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. Recent and projected growth along with the efficiencies to be gained from having its operations under one roof have led the company to investigate the acquisition of different facilities.
Selected Financial Data _______________________________________ AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT) Following is a summary of selected financial data for the five years ended December 31, 1994:
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, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities in 1994 and Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in 1993. /s/Deloitte & Touche LLP ____________________________
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's Omitted, except per share data)
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Increase (Decrease) in Cash and Cash Equivalents
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, 1994 and 1993 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ______________________________________________________________ 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. 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 policies issued before January 1, 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. Determination of expected gross profits includes the best estimate of certain elements over the life of the contracts, including anticipated excess investment income, surrender charge revenues and mortality charge revenues (single premium life insurance). Estimates of expected gross profits used as a basis for amortization are evaluated regularly by management, and the total amortization recorded to date is adjusted by a charge or credit to the statement of earnings if actual experience indicates that the estimates should be revised. Net investment gains realized in 1994, 1993 and 1992 resulted in the company experiencing investment margins greater than those estimated. As a result, $203,940, $4,790,523 and $8,691,521 of the unamortized balance of deferred policy acquisition costs were expensed in 1994, 1993 and 1992, 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. E. 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 4% to 9% 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. F. PARTICIPATING POLICIES: The company issued participating policies in past years 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): ______________________________________________________________ G. 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. H. 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. I. EARNINGS PER SHARE: Primary earnings per share of common stock are computed by dividing net earnings (reduced by preferred dividend requirements in 1993 and 1992) 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 preferred stock outstanding during 1992. 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. J. CONSOLIDATED STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents includes cash and money market accounts. K. NEW ACCOUNTING STANDARDS: Effective January 1, 1994, the company adopted to 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. Net earnings for the period ended December 31, 1994 were not affected by the adoption of this Statement. Effective May 1993, the company adopted the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" and restated the financial statements of prior years to report amounts ceded to reinsurers separately as assets in the respective consolidated balance sheets. Adoption of this standard increased total assets and liabilities by $148,626,459 and $150,635,000 as of December 31, 1994 and 1993, respectively. L. RECLASSIFICATIONS: Certain reclassifications have been made to conform prior years' financial statements to the December 31, 1994, presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments: A summary of investment income is as follows:
These tables include mortgage-backed securities based on the estimated future cash flows of the underlying mortgages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (cont.): _________________________ The book value, estimated market value and unrealized market gains and losses of debt and equity securities as of December 31, 1994, and 1993 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (cont.): _________________________ 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:
2. Investments (cont.): _______________________ 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 ADsecurities comprised 76.8% and 76.3% of the carrying value of the company's mortgage-backed securities as of December 31, 1994 and December 31, 1993, respectively. The company does not invest in support class securities or principal-only ("PO") and interest-only ("IO") strips. As of December 31, 1994, 76.4% of the company's mortgage-backed securities were issued by either government agencies or government sponsored enterprises, compared to 75.6% as of December 31, 1993. The credit risk associated with these securities is generally less than other mortgage-backed securities. With the exception of four issues, with a carrying value of $15,186,000 as of December 31, 1994, 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, 1994, exceeded ten percent of stockholders' equity:
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. The consideration received on sales of debt and equity securities, carrying value and realized gains and losses on those sales were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Retirement Plans (continued): ________________________________ participating employees with the remaining 268,375 shares held by American as collateral for the loan. The unallocated portion of the company's common stock owned by the LESOP has been recorded as a separate reduction of stockholders' equity. Contributions to the LESOP during December 31, 1994, 1993 and 1992 were $285,565, $266,886 and $200,226, 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 have reached 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. As of December 31, 1994, five of the company's directors qualified for benefits under the plan. A liability in the amount of $521,180, representing the present value of future benefits, has been established. Charges (credits) to earnings relating to the plans were ($40,244), $(3,282) and $564,706, for the years ended December 31, 1994, 1993 and 1992, 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 year ended December 31, 1994 and 1993, were $215,664 and $213,059, respectively. 8. Stockholders' Equity: ________________________ Dividends by American 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, 1994, surplus profits of American were $12,996,673 and 10% of statutory capital and surplus was $8,752,120. 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 $100,000 each. As of December 31, 1994 and 1993 American's statutory capital and surplus was $87,521,204 and $87,146,052, respectively. Statutory net income (loss) for the years 1994, 1993 and 1992 was $4,167,120, ($1,469,786) and $1,853,297, respectively. 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 permitted accounting practice increased statutory surplus as of December 31, 1992, by $8,167,587. Gains and losses for years subsequent to 1992 are recorded in accordance with prescribed statutory accounting practices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. Stockholders' Equity (cont.): _________________________________ On March 17, 1989, the Board of Directors of the company adopted the 1989 Nonqualified Stock Option Plan. The options granted under the 1989 Nonqualified Plan will cover the same number of shares and have the same exercise price as the cancelled options, and none of such options may be exercised beyond ten years from the original date of grant of the cancelled option. A total of 859,837 options to acquire common stock are outstanding under the 1989 Nonqualified Plan. The 1989 Nonqualified Plan is administered by the Board of Directors and officers of the company and its subsidiaries. The terms of the options, including the number of shares, and the exercise price are subject to the sole discretion of the Board of Directors. Changes during the years were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. Stockholders' Equity (cont.): _________________________________ The company recorded compensation expense relating to stock appreciation rights of $-0-, $1,875 and $121,875, for the years ended December 31, 1994, 1993, and 1992, 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 its bank borrowing, the company issued ten-year warrants to purchase a total of 170,002 shares of its common stock as summarized in the following table:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. 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 1994, 1993 and 1992 was $129,972, $136,912 and $143,370, respectively. During 1993 and 1992, the company received amounts of $51,000 and $472,000, respectively representing recoveries of amounts paid during 1991 as a result of the settlement of legal claims which resulted from agent fraud. 12. Income Taxes: ________________ The provision for income taxes charged to operations was as follows:
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:
As of December 31, 1994, the company had no capital loss carryforwards available to offset future realized investment gains.