Selected Financial Data ___________________________________ AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
RESULTS OF OPERATIONS Years Ended December 31, 1996, 1995 and 1994
INSURANCE PREMIUMS AND POLICY CHARGES increased $5.8 million, or 68%, to $14.3 from $8.5 million in 1995, due primarily to a $5.4 million increase in surrender charges received on increased surrenders of annuity policies. This increase results in large part to the acquisition of FBG. This follows an increase of $2.2 million, or 35%, to $8.5 million in 1995 from $6.3 million in 1994. The 1995 increase again attributable to increased surrender charges received on increased surrenders of annuity policies. NET INVESTMENT INCOME increased $35.0 million, or 22%, to $191.5 million from $156.5 million in 1995. This increase resulted from an increase in average invested assets from $1,992.7 million in 1995 to $2,534.0 million in 1996 partially offset by a decrease in the average yield on invested assets from 7.9% in 1995 to 7.6% in 1996. Net investment income increased $14.5 million, or 10%, to $156.5 million in 1995 from $142.0 million in 1994. This increase resulted from both an increase in average invested assets from $1,862.3 million in 1994 to $1,992.7 million in 1995, and an increase in the average yield on invested assets from 7.6% in 1994 to 7.9% in 1995. Yields in each of the above years were impacted by the returns on the company's investment in investment partnerships. These partnerships form a fund of funds totaling $18.4 million on December 31, 1996, which is structured in an attempt to consistently provide returns in excess of the Standard & Poor's (S&P) 500 over time without regard to the general direction of financial markets. This fund generated income of $2.1 million and $3.6 million in 1996 and 1995, respectively and a loss of $1.9 million in 1994. NET INVESTMENT GAINS increased $7.8 million to $7.9 million in 1996 from $.1 million in 1995. This follows a $.7 million decrease in 1995 from $.8 million in 1994. Gains and losses may be realized on securities which are disposed of for various reasons. The net gains realized in 1996 are the result of general portfolio management. The gain reported in 1995 is the net of a gain of $2.2 million resulting from the release of the allowance for credit losses that was first established in 1989, writedowns in the amount of $1.0 million on securities deemed to have an other than temporary diminution in value, and losses of $1.0 million on securities sold for tax purposes which can be carried back against capital gains realized in 1992. 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 $46.7 million, $96.8 million and ($105.6) million as of December 31, 1996, 1995 and 1994, respectively. For a summary of net investment gains (losses) see Note 2 of Notes to Consolidated Financial Statements. OTHER REVENUE increased $.8 million, or 53%, to $2.3 million in 1996 from $1.5 million in 1995. This increase is the result of commission income received by TIM and AIMCOR. Other revenue increased $.9 million to $1.5 million in 1995 from $.6 million in 1994. The 1995 increase resulted from a gain of $.7 million recognized on the sale of one of the company's subsidiaries, Omni-Tech Medical, Inc., and a $.3 million increase in that subsidiary's sales. BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $24.9 million, or 21%, to $143.8 million in 1996, from $118.9 million in 1995. This increase results primarily from an increase in annuity liabilities to $2,858.6 million on December 31, 1996, from $2,082.0 million on December 31, 1995. This was partially offset by a decrease in the interest rate credited on those liabilities to 5.7% in 1996 from 6.0% in 1995. Both the increase in annuity liabilities and the decrease in the interest rate credited on those liabilities are largely due to the acquisition of FBG. In 1995, this expense increased $6.6 million, to $118.9 million from $112.3 million in 1994. This increase resulted primarily from an increase in annuity liabilities to $2,082.0 million on December 31, 1995 from $1,971.6 million on December 31, 1994. AMORTIZATION OF DEFERRED COST OF POLICIES PRODUCED increased $2.8 million, or 23%, to $15.2 million in 1996 from $12.4 million in 1995. Amortization associated with gross interest margin increased $1.8 million to $13.9 million in 1996 from $12.1 million in 1995. Amortization associated with investment gains increased $1.1 million with expense of $1.3 million on gains of $4.2 million in 1996, compared with expense of $.2 million on gains of $1.0 million in 1995. Amortization of deferred cost of policies produced increased $3.4 million, or 38%, to $12.4 million from $9.0 million in 1994. Amortization associated with gross interest margin increased $3.3 million to $12.1 million in 1995 from $8.8 million in 1994. Amortization associated with investment gains was unchanged with expense of $.2 million on gains of $1.0 million in 1995, compared with expense of $.2 million on gains of $.8 million in 1994. Acquisition costs incurred in 1996 and deferred into future periods were $41.4 million, compared with $34.8 million in 1995 and $25.8 million in 1994. AMORTIZATION OF DEFERRED COST OF POLICIES PURCHASED of $6.5 million in 1996 represents the amortization of the purchase price allocated to the policies acquired in the acquisition of FBG. There was no similar expense in either 1995 or 1994. GENERAL INSURANCE EXPENSES increased $4.2 million, or 50%, to $12.6 million in 1996 from $8.4 million in 1995. This increase is due primarily to the acquisition of FBG. This follows an increase of $.8 million, or 11%, to $8.4 million in 1995 from $7.6 million in 1994. The increase in 1995 can be attributed to increases in business activity and assets under management. PREMIUM AND OTHER TAXES, LICENSES AND FEES increased $1.1 million, or 69%, to $2.7 million in 1996 from $1.6 million in 1995. This increase is largely due to the acquisition of FBG. This follows an increase of $.3 million to $1.6 million in 1995 from $1.3 million in 1994. INTEREST EXPENSE increased $3.4 million to $3.5 million in 1996 from $.1 million in 1995. This increase reflects the interest on both the $35.0 million financing for the acquisition of FBG and the $65.0 million of convertible debentures issued in July, 1996, a portion of which was used to repay the $35.0 million of bank debt. INCOME TAX EXPENSE increased $1.8 million to $10.3 million in 1996 from $8.5 million in 1995. This follows a $2.9 million increase in 1995 from $5.6 million in 1994. Taxes were provided at an effective rate of 33%, 34% and 29% in 1996, 1995 and 1994, respectively. For additional information on income taxes see Note 11 of Notes to Consolidated Financial Statements. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT represents the write-off of unamortized costs capitalized under the company's debt agreement that was paid in full on July 12, 1996. LIQUIDITY AND CAPITAL RESOURCES The company is an insurance holding company whose principal asset is the common stock of its insurance subsidiaries. The company's primary cash requirements are to pay operating expenses, stockholder dividends and debt service. As a holding company, the company relies on funds received from American and FBL to meet its cash requirements at the holding company level. The company receives funds from American in the form of commissions paid to American Sales, fees paid to AIG, rent, administrative, printing and data processing charges and dividends. The insurance laws of Kansas and Florida generally limit the ability of American and FBL to pay cash dividends in excess of certain amounts without prior regulatory approval and also require that certain agreements relating to the payment of fees and charges to the company by it's insurance subsidiaries be approved by the Insurance Commissioner of the state of domicile. The liquidity requirements of American and FBL are met by premiums received from annuity sales, net investment income received, and proceeds from investments upon maturity, sale or redemption. The primary uses of funds are the payment of surrenders, policy benefits, operating expenses and commissions, as well as the purchase of assets for investment. For purposes of the company's consolidated statements of cash flows, financing activities include premiums received from sales of deferred annuities, surrenders and death benefits paid, and surrender and policy charges collected on these contracts. The net cash provided by (used in) these particular financing activities for the years ended December 31, 1996, 1995 and 1994, was ($8.4) million, ($7.6) million and $26.6 million, respectively. The decrease in net cash provided by annuity contracts without life contingencies in 1996 resulted primarily from a $95.1 million increase in surrender and death benefits paid from $372.2 million (approximately 17.3% of beginning reserves for future policy benefits) to $467.3 million (approximately 20.7% of beginning reserves for future policy benefits) along with a $88.8 million increase in premiums received from $357.7 million to $446.5 million. The decrease in net cash provided by annuity contracts without life contingencies in 1995 resulted primarily from a $125.6 million increase in surrender and death benefits paid from $246.6 million (approximately 11.5% of beginning reserves for future policy benefits) to $372.2 million, (approximately 17.3% of beginning reserves for future policy benefits) along with a $89.9 million increase in premiums received from $267.8 million to $357.7 million. Net cash provided by the company's operating activities was $172.7 million, $154.9 million and $130.5 million in 1996, 1995 and 1994, respectively. Cash provided by financing and operating activities and by the sale and maturity of portfolio investments is used primarily to purchase portfolio investments and for the payment of acquisition costs (commissions and expenses associated with the sale and issue of policies). To meet its anticipated liquidity requirements, the company purchases investments taking into account the anticipated future cash flow requirements of its underlying liabilities. In addition, the company invests a portion of its assets in short-term investments with maturities of less than one year (8%, 5% and 3% as of December 31, 1996, 1995 and 1994, respectively). The weighted average duration of the company's investment portfolio was 4.6 years as of December 31, 1996. The company continually assesses its capital requirements in light of business developments and various capital and surplus adequacy ratios which affect insurance companies. The company has met its capital needs and those of American through several different sources including bank borrowing, the issuance of convertible debentures and the sale of both preferred and common stock. As of December 31, 1996, the company owned bonds of 4 issuers in amounts exceeding 10% of stockholders' equity. The carrying value of such bonds was $119.7 million which represented 4.5% of the company's invested assets. See Note 2 of Notes to Consolidated Financial Statements. A default by any one of these issuers could materially adversely affect the results of operations and financial condition of the company. Recent regulatory actions against certain large life insurers encountering financial difficulty have prompted the various state guaranty associations to begin assessing life insurance companies for the resulting losses. For further information regarding the effects of guaranty fund assessments, see Note 13 of Notes to Consolidated Financial Statements. REINSURANCE. American and Employers Reassurance Corporation (ERC) are parties to a reinsurance agreement under which American ceded 90% of the risk on its SPWL policies written prior to 1989 on a coinsurance basis. Under the terms of the agreement, American continues to administer the policies and is reimbursed for all payments made under the terms of the reinsured policies. For its services, American receives a fee from the reinsurer for administering such policies. If ERCwere to become insolvent, American would re main responsible for the payment of all policy liabilities. As of December 31, 1996 and 1995, American had amounts receivable resulting from this agreement of $140.5 million and $145.0 million, respectively. FBL and Philadelphia Life Insurance Company (PLI) are parties to a reinsurance agreement under which FBLceded 100% of the risk on certain deferred annuity policies on a coinsurance basis. Under the terms of the agreement, FBL continues to administer the policies and is reimbursed for all payments made under the terms of the reinsured policies. For its services FBLreceives a fee from the reinsurer for administering such policies. If PLI were to become insolvent, FBL would remain responsible for the payment of all policy liabilities. As of December 31, 1996, FBL had amounts receivable resulting from this agreement of $99.3 million. 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), 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 1996), fixed income investments generally will decrease in market value, while net investment income will increase. In a rising interest rate environment, 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 no longer protected by surrender charges increase.
Page Number Independent Auditors' Report 29 Consolidated Balance Sheets - as of December 31, 1996 and 1995 30-31 Consolidated Statements of Earnings - for the years ended December 31, 1996, 1995 and 1994 32 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 33 Consolidated Statements of Cash Flows - for the years ended December 31, 1996, 1995 and 1994 34-35 Notes to Consolidated Financial Statements - for the years ended December 31, 1996, 1995 and 1994 36-59 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.
See notes to consolidated financial statements. AMVESTORS AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's Omitted, except share and per share data)
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
See notes to consolidated financial statements. AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Increase (Decrease) in Cash and Cash Equivalents
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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ 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:
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 c alculated 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(000's Omitted) For the Year Ended December 31, 1996 1995 1994 Net investment income: Debt securities ................................. $184,758 148,040 1,42,469 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
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 4,845 2,642,257 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(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
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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 4. Reinsurance Continued: _________________________ The following table identifies the components of the amounts receivable from ERC:
Reserve for future policy benefits............. $139,571 143,558 Reimbursement for benefit payments and administrative allowance...................... 886 1,407 $140,457 144,965
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 ____________ __________
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 p lans 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (continued): ____________________________________ For the Year Ended December 31, ________________________________________________
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:
(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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. Income Taxes (continued): _____________________________
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 and tax return purposes. The primary component of the deferred income tax provision are as follows:
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 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 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 14. Quarterly results (Unaudited) (continued): ______________________________________________ (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