Properties ___________________ The company owns its home office complex consisting of four buildings and the adjacent property in Topeka, Kansas. Total floor space in the four buildings is approximately 31,000 square feet. During 1995, the company began construction of a six-story Home Office building in Topeka, Kansas to house all operations and plans to move into the new facility by early 1997.
general decline in interest rates and the yield on its investment portfolio, to reduce credited interest rates on certain annuity contracts below the "bailout" level. The aggregate account values of annuity contracts on which the crediting rate was reduced below the "bailout" level totalled $109.8 million and $326.2 million during 1994 and 1993, respectively. As a result, $18.3 million, or 17%, and $139.6 million, or 43%, of such policies were surrendered during 1994 and 1993, respectively. The company was able to offset the negative impact of "bailout" surrenders on its earnings through the realization of gains on the sale of its securities. Excluding surrenders from "bailout" products, American's annuity withdrawal rates were 9% for 1994, and 7% for 1993. Although, as of December 31, 1995, approximately $213.1 million, or 12% of annuity account values contained a "bailout" provision, the current credited rates on these policies are above the "bailout" rate. The "bailout" rate on $211.0 million of this amount is 6% or less. If the company reduces credited rate below the "bailout" rates on policies containing "bailout" provisions in the future, it intends to pay any resulting surrenders from cash provided by operations and premiums received. In the event such sources are not sufficient to pay surrenders, the company would have to sell securities at the then current market prices. American expects that withdrawals on its annuity contracts will increase as such contracts approach maturity. The company may not be able to realize investment gains in the future to offset the adverse impact on earnings, should future "bailout" surrenders were to occur. Margin Analysis The company's earnings are impacted by realized investment gains and losses and by the associated amortization of DAC. The actual timing and pattern of such amortization is determined by the actual profitability to date (which includes realized investment gains and losses) and the expected future profitability on a particular annuity contract. To the extent investment income is accelerated through realization of investment gains, the corresponding amortization of DAC is also accelerated as the stream of profitability on the underlying annuities is effectively accelerated. When investment losses are realized, the corresponding amortization of DAC is reduced as stream of profitability on the underlying annuities is effectively reduced. The following margin analysis depicts the effects of realized gains (losses) on the company's operating earnings (loss):
surrenders following the reduction of interest crediting rates on certain annuity policies below the "bailout" rate. The decision to realize gains or losses lies to a great degree in management's discretion. Unrealized gains (losses) in the company's bond portfolio were $96.8 million, ($105.6) million and $81.4 million as of December 31, 1995, 1994 and 1993 respectively. OTHER REVENUE increased $.9 million, or 150%, to $1.5 million in 1995 from $.6 million in 1994. This increase resulted from a gain of $.7 million recognized on the sale of Omni-Tech Medical Inc., and a $.3 million increase in Omni-Tech sales. Other revenue increased $.3 million to $.6 million in 1994 from $.3 million in 1993. This increase is due to an increase in Omni-Tech sales. BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $6.6 million, or 6%, to $118.9 million in 1995 from $112.3 million in 1994. This increase results primarily from an increase in the average interest rate credited on the company's annuity liabilities, from 5.8% as of December 31, 1994 to 6.0% as of December 31, 1995, along with an increase in annuity liabilities to $2,082.0 million on December 31, 1995 from $1,971.6 million on December 31, 1994. In 1994, this expense decreased $1.5 million, to $112.3 million from $113.8 million in 1993. This decrease resulted primarily from a reduction in the average interest rate credited on annuity liabilities, from 6.2% as of December 31, 1993 to 5.8% as of December 31, 1994. This decrease was partially offset by an increase in annuity liabilities to $1,971.6 million on December 31, 1994 from $1,826.9 million on December 31, 1993. AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased $3.4 million, or 38%, to $12.4 million in 1995 from $9.0 million in 1994. Amortization of deferred policy acquisition costs (DAC) associated with gross interest margin increased $3.3 million to $12.1 million in 1995 from $8.8 million in 1994. Amortization of DACassociated with investment gains was unchanged at an expense of $.2 million on gains of $1.0 million in 1995 and an expense of $.2 million on gains of $.8 million in 1994. The increase in 1995 amortization associated with gross interest margin reflects the increased surrenders realized during 1995. Amortization of DACdecreased $.4 million, to $9.0 million in 1994 from $9.4 million in 1993. Amortization of DAC associated with gross interest margins increased $4.1 million, to $8.8 million in 1994, from $4.7 million in 1993. Amortization of DACassociated with investment gains decreased $4.6 million, to $.2 million in 1994, from $4.8 million in 1993. The 1993 amortization amounts reflect the lowering of interest crediting rates and the resulting increase in the estimates of future expected gross profits and the realization of $17.0 million of investment gains. Acquisition costs incurred in 1995 and deferred into future policy periods were $34.8 million, compared with $25.8 million in 1994 and $18.2 million in 1993. GENERAL INSURANCE EXPENSES increased $.8 million, or 11%, to $8.4 million in 1995 from $7.6 million in 1994. Management believes this increase can be attributed to increases in business activity and assets under management. This follows a decrease of $1.2 million to $7.6 million in 1994 from $8.8 million in 1993. This decrease is primarily attributable to the deferral of additional expenses related to the acquisition of annuity contracts in 1994. PREMIUM AND OTHER TAXES, LICENSES AND FEES INCREASED $.3 million, or 23%, to $1.6 million in 1995 from $1.3 million in 1994 following a decrease of $1.1 million in 1994 from $2.4 million in 1993. The above amounts include charges of approximately $1.0 million, $.5 million and $1.6 million for the years 1995, 1994 and 1993, respectively, for nonrecoverable guaranty fund assessments resulting from the significant number of insolvencies that have occurred in recent years.
made with ERC on a monthly basis. If ERC were to become insolvent, American would remain responsible for the payment of all policy liabilities. In addition, the company is a party to two assumption reinsurance agreements with other reinsurers. See Item 1. (c)(l) Business Done and Intended to be Done-Other Insurance Products. EFFECT OF INFLATION AND CHANGES IN INTEREST RATES. The company does not believe that inflation has had a material effect on its consolidated results of operations during the past three years. The company seeks to manage its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the company's fixed income securities increases or decreases directly with interest rate changes. For example, if interest rates decline (as was the case in 1995 and 1993), the company's fixed income investments generally will increase in market value, while net investment income will decrease. Conversely, if interest rates rise (as was the case in 1994), fixed income investments generally will decrease in market value, while net investment income will increase. In a rising interest rate environment, (such as that experienced in 1994), the company's average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. During such a rise in interest rates, new funds would be invested in bonds with higher yields than the liabilities assumed. In a declining interest rate environment, the company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities. In addition to the increase in the company's average cost of funds caused by a rising interest rate environment, surrenders of annuities that are no longer protected by surrender charges increase. While the company experienced a decrease in total surrenders during 1994, the decrease was primarily due to the large number of bailout surrenders in 1993. Throughout 1994, the company saw an increase in surrenders of policies which no longer were covered by surrender charges. Management believes the increased surrenders experienced in 1994 were due to the increasing interest rates throughout 1994. This trend has continued into 1995. Management believes that surrenders are lower during periods of declining interest rates. BOND PORTFOLIO RESTRUCTURING. During 1990, the quoted market values of many non-investment grade bonds substantially decreased. In response to this decrease, the company substantially increased the allowance for credit losses during the third quarter of that year, and completed a significant restructuring of its bond portfolio during 1991. During 1995, 1994 and 1993, the company disposed of bonds with book values of $144.7, $337.7 and $374.6 million for net gains (losses) of ($.1), ($.8) and $18.6 million, respectively. In 1993, the company reduced credited interest rates below the "bailout" rates on certain annuity policies and the related surrenders experienced during the "bailout" period resulted in losses on a statutory basis. The company sold securities at gains to restore the statutory surplus lost. The following table sets forth the reasons that bonds were disposed of, the book value of bonds disposed of and the gains (losses) on dispositions for the years ended December 31, 1995, 1994 and 1993:
In managing the relationship between its assets and liabilities, the company utilizes models which determine the cash flows necessary to meet the expected cash needs on the underlying liabilities under various interest rate scenarios. The company also utilizes these models to determine the dollar value of securities that would need to be sold under each interest rate scenario so as to determine what portion of its investment portfolio needs to be carried on its balance sheet as "available-for-sale." In addition, certain conditions specific to an individual security (such as deterioration in credit quality) may result in a security being carried as "available-for-sale." For a discussion of the impact of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" see Note 1 of Notes to Consolidated Financial Statements. The book value, estimated market value, unrealized gains, and unrealized losses in non-investment grade bonds owned as of December 31, 1995, and December 31, 1994, were $158.5 million and $136.9 million, respectively, $159.8 million and $126.5 million, respectively, $4.2 million and $.1 million, respectively, and $1.8 million and $9.3 million, respectively. The market values of corporate debt securities rated below investment grade and comparable unrated securities tend to be more sensitive to issuer-specific developments and changes in economic conditions than higher rated securities. Issuers of these securities are often highly leveraged, so
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's Omitted, except share and per share data)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Increase (Decrease) in Cash and Cash Equivalents
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1995, 1994 and 1993
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________________ 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 approximate the fair value of this asset. ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - The carrying amounts reported in the balance sheet for these assets approximates 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. 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. OTHER POLICY LIABILITIES - The carrying amount reported in the balance sheet approximates the fair value of these liabilities. 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 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 regulation 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 through a network of independent agents licensed in 47 states and the District of Columbia. 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 1% of annuity sales in 1995, and the top twenty individual agents accounted for approximately 11% of 1995 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________________ 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 POLICY ACQUISITION COSTS: 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 polici es 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 1995, 1994 and 1993 resulted in the company experiencing investment margins greater than those estimated. As a result, $3,902, $203,940 and $4,790,523 of the unamortized balance of deferred policy acquisition costs were expensed in 1995, 1994 and 1993, 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. 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\2% 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. G. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________________ H. 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. I. 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. J. EARNINGS PER SHARE: Primary earnings per share of common stock is computed by dividing net earnings (reduced by preferred dividend requirements in 1993) 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. During 1993, 573,332 common shares were issued upon conversion of $4,300,000 of Series B Convertible Preferred Stock. Had this conversion occurred on January 1, 1993, primary earnings per share would have been $2.46 for 1993. During 1993, 1,646,883 shares of common stock were sold to retire debt in the amount of $14,030,289. Had this sale and the corresponding retirement of debt occurred on January 1, 1993, primary earnings per share would have been $2.25 for 1993. K. 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 within three months. L. NEW ACCOUNTING STANDARDS: Effective January 1, 1994, the company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement addresses the accounting and reporting for certain investments in debt and equity securities by requiring such investments to be classified in held-to-maturity, available-for-sale, or trading categories. The cumulative effect of the adoption of this Statement was an increase in stockholder's equity of $19,612,653 (net of related amortization of deferred policy acquisition costs of $12,745,031 and deferred income tax expense of $10,560,659), representing the aggregate excess fair value over cost for those securities included in the available-for-sale category, net of associated amortization of deferred policy acquisition costs and deferred income tax expense. Effective November 30, 1995, the company adopted the provisions of "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" and transferred all bonds with an amortized cost of $1,159,390,768 classified as held-to-maturity to available-for-sale. The effect of the adoption was an increase in stockholders' equity of $21,218,205(net of related amortization of deferred policy acquisition costs of $12,792,403 and deferred income taxes of $11,425,188). Net earnings for the year ended December 31, 1995 were not affected by the adoption of this implementation guide.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________________ Effective for fiscal years beginning after December 15, 1995, SFAS No. 121, "Accounting for the Impairment Of Long Lived Assets" establishes accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets. The company does not expect this Statement to have a material effect on its consolidated financial statements. Effective January 1, 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," will require increased disclosure of compensation expense arising from stock compensation plans. The Statement encourages rather than requires companies to adopt a new method that accounts for stock compensation awards based on their estimated fair value at the date they are granted. Companies will be permitted, however, 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 will continue to apply APB Opinion No. 25 in its consolidated financial statements and will disclose pro forma net income and earnings per share in a footnote to its consolidated financial statements, determined as if the new method were applied. M. RECLASSIFICATIONS: Certain reclassifications have been made to conform prior years' financial statements to the December 31, 1995, presentation. 2. INVESTMENTS: A summary of investment income is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investment (continued): _______________________________ 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, 1995 was as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ________________________________ As of December 31, 1995, 75.3% of the company's mortgage-backed securities were issued by either government agencies or government sponsored enterprises, compared to 76.4% as of December 31, 1994. 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 $19.3 million as of December 31, 1995, 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, 1995, exceeded ten percent of stockholders' equity:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ______________________________ 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, equity securities available-for-sale and other long-term investments changed as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 5. Credit Agreement: ______________________ On December 29, 1994, the company entered into a credit agreement with The First National Bank of Chicago (First Chicago) and Boatmen's First National Bank of Kansas City (Boatmen's), as Lenders. On July 28, 1995, this agreement was amended to reduce the commitment from $25,000,000 to $15,000,000. The company has agreed to pay a commitment fee of .25% per annum on the unused portion of the commitment. Borrowings under this agreement may be used for general corporate purposes. During December, 1995, the company borrowed $7,000,000 (effective annual interest at December 31, 1995 of 6.91%) under the credit agreement and contributed the proceeds to the capital and surplus of American. Principal repayments for this borrowing are as follows: 1996 - $-0- 1997 - $1,820,000 1998 - $2,240,000 1999 - $2,940,000. Interest on the borrowings under this agreement is determined at the option of the company to be: (i) a fluctuating rate of interest equal to the higher of the corporate base announced by First Chicago from time to time, and a fluctuating rate equal to the weighted average of rates on overnight Federal Funds transactions with members of the Federal Reserve System as published by the Federal Reserve Bank of New York plus .50% per annum, or (ii) a Eurodollar rate plus a margin ranging from 1.00% to 1.25%. In addition to general covenants which are customary for facilities such as this, the company has agreed to maintain minimum consolidated net worth, a minimum cash flow coverage ratio, minimum risk based capital for American, minimum capital, surplus and asset valuation reserve of American and to maintain a maximum debt to equity (including indebtedness) ratio. Additional covenants include: (i) limitations on acquisitions; (ii) maintenance of current lines of business; (iii) limitations on additional indebtedness; (iv) limitations on investments; (v) limitations on dividends and stock repurchases, and (vi) limitations on mergers, consolidations and sales of assets, typical of such facilities. 6. 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 ten percent of covered compensation. The company made no contributions to the plan during the three years ended December 31, 1995. 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 unpaid principal balances of $3,010,882 and $3,336,038 as of December 31, 1995 and 1994, respectively. 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 is allocated to participating employees. Of the 361,735 shares of the company's common stock now owned by the LESOP, 119,518 shares have been allocated to the participating employees with the remaining 242,217 shares being held by American as collateral for the loan.
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.
8. 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. 9. 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 1995, 1994 and 1993 was $121,780, $129,972 and $136,912, respectively.
The company's net deferred tax asset (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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 10. Income taxes (continued): _________________________________ 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. ACQUISITION On September 8, 1995, the company signed a merger agreement pursuant to which it will acquire all of the outstanding capital stock of Financial Benefit Group (FBG), a Delaware corporation, for $5.31 per share, payable in the company's common stock, warrants and cash. FBG is an insurance holding company which owns all of the shares of Financial Benefit Life Insurance Company, 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 owns all of the shares of Annuity International Marketing Corporation and The Insurancemart, Inc. both of which specialize in the distribution and marketing of annuities. The merger is subject to the approval of the stockholders of FBG and the company and the fulfillment of certain other conditions set forth in the merger agreement. Special Meetings of Stockholders for both FBG and the company will be held on April 8, 1996 to approve the acquisition, with the closing expected to occur as soon thereafter as practicable. In connection with the acquisition, the company received a bank commitment from First Chicago for borrowing of up to $35 million, the proceeds of which will be used to fund the cash portion of the purchase price and refinance existing indebtedness of the company and FBG. The transaction will be accounted for using the purchase method with any resulting goodwill being amortized over a period not to exceed 40 years.