and Rainbow Card Pack Publication,
Inc. (RBCP), (collectively the company). All significant intercompany accounts
and transactions have been eliminated.
B. ACCOUNTING PRINCIPLES AND PRACTICES:
The accompanying unaudited consolidated financial statements have been
prepared on the basis of generally accepted accounting principles as promulgated
by the American Institute of Certified Public Accountants. In the opinion of the
company, the consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position as of September 30, 1997 and the results of earnings and the
statements of cash flows for the nine month period s ended September 30, 1997
and 1996.
C. INVESTMENTS:
Debt securities held-to-maturity are carried at amortized cost, except
that those securities with an other than temporary impairment in value are
carried at estimated net realizable value. Debt securities available-for-sale
are carried at estimated market value, with any unrealized gains (losses)
recorded in stockholders' equity.
Investments are reviewed on each balance sheet date to determine if
they are impaired. In determining whether an investment is impaired, the company
considers whether the decline in market value at the balance sheet date is an
other than temporary decline; if so, then the investment's carrying value is
reduced to a new cost basis which represents estimated fair value. The decline
in value is reported as a realized loss, and a recovery from the new cost basis
is recognized as a realized gain only at sale.
The estimates of fair value are based on information obtained from
published financial information provided by issuers, independent sources such as
broker dealers or the company's independent investment advisor. Such amounts
represent an estimate of the consideration to be received in the future when the
defaulted company's debt is settled through the sale of their assets or the
restructuring of their debt. These estimates do not represent the discounted
present value of these future considerations.
Investments in common and preferred stock are carried at market, with
unrealized gains (losses) recorded in stockholders' equity for securities
available-for-sale.
Investments in debt and equity securities which were purchased
principally for the purpose of selling such securities in the near term are
classified as trading securities and are carried at market, with unrealized
gains (losses) included currently in the results of earnings.
The cost of securities sold is determined on a specific identification
basis.
Other long-term investments include policy loans and mortgage loans on
real estate which are carried at cost less principal payments since date of
acquisition, and certain partnership investments which are accounted for using
the equity method of accounting. These partnership investments are evaluated on
an annual basis to determine the existence of an impairment.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company using
available market information and appropriate valuation methodologies. Due to the
fact that considerable judgment is required to interpret market data to develop
the estimates of fair value, the estimates presented are not necessarily
indicative of the amounts that could be realized in a current market exchange.
The carrying values and estimated fair values of the company's financial
instruments as of September 30, 1997, and December 31, 1996, were as follows:
(000's Omitted)
1997 1996
--------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- --------- ---------- ----------
Assets:
Debt securities $2,884,963 $2,884,963 $2,606,584 $2,606,584
Equity securities 38,081 38,081 35,673 35,673
Other long-term investments 40,065 40,216 41,152 41,176
Short-term investments 488 488 371 371
Cash and cash equivalents 32,882 32,882 132,574 132,574
Accounts receivable on
securities settlements in
process 22,344 22,344 2,395 2,395
Accrued investment income 40,800 40,800 36,676 36,676
Liabilities:
Future policy benefits -
investment contracts 2,954,041 2,731,858 2,767,326 2,583,902
Other policy liabilities 12,718 12,718 6,709 6,709
Subordinated debentures
payable 65,000 79,950 65,000 65,325
Amounts due on securities
settlements in process 8,320 8,320 11,301 11,301
Accrued expenses and other
liabilities 11,818 11,818 7,811 7,811
DEBT SECURITIES - Fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
EQUITY SECURITIES - Fair value equals the carrying value as these
securities are carried at quoted market value.
OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of
mortgage loans, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value of policy loans and other long-term investments is
estimated to approximate the assets' carrying value.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS - The carrying
amounts reported in the balance sheet approximate the assets' fair value.
AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying
amount reported in the balance sheet approximates the fair value of this asset.
ACCRUED INVESTMENT INCOME - The carrying amounts reported in the balance
sheet for these assets approximate fair value.
FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for
deferred annuities were estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are
similar to a deposit liability. The amount payable at the reporting date was
calculated as the account balance less any applicable surrender charges.
OTHER POLICY LIABILITIES - The carrying amount reported in the balance
sheet approximates the fair value of these liabilities.
SUBORDINATED DEBENTURES PAYABLE - The fair value of the company's
debentures is based on a dealer quote.
AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount
reported in the balance sheet approximates the fair value of this liability.
ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported in
the balance sheet approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair value amounts.
E. SIGNIFICANT RISKS AND UNCERTAINTIES:
NATURE OF OPERATIONS - The company specializes in the sale of deferred
annuity products, the earnings on which are not currently taxable to the annuity
owner. Any changes in tax regulations which eliminate or significantly reduce
this advantage of tax deferred income would adversely impact the operations of
the company. The company's products are marketed nationwide through a network of
independent agents licensed in 47 states, the District of Columbia and the U.S.
Virgin Islands. The company is not dependent on any one agent or agency for a
substantial amount of its business. No single agent accounted for more than 2%
of annuity sales in 1996, and the top twenty individual agents accounted for
approximately 18% of 1996 annuity sales.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
CERTAIN SIGNIFICANT ESTIMATES - Certain costs incurred to acquire new
business are deferred and amortized in relation to the incidence of expected
gross profits over the expected life of the policies. Determination of expected
gross profits includes management's estimate of certain elements over the life
of the policies, including investment income, interest to be credited to the
contract, surrenders and resultant surrender charges, deaths and in the case of
life insurance, mortality charges to be collected. These estimates of expected
gross profits are used as a basis for amortizing deferred costs. These estimates
are periodically reviewed by management and, if actual experience indicates that
the estimates should be revised, the total amortization recorded to date is
adjusted by a charge or credit to earnings.
F. DEFERRED COST OF POLICIES PRODUCED:
The costs of acquiring new business (primarily commissions and policy
expenses), which vary with and are directly related to the production of new
business, have been deferred. The deferred costs related to investment-type
deferred annuity contracts are amortized in relation to the incidence of
expected gross profits over the expected life of the policies. For single
premium life insurance, deferred policy acquisition costs are amortized over the
life of the policies, but not more than 20 years for policies issued before
January l, 1987, and not more than 30 years for policies issued after December
31, 1986, based on the expected gross profits for the amortization periods. The
deferred costs related to traditional life contracts are amortized over the
premium paying period for the related policies using the same actuarial
assumptions as to interest, mortality and withdrawals as are used to calculate
the reserves for future benefits.
Estimates of the expected gross profits to be realized in future years
include the anticipated yield on investments, including realized gains (losses).
Deferred policy acquisition costs will be adjusted in the future based on actual
investment income earned.
G. DEFERRED COST OF POLICIES PURCHASED:
At the date of acquisition of a company, a portion of the purchase price
is allocated to the right to receive future cash flows from the existing
insurance contracts. The amount allocated represents the present value of the
projected future cash flows from the acquired policies. These projections take
into account mortality, surrenders, operating expenses, yields on the
investments held to back the policy liabilities and other factors known or
expected at the valuation date based on the judgment of management.
The deferred cost of policies purchased is amortized in relation to the
incidence of expected cash flows over the expected life of the policies. If it
is determined that the present value of future cash flows is insufficient to
recover the deferred cost of policies purchased, its carrying value will be
reduced with a corresponding charge to earnings.
H. GOODWILL:
Goodwill represents the excess of the amount paid to acquire a company
over the fair value of the net assets acquired. This balance is amortized on a
straight-line basis over a 30-year period. If it is determined through an
estimate of future cash flows that the goodwill has been impaired, its carrying
value will be reduced with a corresponding charge to earnings.
I. FUTURE POLICY BENEFITS:
Liabilities for future policy benefits under life insurance policies,
other than single premium life insurance, have been computed by the net level
premium method based upon estimated future policy benefits (excluding
participating dividends), investment yield, mortality and withdrawals giving
recognition to risk of adverse deviation. Interest rates range from 41\2% to
101\4% depending on the year of issue, with mortality and withdrawal assumptions
based on company and industry experience prevailing at the time of issue.
For single premium life insurance and single premium annuities, the
future policy benefits are equal to the accumulation of the single premiums at
the credited rate of interest and for single premium whole life, less any
mortality charges.
J. PARTICIPATING POLICIES:
The company issued participating policies on which dividends are paid to
policyholders as determined annually by the Board of Directors. The amount of
dividends declared but undistributed is included in other liabilities. Policy
benefit reserves do not include a provision for estimated future participating
dividends.
K. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives from 25 to 40 years. Other depreciation is provided on the
straight-line basis over useful lives ranging from 1 to 10 years.
L. INCOME TAXES:
The company and its subsidiaries, except for FBL, prepare and file their
income tax returns on a consolidated basis. Under current tax law, FBL is not
eligible for inclusion in a consolidated tax return for a period of five years
following the date of acquisition.
The company provides for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
reported in the financial statements on the liability method.
M. EARNINGS PER SHARE:
Primary earnings per share of common stock are computed by dividing net
earnings by the sum of the weighted average number of shares outstanding during
the period plus dilutive common stock equivalents applicable to stock options
and warrants calculated using the treasury stock method. Fully diluted earnings
per share assumes the conversion of the convertible debentures outstanding with
applicable reduction in interest expense related to the debentures.
N. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents includes
cash and money market accounts and other securities with original maturities of
three months or less.
O. NEW ACCOUNTING STANDARDS:
SFAS 125 - ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENT OF LIABILITIES
Effective for transactions occurring after December 31, 1996, SFAS 125
establishes accounting and reporting standards based on the consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. The company does not expect
the implementation of SFAS 125 to have a material effect on its consolidated
financial statements.
SFAS 127 - Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125
Issued in December, 1996, as an amendment to SFAS 125, SFAS 127 defers
the provisions of SFAS 125 as regards repurchase agreements, dollar-rolls,
securities lending and similar transactions for one year. The company does not
expect the implementation of SFAS 127 to have a material effect on its
consolidated financial statements.
SFAS 128 - Earnings Per Share
Effective for interim and annual periods ending after December 15, 1997,
SFAS128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock. Basic earnings
per share is computed by dividing income available for common stockholders by
the weighted average number of common shares outstanding. Diluted earnings per
share reflects the dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock and shared in the income available for common
stockholders. The company does not expect the implementation of SFAS 128 to have
a material effect on the reported earnings per share of the company.
SFAS 129 - Disclosure of Information about Capital Structure Effective
for periods ending after December 15, 1997, SFAS129 is applicable to all
entities and requires disclosure of the pertinent rights and privileges of the
various securities the entity has outstanding. These disclosures shall include
dividend and liquidation preferences, participation rights, call prices and
dates, conversion or exercise prices or rates and pertinent dates, sinking-fund
requirements, unusual voting rights and significant terms of contracts to issue
additional shares. In addition, an entity is required to disclose the number of
shares issued upon conversion, exercise or satisfaction of required conditions.
Due to the reporting nature of SFAS129, the company does not expect the
implementation to have a material effect on its consolidated financial
statements.
SFAS 130 - Reporting Comprehensive Income
Effective for financial periods beginning after December 15, 1997,
SFAS130 establishes standards for reporting of comprehensive income and its
components. All items that are required to be recognized as components of
comprehensive income, consisting of changes in the equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources, are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Due to the
reporting nature of SFAS130, the company does not expect the implementation to
have a material effect on its consolidated financial statements.
SFAS 131 - Disclosures about Segments of an Enterprise and Related
Information
Effective for financial periods beginning after December 15, 1997,
SFAS131 establishes standards for the reporting of information about operating
segments in the financial statements of public companies. Operating segments are
components of an enterprise about which separate financial information is
available and evaluated on a regular basis by the chief operating decision maker
in deciding how to allocate resources and assess performance. Financial
information is required to be reported on the basis that it is used for the
internal evaluation of segment performance and the allocation of resources to
segments. Due to the reporting nature of SFAS 131, the company does not expect
the implementation to have a material effect on its consolidated financial
statements.
P. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the September 30,
1996 and December 31, 1996 financial statements to the September 30, 1997
presentation.
2. Investments:
- ----------------
A summary of net investment income and net investment gains (losses) follows:
(000's Omitted)
For the Period Ended September 30,
----------------------------------
1997 1996
---- ----
Net investment income:
Debt securities $148,763 $135,403
Equity securities 1,371 1,057
Other long-term investments 5,892 3,590
Short-term investments 3,258 1,641
-------- --------
159,284 141,691
Less investment expenses 1,740 1,987
-------- --------
Net investment income $157,544 $139,704
======== ========
Net investment gains (losses):
Realized investment gains (losses):
Debt securities, available-for-sale $4,646 $3,404
Debt securities, trading 1,540 360
Equity securities, available-for-sale 4,039 707
Equity securities, trading 427 282
Other (1) (122)
------- -------
Net realized investment gains (losses) 10,651 4,631
======= =======
Unrealized investment gains (losses):
Debt securities, trading 1,173 154
Equity securities, trading 181 7
Other long-term investments (12) -
------- -------
Net unrealized investment gains (losses) 1,342 161
------- ------
Net investment gains (losses) $11,993 $4,792
======= ======
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge funds)
are managed by outside investment advisors. The investment guidelines of these
partnerships provide for a broad range of investment alternatives, including
stocks, bonds, futures, options, commodities, and various other financial
instruments. These investments were purchased with the strategy to achieve a
yield in excess of the S&P 500 Index. The partnerships are carried at an amount
equal to the company's share of the partnerships' net asset value with the
current period change recorded in net investment income. In accordance with the
permitted guidelines, the investments purchased by these partnerships may
experience greater than normal volatility which could materially affect the
company's earnings for any given period.
The maturity of the company's debt and equity securities portfolio as of
September 30, 1997 was as follows:
(000's Omitted)
As of September 30, 1997
Available-for-Sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Debt securities:
One year or less $ 40,939 $ 41,222 $ - $ -
Two years through five years 645,303 668,332 3,016 3,172
Six years through ten years 1,635,997 1,679,494 25,197 26,084
Eleven years and after 451,692 461,085 5,350 5,574
---------- ---------- ------- -------
2,773,931 2,850,133 33,563 34,830
Equity securities 29,053 34,420 3,458 3,661
---------- ---------- ------- -------
$2,802,984 $2,884,553 $37,021 $38,491
========== ========== ======= =======
These tables include the maturities of mortgage-backed securities
based on the estimated cash flows of the underlying mortgages.
The amortized cost, estimated market value and unrealized market gains
and losses of debt and equity securities as of September 30, 1997 and December
31, 1996, were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- -------------------
September 30, 1997
Bonds available-for-sale:
Corporate debt obligations
Investment grade $1,855,929 $52,937 $2,984 $1,905,882
High-yield 158,266 4,870 959 162,177
---------- ------- ------ ----------
2,014,195 57,807 3,943 2,068,059
U.S. Treasury obligations 6,310 27 21 6,316
Mortgage-backed securities
Investment grade 753,426 23,052 720 775,758
High-yield -- -- -- --
---------- ------- ------ ----------
Bonds available-for-sale 2,773,931 80,886 4,684 2,850,133
---------- ------- ------ ----------
Bonds trading:
Corporate debt obligations
Investment grade 12,263 570 130 12,703
High-yield 21,300 877 50 22,127
---------- ------- ------ ----------
Bonds trading 33,563 1,447 180 34,830
---------- ------- ------ ----------
Total bonds 2,807,494 82,333 4,864 2,884,963
Equity securities 32,511 5,901 331 38,081
---------- ------- ------ ----------
$2,840,005 $88,234 $5,195 $2,923,044
========== ======= ====== ==========
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- --------
December 31, 1996
Bonds available-for-sale:
Corporate debt obligations
Investment grade $1,589,336 $38,980 $8,831 $1,619,485
High-yield 129,510 3,546 821 132,235
---------- ------- ------ ----------
1,718,846 42,526 9,652 1,751,720
U.S. Treasury obligations 44,520 246 437 44,329
Mortgage-backed securities
Investment grade 778,615 18,216 2,561 794,270
High-yield 5,677 -- 1,703 3,974
---------- ------- ------ ----------
Bonds available-for-sale 2,547,658 60,988 14,353 2,594,293
Bonds trading:
Corporate debt obligations
Investment grade 8,824 90 57 8,857
High-yield 3,374 84 24 3,434
---------- ------- ------- ----------
Bonds trading 12,198 174 81 12,291
---------- ------- ------- ----------
Total bonds 2,559,856 61,162 14,434 2,606,584
Equity securities 31,654 4,430 411 35,673
---------- ------- ------- ----------
$2,591,510 $65,592 $14,845 $2,642,257
========== ======= ======= ==========
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired (other
than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write Carrying Market
Cost Downs Value Value
--------- ------- ----- -------
September 30, 1997 $7,545 7,545 - -
December 31, 1996 $7,545 7,545 - -
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and Moody's or, if
unrated, those that meet the objective criteria developed by the company's
independent investment advisory firm. Management believes that the return on
high-yield securities adequately compensates the company for additional credit
and liquidity risks that characterize such investments. In some cases, the
ultimate collection of principal and timely receipt of interest is dependent
upon the issuer attaining improved operating results, selling assets or
obtaining financing.
The amortized cost, estimated market value and unrealized market gains
(losses) by type of mortgage-backed security as of September 30, 1997 and
December 31, 1996 were as follows:
(000's Omitted)
Estimated
AmortizedUnrealized Unrealized Market
Cost Gains Losses Value
------------------ ---------- -------
September 30, 1997
Government agency mortgage-backed securities:
Pass-throughs $22 $2 $- $24
------- ------ ----- -------
Total government agency
mortgage-backed securities 22 2 - 24
------- ------ ----- -------
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 433,483 15,141 580 448,044
Targeted amortization classes and
accretion directed classes 27,259 1,092 - 28,351
Sequential classes 8,832 221 - 9,053
Pass-throughs 1,770 22 18 1,774
-------- ------- ----- --------
Total government-sponsored enterprise
mortgage-backed securities 471,344 16,476 598 487,222
-------- ------- ----- -------
Other mortgage-backed securities:
Planned amortization classes 8,678 111 - 8,789
Sequential classes 227,718 4,923 122 232,519
Pass-throughs 7 - - 7
Subordinated classes 45,657 1,540 - 47,197
-------- ------- ----- --------
Total other mortgage-backed
securities 282,060 6,574 122 288,512
-------- ------- ----- --------
Total mortgage-backed securities $753,426 $23,052 $720 $775,758
======== ======= ===== ========
(000's Omitted)
Estimated
AmortizedUnrealized UnrealizedMarket
December 31, 1996 Cost Gains Losses Value
------------------ --------- -----
Government agency mortgage-backed securities:
Pass-throughs $ 23 $ 2 $ - $ 25
-------- ------- ------ -------
Total government agency
mortgage-backed securities 23 2 - 25
-------- ------- ------ -------
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 488,496 13,569 1,400 500,665
Targeted amortization classes and
accretion directed classes 27,596 673 - 28,269
Sequential classes 8,883 194 - 9,077
Pass-throughs 2,712 31 1 2,742
-------- ------- ------ -------
Total government-sponsored enterprise
mortgage-backed securities 527,687 14,467 1,401 540,753
Other mortgage-backed securities:
Planned amortization classes 13,025 163 - 13,188
Sequential classes 204,193 3,054 1,160 206,087
Pass-throughs 9 - - 9
Subordinated classes 39,355 530 1,703 38,182
-------- ------- ------ --------
Total other mortgage-backed securities 256,582 3,747 2,863 257,466
-------- ------- ------ --------
Total mortgage-backed securities $784,292 $18,216 $4,264 $798,244
======== ======= ====== ========
Certain mortgage-backed securities are subject to significant
prepayment risk. In periods of declining interest rates, mortgages may be repaid
more rapidly than scheduled as individuals refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investments
which they are unable to reinvest at an interest rate comparable to the rate on
the prepaying mortgages. Mortgage-backed pass-through securities and sequential
classes, which comprised 31.6% and 27.5% of the carrying value of the company's
mortgage-backed securities as of September 30, 1997 and December 31, 1996,
respectively, are sensitive to this prepayment risk.
A portion of the company's mortgage-backed securities portfolio consist
of planned amortization class ("PAC"), targeted amortization class ("TAC") and
accretion directed class ("AD") instruments. These securities are designed to
amortize in a more predictable manner by shifting the primary risk of prepayment
to investors in other tranches of the mortgage-backed security. PAC, TAC and AD
securities comprised 62.3% and 67.5% of the carrying value of the company's
mortgage-backed securities as of September 30, 1997 and December 31, 1996,
respectively.
As of September 30, 1997, 62.6% of the company's mortgage-backed
securities were issued by either government agencies or government-sponsored
enterprises, compared to 67.3% as of December 31, 1996. The credit risk
associated with these securities is generally less than other mortgage-backed
securities. With the exception of six issues, with a carrying value of
$21,957,957 as of September 30, 1997, all of the company's investments in other
mortgage-backed securities are rated A or better by Standard& Poor's or Moody's.
The consideration received on sales of investments, carrying value and
realized gains and losses on those sales were as follows:
(000's Omitted)
For the Period Ended September 30
-----------------------------------
1997 1996
---- ----
Consideration received $524,806 $557,219
Carrying value 514,155 552,588
-------- --------
Net realized investment gains (losses) $10,651 4,631
======== ========
Investment gains $15,046 $13,262
Investment losses (4,395) (8,631)
-------- -------
Net realized investment gains (losses) $10,651 $ 4,631
======== =======
Net unrealized gains (losses) on debt securities available-for-sale,
debt securities trading, equity securities available-for-sale, equity securities
trading and other long-term investments changed as follows:
(000's Omitted)
Net Unrealized Gains (Losses)
-------------------------------------------------------
Debt Equity
Securities Debt Securities Equity Other
Available- Securities Available- Securities Long-term
for-Sale Trading for-Sale Trading Investments
--------- --------- --------- --------------------
Balance as of
January 1, 1996 $96,829 $ (4) $ 301 $ 10 $ -
1996 Net Change (50,194) 97 3,695 13 -
-------- ----- ----- --- ----
Balance as of
December 31, 1996 46,635 93 3,996 23 -
1997 Net Change 29,567 1,174 1,371 180 (12)
------- ------ ------ ---- -----
Balance as of
September 30, 1997 $76,202 $1,267 $5,367 $203 $(12)
======= ====== ====== ==== =====
3. Other Assets:
- -----------------
Other assets consist of the following:
(000's Omitted)
September 30, December 31,
1997 1996
------------ -----------
Property and equipment at cost:
Home office properties
(including land of $1,374 and 1,919) $19,625 $17,605
Furniture and equipment 5,785 5,015
Automobiles 212 196
------- -------
25,622 22,816
Less accumulated depreciation 5,178 5,987
------- -------
20,444 16,829
Accounts receivable 1,355 593
Other 3,143 3,824
------- -------
$24,942 $21,246
======= =======
4. Reinsurance:
- ----------------
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by American on any one life is $150,000, while the
maximum amount of risk retained by FBL on any one life is $25,000.
A summary of reinsurance data follows (000's Omitted):
Ceded to
For the Gross Other Net
Period Ended Descriptions Amount Companies Amount
------------ ------------- ------ --------- -------
September 30,
1997 Life insurance in force $277,193 $203,771 $73,422
Insurance premiums and
policy charges 14,998 684 14,314
September 30,
1996 Life insurance in force 303,309 228,696 74,613
Insurance premiums and
policy charges 11,012 561 10,451
September 30,
1997 Future policy benefits 3,190,796 220,306 2,970,490
December 31,
1996 Future policy benefits 3,037,005 238,774 2,798,231
The company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
The company had amounts receivable under reinsurance agreements of
$225,104,354 and $241,458,335 as of September 30, 1997 and December 31, 1996,
respectively. Of the total amounts receivable, $134,799,345 and $140,457,353
were associated with a coinsurance agreement entered into in 1989, which ceded
90% of the risk on American's block of single premium whole life policies
written prior to 1989 to Employers Reassurance Corporation (ERC). The agreement
provides that ERC assumes 90% of all risks associated with each policy in the
block. Reimbursement received from ERC for amounts paid by American on the
reinsured risks totaled $10,283,674 and $8,222,668 for periods ended September
30, 1997 and 1996, respectively.
The following table identifies the components of the amounts receivable
from ERC:
(000's Omitted)
September 30, December 31,
1997 1996
----------- ------------
Reserve for future policy benefits $132,541 $139,571
Reimbursement for benefit payments and
administrative allowance 2,258 886
-------- --------
$134,799 $140,457
======== ========
FBL and Philadelphia Life Insurance Company (PLI) are parties to a
reinsurance agreement under which FBL ceded 100% of the risk on certain deferred
annuity policies on a coinsurance basis. As of September 30, 1997 and December
31, 1996, the company had amounts receivable of $88,649,720 and $99,335,043
resulting from this agreement.
5. Convertible Subordinated Debentures:
- ----------------------------------------
The following table identifies the components of the amounts receivable
from PLI:
(000's Omitted)
September 30, December 31,
1997 1996
------------ ----------
Reserve for future policy benefits $86,146 $97,602
Reimbursement for benefit payments and
administrative allowance 2,504 1,733
------- -------
$88,650 $99,335
======= =======
On July 12, 1996, the company closed an offering of $65,000,000 par
value of Convertible Subordinated Debentures. These securities were placed in
Europe pursuant to Regulation S under the Securities Act of 1933. The debentures
pay an annual cash yield of 3% payable semi-annually, are convertible into the
company's common stock at $17.125, and mature on July 12, 2003 unless previously
converted or redeemed. The debentures are redeemable, in whole or in part, at
the option of the holders, on September 30, 2001, at 124.25% of their principal
amount (which in essence reflects deferred interest at a compounded rate of
4.25%), plus accrued but unpaid cash interest at the coupon rate of 3%. The
debentures are redeemable, at the company's option, on or after June 30, 1999,
at certain specified declining redemption prices (starting at 103% of principal
value) plus accrued but unpaid cash interest (at the rate of 3%) and accrued
deferred interest (at a compounded rate of 4.25%). The debentures may be
redeemed any time after August 15, 1996, at the company's option at their
principal amount plus accrued cash interest (at the rate of 3%), but with no
payment for accrued deferred interest, if the average closing price of the
company's common stock equals or exceeds $23.12 for 20 consecutive trading days.
The debentures are unsecured obligations of the company, subordinated to
all existing and future senior indebtedness. Approximately $35,000,000 of the
net proceeds of the offering were used to repay existing bank debt, $20,000,000
was contributed to American and the balance was used for other general corporate
purposes.
On September 24, 1997, a notice of redemption was mailed to the holders
of the company's debentures. Under the terms of this redemption all $65,000,000
have been called for mandatory redemption on November 14, 1997, at the principal
amount plus accrued current interest as of the redemption date.
Prior to the close of business on November 7, 1997, the debentures may
be converted into common shares at a conversion price of $17.125 per share.
6. Credit Agreement:
- ---------------------
On April 8, 1996, the company entered into a $35,000,000 credit
agreement with The First National Bank of Chicago (First Chicago), Fleet
National Bank (Fleet) and Boatmen's First National Bank of Kansas City
(Boatmen's), as Lenders. On that same date, the company borrowed the entire
$35,000,000, using the proceeds to repay existing bank debt, fund the cash
portion of the acquisition of FBG and for general corporate purposes.
On July 12, 1996, the company paid off the existing bank debt from the
proceeds of the Convertible Subordinated Debentures.
7. Related Party Transactions:
- ------------------------------
On April 15, 1997 the company made a loan in the amount of $66,531 to
its President and General Counsel. This loan bears interest at prime and is due
and payable on or before December 31, 1997.
On April 22, 1997 the company engaged Bush-O'Donnell &Co., Inc. as a
financial advisor to assist the company in its analysis and consideration of
various financial alternatives, including the possible sale or merger of the
company. The fees to be earned will depend on the outcome of the assignment,
subject to a minimum of $25,000. In the event the company is either sold or
merged, a transaction fee of $350,000 plus .4% of the amount by which the
aggregate consideration exceeds $362.5 million will be paid. Mr. James V.
O'Donnell, President and shareholder of Bush-O'Donnell & Co., Inc. serves as a
director of the company.
Mr. B.B. Andersen, spouse of Janis L. Andersen who serves as a director
of the company, served as project manager in the construction of the company's
home office complex. For his services, Mr. Andersen received $335,000 and
$45,000 during the nine months ended September 30, 1997 and 1996 respectively.
8. Retirement Plans:
- --------------------
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed 10% of covered compensation. As of September
30, 1997 and December 31, 1996, the ESOP held 59,153 and 61,735 shares of
AmVestors common stock. The company made no contributions to this plan during
either the nine months ended September 30, 1997 or 1996.
The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP)
for all full-time employees with one year of service.
The LESOP has acquired 370,244 shares of the company's stock through the
proceeds of a note payable to American. The note bears interest at 7.0% and is
payable in annual installments through December 30, 2002. The note had an unpaid
principal balance of $2,662,965 as of September 30, 1997, and December 31, 1996.
Each year the company makes contributions to the LESOP which are to be
used to make loan interest and principal payments. On December 31 of each year,
a portion of the common stock is allocated to participating employees. Of the
410,558 shares of the company's common stock now owned by the LESOP, 196,330
shares have been allocated to the participating employees with the remaining
214,228 shares being held by American as collateral for the loan.
On October 24, 1996, the ESOP was merged into the LESOP.
The unallocated portion of the company's common stock owned by the LESOP
has been recorded as a separate reduction of stockholders' equity. Accrued
contributions to the LESOP were $262,377 and $245,214 for nine months ended
September 30, 1997 and 1996, respectively.
During 1992, the company's Board of Directors approved retirement plans
for its members and members of the Board of Directors of certain of its
subsidiaries. The plans provide that retired Directors shall serve as Advisory
Members to the Board at a fee of $750 per meeting attended and a monthly
lifetime benefit in the amount of $750 be paid to each qualified Director upon
retirement. In addition, the company has agreed to continue any life insurance
policies being provided as of the date of retirement.
To qualify for this benefit, a Director must reach the age of 60 and
meet years of service requirements thereafter. The plan also calls for a
mandatory retirement on the date the Director's term expires following age 70. A
liability in the amount of $430,953, representing the present value of future
benefits, has been established. Charges (credits) to earnings related to the
plans were ($406) and ($2,889) for the nine months ended September 30, 1997 and
1996, respectively.
Effective January 1, 1993, the company adopted an Age-Weighted Money
Purchase Plan for all full-time employees with one year of service. The full
cost of this plan will be paid by the company with qualifying participants
receiving contributions based upon their age at plan implementation and current
salary. Contributions to the Age-Weighted Money Purchase Plan for the nine
months ended September 30, 1997 and 1996, were $292,908 and $273,099,
respectively.
Prior to the merger with AmVestors, FBG had approved a non-contributory
Employee Stock Ownership Plan (FBGESOP) and a contributory 401-k Plan for all of
its employees. As of December 31, 1996, the FBG ESOP owned 313,031 shares of
AmVestors common stock and 76,579 warrants to purchase AmVestors common stock.
At that same date, the 401-k Plan held 15,846 shares of AmVestors common stock
and 3,861 warrants to purchase AmVestors common stock. The company anticipates
maintaining these as separate plans for the benefit of the former FBG employees
and is working with the Internal Revenue Service to correct any qualification
problems which may exist. There were no contributions to the FBG ESOP in 1997 or
1996.
9. STOCKHOLDERS' EQUITY:
- ------------------------
Dividends by American and FBL to AmVestors are limited by laws
applicable to insurance companies. Under Kansas law, American may pay a dividend
from its surplus profits, without prior consent of the Kansas Commissioner of
Insurance, if the dividend does not exceed the greater of 10% of statutory
capital and surplus at the end of the preceding year or all of the statutory net
gain from operations of the preceding year. As of December 31, 1996, surplus
profits of American were $19,936,727 and 10% of statutory capital and surplus
was $10,146,126. American is also required to maintain, on a statutory basis,
paid-in capital stock and surplus (capital in excess of par value and unassigned
surplus) of $400,000 each. As of September 30, 1997 and December 31, 1996,
American's statutory capital and surplus was $105,115,766 and $101,461,258,
respectively. The statutory net gain from operations for 1996 was $7,203,263.
Under Florida insurance law and regulations, the aggregate dividends
that FBL may pay without prior regulatory approval is limited to the greater of
the sum of statutory net operating profits and net realized capital gains for
the preceding calendar year (provided there is available surplus from net
operating profits and net realized capital gains) or 10% of its available and
accumulated statutory surplus derived from net operating profits and net
realized capital gains. After payment of a dividend, FBL must have 115% of
required statutory surplus.
On December 31, 1996, FBL had accumulated statutory surplus derived from
net operating profits and net realized capital gains of $25,384,976. The sum of
statutory net profits and net realized capital gains for 1996 were $3,811,912.
As of September 30, 1997, available surplus from net operating profits and net
realized capital gains was $2,660,089. Required statutory surplus as of
September 30, 1997 was $19,237,426 and actual surplus was $35,958,053.
In connection with the original establishment of the Interest
Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the
company's domiciliary state, ordered that American prepare its December 31,
1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and
losses, not included in the calculation of the Asset Valuation Reserve (AVR), on
other than government securities, fifty (50%) percent to surplus and fifty (50%)
percent to IMR, after calculation of the AVR pursuant to the instructions
provided by the NAIC. This differs from prescribed statutory accounting
practices. This represented a permitted accounting practice for regulatory
purposes, the effect of which was to increase statutory surplus by $8,168,000 as
of December 31, 1992 ($4,844,920 as of September 30, 1997).
In addition, American received permission from the Commissioner of
Insurance of Kansas to amortize the effects of changing to Actuarial Guideline
No. 33 concerning the Commissioners Annuity Reserve Valuation Method for
individual annuity contracts over a three-year period beginning in 1995 rather
than to record the full amount of the change of $2,176,497. The effect of this
permitted accounting practice was to increase statutory surplus by $103,299 and
$441,450 as of September 30, 1997 and December 31, 1996, respectively.
On August 2, 1996, American was granted a variance from prescribed
statutory accounting practices which allowed the company to contribute
$20,000,000 to be used for the sole purpose of strengthening American's reserves
without experiencing a decrease in Unassigned Funds (Surplus). The contribution
was recorded as a contribution to a Special Surplus Fund and the resulting
reserve strengthening was charged against this Special Surplus Fund. Total
surplus was unaffected by this transaction.
The company currently has two fixed stock option plans; the 1989
Nonqualified Stock Option Plan (1989 Plan), and the 1996 Incentive Stock Option
Plan (1996 Plan). Options granted under the 1989 Plan have an exercise price
equal to the closing price of the company's stock on the date of the original
grant and none may be exercised beyond ten years from the grant date. A total of
923,820 options to acquire common stock were outstanding under the 1989 Plan as
of September 30, 1997. The 1996 Plan was approved by the stockholders of the
company at its Annual Meeting held on May 16, 1996 and is intended to qualify as
an "incentive stock option plan" under Section 422 of the Internal Revenue Code
of 1986. Options granted under the 1996 Plan have an exercise price equal to the
closing price of the company's stock on the date of the original grant and none
may be exercised beyond ten years from the grant date. A total of 931,064
options to acquire common stock were outstanding under the 1996 Plan as of
September 30, 1997.
Both the 1989 Plan and the 1996 Plan are administered by the Board of
Directors and officers of the company and its subsidiaries. The terms of the
options, including the number of shares granted, and the exercise price are
subject to the sole discretion of the Board of Directors.
A summary of the company's stock option plans as of and for the period
ended September 30, 1997 and December 31, 1996 follows:
1997 1996
---------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ ---------
Options outstanding,
beginning of period 1,551,556 $11.15 839,841 $8.97
Options granted 483,247 15.63 804,500 12.96
Options exercised (179,919) 7.78 (76,285) 6.52
Options terminated - - (16,500) 10.15
---------- ------- ---------- ------
Options outstanding,
end of period 1,854,884 $12.64 1,551,556 $11.15
========== ======= ========= ======
Options exercisable,
end of period 1,077,711 - 1,127,630 -
========== ==========
Options reserved for
future grants,
end of period - - 483,247 -
========== ==========
The following table summarizes information about stock options
outstanding under the company's option plans as of September 30, 1997:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life in Years Price
-------- ----------- -------------- ----------
$7.03-$7.50 143,073 .09 $7.32
$8.75 20,000 7.15 8.75
$10.00-$11.25 343,500 6.41 10.13
$12.66-$13.50 865,064 8.21 12.94
$15.63 483,247 4.57 15.63
--------- ------ ------
1,854,884 6.29 $12.64
========= ===== ======
The following table summarizes information about stock options
exercisable under the company's option plans as of September 30, 1997:
Weighted
Average
Options Exercise
Exercisable Price
------------ --------
143,073 $7.32
20,000 8.75
343,500 10.13
571,138 12.98
--------- -------
1,077,711 $11.24
========= =======
The estimated fair value of options granted or modified in 1996 was
$6.03 per share. The estimated fair value of options granted in 1997 was $4.73
per share. The company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation expense has been recognized for its option plans. Had
compensation expense for the company's option plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method prescribed by SFAS 123, the company's net earnings and fully diluted
earnings per share for the nine month period ended September 30, 1997 and 1996
would have been reduced to the pro forma amounts indicated below:
1997 1996
---- ----
Net earnings (in thousands):
As reported $18,396 $15,019
Pro forma 17,251 14,483
Fully diluted earnings per share:
As reported $1.17 $1.15
Pro forma $1.11 $1.06
As SFAS No. 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
The fair value of options granted in 1997 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 23.9%, (ii) risk-free interest rate of
5.37%, (iii) dividend yield of .58%, and (iv) an expected life equal to the
contractual expiration.
The fair value of options granted in 1996 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 29.4% (ii) risk-free interest rate of
5.14%, (iii) dividend yield of .69%, and (iv) an expected life equal to the
contractual expiration.
On March 17, 1989, the Board of Directors also adopted the 1989 Stock
Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan (the
Restricted Stock Plan). The SAR Plan authorized the Board of Directors to grant
stock appreciation rights to employees, officers and directors in such amounts
and with such exercise prices as it shall determine. No stock appreciation
rights granted under the SAR Plan may be exercised more than five years from its
date of grant. The SAR Plan authorized a maximum of 125,000 shares to be issued
pursuant to stock appreciation rights granted thereunder.
For the Period Ended
(000's Omitted)
-------------------------------
September 30, December 31,
1997 1996
------------ ------------
Rights outstanding, beginning of year - -
Rights granted - -
Rights exercised - -
Rights expired - -
Rights canceled - -
------ ------
Rights outstanding, end of year - -
====== ======
Reserved for future grants 35,000 35,000
====== ======
The company recorded no compensation expense relating to stock
appreciation rights for the nine months ended September 30, 1997 and 1996,
respectively.
The Restricted Stock Plan authorizes the Board of Directors to make
restricted stock awards to employees, officers and directors in such amounts as
it shall determine. The stock issued pursuant to such awards is subject to
restrictions on transferability for a period of five years. Such stock is
subject to a five-year vesting schedule, and the company is required to
repurchase all vested stock from a grantee if such grantee's employment with the
company is terminated prior to the lapse of the transfer restrictions. The
Restricted Stock Plan authorizes a maximum of 125,000 shares to be issued
thereunder. No restricted stock awards have been granted pursuant to the
Restricted Stock Plan.
In conjunction with a previous bank borrowing, the company issued
ten-year warrants to purchase a total of 170,002 shares of its common stocks as
summarized in the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
-------- ------ ---------- -------- ----------
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 $ 6.3855 5/1/02
-------
170,002
=======
In conjunction with the acquisition of FBG, the company issued warrants
to purchase 663,706 shares (11,747 of which were issued to subsidiaries of the
company) of its common stock. In addition, 52,660 warrants to purchase common
stock were issued upon the exercise of warrants previously issued by FBG by
conversion. These warrants are exercisable at $16.42 per share of common stock
and expire on April 2, 2002. As of September 30, 1997, 704,614 of these warrants
were outstanding.
In addition to the above, the company assumed warrants previously issued
by FBG to purchase a total of 270,689 shares of its common stock. Prior to
December 31, 1996, 260,305 warrants had been exercised. The remaining 10,384
warrants have exercise prices ranging from $1.346 to $3.7198.
10. Other Revenue:
- -------------------
American is party to a coinsurance agreement with Employers Reassurance
Corporation (ERC) which reinsured 90% of the risk on the American's block of
SPWL policies written prior to 1989. The agreement provides that ERC assumes 90%
of all risks associated with each policy in the block. These policies continue
to be administered by American. In return, American receives an administrative
allowance of $31.50 per policy per year. The total allowance received during the
nine months ended September 30, 1997 and 1996 were $78,894 and $85,937,
respectively.
FBL and Philadelphia Life Insurance Company (PLI) are parties to a
reinsurance agreement under which FBL ceded 100% of the risk on certain deferred
annuity policies on a coinsurance basis. These policies continue to be
administered by FBL. In return, FBL receives an administrative allowance of $25
per policy per year. The total allowance received during the nine months ended
September 30, 1997 and 1996 were $67,318 and $51,944, respectively.
In addition to the above, other revenue for the nine months ended
September 30, 1997 and 1996 includes override commissions of $1,253,357 and
$902,471, respectively attributable to the marketing efforts of AIMCOR and AW.
The 1997 period includes $390,905 of administrative fees received by AIG from
AmVestors CBO Trust I.
11. Income Taxes:
- -----------------
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the nine months Ended September 30,
---------------------------------------
1997 1996
---- ----
Current income tax expense $4,683 $5,001
Deferred income tax expense (benefit) 5,223 3,413
------ ------
Total income tax expense (benefit) $9,906 $8,414
====== ======
12. Acquisition:
- ----------------
On September 8, 1995, the company signed a merger agreement pursuant to
which it acquired all of the outstanding capital stock of FBG, a Delaware
corporation, for $5.31 per share, payable in 2,722,223 shares of the company's
common stock, warrants to purchase 663,706 shares of common stock and cash of
approximately $10,000,000.
FBG was an insurance holding company which owned all of the shares of
FBL, a Florida domiciled insurer, which specializes in the sale and underwriting
of annuity products and is admitted in 41 jurisdictions, which includes 39
states, the District of Columbia and the U.S. Virgin Islands. FBG also owned all
of the shares of AIMCOR and AW, both of which specialize in the distribution and
marketing of annuities.
The merger received the approval of the shareholders of both FBG and the
company, and became effective on April 8, 1996. The consolidated statements of
earnings for the nine months ended September 30, 1997 and 1996 include the
results of operations of FBG.
The transaction has been accounted for using the purchase method with
any resulting goodwill being amortized on a straight line basis over a period
not to exceed 30 years. The opening consolidated balance sheet of the acquired
entities follows:
(000's Omitted)
---------------
ASSETS
Investments $523,145
Cash and cash equivalents 8,932
Amounts receivable under reinsurance agreements 112,875
Accrued investment income 7,373
Deferred cost of policies purchased 51,500
Goodwill 11,942
Other assets 6,621
--------
Total assets $722,388
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities $650,865
Notes payable 15,500
Deferred income taxes 1,316
Accrued expenses and other liabilities 5,930
--------
Total liabilities $673,611
--------
Stockholders' Equity:
Common stock, no par value -
Paid in capital 48,777
--------
Total stockholders' equity 48,777
--------
Total liabilities and stockholders' equity $722,388
========
13. Proposed Merger with AmerUs:
- --------------------------------
On September 19, 1997, the company entered into an Agreement and Plan of
Merger with AmerUs Life Holdings, Inc. (AmerUs) providing for a merger whereby
the company would become a wholly-owned subsidiary of AmerUs.
The transaction provides for an exchange ratio of .6724 shares of AmerUs
Class A common stock for each outstanding share of common stock of the company,
provided the average closing price of the AmerUs stock for the 20-day trading
period, which ends 10 trading days prior to completion of the transaction, is at
least $29.75. In the event the average AmerUs stock price if less than $29.75
but greater than or equal to $27.00, the exchange ratio will be adjusted to
value the company's stock at $20.00 per share.
If the average AmerUs stock price is less than $27.00, the exchange
ratio will be .7407, or the company can terminate the transaction unless AmerUs
adjusts the exchange ratio to value the company's outstanding common stock at
$20.00 per share.
The merger transaction was unanimously approved by the boards of
directors of both the company and AmerUs and is subject to approval by
regulatory authorities and the stockholders of the company and AmerUs.
14. Commitments and Contingencies:
- ----------------------------------
The company's insurance subsidiaries are subject to state guaranty
association assessments in all states in which they are admitted. Generally,
these associations guarantee specified amounts payable to residents of the state
under policies issued by insolvent insurers. Most state laws permit assessments
or some portion thereof to be credited against future premium taxes. Charges
relating to the guaranty fund assessments impacted the years 1996 and 1995 by
approximately $1,913,000 and $1,001,000. The company expects that further
charges to income may be required in the future and will record such amounts
when they become known.
15. Subsequent Event:
- ---------------------
On September 24, 1997, the company mailed a Notice of Redemption to the
holders of its 3% Convertible Subordinated Debentures due 2003.
Under the terms of this redemption, all $65,000,000 principal amount of
the debentures were called for mandatory cash redemption on November 14, 1997,
at a redemption price of 100 percent of the principal amount together with
Accrued Current Interest to the redemption date.
As of the close of business on November 7, 1997, all $65,000,000 of the
debentures had been converted, at the election of the holders thereof, into
shares of the company's common stock at a conversion price of $17.125 per share,
in accordance with the terms of the indenture, resulting in no cash redemption
being made.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Shareholders of
AmVestors Financial Corporation
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of
AmVestors Financial Corporation and subsidiaries (the company) as of December
31, 1996 and 1995, and the related consolidated statements of earnings,
stockholders' 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 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, such consolidated financial statements present fairly,
in all material respects, the financial position of AmVestors Financial
Corporation and subsidiaries as of December 31, 1996 and 1995, and the 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.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
February 28, 1997
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
As of December 31,
ASSETS 1996 1995
---- ----
Investments:
Debt securities:
Bonds:
Available-for-sale (cost: $2,547,658 and
$1,947,777) $2,594,293 $2,044,606
Trading (cost: $12,198 and $1,489) 12,291 1,485
---------- ----------
2,606,584 2,046,091
---------- ----------
Equity securities:
Common stock:
Available-for-sale (cost: $1,396 and $1,047) 2,440 1,181
Preferred stock:
Available-for-sale (cost: $27,742 and $7,566) 30,694 7,733
Trading (cost: $2,516 and $619) 2,539 629
---------- ----------
35,673 9,543
Other long-term investments 41,152 39,491
Short-term investments 371 436
---------- ----------
Total investments 2,683,780 2,095,561
Cash and cash equivalents 132,574 48,281
Accounts receivable (net of allowance for uncollectible
accounts of $840 and $739) 1,051 454
Amounts receivable under reinsurance agreements 241,458 146,618
Amounts receivable on securities settlements in process 1,937 10,873
Accrued investment income 36,676 29,357
Deferred cost of policies produced 175,837 140,476
Deferred cost of policies purchased 39,865
Other assets 32,297 4,584
---------- ----------
Total assets $3,345,475 $2,476,204
========== ==========
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
As of December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
Liabilities:
Policy liabilities:
Future policy benefits $3,037,005 $2,259,028
Other policy liabilities 6,709 7,312
---------- ----------
3,043,714 2,266,340
Subordinated debentures payable 65,000 -
Notes payable - 7,000
Amounts due on securities settlements in process 11,301 1,438
Deferred income taxes 13,302 22,901
Accrued expenses and other liabilities 7,811 4,080
---------- ----------
Total liabilities $3,141,128 $2,301,759
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized -
2,000,000 shares - -
Common stock, no par value, authorized -
25,000,000 shares; issued - 13,167,372
shares in 1996 and 10,140,738 shares in 1995 16,755 12,904
Paid in capital 98,678 64,284
Unrealized investment gains (net of deferred cost of
policies produced amortization expense of $18,175
and $27,327 and net of deferred cost of policies
purchased amortization expense of $5,112 and $0 and
deferred income tax expense of $9,643 and $24,431) 17,701 45,372
Retained earnings 73,949 54,714
---------- ----------
207,083 177,274
Less treasury stock (234) -
Less leveraged employee stock ownership trust
(LESOP) (2,502) (2,829)
---------- ----------
Total stockholders' equity 204,347 174,445
---------- ----------
Total liabilities and stockholders' equity $3,345,475 $2,476,204
========== ==========
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's Omitted, except per share data)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Revenue:
Insurance premiums and policy charges $ 14,312 $ 8,500 $ 6,331
Net investment income 191,475 156,510 142,009
Net investment gains (losses) 7,936 156 803
Other revenue 2,285 1,485 557
-------- -------- --------
Total revenue 216,008 166,651 149,700
Benefits and expenses:
Benefits, claims and interest credited
to policyholders 143,794 118,886 112,310
Amortization of deferred cost of policies
produced 15,241 12,365 9,026
Amortization of deferred cost of policies
purchased 6,523 - -
General insurance expenses 12,627 8,370 7,587
Premium and other taxes, licenses and
fees 2,687 1,603 1,252
Other expenses 228 221 239
-------- -------- --------
Total benefits and expenses 181,100 141,445 130,414
Operating earnings 34,908 25,206 19,286
Interest expense 3,520 77 -
-------- -------- --------
Earnings before income tax expense and
extraordinary item 31,388 25,129 19,286
Income tax expense 10,257 8,530 5,593
-------- -------- --------
Earnings before extraordinary item 21,131 16,599 13,693
Extraordinary item: Loss on early
extinguishment of debt (net of income tax
benefit of $148) (269) - -
------- ------- -------
Net earnings $20,862 $16,599 $13,693
======= ======= =======
Earnings per share of common stock:
Primary:
Earnings before extraordinary item $1.65 1.60 1.32
Extraordinary item (.02) - -
Net earnings $1.63 1.60 1.32
Fully diluted:
Earnings before extraordinary item $1.56 1.60 1.32
Extraordinary item (.02) - -
Net earnings $1.54 1.60 1.32
Average shares outstanding:
Primary 12,832 10,354 10,341
Fully diluted 14,697 10,404 10,341
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
Unrealized
Investment
Common Paid-in Gains Retained Treasury
Stock Capital (Losses) Earnings Stock LESOP Total
------ ------- --------- --------- ------- ----- -----
Balance as of
January 1, 1994. $12,907 $64,612 $1,064$25,183 $ - $(3,421) $100,345
Net earnings - - - 13,693 - - 13,693
Cumulative effect of adoption
of SFAS 115 - - 19,613 - - - 19,613
Change in unrealized invest-
ment gains (losses) - - (28,490) - - - (28,490)
Remaining offering costs - (135) - - - - (135)
Redemption of stockholder
rights plan - (101) - - - - (101)
Issuance of common stock:
upon exercise of options 28 143<F1> - - - - 171
Purchase of treasury stock - - - - (1,186) - (1,186)
Retirement of treasury
stock (166) (1,020) - - 1,186 - -
------- ------- ------ ------ ------ -------- -------
Allocation of LESOP shares - - - - - 286 286
Balance December 31, 1994 12,769 63,499 (7,813) 38,876 - (3,135) 104,196
Net earnings - - -16,599 - - 16,599
Change in unrealized invest-
ment gains (losses) - - 53,185 - - - 53,185
Cash dividends to stockholders
($.075 per share on common
stock) - - - (761) - - (761)
Issuance of common stock:
upon exercise of options 135 785(1) - - - - 920
------- ------- ------ ----- ----- ------ --------
Allocation of LESOP shares - - - - - 306 306
Balance as of December 31,
1995 12,904 64,284 45,37254,714 - (2,829) 174,445
Net earnings - - - 20,862 - - 20,862
Change in unrealized invest-
ment gains (losses) - - (27,671) - - - (27,671)
Cash dividends to stockholders
($.1425 per share on common
stock) - - -(1,627) - - (1,627)
Issuance of common stock:
upon acquisition of company 3,464 28,865 - - - - 32,329
upon exercise of options 387 585<F1> - - - - 972
Issuance of warrants:
upon acquisition of company - 5,201 - - - - 5,201
Purchase of warrants - (257) - - - - (257)
Acquisition of treasury shares - - - - (234) - (234)
Allocation of LESOP shares - - - - - 327 327
------- ------- ------- ------ ------ -------- --------
Balance as of December 31,
1996 $16,755 $98,678 $17,701$73,949 $(234) $(2,502) $204,347
======= ======= ============== ====== ======== ========
<FN>
<F1> Net of income tax benefit of $242, $129 and $10 for the years ended
December 31, 1996, 1995 and 1994, respectively.
</FN>
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Operating Activities:
Net earnings $20,862 $16,599 $13,693
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Interest credited to policyholders 145,577 121,182 114,871
Amortization of (discounts) premiums
on debt securities, net 27 (1,561) (2,347)
Amortization of deferred cost of policies
produced 15,241 12,365 9,026
Amortization of deferred cost of policies
purchased 6,523 - -
Net investment (gains) losses (7,936) (156) (803)
Investment trading activity (11,989) (3,001) -
Accrued investment income 53 (61) (2,752)
Deferred income taxes 3,688 6,990 650
Other, net 623 2,538 (1,829)
------- ------- -------
Net cash provided by operating
activities 172,669 154,895 130,509
------- ------- -------
Investing Activities:
Purchases of securities:
Held-to-maturity - (5,052) (242,464)
Available-for-sale (878,871) (343,322) (332,647)
Proceeds from sale of securities:
Held-to-maturity - - 8,302
Available-for-sale 642,256 140,742 319,846
Proceeds from maturity or redemption:
Held-to-maturity - 26,303 35,375
Available-for-sale 141,209 85,767 86,973
Other long-term investments, net 4,570 19,271 (20,215)
Short-term investments, net 83 83 1,392
Capitalization of deferred cost of policies
produced (41,449) (34,775) (25,750)
Acquisition, net of cash received (2,314) - -
Construction of home office (10,516) (1,525) -
Other, net 75 (216) (413)
--------- -------- --------
Net cash used in investing activities (144,957) (112,724) (169,601)
--------- -------- --------
Financing Activities:
Premiums received 446,455 357,705 267,802
Surrender and death benefits paid (467,304) (372,234) (246,632)
Surrender and risk charges collected 12,416 6,971 5,409
Securities settlements in process 18,798 (8,804) 573
Acquisition of treasury stock (234) - -
Cash dividends to stockholders (1,627) (761) -
Issuance of common stock 730 791 161
Purchase of warrants (257) - -
Notes payable (22,500) 7,000 -
Subordinated debentures payable 65,000 - -
Other, net 5,104 4,821 618
-------- ------- --------
Net cash provided by (used in)
financing activities 56,581 (4,511) 27,931
-------- ------- --------
Increase (Decrease) in Cash and Cash
Equivalents 84,293 37,660 (11,161)
Cash and Cash Equivalents:
Beginning of year 48,281 10,621 21,782
-------- ------- -------
End of year $132,574 $48,281 $10,621
======== ======= =======
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: 1996 1995 1994
---- ---- ----
Income tax payments (refunds) $4,158 $(1,507) $6,150
Interest payments $1,428 $43 $-
NON-CASH ACTIVITIES:
Change in net unrealized investment gains
(losses) (46,498) 111,035 (56,823)
Less: Associated (increase) reduction in
amortization of deferred cost of policies
Produced 9,152 (30,803) 16,221
Purchased (5,112) - -
Deferred income tax (expense) benefit 14,787 (27,047) 13,177
------- ------- --------
Net change in net unrealized gains (losses) $(27,671) $53,185 $(27,425)
======== ======= ========
Details of acquisition:
Fair value of assets acquired $722,388 $- $-
Liabilities assumed (673,611) - -
Common stock and warrants issued (37,531) - -
--------- ------- --------
Cash paid 11,246 - -
Less: Cash acquired (8,932) - -
--------- ------- --------
Net cash paid for acquisition $2,314 $- $-
========= ======= ========
Investing activities:
Purchase of securities:
Available-for-sale $56,473 $- $-
Sales of securities:
Available-for-sale $56,473 $- $-
The above represents transactions involving the exchange of one security
for another. For additional information see Note 2 of Notes to Consolidated
Financial Statements.
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies:
- -----------------------------------------------
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of AmVestors
and its wholly-owned subsidiaries American Investors Life Insurance Company,
Inc.(American), American Investors Sales Group, Inc. (American Sales), AmVestors
Acquisition Subsidiary, Inc. (AAS), successor through merger with Financial
Benefit Group, Inc. (FBG), AmVestors CBO II, Inc. (CBO II), AmVestors Investment
Group, Inc. (AIG), Annuity International Marketing Corporation (AIMCOR),
Financial Benefit Life Insurance Company (FBL), The Insurance Mart, Inc. (TIM),
and Rainbow Card Pack Publication, Inc. (RBCP), (collectively the company). All
significant intercompany accounts and transactions have been eliminated.
B. INVESTMENTS:
Debt securities held-to-maturity are carried at amortized cost, except
that those securities with an other than temporary impairment in value, are
carried at estimated net realizable value. Debt securities available-for-sale
are carried at estimated market value, with any unrealized gains (losses)
recorded in stockholders' equity.
Investments are reviewed on each balance sheet date to determine if they
are impaired. In determining whether an investment is impaired, the company
considers whether the decline in market value at the balance sheet date is an
other than temporary decline; if so, then the investment's carrying value is
reduced to a new cost basis which represents estimated net realizable value. The
decline in value is reported as a realized loss, and a recovery from the new
cost basis is recognized as a realized gain only at sale.
The estimates of net realizable value are based on information obtained
from published financial information provided by issuers, independent sources
such as broker dealers or the company's independent investment advisor. Such
amounts represent an estimate of the consideration to be received in the future
when the defaulted company's debt is settled through the sale of their assets or
the restructuring of their debt. These estimates do not represent the discounted
present value of these future considerations.
Investments in common and preferred stock are carried at market, with
unrealized gains (losses) recorded in stockholders' equity for securities
available-for-sale.
Investments in debt and equity securities which were purchased
principally for the purpose of selling such securities in the near term are
classified as trading securities and are carried at market. Unrealized gains
(losses) are included currently in the results of earnings.
The cost of securities sold is determined on a specific identification
basis.
Other long-term investments include policy loans and mortgage loans on
real estate which are carried at cost less principal payments since date of
acquisition, and certain partnership investments which are carried at an amount
equal to the company's share of the partner's estimated market value with any
unrealized gains or (losses) recorded in net investment income.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company using
available market information and appropriate valuation methodologies. Due to the
fact that considerable judgment is required to interpret market data to develop
the estimates of fair value, the estimates presented are not necessarily
indicative of the amounts that could be realized in a current market exchange.
The carrying values and estimated fair values of the company's financial
instruments as of December 31, 1996, and December 31, 1995, were as follows:
(000's Omitted)
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- ------- ------
Assets:
Debt securities $2,606,584 $2,606,584 $2,046,091$2,046,091
Equity securities 35,673 35,673 9,543 9,543
Other long-term investments 41,152 41,176 39,491 39,546
Short-term investments 371 371 436 436
Cash and cash equivalents 132,574 132,574 48,281 48,281
Accounts receivable on
securities settlements in
process 1,937 1,937 10,873 10,873
Accounts receivable and
accrued investment income 37,727 37,727 29,811 29,811
Liabilities:
Future policy benefits -
investment contracts 2,767,326 2,583,902 2,022,653 1,900,895
Other policy liabilities 6,709 6,709 7,312 7,312
Subordinated debentures
payable 65,000 65,325 - -
Notes payable - - 7,000 7,000
Amounts due on securities
settlements in process 11,301 11,301 1,438 1,438
Accrued expenses and other
liabilities 7,811 7,811 4,080 4,080
DEBT SECURITIES - Fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
EQUITY SECURITIES - Fair value equals the carrying value as these
securities are carried at quoted market value.
OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of
mortgage loans, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value of policy loans and other long-term investments is
estimated to approximate the assets' carrying value.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS - The carrying
amounts reported in the balance sheet approximate the assets' fair value.
AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying
amount reported in the balance sheet approximates the fair value of this asset.
ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - The carrying amounts
reported in the balance sheet for these assets approximate fair value.
FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for
deferred annuities were estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are
similar to a deposit liability. The amount payable at the reporting date was
calculated as the account balance less any applicable surrender charges.
OTHER POLICY LIABILITIES - The carrying amount reported in the balance
sheet approximates the fair value of these liabilities.
SUBORDINATED DEBENTURES PAYABLE - The fair value of the company's
debentures is based on a dealer quote.
NOTES PAYABLE - The fair value of the company's note payable has been
estimated to be an amount equal to the balance reported in the balance sheet.
AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount
reported in the balance sheet approximates the fair value of this liability.
ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported in
the balance sheet approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair value amounts.
D. SIGNIFICANT RISKS AND UNCERTAINTIES:
NATURE OF OPERATIONS - The company specializes in the sale of deferred
annuity products, the earnings on which are not currently taxable to the annuity
owner. Any changes in tax regulations which eliminate or significantly reduce
this advantage of tax deferred income would adversely impact the operations of
the company. The company's products are marketed nationwide through a network of
independent agents licensed in 47 states, the District of Columbia and the U.S.
Virgin Islands. The company is not dependent on any one agent or agency for a
substantial amount of its business. No single agent accounted for more than 2%
of annuity sales in 1996, and the top twenty individual agents accounted for
approximately 18% of 1996 annuity sales.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
CERTAIN SIGNIFICANT ESTIMATES - Certain costs incurred to acquire new
business are deferred and amortized in relation to the incidence of expected
gross profits over the expected life of the policies. Determination of expected
gross profits includes management's estimate of certain elements over the life
of the policies, including investment income, interest to be credited to the
contract, surrenders and resultant surrender charges, deaths and in the case of
life insurance, mortality charges to be collected. These estimates of expected
gross profits are used as a basis for amortizing deferred costs. These estimates
are periodically reviewed by management and, if actual experience indicates that
the estimates should be revised, the total amortization recorded to date is
adjusted by a charge or credit to earnings.
E. DEFERRED COST OF POLICIES PRODUCED:
The costs of acquiring new business (primarily commissions and policy
expenses), which vary with and are directly related to the production of new
business, have been deferred. The deferred costs related to investment-type
deferred annuity contracts are amortized in relation to the incidence of
expected gross profits over the expected life of the policies. For single
premium life insurance, deferred policy acquisition costs are amortized over the
life of the policies, but not more than 20 years for policies issued before
January l, 1987, and not more than 30 years for policies issued after December
31, 1986, based on the expected gross profits for the amortization periods. The
deferred costs related to traditional life contracts are amortized over the
premium paying period for the related policies using the same actuarial
assumptions as to interest, mortality and withdrawals as are used to calculate
the reserves for future benefits.
Net investment gains realized in 1996, 1995 and 1994 resulted in the
company experiencing investment margins greater than those estimated. As a
result, $3,691,731, $3,902 and $203,940 of the unamortized balance of
deferred policy acquisition costs were expensed in 1996, 1995 and 1994,
respectively. The amount charged off is based on actual gross profits earned to
date in relation to total gross profits expected to be earned over the life of
the related contracts.
Estimates of the expected gross profits to be realized in future years
include the anticipated yield on investments. Deferred policy acquisition costs
will be adjusted in the future based on actual investment income earned.
F. DEFERRED COST OF POLICIES PURCHASED:
At the date of acquisition of a company, a portion of the purchase price
is allocated to the right to receive future cash flows from the existing
insurance contracts. The amount allocated represents the present value of the
projected future cash flows from the acquired policies. These projections take
into account mortality, surrenders, operating expenses, investment yields on the
investments held to back the policy liabilities and other factors known or
expected at the valuation date based on the judgment of management.
The deferred cost of policies purchased is amortized in relation to the
incidence of expected cash flows over the expected life of the policies. If it
is determined that the present value of future cash flows is insufficient to
recover the deferred cost of policies purchased, its carrying value will be
reduced with a corresponding charge to earnings.
G. GOODWILL:
Goodwill represents the excess of the amount paid to acquire a company
over the fair value of the net assets acquired. This balance is amortized on a
straight-line basis over a 30-year period. If it is determined through an
estimate of future cash flows that the goodwill has been impaired, its carrying
value will be reduced with a corresponding charge to earnings.
H. FUTURE POLICY BENEFITS:
Liabilities for future policy benefits under life insurance policies,
other than single premium life insurance, have been computed by the net level
premium method based upon estimated future policy benefits (excluding
participating dividends), investment yield, mortality and withdrawals giving
recognition to risk of adverse deviation. Interest rates range from 41\2% to
101\4% depending on the year of issue, with mortality and withdrawal assumptions
based on company and industry experience prevailing at the time of issue.
For single premium life insurance and single premium annuities, the
future policy benefits are equal to the accumulation of the single premiums at
the credited rate of interest and for single premium whole life, less any
mortality charges.
I. PARTICIPATING POLICIES:
The company issued participating policies on which dividends are paid to
policyholders as determined annually by the Board of Directors. The amount of
dividends declared but undistributed is included in other liabilities. Policy
benefit reserves do not include a provision for estimated future participating
dividends.
J. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives of 40 years. Other depreciation is provided on the
straight-line basis over useful lives ranging from 5 to 8 years.
K. INCOME TAXES:
The company and its subsidiaries prepare and file their income tax
returns on a consolidated basis.
The company provides for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
reported in the financial statements on the liability method.
L. EARNINGS PER SHARE:
Primary earnings per share of common stock are computed by dividing net
earnings by the sum of the weighted average number of shares outstanding during
the period plus dilutive common stock equivalents applicable to stock options
and warrants calculated using the treasury stock method. Fully diluted earnings
per share assumes the conversion of the convertible debentures outstanding with
applicable reduction in interest expense related to the debentures.
M. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents includes
cash and money market accounts and other securities with original maturities of
three months or less.
N. NEW ACCOUNTING STANDARDS:
Effective January 1, 1996, the company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long Lived Assets." This statement establishes accounting
standards for the impairment of long-lived assets, certain intangibles, and
goodwill related to those assets. The adoption did not have a material affect on
its consolidated financial statements.
Effective January 1, 1996, the company adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." This statement requires
increased disclosure of compensation expense arising from stock compensation
plans. The Statement encourages rather than requires companies to adopt a new
method of accounting that accounts for stock compensation awards based on their
estimated fair value at the date they are granted. Companies are permitted to
continue accounting under APB Opinion No. 25 which requires compensation cost be
recognized based on the difference, if any, between the quoted market price of
the stock on the date of grant and the amount an employee must pay to acquire
the stock. The company has elected to continue to apply APB Opinion No. 25 in
its consolidated financial statements and has disclosed pro forma net income and
earnings per share in Note 8 of Notes to Consolidated Financial Statements,
determined as if the new method were applied.
Effective for transfer and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" establishes accounting and reporting standards based on the
consistent application of the financial-components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, the derecognition of financial assets when
control is surrendered, and the derecognition of liabilities when they are
extinguished. Specific criteria are established for determining when control has
been surrendered in the transfer of financial assets. The company does not
expect the implementation of this Statement to have a material effect on its
consolidated financial statements.
O. RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior years'
financial statements to the December 31, 1996 presentation.
2. Investments:
- ---------------
A summary of net investment income and net investment gains (losses) follows:
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Net investment income:
Debt securities $184,758 $148,040 $142,469
Equity securities 1,496 1,158 50
Other long-term investments 5,271 8,032 486
Short-term investments 2,599 1,612 830
-------- -------- --------
194,124 158,842 143,835
Less investment expenses 2,649 2,332 1,826
-------- -------- --------
Net investment income $191,475 $156,510 $142,009
======== ======== ========
Net investment gains (losses):
Realized investment gains (losses):
Debt securities, available-for-sale $6,526 $ (1,141) $ (465)
Debt securities, held-to-maturity - 303 (56)
Debt securities, trading 193 72 -
Equity securities, available-for-sale 995 644 1,323
Equity securities, trading 502 (960) -
Other (390) 1,232 1
------ ------- ------
Net realized investment gains (losses) 7,826 150 803
------ ------- ------
Unrealized investment gains (losses):
Debt securities, trading 97 (4) -
Equity securities, trading 13 10 -
------ ------- -----
Net unrealized investment gains (losses) 110 6 -
------ ------- -----
Net investment gains (losses) $7,936 $156 $803
====== ==== ====
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge funds)
are managed by outside investment advisors. The investment guidelines of these
partnerships provide for a broad range of investment alternatives, including
stocks, bonds, futures, options, commodities, and various other financial
instruments. These investments were purchased with the strategy to achieve a
yield in excess of the S&P 500 Index. The partnerships are carried at an amount
equal to the company's share of the partnerships' estimated market value with
related unrealized gains and losses recorded in net investment income. In
accordance with the permitted guidelines, the investments purchased by these
partnerships may experience greater than normal volatility which could
materially affect the company's earnings for any given period.
The maturity of the company's debt and equity securities portfolio as of
December 31, 1996 was as follows:
(000's Omitted)
As of December 31, 1996
----------------------------------------------
Available-for-Sale Trading Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------- ------ -------- ------
Debt securities:
One year or less $ 46,575 $ 46,891 $ - $ -
Two years through five years 520,055 534,620 2,142 2,118
Six years through ten years 1,431,006 1,457,212 8,476 8,594
Eleven years and after 550,022 555,570 1,580 1,579
---------- ---------- ------- ------
2,547,658 2,594,293 12,198 12,291
Equity securities 29,138 33,134 2,516 2,539
---------- ---------- ------- -------
$2,576,796 $2,627,427 $14,714 $14,830
========== ========== ======= =======
These tables include the maturities of mortgage-backed securities based
on the estimated cash flows of the underlying mortgages.
The amortized cost, estimated market value and unrealized market gains
and losses of debt and equity securities as of December 31, 1996 and 1995, were
as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- -------
December 31, 1996
Bonds available-for-sale:
Corporate debt obligations
Investment grade $1,589,336 $38,980 $8,831 $1,619,485
High-yield 129,510 3,546 821 132,235
---------- ------- ------ ---------
1,718,846 42,526 9,652 1,751,720
U.S. Treasury obligations 44,520 246 437 44,329
Mortgage-backed securities
Investment grade 778,615 18,216 2,561 794,270
High-yield 5,677 - 1,703 3,974
---------- ------- ------- ----------
Bonds available-for-sale $2,547,658 $60,988 $14,353 $2,594,293
---------- ------- ------- ----------
Bonds trading:
Corporate debt obligations
Investment grade $ 8,824 $ 90 $ 57 $ 8,857
High-yield 3,374 84 24 3,434
---------- ------- ------- ----------
Bonds trading 12,198 174 81 12,291
---------- ------- ------- ----------
Total bonds 2,559,856 61,162 14,434 2,606,584
Equity securities 31,654 4,430 411 35,673
---------- ------- ------- ---------
$2,591,510 $65,592 $14,845 $2,642,257
========== ======= ======= =========
(000's Omitted)
Estimated
AmortizedUnrealized Unrealized Market
Costs Gains Losses Value
-------- --------- --------- -----
December 31, 1995
Bonds available-for-sale:
Corporate debt obligations
Investment grade $1,076,873 $63,321 $ 724 $1,139,470
High-yield 147,878 5,468 1,810 151,536
---------- ------- ------ ----------
1,224,751 68,789 2,534 1,291,006
U.S. Treasury obligations 51,743 942 21 52,664
Mortgage-backed securities
Investment grade 661,652 32,062 1 693,713
High-Yield 9,631 - 2,408 7,223
---------- -------- ------ ----------
Bonds available-for-sale $1,947,777 $101,793 $4,964 $2,044,606
---------- -------- ------ ----------
Bonds trading:
Corporate debt obligations
Investment grade 458 - 7 451
High-yield 1,031 5 2 1,034
---------- ------- ------ ---------
Bonds trading 1,489 5 9 1,485
---------- -------- ------ ----------
Total bonds 1,949,266 101,798 4,973 2,046,091
Equity securities 9,232 614 303 9,543
---------- -------- ------ ----------
$1,958,498 $102,412 $5,276 $2,055,634
========== ======== ====== ==========
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired (other
than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write Carrying Market
Cost Downs Value Value
------- ---------- -------- ---------
December 31, 1996 $7,545 $7,545 - -
December 31, 1995 $7,545 $7,545 - -
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and Moody's or, if
unrated, those that meet the objective criteria developed by the company's
independent investment advisory firm. Management believes that the return on
high-yield securities adequately compensates the company for additional credit
and liquidity risks that characterize such investments. In some cases, the
ultimate collection of principal and timely receipt of interest is dependent
upon the issuer attaining improved operating results, selling assets or
obtaining financing.
The amortized cost, estimated market value and unrealized market gains
(losses) by type of mortgage-backed security as of December 31, 1996 and 1995
were as follows:
(000's Omitted)
Estimated
AmortizedUnrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
------ -------- -------- -----
Government agency mortgage-backed securities:
Planned amortization classes and accretion
directed classes $23 $2 $- $25
------- ------ ------ -------
Total government agency
mortgage-backed securities 23 2 - 25
------- ------ ------ -------
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 488,496 13,569 1,400 500,665
Targeted amortization classes and
accretion directed classes 27,596 673 - 28,269
Sequential classes 8,883 194 - 9,077
Pass-throughs 2,712 31 1 2,742
-------- ------ ------ -------
Total government-sponsored enterprise
mortgage-backed securities 527,687 14,467 1,401 540,753
-------- ------ ------ -------
Other mortgage-backed securities:
Planned amortization classes 13,025 163 - 13,188
Sequential classes 204,193 3,054 1,160 206,087
Pass-throughs 9 - - 9
Subordinated classes 39,355 530 1,703 38,182
-------- ------ ------ -------
Total other mortgage-backed securities 256,582 3,747 2,863 257,466
-------- ------- ------ --------
Total mortgage-backed securities $784,292 $18,216 $4,264 $798,244
======== ======= ====== ========
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
--------- --------- ---------- -------
Government agency mortgage-backed
securities:
Planned amortization classes
and accretion
directed classes $71,164 $1,823 $- $72,987
Targeted amortization classes
and accretion directed classes 7,833 360 - 8,193
Pass-throughs 32 3 - 35
------- ------ ----- -------
Total government agency
mortgage-backed securities 79,029 2,186 - 81,215
------- ------ ----- -------
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 403,359 23,750 - 427,109
Sequential classes 19,546 1,405 - 20,951
Pass-throughs 3,258 21 - 3,279
-------- ------ ----- -------
Total government sponsored
enterprise
mortgage-backed securities 426,163 25,176 - 451,339
-------- ------ ----- -------
Other mortgage-backed securities:
Planned amortization classes 18,574 172 - 18,746
Sequential classes 134,245 4,484 1 138,728
Pass-throughs 11 - - 11
Subordinated classes 13,261 44 2,408 10,897
-------- ------- ------ --------
Total other mortgage-
backed securities 166,091 4,700 2,409 168,382
-------- ------- ------ --------
Total mortgage-backed securities $671,283 $32,062 $2,409 $700,936
======== ======= ====== ========
Certain mortgage-backed securities are subject to significant prepayment
risk. In periods of declining interest rates, mortgages may be repaid more
rapidly than scheduled as individuals refinance higher rate mortgages to take
advantage of the lower current rates. As a result, holders of mortgage-backed
securities may receive large prepayments on their investments which they are
unable to reinvest at an interest rate comparable to the rate on the prepaying
mortgages. Mortgage-backed pass-through securities and sequential classes,
which comprised 27.5% and 23.4% of the carrying value of the company's
mortgage-backed securities as of December 31, 1996 and 1995, respectively, are
sensitive to this prepayment risk.
A portion of the company's mortgage-backed securities portfolio
consists of planned amortization class ("PAC"), targeted amortization class
("TAC") and accretion directed class ("AD") instruments. These securities are
designed to amortize in a more predictable manner by shifting the primary risk
of prepayment to investors in other tranches (support classes) of the
mortgage-backed security. PAC, TAC and AD securities comprised 67.5% and 74.6%
of the carrying value of the company's mortgage-backed securities as of December
31, 1996 and 1995, respectively.
As of December 31, 1996, 67.3% of the company's mortgage-backed
securities were issued by either government agencies or government-sponsored
enterprises, compared to 75.3% as of December 31, 1995. The credit risk
associated with these securities is generally less than other mortgage-backed
securities. With the exception of seven issues, with a carrying value of
$26,799,287 as of December 31, 1996, all of the company's investments in other
mortgage-backed securities are rated A or better by Standard& Poor's or Moody's.
The following investments held as of December 31, 1996, exceeded ten
percent of stockholders' equity:
(000's Omitted)
As of December 31,
Amortized Estimated Amortized Estimated
Value Market Value Market
-------- ------- --------- ---------
10% of Stockholders' Equity $20,435 $ $17,444 $
Bonds:
Columbia/HCA Healthcare Corp,
various interest rates and due
dates through 2005 24,164 24,993
FNMA94 83 B, 7.5%, due 7-2003 19,197 20,598
Goldman Sachs Group, various
interest rates and due dates
through 2003 21,093 21,098
LA County Pension Oblig, various
interest rates and due dates
through 2005 - - 18,633 20,675
Quebec Province CDA, various
interest rates and due dates
through 2007 24,821 25,737 20,199 21,923
Racers 1996 C12-7, 0%,
due 01-2009 48,142 47,911 - -
The amounts shown as "estimated market" are primarily based on
quotations obtained from independent sources such as broker dealers who make
markets in similar securities. Unless representative trades of securities
actually occur at the balance sheet date, these quotes are generally estimates
of market value based on an evaluation of appropriate factors such as
institution-size trading in similar securities, yield, credit quality, coupon
rate, maturity, type of issue and other market data. Losses are recognized in
the period they occur based upon specific review of the securities portfolio and
other factors.
On December 5, 1996, the company through its subsidiaries American, FBL
and CBO II completed the formation of a Collateralized Bond Obligation (CBO).
The transaction involved the formation of a CBO Trust which borrowed
$159,500,800 from foreign investors at a rate equal to the London Inter Bank
Offering Rate (LIBOR) plus .5%. The proceeds of this offering were used to
purchase $171,044,460 of below investment grade bonds, $158,640,651 from
American, $5,963,809 from FBL and $6,440,000 from a brokerage firm. At the same
time, American, FBL and CBO II purchased $42,522,242 of trust certificates from
the CBO Trust for cash totaling $12,345,266 and below investment grade bonds
totaling $30,176,976. Certain of the trust certificates received by American and
FBL were not rated investment grade. These certificates, which had a book value
of $25,789,580 were transferred along with cash totaling $22,352,117 into a
Trust on December 31, 1996. The Trust used the cash to purchase Zero Coupon U.S.
Treasury securities. The CBO certificates along with the U.S. Treasury
securities were then used as collateral for the issuance of the $48,141,697 of
the Racers 1996 C12-7 reflected in the above table.
The consideration received on sales of investments, carrying value and
realized gains and losses on those sales were as follows:
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Consideration received $1,007,456 $329,295 $462,138
Carrying value 999,630 329,145 461,335
---------- -------- --------
Net realized investment gains (losses) $7,826 $150 $803
========== ======== ========
Investment gains $ 20,981 $ 4,138 $ 4,268
Investment losses (13,155) (3,988) (3,465)
---------- -------- --------
Net realized investment gains (losses) $7,826 $150 $803
========= ======= ========
During 1995, the company transferred bonds of four issuers from
held-to-maturity to available-for-sale based upon a significant deterioration in
the issuers' creditworthiness. The book value of these bonds at the time of
transfer was $16,128,888. Included in the above table are 1995 losses of
$2,151,154 on the sale of bonds of four issuers which the company had
transferred from held-to-maturity to available-for-sale.
The 1994 amounts include bonds of one issuer which the company had
classified as held-to-maturity, the sale of which resulted in a loss of
$205,526. The decision to sell these bonds was based upon a significant
deterioration in the issuers' creditworthiness. The book value of these bonds at
the time of sale was $8,507,732.
Net unrealized gains (losses) on debt securities held-to-maturity, debt
securities available-for-sale, debt securities trading, equity securities
available-for-sale, equity securities trading and other long-term investments
changed as follows:
(000's Omitted)
Debt Equity Other
Securities Debt Securities Equity Long-
Held-to AvailableSecurities AvailableSecurities term
Maturity for-Sale Trading for Sale Trading Investments
--------- -------- --------- --------- ------- ---------
Balance as of
January 1, 1994 $38,331 $43,035 $- $282 $- $1,330
1994 Net Change (129,824) (57,127) - (95) - (1,330)
-------- ------- ------ --- ---- -------
Balance as of
December 31, 1994 (91,493) (14,092) - 187 - -
1995 Net Change 91,493 110,921 (4) 114 10 -
------- -------- --- ---- --- ------
Balance as of
December 31, 1995 - 96,829 (4) 301 10 -
1996 Net Change - (50,194) 97 3,695 13 -
-------- -------- --- ----- --- ------
Balance as of
December 31, 1996 $- $46,635 $93 $3,996 $23 -
======== ======== === ====== === ======
3. Other Assets:
- ----------------
Other assets consist of the following:
(000's Omitted)
As of December 31,
-------------------
1996 1995
---- -----
Property and equipment at cost:
Home office properties
(including land of $1,067 and $352) $17,605 $3,643
Furniture and equipment 5,015 3,711
Automobiles 196 99
------- ------
22,816 7,453
Less accumulated depreciation 5,987 3,650
------- ------
16,829 3,803
------- ------
Goodwill 11,942 -
Less accumulated amortization 298 -
------- ------
11,644 -
Other 3,824 781
------- ------
$32,297 $4,584
======= ======
4. Reinsurance:
- ---------------
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by the company on any one life is $150,000.
A summary of reinsurance data follows (000's Omitted):
For the Ceded to
Year Ended Gross Other Net
December 31, Descriptions Amount Companies Amount
----------- ------------- ------ ---------- --------
1996 Life insurance in force 295,552 221,147 74,405
Insurance premiums and
policy charges 15,107 795 14,312
Future policy benefits 3,037,005 238,774 2,798,231
1995 Life insurance in force 311,991 240,206 71,785
Insurance premiums and
policy charges 9,409 909 8,500
Future policy benefits 2,259,028 145,183 2,113,845
1994 Life insurance in force 330,108 259,200 70,908
Insurance premium and
policy charges 7,308 977 6,331
Future policy benefits 2,148,763 148,575 2,000,188
The company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
The company had amounts receivable under reinsurance agreements of
$241,458,335 and $146,617,611 as of December 31, 1996, and 1995, respectively.
Of the total amounts receivable, $140,457,353 and $144,965,371 were associated
with a coinsurance agreement entered into in 1989, which ceded 90% of the risk
on the company's block of single premium whole life policies written prior to
1989 to Employers Reassurance Corporation (ERC). The agreement provides that ERC
assumes 90% of all risks associated with each policy in the block. Reimbursement
received from ERC for amounts paid by the company on the reinsured risks totaled
$10,774,227, $12,044,418 and $9,740,717 for years ended December 31, 1996, 1995
and 1994, respectively.
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
As of December 31,
1996 1995
---- ----
Reserve for future policy benefits $139,571 $143,558
Reimbursement for benefit payments and
administrative allowance 886 1,407
-------- --------
$140,457 $144,965
======== ========
FBL and Philadelphia Life Insurance Company are parties to a reinsurance
agreement under which FBL ceded 100% of the risk on certain deferred annuity
policies on a coinsurance basis. As of December 31, 1996, the company had
amounts receivable of $99,335,043 resulting from this agreement.
5. Convertible Subordinated Debentures:
- ---------------------------------------
On July 12, 1996, the company closed an offering of $65,000,000 of
Convertible Subordinated Debentures. These securities were placed in Europe
pursuant to Regulation S under the Securities Act of 1933. The debentures pay an
annual cash yield of 3% payable semi-annually, are convertible into the
company's common stock at $17.125, and mature on July 12, 2003 unless previously
converted or redeemed. The debentures are redeemable, in whole or in part, at
the option of the holders, on September 30, 2001, at 124.25% of their principal
amount (which in essence reflects deferred interest at a compounded rate of
4.25%), plus accrued but unpaid cash interest at the coupon rate of 3%. The
debentures are redeemable, at the company's option, on or after June 30, 1999,
at certain specified declining redemption prices (starting at 103% of principal
value) plus accrued but unpaid cash interest (at the rate of 3%) and accrued
deferred interest (at a compounded rate of 4.25%). The debentures may be
redeemed any time after August 15, 1996, at the company's option at their
principal amount plus accrued cash interest (at the rate of 3%), but with no
payment for accrued deferred interest, if the average closing price of the
company's common stock equals or exceeds $23.12 for 20 consecutive trading days.
The debentures are unsecured obligations of the company, subordinated to
all existing and future senior indebtedness. Approximately $35,000,000 of the
net proceeds of the offering were used to repay existing bank debt, $20,000,000
was contributed to American and the balance was used for other general corporate
purposes.
6. Credit Agreement:
- --------------------
On April 8, 1996, the company entered into a $35,000,000 credit
agreement with The First National Bank of Chicago (First Chicago), Fleet
National Bank (Fleet) and Boatmen's First National Bank of Kansas City
(Boatmen's), as Lenders. On that same date, the company borrowed the entire
$35,000,000, using the proceeds to repay existing bank debt, fund the cash
portion of the acquisition of FBG and for general corporate purposes.
On July 12, 1996 the company paid off the existing bank debt from the
proceeds of the Convertible Subordinated Debentures.
7. Retirement Plans:
- --------------------
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed 10% of covered compensation. The company made
no contributions to this plan during the three years ended December 31, 1996,
1995 and 1994.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all full-time employees with one year of service.
The LESOP has acquired 370,244 shares of the company's stock through the
proceeds of a note payable to American. The note bears interest at 7.0% and is
payable in annual installments through December 30, 2002. The note had an unpaid
principal balance of $2,662,965 and $3,010,882 as of December 31, 1996, and
December 31, 1995.
Each year the company will make contributions to the LESOP which are to
be used to make loan interest and principal payments. On December 31 of each
year, a portion of the common stock will be allocated to participating
employees. Of the 416,862 shares of the company's common stock now owned by the
LESOP, 202,634 shares have been allocated to the participating employees with
the remaining 214,228 shares being held by American as collateral for the loan.
On October 24, 1996, the ESOP was merged into the LESOP.
The unallocated portion of the company's common stock owned by the
LESOP has been recorded as a separate reduction of stockholders' equity. Accrued
contributions to the LESOP during December 31, 1996, 1995 and 1994 were
$326,952, $305,564 and $285,565.
During 1992, the company's Board of Directors approved retirement plans
for its members and members of the Board of Directors of certain of its
subsidiaries. The plans provide that retired Directors shall serve as Advisory
Members to the Board at a fee of $750 per meeting attended and a monthly
lifetime benefit in the amount of $750 be paid to each qualified Director upon
retirement. In addition, the company has agreed to continue any life insurance
policies being provided as of the date of retirement.
To qualify for this benefit, a Director must reach the age of 60 and
meet years of service requirements thereafter. The plan also calls for a
mandatory retirement on the date the Director's term expires following age
70. A liability in the amount of $431,359, representing the present value of
future benefits, has been established. Charges (credits) to earnings related to
the plans were $4,278, ($85,543) and $(40,244) for the years ended December 31,
1996, 1995 and 1994, respectively.
Effective January 1, 1993, the company adopted an Age-Weighted Money
Purchase Plan for all full-time employees with one year of service. The full
cost of this plan will be paid by the company with qualifying participants
receiving contributions based upon their age at plan implementation and current
salary. Contributions to the Age-Weighted Money Purchase Plan for the years
ended December 31, 1996, 1995 and 1994 were $353,953, $210,907 and $215,664,
respectively.
Prior to the merger with AmVestors, FBG had approved a non-contributory
Employee Stock Ownership Plan (FBGESOP) and a contributory 401-k Plan for all of
its employees. As of December 31, 1996, the FBG ESOP owned 311,593 shares of
AmVestors common stock and 75,982 warrants to purchase AmVestors common stock.
At that same date, the 401-k Plan held 18,284 shares of AmVestors common stock
and 4,458 warrants to purchase AmVestors common stock. The company anticipates
maintaining these as separate plans for the benefit of the former FBG employees
and is working with the Internal Revenue Service to correct any qualification
problems which may exist. There were no contributions to the FBG ESOP in 1996.
8. Stockholders' Equity:
- ------------------------
Dividends by American and FBL to AmVestors are limited by laws
applicable to insurance companies. Under Kansas law, American may pay a dividend
from its surplus profits, without prior consent of the Kansas Commissioner of
Insurance, if the dividend does not exceed the greater of 10% of statutory
capital and surplus at the end of the preceding year or all of the statutory net
gain from operations of the preceding year. As of December 31, 1996, surplus
profits of American were $19,936,727 and 10% of statutory capital and surplus
was $10,146,126. American is also required to maintain, on a statutory basis,
paid-in capital stock and surplus (capital in excess of par value and unassigned
surplus) of $400,000 each. As of December 31, 1996 and 1995, American's
statutory capital and surplus was $101,461,258 and $98,288,590, respectively.
Statutory net gain from operations for 1996, 1995 and 1994 was $7,203,263
$5,744,938 and $5,645,097, respectively.
Under Florida insurance law and regulations, the aggregate dividends
that FBL may pay without prior regulatory approval is limited to the greater of
the sum of statutory net operating profits and net realized capital gains for
the preceding calendar year (provided there is available surplus from net
operating profits and net realized capital gains) or 10% of its available and
accumulated statutory surplus derived from net operating profits and net
realized capital gains. After payment of a dividend, FBL must have 115% of
required statutory surplus.
On December 31, 1996, FBL had accumulated statutory surplus derived from
net operating profits and net realized capital gains of $25,384,976. The sum was
statutory net profits and net realized capital gains for 1996 were $3,811,912.
As of December 31, 1996, available surplus from net operating profits and net
realized capital gains was $3,811,912. Required statutory surplus as of December
31, 1996 was $19,415,943 and actual surplus was $33,746,022.
In connection with the original establishment of the Interest
Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the
company's domiciliary state, ordered that American prepare its December 31,
1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and
losses, not included in the calculation of the Asset Valuation Reserve (AVR), on
other than government securities, fifty (50%) percent to surplus and fifty (50%)
percent to IMR, after calculation of the AVR pursuant to the instructions
provided by the NAIC. This differs from prescribed statutory accounting
practices. This represented a permitted accounting practice for regulatory
purposes, the effect of which was to increase statutory surplus by $8,168,000 as
of December 31, 1992 ($5,533,000 as of December 31, 1996).
In addition, American received permission from the Commissioner of
Insurance of Kansas to amortize the effects of changing to Actuarial Guideline
No. 32 concerning the Commissioners Annuity Reserve Valuation Method for
individual annuity contracts over a three-year period beginning in 1995 rather
than to record the full amount of the change of $2,176,000. The effect of this
permitted accounting practice was to increase statutory surplus by $679,154 and
$943,150 as of December 31, 1996 and 1995, respectively.
On August 2, 1996, American was granted a variance from prescribed
statutory accounting practices which allowed the company to contribute
$20,000,000 to be used for the sole purpose of strengthening American's reserves
without experiencing a decrease in Unassigned Funds (Surplus). The contribution
was recorded as a contribution to a Special Surplus Fund and the resulting
reserve strengthening was charged against this Special Surplus Fund. Total
surplus was unaffected by this transaction.
The company currently has two fixed stock option plans; the 1989
Nonqualified Stock Option Plan (1989 Plan), and the 1996 Incentive Stock Option
Plan (1996 Plan). Options granted under the 1989 Plan have an exercise price
equal to the closing price of the company's stock on the date of the original
grant and none may be exercised beyond ten years from the grant date. A total of
878,556 options to acquire common stock were outstanding under the 1989 Plan as
of December 31, 1996. The 1996 Plan was approved by the stockholders of the
company at its Annual Meeting held on May 16, 1996 and is intended to qualify as
an "incentive stock option plan" under Section 422 of the Internal Revenue Code
of 1986. Options granted under the 1996 Plan have an exercise price equal to the
closing price of the company's stock on the date of the original grant and none
may be exercised beyond ten years from the grant date. A total of 673,000
options to acquire common stock were outstanding under the 1996 Plan as of
December 31, 1996.
Both the 1989 Plan and the 1996 Plan are administered by the Board of
Directors and officers of the company and its subsidiaries. The terms of the
options, including the number of shares granted, and the exercise price are
subject to the sole discretion of the Board of Directors.
A summary of the company's stock option plans as of and for the years
ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ----- ------ ----- ----- -----
Options outstanding,
beginning of period 839,841 $8.97 859,837 $8.62 816,107 $8.62
Options granted 804,500 12.96 86,000 10.63 95,000 9.28
Options exercised (76,285) 6.52 (105,996) 7.46 (22,200) 7.27
Options terminated (16,500) 10.15 - - (29,070) 11.85
--------- ------ ------- ----- ------- -----
Options outstanding,
end of period 1,551,556 $11.15 839,841 $8.97 859,837 $8.62
========= ====== ======= ===== ======= =====
Options exercisable,
end of period 1,127,630 - 779,841 - 764,837 -
========= ====== ======= ===== ======= =====
Options reserved for
future grants,
end of period 483,247 - 46,247 - 132,247 -
========= ====== ======== ===== ======= =====
The following table summarizes information about stock options
outstanding under the company's option plans as of December 31, 1996:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life in Years Price
-------- ------------ -------------- ---------
$4.84-$5.31 77,483 0.22 $4.99
$7.03-$7.50 161,573 0.84 7.34
$8.75-$9.75 75,000 7.64 9.42
$10.00-$11.25 353,500 7.15 10.12
$12.66-$13.50 884,000 8.96 12.94
---------- ----- -----
1,551,556 7.20 $11.15
========== ===== =====
The following table summarizes information about stock options
exercisable under the company's option plans as of December 31, 1996:
Weighted
Average
Options Exercise
Exercisable Price
----------- -------
77,483 $4.99
161,573 7.34
75,000 9.42
348,500 10.11
465,074 12.83
--------- ------
1,127,630 $10.44
========= ======
The estimated fair value of options granted in 1995 was $4.77 per share.
The estimated fair value of options granted or modified in 1996 was $5.00 per
share. The company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation expense has been recognized for its option plans. Had
compensation expense for the company's option plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method prescribed by SFAS123, the company's net earnings and fully diluted
earnings per share for the years ended December 31, 1996 and 1995 would have
been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net earnings (in thousands):
As reported $20,862 $16,599
Pro forma 18,857 16,458
Fully diluted earnings per share:
As reported $1.54 1.60
Pro forma 1.41 1.58
As SFAS No. 123 has not been applied to options granted prior to January
1, 1995, the resulting proforma compensation cost may not be representative of
that to be expected in future years.
The fair value of options granted in 1995 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 24.1%, (ii) risk-free interest rate of
5.85%, (iii) dividend yield of .70%, and (iv) an expected life equal to the
contractual expiration.
The fair value of options granted in 1996 was estimated on the date of
grant using a binomial options-pricing model and the following weighted average
assumptions: (i) expected volatility of 29.4% (ii) risk-free interest rate of
5.14%, (iii) dividend yield of .69%, and (iv) an expected life equal to the
contractual expiration.
On March 17, 1989, the Board of Directors also adopted the 1989 Stock
Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan (the
Restricted Stock Plan). The SAR Plan authorized the Board of Directors to grant
stock appreciation rights to employees, officers and directors in such amounts
and with such exercise prices as it shall determine. No stock appreciation
rights granted under the SAR Plan may be exercised more than five years from its
date of grant. The SAR Plan authorized a maximum of 125,000 shares to be issued
pursuant to stock appreciation rights granted thereunder.
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Rights outstanding, beginning of year - - 30,000
Rights granted - - -
Rights exercised - - -
Rights expired - - (30,000)
Rights canceled - - -
------ ------ ------
Rights outstanding, end of year - - -
====== ====== ======
Reserved for future grants 35,000 35,000 35,000
====== ====== ======
The company recorded no compensation expense relating to stock
appreciation rights for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Restricted Stock Plan authorizes the Board of Directors to make
restricted stock awards to employees, officers and directors in such amounts as
it shall determine. The stock issued pursuant to such awards is subject to
restrictions on transferability for a period of five years. Such stock is
subject to a five-year vesting schedule, and the company is required to
repurchase all vested stock from a grantee if such grantee's employment with the
company is terminated prior to the lapse of the transfer restrictions. The
Restricted Stock Plan authorizes a maximum of 125,000 shares to be issued
thereunder. No restricted stock awards have been granted pursuant to the
Restricted Stock Plan.
In conjunction with a previous bank borrowing, the company issued
ten-year warrants to purchase a total of 170,002 shares of its common stocks as
summarized in the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
------- ----- -------- -------- ---------
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 6.3855 5/1/02
170,002
In conjunction with the acquisition of FBG, the company issued warrants
to purchase 663,708 shares of its common stock. These warrants are exercisable
at $16.42 per share of common stock and expire on April 2, 2002.
In addition to the above, the company assumed warrants previously issued
by FBG to purchase a total of 270,689 shares of its common stock. Prior to
December 31, 1996, 260,305 warrants have been exercised. The remaining 10,384
warrants have exercise prices ranging from $1.346 to $3.7198.
9. Stockholders' Rights Plan:
- -----------------------------
On June 30, 1994, the company's Board of Directors voted to repeal the
1988 Stockholders' Rights Plan and set the close of business on July 22, 1994 as
the record date for the payment of the one cent per share redemption price.
Stockholders of record were paid on August 8, 1994, in full redemption of the
rights under the plan. The total amount to redeem the Rights was $101,432.
10. Other Revenue:
- ------------------
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's block of SPWL policies written prior to 1989. The
agreement provides that ERC assumes 90% of all risks associated with each policy
in the block. These policies continue to be administered by American. In return,
American receives an administrative allowance of $31.50 per policy per year. The
total allowance received in 1996, 1995 and 1994 was $113,384, $121,780 and
129,972, respectively.
Other revenue for the year ended December 31, 1996 includes override
commissions of $1,483,019 attributable to the marketing efforts of AIMCOR and
TIM, $413,064 of rental income received by FBL and $131,313 of advertising
revenues received by RBCP.
11. Income Taxes:
- ------------------
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Current income tax expense $ 6,569 $1,540 $4,943
Deferred income tax expense (benefit) 3,688 6,990 650
------- ------ ------
Total income tax expense (benefit) $10,257 $8,530 $5,593
======= ====== ======
The net deferred tax liability was comprised of the following:
(000's Omitted)
For the Year Ended
December 31,
1996 1995
---- ----
Gross deferred tax assets:
Investments $ 1,539 $ 679
Accounts receivable 21 -
Deferred policy acquisition costs 6,361 9,565
Property and equipment 391 314
Other assets 2,192 143
Reserves for future policy benefits 127,921 109,273
Accrued expenses and other liabilities 1,815 1,708
-------- --------
140,240 121,682
-------- --------
Gross deferred tax liabilities:
Investments 21,732 36,442
Accounts receivable 49,349 50,708
Accrued investment income 24 -
Deferred policy acquisition costs 64,190 55,530
Present value of future profits 15,791 -
Policy and contract claims 258 335
-------- -------
151,344 143,015
(11,104) (21,333)
--------- ---------
Less valuation allowance (2,198) (1,568)
--------- ---------
Net deferred tax liability $(13,302) $(22,901)
========= =========
The company's net deferred tax liability consists of amounts that
represent both ordinary tax deductions and capital losses in future tax returns
and includes a valuation allowance as it is more likely than not that a portion
of the deferred tax asset will not be realized. The inability to offset ordinary
income with capital losses and uncertainty as to the timing of future losses and
the ability to carry those losses back against prior income has resulted in the
company establishing a valuation allowance.
The actual tax expense (benefit) for each year differs from the
"expected" tax expense (computed by applying the Federal tax rate of 35% to
earnings before income taxes) as follows:
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Expected tax expense $10,840 $8,795 $6,750
State income tax 122 71 254
Change in valuation allowance on future
deductions (1,072) 188 (153)
Change in valuation allowance on capital
loss temporary differences - (179) (597)
Change in expected tax rate on future
deductions 30 - (321)
Change in other net temporary differences,
not previously tax effected 337 (345) (340)
------- ------ ------
Actual income tax expense (benefit) $10,257 $8,530 $5,593
======= ====== ======
Deferred income taxes are provided for the tax effects of transactions
that are reported in different periods for financial reporting band tax return
purposes. The primary component of the deferred income tax provision are as
follows:
(000's Omitted)
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
Investments $(76) $3,067 $(692)
Accounts receivable (1,484) (1,232) 842
Accrued investment income (18) (193) 204
Deferred policy acquisition costs 8,660 7,094 6,629
Present value of future profits (2,447) - -
Property and equipment 215 27 (234)
Other assets 4 (133) (9)
Future policy benefits (44) (1,825) (5,632)
Policy and contract claims (78) 56 178
Accrued expenses and other liabilities 27 120 114
Valuation allowance on future deductions
and capital loss differences (1,071) 9 (750)
-------- ------- -------
Deferred income tax expense (benefit) $3,688 $6,990 $650
======== ======= =======
12. Acquisition
- ---------------
On September 8, 1995, the company signed a merger agreement pursuant to
which it acquired all of the outstanding capital stock of FBG a Delaware
corporation, for $5.31 per share, payable in 2,722,223 shares of the company's
common stock, warrants to purchase 663,708 shares of common stock and cash of
approximately $10,000,000.
FBG was an insurance holding company which owned all of the shares of
FBL a Florida domiciled insurer which specializes in the sale and underwriting
of annuity products and is admitted in 41 jurisdictions, which includes 39
states, the District of Columbia and the U.S. Virgin Islands. FBG also owned all
of the shares of AIMCOR and TIM both of which specialize in the distribution and
marketing of annuities.
The merger received the approval of the shareholders of both FBG and the
company, and became effective on April 8, 1996. The consolidated statements of
earnings for the year ended December 31, 1996 include the results of operations
of FBG for the nine month period ended December 31, 1996.
The transaction has been accounted for using the purchase method with
any resulting goodwill being amortized on a straight line basis over a period
not to exceed 30 years. The opening consolidated balance sheet of the acquired
entities follows:
(000's Omitted)
-------------
ASSETS
Investments $523,145
Cash and cash equivalents 8,932
Amounts receivable under reinsurance agreements 112,875
Accrued investment income 7,373
Deferred cost of policies purchased 51,500
Goodwill 11,942
Other assets 6,621
--------
Total assets $722,388
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities $650,865
Notes payable 15,500
Deferred income taxes 1,316
Accrued expenses and other liabilities 5,930
--------
Total liabilities 673,611
--------
Stockholders' Equity:
Common stock, no par value -
Paid in capital 48,777
--------
Total stockholders' equity 48,777
--------
Total liabilities and stockholders' equity $722,388
========
The following table sets forth certain unaudited pro forma operating
data of the company for the year ended December 31, 1996 and 1995. This pro
forma data assumes the acquisition of FBG occurred on January 1, 1996 and 1995,
respectively.
(in thousands, except per share data)
For the year ended December 31,
1996 1995
---- ----
Pro Forma Operating Data:
Total revenue $218,973 $238,831
Earnings before extraordinary item 18,822 28,152
Net earnings 18,553 28,152
Earnings per share of common stock:
Primary:
Earnings before extraordinary item $1.37 $2.12
Net earnings $1.35 $2.12
Fully diluted:
Earnings before extraordinary item $1.26 $2.11
Net earnings $1.24 $2.11
Average shares outstanding:
Primary 13,732 13,275
Fully diluted 15,597 13,325
13. Commitments and Contingencies:
- ----------------------------------
The company's insurance subsidiaries are subject to state guaranty
association assessments in all states in which they are admitted. Generally,
these associations guarantee specified amounts payable to residents of the state
under policies issued by insolvent insurers. Most state laws permit assessments
or some portion thereof to be credited against future premium taxes. Charges
relating to the guaranty fund assessments impacted 1996, 1995 and 1994 by
approximately $1,913,000, $1,001,000 and $504,000. The company expects that
further charges to income may be required in the future and will record such
amounts when they become known.
14. Quarterly Results (Unaudited):
- ----------------------------------
The company's quarterly results are set forth in the following table:
(000's Omitted, except per share data)
1996 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------
February 26, 1998
Total revenue $49,278 $49,479 $57,663 $59,588
======= ======= ======= =======
Earnings before income taxes $11,331 $3,649 $8,722 $7,686
Income tax expense 3,910 1,333 3,171 1,843
Extraordinary item - (47) (222) -
------- ------ ------ ------
Net earnings $7,421 $2,269 $5,329 $5,843
======= ====== ====== ======
Per share of common stock:
Primary:
Earnings before extraordinary
item $.71 $.17 $.41 $.43
Extraordinary item - - (.02) -
---- ---- ---- ----
Net earnings $.71 $.17 $.39 $.43
==== ==== ==== ====
Fully diluted:
Earnings before extraordinary
item $.71 $.17 $.38 $.39
Extraordinary item - - (.02) -
---- ---- ---- ----
Net earnings $.71 $.17 $.36 $.39
==== ==== ==== ====
(000's Omitted, except per share data)
1995 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------
Total revenue $40,212 $40,378 $40,378 $45,683
------- ------- ------- -------
Earnings before income taxes $5,409 $5,494 $5,607 $8,619
Income tax expense 1,893 1,923 1,801 2,913
------- ------- ------- -------
Net earnings $3,516 $3,571 $3,806 $5,706
======= ======= ======= =======
Per share of common stock:
Primary:
Net earnings $.34 $.35 $.37 $.55
==== ==== ==== ====
Fully diluted:
Net earnings $.34 $.34 $.37 $.55
==== ==== ==== ====
(b) PRO FORMA FINANCIAL INFORMATION
Description of the transactions, entities involved and periods for which the
pro forma information is presented. The unaudited pro forma financial
information is presented for the following periods:
Condensed Consolidated Statements of Income: for the twelve months ended
December 31, 1996 and for the nine months ended September 30, 1997.
Condensed Consolidated Balance Sheet: as of September 30, 1997.
The Unaudited Pro Forma Condensed Consolidated Statements of Income for both
periods present the pro forma results of operations for the Company and its
subsidiaries as if the Company acquired Delta Life Corporation and AmVestors
Financial Corporation at the beginning of the respective periods stated. (On
January 1, 1996, for the twelve months ended December 31, 1996 and on January
1, 1997, for the nine months ended September 30, 1997). The unaudited Pro Forma
Condensed Consolidated Balance Sheet as of September 30, 1997, presents
the pro forma financial position of the Company and its subsidiaries assuming
that the Company acquired Delta Life Corporation and AmVestors Financial
Corporation on September 30, 1997.
AMERUS LIFE HOLDINGS, INC., DELTA LIFE CORPORATION AND AMVESTORS
FINANCIAL CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET AS OF SEPTEMBER 30, 1997
Pro
Pro Forma for
Delta Pro Forma for AmVestors Delta &
AmerUs Delta Forma the Delta AmVestors Pro Forma AmVestors
Historical Historical AdjustmentsAcquisition Historical Adjust. Acquis.
---------- ---------- ----------------------- ------------ ----- --------
(in millions)
ASSETS:
Invested assets:
Fixed maturities $2,338.1 $1,475.2 $(3.8) (A) $3,809.5 $2,885.0 $ $6,694.5
Equity securities 53.0 1.3 54.3 38.1 92.4
Purchased option
contracts - 11.6 19.3 (A) 30.9 - 30.9
Short-term
investments 24.4 - - 24.4 0.5 24.9
Investment in
unconsolidated
subsidiary 23.7 - - 23.7 - 23.7
Mortgage loans 303.3 266.4 569.7 - 569.7
Real estate 4.3 4.8 0.1 (A) 9.2 - 9.2
Policy loans 66.3 37.1 - 103.4 - 103.4
Other investments 87.9 0.6 - 88.5 40.1 128.6
------- ------- ---- ------- ------- ----- -------
Total investments 2,901.0 1,797.0 15.6 4,713.6 2,963.7 7,677.3
Cash - 9.7 - 9.7 32.9 (22.6)(E) 20.0
Accrued investment
income 40.0 12.2 - 52.2 40.8 93.0
Deferred policy
acquisition costs 128.5 116.0 (116.0) (F) 128.5 195.6 (195.6)(F) 128.5
Ceded reserves and claims - - - - 225.1 225.1
Value of business
acquired - - 109.0(A)(C) 109.0 30.8 128.7(B)(C) 268.5
Other assets 63.9 77.9 (6.9) (A) 134.9 47.2 182.1
Closed Block 1,350.3 - - 1,350.3 - 1,350.3
Goodwill - - 69.5(A)(D) 69.5 11.3 137.7(B)(D) 218.5
------- ------- ---- ------- ----- ----- -----
Total assets $4,483.7 $2,012.8 $71.2 $6,567.7 $3,547.4 $48.2 $10,163.3
======== ======== ===== ======== ======== ===== =========
AMERUS LIFE HOLDINGS, INC., DELTA LIFE CORPORATION AND AMVESTORS
FINANCIAL CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET AS OF SEPTEMBER 30, 1997.
Pro
Forma
Pro AmVestors for the
Delta Pro Forma for Pro Delta &
AmerUs Delta Forma the Delta AmVestors Forma AmVestors
Historical Historical Adjustments Acquisition Historical Adjust. Acquis.
---------- -------------------- ------------ ----------- ------- -------
(in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Policyowner reserves
and policyowner funds $2,051.6 $1,841.8 $15.8 (A) $3,909.2$3,203.5 $10.1(B) $7,122.8
Other liabilities 120.6 42.4 (6.6) (A) 156.4 44.3 (11.5)(B)(G) 189.2
Debt 61.5 25.8 164.8 (A)(H) 252.1 65.0 (65.0)(B) 252.1
Closed Block liabilities 1,587.1 - - 1,587.1 - - 1,587.1
------- ------- ----- ------- ------- ------ -------
Total liabilities 3,820.8 1,910.0 174.0 5,904.8 3,312.8 (66.4) 9,151.2
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely Junior Subordinated
Debentures of AmerUs 86.0 - - 86.0 - - 86.0
------ ----- ----- ----- ---- ----- -----
SHAREHOLDERS' EQUITY:
Preferred stock - - - - - -
Common stock 23.2 1.8 (1.8) (A) 23.2 17.0 (5.4)(B) 34.8
Additional paid-in
capital 51.4 78.4 (78.4) (A) 51.4 100.4 237.2(B) 389.0
Retained earnings 443.6 20.8 (20.8) (A) 443.6 91.2 (91.2)(B) 443.6
Unrealized
appreciation of
available-for-sale
securities 58.7 1.8 (1.8) (A) 58.7 28.7 (28.7)(B) 58.7
Treasury stock - - - - (.2) .2(B) -
Leveraged employee
stock ownership trust - - - - (2.5) 2.5(B) -
------- ------- ----- ------- ----- ----- -----
Total shareholders'
equity 576.9 102.8 (102.8) 576.9 234.6 114.6 926.1
------- ------- ----- ------- ----- ----- -----
Total liabilities and
shareholders' equity $4,483.7 $2,012.8 $71.2 $6,567.7$3,547.4 $48.2 $10,163.3
======== ======== ===== ======= ======= ===== =========
AMERUS LIFE HOLDINGS, INC., DELTA LIFE CORPORATION AND AMVESTORS FINANCIAL
CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997.
Pro Forma
Pro Forma for the
Pro for the AmVestors Delta &
AmerUs Delta Forma Delta AmVestors Pro Forma AmVestors
Historical HistoricalAdjust. Acquis.Historical AdjustmentsAcquisitions
---------- ---------------- -------- --------- ----------------------
(In millions, except per share amounts)
REVENUES:
Premiums and product charges $ 64.2 $ 4.9 - $ 69.1 $ 14.3 $ $83.4
Net investment income 149.8 95.8 - 245.6 157.5 403.1
Realized gains on investments 14.5 0.9 - 15.4 12.0 27.4
Other 2.2 - - 2.2 2.3 4.5
Contribution from the Closed Block 21.7 - - 21.7 - 21.7
----- ----- ----- ----- ----- ----- ------
Total revenues 252.4 101.6 0.0 354.0 186.1 540.1
----- ----- ----- ----- ----- ----- ------
BENEFITS AND EXPENSES:
Total policyowner benefits 126.1 73.8 - 199.9 117.9 317.8
Total expenses 63.5 18.9 6.6(L) 89.0 39.9 9.2 (L) 138.1
Dividends to policyowners 0.8 - - 0.8 - .8
----- ----- ----- ----- ----- ----- -----
Total benefits and expenses 190.4 92.7 6.6 289.7 157.8 9.2 456.7
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense 62.0 8.9 (6.6) 64.3 28.3 (9.2) 83.4
Income tax expense (benefit) 17.7 3.3 (1.7)(M) 19.3 9.9 (2.0)(M) 27.2
----- ----- ----- ----- ---- ----- ------
Income (loss) before equity
in earnings of unconsolidated
subsidiary 44.3 5.6 (4.9) 45.0 18.4 (7.2) 56.2
Equity in earnings of
unconsolidated subsidiary 1.2 1.2 - - 1.2
----- ----- ----- ----- ---- ----- -----
Net income (loss) $45.5 $ 5.6 $(4.9) $46.2 $18.4 $(7.2) $57.4
===== ===== ===== ===== ===== ===== ======
Net income per share:
Historical $1.96
=====
Pro Forma $1.64
=====
Shares used in the calculation
of net income per share:
Historical 23,155,989
==========
Pro Forma 35,046,673(N)
==========
AMERUS LIFE HOLDINGS, INC., DELTA LIFE CORPORATION AND AMVESTORS FINANCIAL
CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Pro
Forma
for the
Pro Forma AmVest. Delta
Delta Pro for the Pro and
AmerUs Delta Forma Delta AmVestors Forma AmVest.
Historical Historical Adjust. Acquisition HistoricalAdjust Acquis.
---------- ---------- ------ ----------- -------- ------ -----
(In millions, except per share amounts)
REVENUES:
Premiums and product charges $187.8 $ 11.0 $198.8 $14.3 $ $213.1
Net investment income 228.7 126.8 355.5 191.5 547.0
Realized gains on investments 66.0 0.1 66.1 7.9 74.0
Other 2.7 0.7 3.4 2.3 5.7
Contribution from
the Closed Block 19.9 0.0 19.9 - 19.9
----- ----- ----- ----- ---- ----- -----
Total revenues 505.1 138.6 - 643.7 216.0 859.7
----- ----- ----- ----- ----- ----- -----
BENEFITS AND EXPENSES:
Total policyowner benefits 261.9 101.6 363.5 143.8 507.3
Total expenses 99.9 24.8 11.1(L) 135.8 40.8 9.6(L)186.2
Dividends to policyowners 26.3 - - 26.3 - 26.3
----- ----- ----- ----- ----- ----- -----
Total benefits and expenses 388.1 126.4 11.1 525.6 184.6 9.6 719.8
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax expense 117.0 12.2 (11.1) 118.1 31.4 (9.6) 139.9
Income tax expense (benefit) 43.8 4.6 (3.1)(M) 45.3 10.3 (1.7)(M)53.9
----- ----- ----- ----- ---- ----- -----
Income (loss) before equity
in earnings of unconsolidated
subsidiary and extraordinary
item 73.2 7.6 (8.0) 72.8 21.1 (7.9) 86.0
Equity in earnings of unconsolidated
subsidiary 1.0 - - 1.0 - - 1.0
----- ----- ----- ----- ----- ----- -----
Net Income (loss) $74.2 $7.6 $(8.0) $73.8 $21.1 $(7.9) $87.0
===== ===== ===== ===== ===== ===== =====
Net income per share:
Historical $3.20
=====
Pro Forma $2.48
=====
Shares used in the
calculation of net income
per share:
Historical 23,155,989
==========
Pro Forma 35,046,673(N)
==========
AMERUS LIFE HOLDINGS, INC. DELTA LIFE CORPORATION AND AMVESTORS FINANCIAL
CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(A) Giving effect to the acquisition of Delta under purchase accounting, the
total purchase cost of Delta was allocated to the assets and
liabilities acquired based on their relative fair values as of the date of
acquisition, with any excess of the total purchase cost over the fair value
of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. The cost allocations are primarily related to value
of business acquired, investments, and goodwill. Although the final
allocations may differ, the pro forma financial statements reflect
management's best estimate based on currently available information
and the differences between the current and final allocations are not
expected to be material.
The allocation of the purchase price is as follows (in millions):
Investments (including cash and
short-term investments) $1,822.3
Receivables and other assets 83.2
Value of business acquired 109.0
Goodwill 69.5
Policyowner reserves and funds (1,857.6)
Debt (25.8)
Other liabilities (35.8)
---------
164.8
Cash Consideration (164.8)
---------
$ -
=========
The historical components of Delta's shareholders' equity have been
eliminated in accordance with purchase accounting.
(B) Giving effect to the acquisition of AmVestors under purchase accounting,
the total purchase cost of AmVestors was allocated to the assets and
liabilities acquired based on their relative fair values as of the date of
acquisition, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities
assumed recorded as goodwill. The cost allocations are primarily related
to value of business acquired, investments, and goodwill. Although the
final allocations may differ, the pro forma financial statements
reflect management's best estimate based on currently available
information and the differences between the current and final
allocations are not expected to be material.
The Average AmerUs trading price was $29.70 per share (which represents
the average of the closing prices of AmerUs common stock the date of the
merger announcement, two days preceding and two days
succeeding the announcement), and each share of AmVestors common
stock was exchanged for .6724 shares of AmerUs Class A common stock.
The number of shares of AmVestors common stock outstanding was the actual
number outstanding at the effective date of the transaction of 17,220,300
after the $65 million outstanding principal amount of AmVestors
Convertible Debentures were converted at $17.125 per share at the
beginning of the respective periods resulting in the issuance of 3,795,620
additional shares of AmVestors Common Stock. The total number of shares
of AmerUs Class A Common Stock issued as a merger consideration was
assumed to be 11,578,929. Options and warrants to acquire
1,902,854 shares of AmVestors Common Stock valued at their fair market
value were rolled over into options or warrants to acquire 1,279,479
shares of AmerUs Common Stock with identical terms as the AmVestors
options or warrants.
The allocation of the purchase price is as follows (in millions):
Investment (including cash and short-term investments) $2,974.0
Receivables and other assets 313.1
Value of business acquired 159.5
Goodwill 149.0
Policyowner reserves and funds (3,213.6)
Other liabilities (32.8)
---------
349.2
Merger consideration:
Issuance of 11,578,929 shares of Class A Common Stock (343.9)
Issuance of stock warrants for 477,769 shares of Class A
Common Stock (5.3)
---------
Total merger consideration $349.2
=========
The historical components of AmVestor's shareholders' equity have been
eliminated in accordance with purchase accounting. In addition, common
stock is adjusted to reflect the shares issued in conjunction with the
merger's exchange of stock amounting to $11.6 million. Additional paid-in
capital is also adjusted for the excess of the merger consideration
exchanged over the stated value of the AmerUs Common Stock amounting to
$332.3 million and the fair market value of warrants issued of $5.3
million.
(C) Value of the insurance business acquired reflects the estimated fair value
of the business in force and represents the portion of the cost to acquire
the company that is allocated to the value of the right to receive future
cash flows from the annuity contracts existing as of the assumed date of
the acquisition. Amortization is recognized in proportion to expected
future gross profits over a 20 year period and is based on the average
interest crediting rates which range from 4.1% to 6.0% for 1996 and over
the next five years. The estimated amortization for the next five years
is as follows (in millions):
Total
-----
1996 $38.3
1997 $45.7
1998 $30.6
1999 $29.5
2000 $30.4
2001 $27.6
(D) Represents the excess of the total purchase price over the fair value of
the assets acquired less the fair value of the liabilities assumed.
(E) Represents transaction costs of $11.1 million, primarily investment
banking fees paid in connection with the Merger, redemption of certain
stock options and warrants of $7.2 million and payment of $4.3 million of
stock appreciation rights.
(F) Represents the unamortized balance of deferred policy acquisition costs.
(G) Represents various liabilities assumed in connection with the AmVestors
Acquisition and the net impact on the deferred tax liability as a result
of the purchase accounting adjustments as following (in millions):
Eliminate historical deferred income taxes $(68.4)
Establish new purchase accounting deferred income taxes 37.5
Establish liability for stock options 12.4
Establish liability for employment and severance agreements 3.4
Establish liability for stock appreciation rights 1.1
Establish liability for guarantee assessments 2.5
------
$(11.5)
======
(H) Represents the proceeds of bank borrowings as the source of $164.8 million
used to acquire Delta.
(I) Includes the amortization of goodwill on a straight-line basis over 30
years and the effects of depreciation adjustments related to the
disposition of redundant assets over five year lives (refer to note K for
amounts).
(J) Includes the interest expense on the bank borrowings for the acquisition
of Delta based on an estimated rate of 6.5%, which represents the current
actual borrowing rate of AmerUs (refer to note K for amounts).
(K) Represents the reversal of historical interest expense resulting from the
conversion of the subordinated debt.
(L) The following is a summary of the expense pro forma adjustments related to
Delta and AmVestors for the nine months ended September 30, 1997, and the
year ended December 31, 1996 (in millions):
Sept. 30,Dec. 31, Sept. 30, Dec. 31,
1997 1996 1997 1996
-------- ------- ------- -------
Delta AmVestors
----------------- ------------------
Value of business acquired
amortization (C) $5.3 $8.6 $28.0 $29.7
Historical deferred acquisition
costs amortization (C) (7.1) (9.0) (17.9) (21.9)
Goodwill amortization (I) 1.7 2.3 3.7 4.7
Historical goodwill amortization(I) - - (.3) (.3)
Depreciation (I) (1.4) (1.6) - -
Interest expense for borrowing (J) 8.1 10.8 - -
Interest expense for subordinated
debt (K) - - (4.3) (2.6)
---- ---- ----- -----
Total $6.6 $11.1 $9.2 $9.6
==== ===== ===== =====
(M) Represents the income tax effect on the pro forma adjustments at an
effective tax rate of 35%.
(N) Represents application of the treasury stock method to calculate the
weighted-average number of shares outstanding for shares used in the
calculation of net income per share. A reconciliation of historical and
pro forma shares outstanding for pro forma purposes is as follows:
AmerUs outstanding common stock 23,155,989
AmVestors* outstanding common stock 11,578,929
outstanding stock options 224,042
outstanding stock warrants 87,713
----------
35,046,673
==========
* after conversion using .6724 exchange ratio.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERUS LIFE HOLDINGS, INC.
By: /s/ Roger K. Brooks
---------------------------------
Name: Roger K. Brooks
Title: Chairman, President and
Chief Executive Officer
Date: March 3, 1998