-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GJ1ckozYfmVi9GB1MfrJ26Ar+oJ3oZcl5NJ9Lgti6Hc3Lxx46ST1+sT6bnqWDHMH vX6uxbubhQyVtK8Y4YBtBQ== 0000950109-95-000857.txt : 19950602 0000950109-95-000857.hdr.sgml : 19950602 ACCESSION NUMBER: 0000950109-95-000857 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TORCHMARK CORP CENTRAL INDEX KEY: 0000320335 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 630780404 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08052 FILM NUMBER: 95522858 BUSINESS ADDRESS: STREET 1: 2001 3RD AVE S CITY: BIRMINGHAM STATE: AL ZIP: 35233 BUSINESS PHONE: 2053254200 FORMER COMPANY: FORMER CONFORMED NAME: TORCHMARK CORP SAVINGS & INVESTMENT PLAN DATE OF NAME CHANGE: 19820825 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY NATIONAL INSURANCE HOLDING CO DATE OF NAME CHANGE: 19820701 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1994 1-8052 TORCHMARK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-0780404 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2001 Third Ave. South, Birmingham, AL 35233 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (205) 325-4200 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED: Common Stock, $1.00 Par 891027104 New York Stock Exchange Value The International Stock Exchange, London, England Securities registered pursuant to Section 12(g) of the Act: None Securities reported pursuant to Section 15(d) of the Act: TITLE OF EACH CLASS: CUSIP NUMBER 8 5/8% Sinking Fund Debentures due 2017 891027 AB 0 9 5/8% Senior Notes due 1998 891027 AD 6 8 1/4% Senior Debentures due 2009 891027 AE 4 7 7/8% Notes due 2023 891027 AF 1 7 3/8% Notes due 2013 891027 AG 9 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT: $2,986,844,056 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 21, 1995: 71,541,175 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 1995, PART III INDEX OF EXHIBITS (PAGES 64 THROUGH 66) TOTAL NUMBER OF PAGES INCLUDED ARE 73 PART 1 ITEM 1. BUSINESS Torchmark Corporation ("Torchmark"), an insurance and diversified financial services holding company, was incorporated in Delaware on November 19, 1979, as Liberty National Insurance Holding Company. Through a plan of reorganization effective December 30, 1980, it became the parent company for the businesses operated by Liberty National Life Insurance Company ("Liberty") and Globe Life And Accident Insurance Company ("Globe"). United American Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United Investors Life Insurance Company ("UILIC") along with their respective subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted on July 1, 1982. Family Service Life Insurance Company ("Famlico") was purchased in July, 1990, and American Income Holding, Inc., whose primary insurance subsidiary is American Income Life Insurance Company ("American Income") was purchased in November, 1994. The following list itemizes Torchmark's principal subsidiaries and a description of the subsidiaries' business: Liberty--offers individual life and health insurance and annuities through a home service sales force. Globe--offers individual life and health insurance through direct response and independent agents. United American--offers Medicare Supplement and other individual health, life and annuity products through independent agents. American Income--offers individual supplemental life and fixed-benefit accident and health insurance through sponsored marketing programs with labor union locals, credit unions and other associations. Famlico--markets life insurance and annuities to fund prearranged funerals. United Investors Management Company ("United Management")--owns UILIC, W&R, and Torch Energy Advisors Incorporated ("Torch Energy"). W&R--engages in institutional investment management services, and offers individual financial planning and products, including life insurance, annuities, and mutual funds through an exclusive sales force. UILIC--offers individual life and annuity products sold by W&R agents. Torch Energy--provides management services with respect to oil and gas production and development; and engages in energy property acquisitions and dispositions, oil and gas product marketing, and well operations Additional information concerning industry segments may be found in - ------------------------------------------------------------------- Management's Discussion and Analysis and in Note 16--Industry Segments in the - ----------------------------------------------------------------------------- Notes to Consolidated Financial Statements. - ------------------------------------------- INSURANCE LIFE INSURANCE Torchmark's insurance subsidiaries; Liberty, Globe, United American, American Income, UILIC, and Famlico, write a variety of nonparticipating ordinary life insurance products. These include whole-life insurance in the form of traditional and interest-sensitive, term life insurance, and other life insurance. The following table presents selected information about Torchmark's life products:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1994 1993 1992 1994 1993 1992 -------- -------- -------- -------- -------- -------- Whole life: Traditional.............. $ 63,108 $ 55,265 $ 59,441 $445,025 $312,905 $311,605 Interest-sensitive....... 34,633 34,211 39,087 171,264 160,824 154,518 Term...................... 48,392 36,303 30,652 167,973 129,815 115,014 Other..................... 3,700 2,654 2,546 12,693 9,112 6,947 -------- -------- -------- -------- -------- -------- $149,833 $128,433 $131,726 $796,955 $612,656 $588,084 ======== ======== ======== ======== ======== ========
1 Life insurance products are sold through a variety of distribution channels, including home service agents, independent agents, exclusive agents, and direct response. These methods are discussed in more depth under the heading "Marketing." The following table presents life annualized premium issued by marketing method:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1994 1993 1992 1994 1993 1992 -------- -------- -------- -------- -------- -------- Direct response........... $ 48,267 $ 36,031 $ 26,228 $154,130 $133,782 $117,950 Home service.............. 51,461 48,474 54,161 291,813 282,059 278,738 Independent agents........ 24,894 22,335 20,199 101,721 94,392 87,109 Exclusive agents.......... 25,211 21,593 31,138 249,291 102,423 104,287 -------- -------- -------- -------- -------- -------- $149,833 $128,433 $131,726 $796,955 $612,656 $588,084 ======== ======== ======== ======== ======== ========
Permanent insurance products sold by Torchmark affiliates build cash values which are available to policyholders. Policyholders may borrow such funds using the policies as collateral. The aggregate value of policy loans outstanding at December 31, 1994 was $182 million and the average interest rate earned on these loans was 6.03% in 1994. Interest income earned on policy loans was $10.0 million in 1994, $9.1 million in 1993 and $8.6 million in 1992. Torchmark had 154 thousand and 140 thousand policy loans outstanding at year-end 1994 and 1993, respectively. The availability of cash values contributes to voluntary policy terminations by policyholders through surrenders. Torchmark's life insurance products may be terminated or surrendered at the election of the insured at any time, generally for the full cash value specified in the policy. Specific surrender procedures vary with the type of policy. For certain policies this cash value is based upon a fund less a surrender charge which decreases with the length of time the policy has been in force. This surrender charge is either based upon a percentage of the fund or a charge per $1,000 of face amount of insurance. The schedule of charges may vary by plan of insurance and, for some plans, by age of the insured at issue. Torchmark's ratio of aggregate face amount voluntary terminations to the mean amount of life insurance in force was 14.7% in 1994, 14.9% in 1993, and 15.4% in 1992. The following table presents an analysis of changes to Torchmark's life insurance business in force:
(AMOUNTS IN THOUSANDS) 1994 1993 1992 --------------------- --------------------- --------------------- NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE --------- ----------- --------- ----------- --------- ----------- In force at January 1,.. 8,110 $61,366,933 8,028 $58,306,295 7,972 $56,110,751 New issues.............. 1,147 14,958,141 944 12,240,245 827 11,067,341 Business acquired....... 595 8,983,055 -0- -0- -0- -0- Other increases......... 1 10,961 -0- 35,530 -0- 204,094 Death benefits.......... (105) (228,354) (102) (213,785) (99) (199,131) Lapses.................. (688) (8,940,980) (625) (7,817,201) (549) (7,743,902) Surrenders.............. (106) (1,048,117) (106) (1,082,962) (113) (1,091,863) Other decreases......... (41) (243,425) (29) (101,189) (10) (40,995) ----- ----------- ----- ----------- ----- ----------- In force at December 31,.................... 8,913 $74,858,214 8,110 $61,366,933 8,028 $58,306,295 ===== =========== ===== =========== ===== =========== Average policy size (in dollar amounts)........ $ 8,399 $ 7,567 $ 7,263 =========== =========== ===========
2 HEALTH INSURANCE Liberty, Globe, United American and American Income offer an assortment of health insurance products. These products are generally classified into three categories: (1) Medicare Supplement, (2) cancer and (3) hospital, surgical, accident, and other. United American Medicare Supplement products are sold by United American, Globe, Liberty and W&R agents. They provide reimbursement for certain expenses not covered under the Medicare program. One feature available under United American's policy is an automatic claim processing system for Medicare Part B benefits, whereby policyholders do not have to file claim forms because they are paid directly by United American from Medicare records. Liberty, Globe and United American offer cancer policies on a guaranteed- renewable basis. These policies provide benefits for hospital stay, radiation, chemotherapy, surgery, physician, medication, and other expenses related to cancer. There are certain per diem, per procedure, and other payment limitations. A variety of hospital, surgical, and other medical expense policies are issued on a guaranteed-renewable basis by Liberty, Globe, and United American. In addition, certain accident policies are issued by Liberty, Globe and American Income. The following table presents health annualized premium information for the three years ending December 31, 1994 by product category:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1994 1993 1992 1994 1993 1992 -------- -------- -------- -------- -------- -------- Medicare Supplement....... $ 87,547 $136,050 $156,170 $572,221 $600,536 $580,509 Cancer.................... 8,101 10,012 18,353 114,495 105,773 109,483 Hospital, surgical, accident, and other...... 25,534 29,966 50,382 120,871 117,073 142,496 -------- -------- -------- -------- -------- -------- $121,182 $176,028 $224,905 $807,587 $823,382 $832,488 ======== ======== ======== ======== ======== ========
ANNUITIES Annuity products are offered through UILIC, Liberty, Famlico, and United American. These products include single-premium deferred annuities, flexible- premium deferred annuities, and variable annuities. Single-premium and flexible-premium annuities are fixed annuities where a portion of the interest credited is guaranteed. Additional interest may be credited on certain contracts. Variable annuity policyholders may select from a variety of mutual funds managed by W&R which offer different degrees of risk and return. The ultimate benefit on a variable annuity results from the account performance. The following table presents Torchmark subsidiaries' annuity collections and deposit balances by product type:
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS) COLLECTIONS DEPOSIT BALANCE FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31, -------------------------------- -------------------------- 1994 1993 1992 1994 1993 1992 ---------- ---------- ---------- -------- -------- -------- Fixed annuities......... $ 43,339 $ 46,573 $ 69,381 $ 801.2 $ 782.8 $ 755.7 Variable annuities...... 196,105 213,982 125,688 692.8 529.7 282.0 ---------- ---------- ---------- -------- -------- -------- $239,444 $260,555 $195,069 $1,494.0 $1,312.5 $1,037.7 ========== ========== ========== ======== ======== ========
3 INVESTMENTS The nature, quality, and percentage mix of insurance company investments are regulated by state laws that generally permit investments in qualified municipal, state, and federal government obligations, corporate bonds, preferred and common stock, real estate, and mortgages where the value of the underlying real estate exceeds the amount of the loan. The investments of Torchmark's insurance subsidiaries, which are substantially all of Torchmark's investments, consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 84% of total investments at December 31, 1994. Approximately 47% of fixed maturity investments were securities guaranteed by the United States Government or its agencies or investments that were collateralized by U.S. government securities. More than 83% of these investments were in GNMA securities that are backed by the full faith and credit of the United States government. The remainder of these government investments were U.S. Treasuries or collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations --------------------------------- in Notes to Consolidated Financial Statements and Management's Discussion and - ----------------------------------------------------------------------------- Analysis.) - --------- The following table presents an analysis of Torchmark's fixed maturity investments at December 31, 1994. All of the securities are classified as available for sale and are, therefore, reported at fair market value.
AMOUNT (IN THOUSANDS) % -------------- ----- Securities of U.S. Government...................... $ 84,626 1.9% GNMA and MBS backed by GNMA collateral............. 1,951,615 44.4 Other U.S. Government guaranteed................... 17,130 0.4 Other investment grade............................. 2,313,398 52.7 Non-investment grade corporates.................... 25,490 0.6 ---------- ----- $4,392,259 100.0% ========== =====
The following table presents Torchmark's fixed maturity investments at December 31, 1994 on the basis of ratings as determined primarily by Moody's Investors Services. Standard and Poor's bond ratings are used when Moody's ratings are not available. Ratings of BAA and higher (or their equivalent) are considered investment grade by the rating services.
AMOUNT RATING (IN THOUSANDS) % ------ -------------- ----- AAA................................................ $2,695,344 61.3% AA................................................. 416,523 9.5 A.................................................. 1,084,678 24.7 BAA................................................ 145,985 3.3 BA................................................. 13,273 0.3 B.................................................. 2,708 0.1 Less than B........................................ 3,995 0.1 Not rated.......................................... 29,753 0.7 ---------- ----- $4,392,259 100.0% ========== =====
4 The following table presents the fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1994 on the basis of ratings as determined by the National Association of Insurance Commissioners ("NAIC"). Categories one and two are considered investment grade by the NAIC.
AMOUNT RATING (IN THOUSANDS) % -------------------- -------------- ----- 1. Highest quality......$4,196,392 96.0% 2. High quality......... 150,925 3.4 3. Medium quality....... 16,236 0.4 4. Low quality.......... 5,145 0.1 5. Lower quality........ 3,314 0.1 6. In or near default... 195 -0- ---------- ----- $4,372,207 100.0% ========== =====
Securities are assigned ratings when acquired. All ratings are reviewed and updated at least annually. Specific security ratings are updated as information becomes available during the year. PRICING Premium rates for life and health insurance products are established by each subsidiary company's management using assumptions as to future mortality, morbidity, persistency, and expenses, all of which are generally based on that company's experience, and on projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on certain individual life products. Profitability is affected to the extent actual experience deviates from that which has been assumed in premium pricing and to the extent investment income exceeds that which is required for policy reserves. Collections for annuity products are not recognized as revenues but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on annuity funds invested in excess of the amounts credited to policy accounts. UNDERWRITING The underwriting standards of Torchmark's life insurance subsidiaries are established by each subsidiary's respective management. The companies use information from the application and, in some cases, inspection reports, doctors' statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage or rejected. Each life insurance subsidiary requires medical examinations of applicants for life insurance in excess of certain prescribed amounts. These are graduated according to the age of the applicant and may vary with the kind of insurance. The maximum amount of insurance issued without medical examination varies by company: for Globe and American Income, it is $100,000 through age 40; and for Liberty and UILIC, it is $99,999 through age 50. These maximums decrease at higher ages, with medical examinations becoming mandatory at the respective companies except American Income at ages 65, 61, and 80. The companies request medical examinations of all applicants, regardless of age or amount, if information obtained from the application or other sources indicates that such an examination is warranted. In recent years, there has been considerable concern regarding the impact of the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS"). Liberty and UILIC have implemented certain underwriting tests to detect the presence of the HIV virus and continue to assess the utility of other appropriate underwriting tests to detect AIDS in light of medical developments in this field. To date, AIDS claims have not had a material impact on claims experience. 5 REINSURANCE As is customary among insurance companies, Torchmark's insurance subsidiaries cede insurance to other unaffiliated insurance companies on policies they issue in excess of the companies' retention limits. Reinsurance is an effective method for keeping insurance risk within acceptable limits. In the event insurance business is ceded, the insurance subsidiary remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations it assumes (See Note 15--Commitments and ----------------------------- Contingencies in Notes to Consolidated Financial Statements and Schedule IV-- - ----------------------------------------------------------------------------- Reinsurance [Consolidated]). - --------------------------- RESERVES The life insurance policy reserves reflected in Torchmark's financial statements as future policy benefits are calculated based on generally accepted accounting principles. These reserves, with the addition of premiums to be received and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on company experience. Similar reserves are held on most of the health policies written by Torchmark's insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. A complete list of the assumptions used in the calculation of Torchmark's reserves are reported in the financial statements (See Note 8--Future Policy -------------------------- Benefit Reserves in the Notes to Consolidated Financial Statements). Reserves - ------------------------------------------------------------------- for annuity products consist of the policyholders' account values and are increased by policyholder deposits and interest credits and are decreased by policy charges and benefit payments. MARKETING Collectively, the insurance subsidiaries of Torchmark are licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and Canada. Distribution is through home service agents, independent agents, exclusive agents and direct response methods. Home service agents of Liberty are employees and are primarily compensated by commissions based on sales and by a salary based on the amount of premiums collected on policies assigned to them for servicing. All other agents are independent contractors and are compensated by commission only. Torchmark's insurance subsidiaries are not committed or obligated in any way to accept a fixed portion of the business submitted by any independent agents. All policy applications, both new and renewal, are subject to approval and acceptance by the particular subsidiary. Torchmark is not dependent on any single agent or any small group of independent agents, the loss of which would have a materially adverse effect on insurance sales. Liberty markets its products through home service agents operating in Alabama, Florida, Georgia, Mississippi, South Carolina and Tennessee. Home service agents are responsible for sales in a geographical area and remain in contact with policyholders to provide continuing service. Within these states, Liberty maintained 118 district offices which employed approximately 3,000 agency personnel as of December 31, 1994. Globe's agents, who primarily sell health insurance, are independent contractors working out of branch offices. Globe's sales organization consists of 64 branch sales offices from which approximately 800 licensed agents operate and approximately 4,500 agents that sell life insurance in special markets. Globe markets modified whole-life and term insurance primarily through direct response solicitation. In 1994, over $6.1 billion or 93% of the face amount of life insurance sold by Globe was sold through direct response methods. 6 UILIC's sales are generated principally through the W&R sales force under a general agency contract in conjunction with W&R's financial planning services. In addition, UILIC sells through unaffiliated brokers. In 1994 W&R sales representatives produced 90% of UILIC's annualized life insurance premium and 99% of annuity deposits. United American markets its products through approximately 53,000 licensed representatives in 49 states, the District of Columbia, Puerto Rico and Canada. United American's Medicare Supplement insurance products are also marketed by Globe, W&R and Liberty. American Income markets its products through approximately 1,300 exclusive agents in 49 states and Canada. Famlico markets its life insurance and annuity products to fund prearranged funeral agreements through a force of approximately 1,000 independent career agents representing approximately 310 funeral homes in 21 states. RATINGS The following list indicates the ratings currently held by Torchmark's five largest insurance companies as rated by A.M. Best Company: Liberty National Life Insurance Company A++ (Superior) Globe Life And Accident Insurance Company A++ (Superior) United Investors Life Insurance Company A++ (Superior) United American Insurance Company A+ (Superior) American Income Life Insurance Company A (Excellent)
These same insurance companies with the exception of American Income are each rated by Standard & Poor's Corporation as AAA(Superior), which is their highest rating. American Income is not rated by Standard & Poor's Corporation. A.M. Best states that it assigns A++ and A+ (Superior) ratings to those companies which, in its opinion, have achieved superior overall performance when compared to the norms of the life/health insurance industry. A++ and A+ (Superior) companies have a very strong ability to meet their policyholder and other contractual obligations over a long period of time. A.M. Best states that it assigns A (Excellent) ratings to those companies which, in its opinion, have demonstrated excellent overall performance when compared to the norms of the life/health insurance industry. A (Excellent) companies have a very strong ability to meet their obligations to policyholders over a long period of time. Standard & Poor's Corporation assigns a superior or AAA rating to those companies who have superior financial security on an absolute and relative basis and whose capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions. In September, 1994, A.M. Best announced that it had placed the ratings of Liberty National, Globe, United Investors, and United American under review. 7 ASSET MANAGEMENT Torchmark conducts its asset management and financial services businesses through United Management and its subsidiaries. This segment consists of two primary activities: (1) mutual fund distribution and management and (2) energy operations. MUTUAL FUNDS Torchmark's mutual fund operations are carried out by W&R, a subsidiary of United Management, which markets and manages the sixteen mutual funds in the United Group of Mutual Funds, the five mutual funds in the Waddell & Reed Fund, Inc. ("W&R Funds"), the nine mutual funds in the TMK/United Fund, Inc. ("TMK/United Funds"), and the two mutual funds in the Torchmark Fund ("Torchmark Funds"). These funds were valued as follows at December 31, 1994 and 1993:
(AMOUNTS IN MILLIONS) 1994 1993 --------- --------- United Funds $10,946.2 $11,102.3 W&R Funds 219.0 124.2 TMK/United Funds 725.3 554.7 Torchmark Funds 3.4 3.9 --------- --------- Total mutual fund assets under management 11,893.9 11,785.1 Institutional and private accounts 2,608.1 2,684.7 --------- --------- Total assets under management $14,502.0 $14,469.8 ========= =========
W&R's revenues consist of the following: (1) fees for managing the assets, which are based on the value of the assets managed, (2) commissions for the sale of products, and (3) fees for accounting and administration, which are based primarily on an annual charge per account. In addition to its mutual fund management and distribution activities, W&R manages accounts for individual and institutional investors for which asset management fees are received. Asset management activities are conducted by an experienced and qualified staff. As of December 31, 1994, the average industry experience of the fund managers for W&R was 20 years, and average company experience was 12 years. The following table indicates W&R revenues by component for the three years ending December 31, 1994:
(AMOUNTS IN THOUSANDS) 1994 1993 1992 -------- -------- -------- Investment product commissions*.............. $ 59,450 $ 65,950 $ 64,749 Insurance product commissions*............... 12,773 12,117 12,044 Asset management fees........................ 70,651 64,181 56,056 Service fees................................. 22,297 21,273 19,890 -------- -------- -------- $165,171 $163,521 $152,739 ======== ======== ========
*Commissions paid to W&R by affiliates for variable annuities and insurance products are eliminated in consolidation. W&R markets its mutual funds and other financial products, including life insurance issued by UILIC and Medicare Supplement insurance issued by United American, through a sales force of approximately 2,400 registered representatives in 50 states and the District of Columbia. These representatives concentrate on product sales of W&R and other Torchmark affiliates. W&R maintained 167 sales offices at December 31, 1994. W&R conducts money management seminars on a national scale to reach numerous potential clients every year. Individual financial plans are developed for clients through one-on-one consultations with the W&R sales representatives. Emphasis is placed on a long-term relationship with a client rather than a one-time sale. 8 ENERGY Torchmark engages in energy operations through Torch Energy and its subsidiaries. Torch Energy is a wholly-owned subsidiary of United Management. Torch Energy manages oil and gas properties and investments, primarily in the form of limited partnerships, for affiliated Torchmark companies as well as for unrelated institutions. Additionally, Torch Energy manages energy properties for Nuevo Energy Company ("Nuevo"), a publicly-traded corporation which was 13.6% owned by Torch Energy at December 31, 1994. Torch Energy also makes direct investments in energy properties from time to time and markets production for the properties it manages and for unrelated third parties. The following table presents an analysis of energy properties under management at December 31, 1994 and 1993:
(AMOUNTS IN MILLIONS) 1994 1993 ---------- ---------- Direct ownership................................ $ 102 $ 24 Other energy investments of Torchmark........... 324 339 Other affiliated*............................... 51 43 Unaffiliated parties............................ 794 750 ---------- ---------- $1,271 $ 1,156 ========== ==========
* Includes Nuevo and general partnership interests Torch Energy manages investments which are made primarily in proven producing properties. These properties consist of oil and gas working and royalty interests in approximately 5,000 wells and are primarily located in seven states and offshore in the Gulf of Mexico. Included in other energy investments of Torchmark is a coalbed methane development in Alabama's Black Warrior Basin in the amount of approximately $235 million. In addition to energy asset management, Torch Energy also engages in energy property acquisition, energy product marketing, and operates approximately 1,500 wells. Energy product marketing involves the sale of oil and gas production, which is acquired through purchase agreements with affiliates and unrelated third parties. The following table presents revenues for energy operations by component for the three years ended December 31, 1994:
(AMOUNTS IN THOUSANDS) 1994 1993 1992 -------- -------- ------- Product marketing revenue................... $350,034 $174,080 $98,352 Less: product marketing costs............... (332,550) (165,068) (91,356) -------- -------- ------- Net product marketing revenue............... 17,484 9,012 6,996 Management fees*............................ 17,105 15,233 15,057 Production revenue.......................... 19,008 45,427 38,155 Operating fees.............................. 10,768 14,310 13,806 Other revenue............................... 2,657 24,705 1,525 -------- -------- ------- $ 67,022 $108,687 $75,539 ======== ======== =======
* Includes fees from affiliates Torchmark is presently evaluating various alternatives concerning the possible sale of Torch Energy. 9 COMPETITION The insurance industry is highly competitive. Torchmark's insurance subsidiaries compete with other insurance carriers through policyholder service, price, product design, and sales effort. In addition to competition with other insurance companies, Torchmark's insurance subsidiaries also face increasing competition from other financial services organizations. While there are a number of larger insurance companies competing with Torchmark that have greater resources and have considerable marketing forces, there is no individual company dominating any of Torchmark's life or health markets. Torchmark's health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care related institutions which provide medical benefits based on contractual agreements. Generally, Torchmark's insurance companies operate at lower administrative expense levels than their peer companies, allowing Torchmark companies to have competitive rates while maintaining margins, or, in the case of Medicare Supplement business, to remain in the business while some companies have ceased new writings. Torchmark's years of experience in direct response business are a valuable asset in designing direct response products. Similarly, Liberty's concentration of business has been considered a competitive advantage in hiring and retaining agents. On the other hand, Torchmark's insurance subsidiaries do not have the same degree of national name recognition as some other companies with which they compete. W&R competes with hundreds of other registered institutional investment advisers and mutual fund management and distribution companies which distribute their fund shares through a variety of methods including affiliated and unaffiliated sales forces, broker-dealers, and direct sales to the public. Although no one company or group of companies dominates the mutual fund industry, some are larger than W&R and have greater resources. Competition is based on the methods of distribution of fund shares, tailoring investment products to meet certain segments of the market, changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services, and the success of sales promotion efforts. Torchmark's energy subsidiaries compete with a large number of institutional investment advisors in the asset management business, although only a limited number of these institutions manage energy assets. There is very little competition from other specialized energy asset managers in terms of institutional assets under management. These energy subsidiaries also face strong competition in their businesses of well operations, product marketing, and energy asset direct ownership. Competitors include independent producers and major oil and gas companies, some of which are quite large and well established with substantial capital, resources, and capabilities exceeding those of Torchmark's energy subsidiaries. REGULATION INSURANCE. Insurance companies are subject to regulation and supervision in the states in which they do business. The laws of the various states establish agencies with broad administrative and supervisory powers which include, among other things, granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the NAIC, insurance companies are examined periodically by one or more of the supervisory agencies. The most recent examinations of Torchmark's insurance subsidiaries were: Famlico, as of September 30, 1990; American Income as of December 31, 1990; Globe, as of December 31, 1991; Liberty, as of December 31, 1991; United American, as of December 31, 1990; and UILIC, as of December 31, 1993. NAIC Ratios. The NAIC developed the Insurance Regulatory Information System ("IRIS"), which is intended to assist state insurance regulators in monitoring the financial condition of insurance companies. 10 IRIS identifies twelve insurance industry ratios from the statutory financial statements of insurance companies, which statements are based on regulatory accounting principles and are not based on generally accepted accounting principles ("GAAP"). IRIS specifies a standard or "usual value" range for each ratio, and a company's variation from this range may be either favorable or unfavorable. The following table presents the IRIS ratios as determined by the NAIC for four of Torchmark's five largest insurance subsidiaries, which varied unfavorably from the "usual value" range for the years 1993 and 1992.
USUAL REPORTED COMPANY RATIO NAME RANGE VALUE - --------- ------------------------------------------------- ---------- -------- 1993: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 126 Globe Adequacy of Investment Income 125 to 900 959 Globe Change in Asset Mix 0 to 5 5.8 Globe Change in Capital and Surplus 50 to -10 -65 United American Change in Capital and Surplus 50 to -10 -13 1992: UILIC Change in Reserving 20 to -20 22 Liberty Investment in Affiliate to Capital and Surplus 0 to 100 177 Globe Adequacy of investment income 125 to 900 999
Explanation of Ratios: Investment in Affiliate to Capital and Surplus--This ratio is determined by measuring total investment in affiliates against the capital and surplus of the company. The NAIC considers a ratio of more than 100% to be high, and to possibly impact a company's liquidity, yield, and overall investment risk. The large ratio in Liberty in 1993 and 1992 is brought about by its ownership of other large Torchmark insurance companies and the ownership of 83% of the stock of United Management. Profitability and growth in these subsidiaries have caused this ratio to gradually rise. All intercompany investment is eliminated in consolidation, and the internal organizational structure has no bearing on consolidated results. Change in Reserving--The change in reserving ratio is computed as the aggregate increase in statutory reserves for individual life insurance taken as a percentage of individual life renewal and single premium. The reserving ratio is then measured against the same ratio for the prior year to determine the degree of change. The NAIC considers a variance of more than 20% to be unusual. The 22% variance in 1992 for United Investors Life Insurance Company was caused by the one-time correction of reserves in 1991 on a block of individual life policies to recognize their decreasing guaranteed death benefits. These ratios are computed utilizing regulatory reserving techniques and not on the basis of calculating policy reserves as determined by GAAP. Because the modifications to statutory reserves had no bearing on reserves calculated in accordance with GAAP, those modifications had no effect on Torchmark's consolidated financial statements. Adequacy of Investment Income--This ratio indicates that an insurer's investment income is adequate to meet interest requirements of policy reserves and is measured as a percentage of investment income to required interest. A ratio higher than 900% is considered to be too high and a ratio lower than 125% is considered to be too low by the NAIC. The 999% ratio in Globe for 1992 and the 959% ratio in 1993 was brought about by the NAIC's inclusion of dividends of various Torchmark subsidiaries in Globe's investment income. These dividends are generally passed through Globe to the parent company and should not be considered in meeting interest requirements. Intercorporate dividends are eliminated in consolidation and have no effect on consolidated results. Had these dividends been excluded, Globe's ratios would have been 246% in 1992 and 220% in 1993, which were within the usual range. Change in Asset Mix--This ratio measures the average change in the percentage of total cash and invested assets. The NAIC considers a ratio greater than 5.0% to be unusual. The 5.8% ratio of Globe was caused by Globe dividending one of its subsidiaries, United American, to Torchmark. This dividend did not affect consolidated net equity of Torchmark at December 31, 1993. Change in Capital and Surplus--These ratios, calculated on both a gross and net basis, are a measure of improvement or deterioration in the company's financial position during the year. The NAIC considers ratios less than minus 10% and greater than 50% to be unusual. United American's ratio of minus 13% in 1993 was due primarily to the payment of a $112 million dividend to its parent, which was used by Torchmark to pay part of the purchase price of United Management. The payment of this dividend did not affect the consolidated equity of Torchmark at December 31, 1993. Globe's ratio of minus 11 65% in 1993 was caused by Globe dividending United American to Torchmark. The internal organizational structure has no bearing on consolidated results. Risk Based Capital: In December 1992, the NAIC adopted a model act that ------------------ requires a risk based capital formula be applied to all life and health insurers. The requirement began in 1994 for information based on the 1993 annual statements. The risk based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All of the insurance subsidiaries of Torchmark are adequately capitalized under the risk based capital formula. Guaranty Assessments. State solvency or guaranty laws provide for -------------------- assessments from insurance companies into a fund which is used, in the event of failures or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed for these state funds is determined according to the extent of these unsatisfied obligations in each state. These assessments are recoverable to a great extent as offsets against state premium taxes. HOLDING COMPANY. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Alabama, Delaware, Missouri, New York, Texas, and Indiana. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for the payment of certain dividends and other distributions in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurer to the holding company or its affiliates. MUTUAL FUNDS. Torchmark's mutual fund management and distribution activities, as well as its investment advisory services, are subject to state and federal regulation and oversight by the National Association of Securities Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R Funds, the TMK/United Funds and the Torchmark Funds is a registered investment company under the Investment Company Act of 1940. W&R and WRAM are registered pursuant to the Investment Advisers Act of 1940. Additionally, W&R is regulated as a broker-dealer under the Securities Exchange Act of 1934. ENERGY. Torch Energy, on behalf of itself as well as its affiliated insurance clients and unrelated institutions, is engaged in oil and gas leasing and production activities which are regulated by the Federal Energy Regulatory Commission and the appropriate state authorities in the states in which Torch Energy does business. These governmental authorities regulate production, the drilling and spacing of wells, conservation, environmental concerns, and various other matters affecting oil and gas production. Torch Energy is also registered under the Investment Advisers Act of 1940. Environmental Regulation: Torchmark's energy subsidiaries' operations are ------------------------ subject to existing federal, state, and local laws and regulations governing environmental quality and pollution control. Energy subsidiaries' activities with respect to oil and gas production are subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency involving the release of materials into the environment or relating to the protection of the environment. In most instances, the regulatory requirements relate to water and air pollution control measures. Such regulation can increase the cost of operating production facilities. Torchmark believes that energy subsidiaries are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact upon operations, capital expenditures, earnings, or competitive position. HEALTH CARE REFORM. Various health care reform proposals are currently being considered by Congress. While such proposals are not as comprehensive as the 1994 proposals by the Clinton Administration, the current proposals cover insurance issues such as guaranteed renewability and portability, administrative simplification, and fraud. 12 PERSONNEL At the end of 1994, Torchmark had 2,889 employees and 3,381 licensed employees under sales contracts. Additionally, approximately 64,000 independent agents and brokers, who were not employees of Torchmark, were associated with Torchmark's marketing efforts. ITEM 2. REAL ESTATE Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Liberty owns a 487,000 sq. ft. building at 2001 Third Avenue South, Birmingham, Alabama, which currently serves as Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately 150,000 sq. ft. of this building to unrelated tenants and has another 15,000 sq. ft. available for lease. Liberty also operates from 67 company-owned district office buildings used for agency sales personnel. Globe owns a 300,000 sq. ft. office building at 204 North Robinson, Oklahoma City, Oklahoma, of which it occupies 85,647 sq. ft. as its home office and the balance is available for lease. Globe also owns a 330,000 sq. ft. office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City and a 110,000 sq. ft. office building at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants. United American owns and occupies a 125,000 sq. ft. home office building at 2909 North Buckner Boulevard, Dallas, Texas. American Income owns and is the sole occupant of an office building located at 1200 Wooded Acres Drive, Waco, Texas. The building is a two-story structure containing approximately 72,000 square feet of usable floor space. In addition, American Income leases office space in various cities throughout the United States. W&R owns and occupies a 116,000 sq. ft. office building located in United Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R owns three other office buildings in this development, each containing approximately 48,000 sq. ft., which are leased or are available for lease. Liberty, Globe and W&R also lease district office space for their agency sales personnel. All of the other Torchmark companies lease their office space in various cities in the U.S. A Torchmark subsidiary, Torchmark Development Corporation (TDC), has completed a 185,000 sq. ft. office building as the initial phase of a 100-acre commercial development at Liberty Park along I-459 in Birmingham, Alabama of which a total of approximately 180,000 sq. ft. is currently leased. A 90,000 sq. ft. office building is under construction in this development and is scheduled for completion in May, 1995, which is 60% preleased. TDC also owns and manages a 70,000 sq. ft. office and retail complex adjacent to Liberty Park. As a part of a joint venture with unaffiliated entities, it is also developing 2,800 contiguous acres as a planned community development. DATA PROCESSING EQUIPMENT Torchmark and its primary subsidiaries have significant automated information processing capabilities, supported by centralized computer systems. Torchmark also uses personal computers to support the user-specific information processing needs of its professional and administrative staffs. All centralized computer software support, information processing schedules and computer-readable data management requirements are supported by company specific policies and procedures which ensure that required information processing results are produced and distributed in a timely manner and provide for the copying, off-site physical storage and retention of significant company computer programs and business data files for backup purposes. 13 ITEM 3. LEGAL PROCEEDINGS Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These suits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages. In particular, Torchmark's subsidiary Liberty is a party to a number of such actions which seek punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. Some of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is virtually unlimited under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. As of December 31, 1994, Liberty was a party to approximately 172 active lawsuits (excluding interpleaders and stayed cases), more than 120 of which were Alabama proceedings in which punitive damages were sought. As previously reported, litigation was filed in May 1992 against Liberty in the Circuit Court for Barbour County, Alabama (Robertson v. Liberty National ----------------------------- Life Insurance Company, Case No.: CV-92-021). This suit was amended in October - ---------------------- 1992 to include claims on behalf of a class of Liberty policyholders alleging fraud in the exchange of certain cancer insurance policies. The complaint sought substantial equitable and injunctive relief and unspecified compensatory and punitive damages. A policyholder class was certified by the Barbour County Court in March 1993. Additionally, subsequent to the class certification, a number of individual lawsuits based on substantially the same allegations as in Robertson were filed by plaintiffs in Alabama, Georgia, --------- Florida and Mississippi. Four additional class action suits also based upon substantially the same allegations as in Robertson were filed in Mobile --------- County, Alabama (Adair v. Liberty National Life Insurance Company, Case No.: ------------------------------------------------ CV-93-958 and Lamey v. Liberty National Life Insurance Company, Case No.: CV ------------------------------------------------ 93-1256) and in Polk County, Florida (Howell v. Liberty National Life ------------------------------- Insurance Company, Case No.: GC-G-93-2023 and Scott v. Liberty National Life - ----------------- ------------------------------ Insurance Company. Case No.: GC-G 93-2415) after the class certification. - ----------------- Adair, Lamey, Howell and Scott have been settled on an individual basis. - -------------------- ----- On October 25, 1993, a jury in the Circuit Court for Mobile County, Alabama rendered a one million dollar verdict ($1,000 actual damages) against Liberty in McAllister v. Liberty National Life Insurance Company (Case No.: CV-92- ----------------------------------------------------- 4085) one of twenty-five suits involving cancer policy exchanges which were filed prior to class certification in the Barbour County litigation and therefore were excluded from the Robertson class section. The McAllister ---------- decision was appealed to the Alabama Supreme Court. On February 25, 1995, the judgment was affirmed. A petition for rehearing has been filed by Liberty. Previously, another judge in the Mobile County Court had granted a summary judgment in favor of Liberty in another substantially similar suit in which no cancer claims had been submitted (Boswell v. Liberty National Life Insurance ------------------------------------------ Company, Case No.: CV-92-3342), which was appealed to the Alabama Supreme - ------- Court. On May 13, 1994, the Alabama Supreme Court reversed and remanded Boswell. The Court held the plaintiffs had alleged injury or damages in the - ------- form of the additional policy premium payments and these allegations were sufficient to withstand a motion to dismiss the complaint. Following this order and pending a petition for rehearing, the Boswell case was settled. ------- Excluding the McAllister case, no pre-class certification individual cancer ---------- exchange cases remain active, all having been settled or stayed. As reported previously, a fairness hearing was held on January 20, 1994, in the Robertson cancer policy exchange class action. Prior to that hearing, class members had been mailed notice of the hearing and the proposed settlement. On February 4, 1994, the Circuit Court for Barbour County, Alabama ruled that with a $16 million increase in the total value of the equitable and monetary relief contained in the proposed Robertson settlement (from --------- approximately $39 million to $55 million in total value), the settlement would be fair and would be approved, provided that the parties to the litigation accepted the amended settlement within fourteen days of the issuance of the ruling. On February 17, 1994, the Court extended for two weeks the period for filing objections to or accepting the court's order conditionally approving the class action settlement. On February 22, 1994, the Court entered an order in the Robertson litigation, which delayed any final decision on the proposed --------- class action settlement and various motions to modify it (including motions to delete Torchmark from the settlement release), pending certain specified discovery to be completed within 90 days from the date the order was entered. In the order, the Court directed limited additional discovery regarding whether Torchmark had any active involvement in the cancer policy exchanges. Pending completion of limited additional discovery, the Court reserved jurisdiction and 14 extended the deadline for acceptance or rejection of the modifications set forth in the February 4, 1994, Order. On May 6, 1994, the Court entered an order in the Robertson litigation setting a hearing on May 19, 1994, on all --------- outstanding motions in that case. On May 26, 1994, the Barbour County Court entered an Order and Final Judgment in the Robertson litigation, making final the findings and --------- conclusions of its February 4, 1994 Order. That Order has been accepted by the parties to the action. The discovery regarding the propriety of Torchmark's release by the settlement agreement was concluded prior to the entry of the Order and Final Judgment, and Torchmark was included in the release given on behalf of the class. The $55 million proposed amended settlement charge was provided for in Torchmark's 1993 financial reports. On July 5, 1994, certain intervenors in the Robertson litigation filed a --------- notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. The appeal is currently pending. Purported class action litigation was filed in December 1993, against Liberty in the Circuit Court for Mobile County, Alabama asserting fraud and misrepresentation in connection with exclusionary provisions of accident and hospital accident policies sold to persons holding multiple accident policies (Cofield v. Liberty National Life Insurance Company, Case No.: CV-93-3667). A -------------------------------------------------- hearing on class certification in Cofield has been postponed and has not been ------- rescheduled. On March 17, 1994, litigation was filed against Liberty, a subsidiary of Torchmark, certain officers and present and former directors of Torchmark, and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court for Marion County, Alabama (Miles v. -------- Liberty National Life Insurance Company, Civil Action No. CV-94-67). The - --------------------------------------- lawsuit asserts that it is brought on behalf of a class composed of the shareholders of Torchmark. The complaint alleges a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount are sought. In April 1994, the complaint in Miles was amended to add an additional ----- shareholder plaintiff and to name Torchmark as a defendant. A second similar action (Oakley v. Torchmark Corporation Case No. CV-94-47) was filed on August ------------------------------- 16, 1994 in the Circuit Court for Bibb County, Alabama, but plaintiff has moved to dismiss that action without prejudice. Thereafter, a third such action was filed in the United States District Court for the Southern District of Alabama. (Dismukes v. Torchmark Corporation, Case No. 94-1006-P-M.) The --------------------------------- Dismukes case was subsequently transferred to the United States District Court - -------- for the Northern District of Alabama. No class has been certified in any of these cases, all of which seek punitive damages. Torchmark, Liberty and the individual defendants intend to vigorously defend these actions. Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in litigation filed April 22, 1994 as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims ------------------------------ damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint has been amended to include new plaintiffs purporting to represent the class. No class has been certified, however, and a motion to dismiss has been filed by the defendants, who intend to vigorously defend the action. In July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil ------------------------------------------------- Action No. 28979). The complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no proceedings of any materiality have occurred in this case. Liberty has removed this case to federal court. Additionally, Liberty had filed a declaratory judgment action essentially seeking an accounting in this matter in the U.S. District Court for the Northern District of Georgia on the same day Bryant was filed. Liberty ------ intends to vigorously defend the Bryant action. ------ Also in July 1994, a purported class action (Bosarge v. Liberty National --------------------------- Life Insurance Company, Case No.: CV-94-2177) was filed against Liberty and - ---------------------- Torchmark in the Circuit Court for Mobile County, Alabama which alleges that Liberty agents have made misrepresentations in connection with converting policyholder accounts to bank budget from other modes of premium payment. The lawsuit claims that agents have represented that insureds would receive additional "free insurance" if they changed to bank 15 budget payment while charges for such "free insurance" were actually made through bank budget payments. Injunctive relief and unspecified actual and punitive damages are sought. No class has been certified and no proceedings of any materiality have occurred in this case. Liberty intends to vigorously defend this action. On November 17, 1994, a Circuit Court jury in Mobile County, Alabama returned a $4.6 million verdict against Liberty in Coram v. Liberty National ------------------------- Life Insurance Company (Case No. 93-2100). This case involved allegations of - ---------------------- fraud by an agent of Liberty and was consolidated for trial with another case involving the same sales agent. A verdict was returned in favor of Liberty in the companion case. Liberty plans to vigorously pursue post-trial motions for relief and, if necessary, an appeal. The $4.6 million verdict was provided for in the 1994 financial reports. In 1978, the United States District Court for the Northern District of Alabama entered a final judgement in Battle v. Liberty National Life Insurance ----------------------------------------- Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a - ------- class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgement fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion was filed to challenge the final judgement under Federal Rule of Civil Procedure 60(b), in February of 1990, but the final judgement was upheld and the Rule 60(b) challenge was rejected by both the District Court and the Eleventh Circuit Court of Appeals. In November, 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgement. The relief sought is unclear, but includes a request that the District Court rule that the final judgement no longer has prospective application. Liberty has filed discovery requests seeking the identity of the funeral directors involved in the petition and information and materials necessary to evaluate the funeral directors' allegations and to clarify the relief sought. Provision has been made in the financial statements for certain anticipated litigation costs. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not considered material. It should be noted, however, that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama, continues to increase universally. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 1994. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market in which Torchmark's common stock is traded is the New York Stock Exchange. There were 8,205 shareholders of record on December 31, 1994, excluding shareholder accounts held in nominee form. Information concerning restrictions on the ability of Torchmark's subsidiaries to transfer funds to Torchmark in the form of cash dividends is set forth in Note 14-- --------- Shareholders' Equity in the Notes to the Consolidated Financial Statements. - -------------------- The market price and cash dividends paid by calendar quarter for the past two years are as follows:
1994 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $49.500 $39.500 $ .2800 2 42.750 36.750 .2800 3 44.125 38.000 .2800 4 44.500 32.375 .2800 Year-end closing price..................$34.875 1993 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $64.750 $55.500 $ .2667 2 61.875 50.250 .2667 3 59.750 51.625 .2667 4 56.625 41.125 .2800
Year-end closing price..................$45.000 17 ITEM 6. SELECTED FINANCIAL DATA The following information should be read in conjunction with Torchmark's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K: (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
1994 1993 1992 1991 1990 YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ---------- Life premium............ $ 601,633 $ 555,859 $ 544,467 $ 524,052 $ 487,991 Health premium.......... 768,714 799,835 797,855 769,821 738,431 Other premium........... 18,527 137,216 111,640 71,940 64,830 Total premium........... 1,388,874 1,492,910 1,453,962 1,365,813 1,291,252 Net investment income... 330,492 372,470 382,735 364,318 348,412 Financial services reve- nue.................... 139,276 137,422 133,462 114,326 108,561 Energy operations reve- nue.................... 64,365 106,013 74,014 54,841 32,218 Realized investment gains (losses)......... (2,551) 8,009 (948) 4,195 4,081 Total revenue........... 1,922,557 2,176,835 2,045,810 1,907,441 1,787,148 Net income.............. 268,946 297,979 265,477 246,489 229,177 Net income available to common shareholders........... 268,142 294,690 262,024 240,373 222,279 Annualized premium is- sued: Life.................. 149,833(1) 128,433 131,726 133,741(2) 129,233(3) Health................ 121,182(1) 176,028 224,905 216,962 273,290 Total................. 271,015 304,461 356,631 350,703 402,523 Mutual fund collections. 1,180,477 1,237,747 1,141,928 813,737 742,142 Per common share: Net income............. 3.72 4.01 3.58 3.13 2.85 Net income excluding realized investment gains (losses) and the re- lated acquisition cost ad- justment.............. 3.81 3.94 3.59 3.10 2.82 Cash dividends paid.... 1.12 1.08 1.07 1.00 .93 Return on average common equity................. 20.8% 24.2% 26.4% 25.5% 26.6% Return on average common equity excluding effect of SFAS 115..... 20.0% 24.4% 26.4% 25.5% 26.6% Average shares outstand- ing.................... 72,096 73,502 73,237 76,728 77,950 - ------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ---------- Cash and invested assets (4).................... $5,305,471 $5,550,931 $4,994,828 $4,605,446 $4,155,577 Total assets............ 8,403,634 7,646,242 6,770,115 6,160,742 5,535,895 Short-term debt......... 255,116 107,108 276,819 11,499 779 Long-term debt.......... 792,763 792,335 497,867 667,125 529,294 Shareholders' equity.... 1,242,603 1,417,255 1,115,660 1,079,251 943,787 Per common share (5)... 17.37 18.80 14.54 13.11 11.13 Per common share ex- cluding effect of SFAS 115................... 19.31 17.29 14.54 13.11 11.13 Annualized premium in force: Life................... 796,955(1) 612,656 588,084 562,550(2) 543,738(3) Health................. 807,587(1) 823,382 832,488 798,142 786,393 Total.................. 1,604,542 1,436,038 1,420,572 1,360,692 1,330,131 Assets under management at W&R................. 14,502,000 14,470,000 12,144,000 10,692,000 8,212,000
- ------------------------------------------------------------------------------- (1) Annualized life premium in force includes $144 million, and annualized health premium in force includes $37 million, representing the business acquired in the acquisition of American Income Life Insurance Company in 1994. (2) Annualized life premium in force includes $2.7 million, representing the business acquired in the acquisition of Sentinel American Life Insurance Company in 1991. (3) Annualized life premium in force includes $28.1 million, representing the business acquired in the acquisition of Family Service Life Insurance Company in 1990. (4) Includes accrued investment income. (5) Computed after deduction of preferred shareholders' equity. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Selected Financial Data and Torchmark's Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. RESULTS OF OPERATIONS Net income for Torchmark in 1994 was $269 million, declining 9.7% from $298 million in 1993. On a per share basis, net income was $3.72, decreasing 7.2% from 1993 per share net income of $4.01. Per share earnings for 1993 rose 12.0% over 1992 earnings of $3.58 per share. Excluding the after-tax effect of realized investment gains and losses and the associated adjustment to deferred acquisition costs, per share earnings were $3.81 in 1994 compared to $3.94 in 1993, a decrease of 3.3%. The adjustment to deferred acquisition costs, which was $7.1 million of additional amortization before tax, was made because of an accounting rule requiring that deferred acquisition costs on interest- sensitive insurance products be amortized in accordance with expected gross profits. Since realized investment gains or losses on assets backing such products change profit expectations, the adjustment is required. The 1993 increase in per share earnings, excluding realized investment gains and losses, was 9.7% over 1992 adjusted per share earnings of $3.59. In a comparison of 1994 results with those of 1993 and 1992, consideration should be given to a number of nonrecurring items. On November 3, 1994, Torchmark acquired American Income, and those results were consolidated with Torchmark's after the acquisition date. American Income added approximately $2.2 million to Torchmark's net income, after taking into account goodwill amortization and financing costs. The purchase was made at a total cost of $552 million. In November, 1993, Torchmark sold 73% of its interest in Vesta, which was Torchmark's wholly-owned property and casualty subsidiary prior to the sale, retaining an approximate 27% interest. Such interest was sold for proceeds of $161 million and a $57 million pretax gain from the sale was recognized. Results for 1993 included an $82 million pretax charge for nonoperating expenses, compared to $25.1 million for 1994 and $5.7 million for 1992. These charges relate to legal costs, guaranty assessments, and other contingencies which are discussed in more depth in "Item 3--Legal Proceedings" ------------------------- on page 14 of this report. The $25.1 million charge in 1994 was principally offset, however, by a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. Two new accounting standards which dealt with postretirement benefits and accounting for income taxes were implemented in 1993, increasing 1993 earnings by $18.4 million. Enactment of corporate tax legislation in mid-1993, which increased tax rates from 34% to 35%, resulted in an additional charge to 1993 earnings of $9.4 million to adjust the deferred tax liability relating to prior years. It also caused an increase in 1994 and 1993 income taxes when compared to 1992. Revenues declined 12% to $1.9 billion in 1994, after having increased 6.4% in 1993 to $2.2 billion. After excluding Vesta's revenues in 1993 and the above-mentioned gain on the sale of Vesta, the decline in 1994 revenues would have been 3.3%. Excluding Vesta, premium income for 1994 grew 1.4% or $19 million to $1.4 billion. Financial services revenues rose 1.4% in 1994 and 3.0% in 1993 primarily because of increased average assets under management. Energy operations revenues declined 39% to $64 million from $106 million after having risen 43% in 1993, because of the sale of a large producing property in late 1993. The $22 million gain from the property sale as well as its production revenues were included in 1993 revenues. Net investment income, which declined 2.7% in 1993, dropped $35 million or 9.5% in 1994. Two significant events caused the decline in net investment income in 1994 and, to a lesser extent, in 1993. First, capitalization of developmental costs in Torchmark's Black Warrior methane gas investment were phased out in 1993 and discontinued in 1994 as the project became operational, causing rising expense recognition while gas prices softened. Additionally, the low interest rate environment in 1993 and early 1994 caused an acceleration of GNMA repayments, requiring Torchmark to reinvest such funds at lower prevailing rates. A more in-depth discussion of each of Torchmark's segments and investment operations is found on pages 20 through 28 of this report. Other operating expenses declined 7% in 1994 after having increased 3% in 1993. When comparing 1994 operating expenses to 1993, three items should be considered. Vesta expenses of $7.5 million should be excluded from 1993, American Income expenses of $1.2 million should be excluded from 1994, and goodwill amortization from the purchases of American Income and United Investors Management Company ("United Management") of $1.6 million and $1.9 million, respectively, should be excluded from 1994. After such adjustments are made, operating expenses declined 6% to $158 million in 1994. As a percentage of total revenues, operating expenses declined to 8.3% in 1994 from 8.5% in 1993, adjusting revenues for the previously-mentioned gains from the Vesta sale of $57 million and the large energy 19 property in the amount of $22 million, and adjusting expenses to exclude Vesta in 1993 and the new amortization of goodwill in 1994. Although operating expenses rose in 1993 over 1992 from $157 million to $170 million, a comparison of operating expenses as a percentage of revenues reveals they were level at 8.3%, adjusting for the one-time Vesta and energy gains but including Vesta operations. Interest expense rose 21% in 1993 to $67.3 million and then rose an additional 13.5% to $76.4 million in 1994, primarily as a result of $300 million in new debt issued during 1993, which caused average indebtedness to rise in both 1993 and 1994. These new issues were used mainly to fund the 1993 acquisition of the remaining shares of United Management. These debt issuances and the United Management transaction are discussed further as a part of the capital resources discussion found on page 29 of this report. Increased borrowings on Torchmark's line of credit and rising rates were also minor factors in the 1994 increase. The line of credit is discussed in more depth in the liquidity discussion found on page 28 of this report. The following is a discussion of Torchmark's operations by segment. INSURANCE OPERATIONS LIFE INSURANCE Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 ------------------ ------------------ ------------------ % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM --------- ------- --------- ------- --------- ------- Premium and policy charges................ $ 601,633 100.0% $ 555,859 100.0% $ 544,467 100.0% Policy obligations...... 412,799 68.6 377,018 67.8 366,214 67.3 Required reserve inter- est.................... (163,637) (27.2) (151,203) (27.2) (143,171) (26.3) --------- ----- --------- ----- --------- ----- Net policy obligations. 249,162 41.4 225,815 40.6 223,043 41.0 Amortization of acquisi- tion costs............. 90,573 15.1 86,098 15.5 87,375 16.0 Commissions and premium taxes.................. 39,845 6.6 36,697 6.6 35,718 6.6 Other expense........... 46,814 7.8 43,790 7.9 46,330 8.5 --------- ----- --------- ----- --------- ----- Total.................. 426,394 70.9 392,400 70.6 392,466 72.1 --------- ----- --------- ----- --------- ----- Insurance operating in- come................... $ 175,239 29.1% $ 163,459 29.4% $ 152,001 27.9% ========= ===== ========= ===== ========= =====
Life Insurance: Torchmark's life insurance premium, including policy --------------- charges, increased 8.2% to $602 million in 1994, after having risen 2.0% to $556 million in 1993. Sales of life products were strong in 1994 with annualized life premium issued increasing 17% to $150 million in 1994. Approximately 57% of the growth in life premium issued was in the direct mail marketing area. Direct mail sales grew 34% in 1994 to $48 million. Annualized life premium in force rose to $797 million at December 31, 1994, growing 30% over the prior year-end amount of $613 million. Annualized life premium in force grew 4% in 1993 from $588 million. Annualized premium in force data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but exclude single premium income and policy charges. Torchmark has emphasized increased sales in life insurance product lines relative to health and other insurance products because profit margins are superior. Additionally, assets backing the higher reserves required for life products allow Torchmark to increase investment income. Profit margin for life insurance, as measured by insurance operating income as a percentage of premium, was in excess of 29% in both 1994 and 1993, improving over 27.9% in 1992. One factor in the improvement over 1992 was increased persistency. Persistency improvements have resulted, at least in part, from revisions in agents' compensation formulas to encourage persistency. Lower lapses have also been attributable to the conversion of a large portion of agent-collected home service business to bank draft premium, which has higher persistency. The proportion of bank draft premium to total home service premium increased from 69% in 1992 to 78% in 1993 to 81% in 1994. Improvements in persistency reduce the amortization of acquisition expenses and positively affect overall profitability margins but may cause some increases in the ratio of policy obligations to premium. 20 The primary cause of the increase in the ratio of policy obligations to premium in 1994 was higher mortality when compared to 1993. Fluctuations in mortality are normal, however, and such increase is not indicative of a pattern. The above presentation of life insurance results excludes a $22.8 million benefit in 1994 from the re-evaluation of reserving assumptions on a block of burial reserves. A review of assumptions regarding mortality, interest and inflation pressures on burial costs indicated that sufficient experience existed to support a change in the level of reserves held on this block. Torchmark will continue to monitor the reserving assumptions for this block on an annual basis to ensure that reserves are sufficient to meet contractual liabilities. Had this item been included, the 1994 ratio of policy obligations to premium would have been reduced and overall margin would have been increased 3.8%. Other expense margins have improved in each of the years considered. These improvements have had the effect of further improving margins. HEALTH INSURANCE Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- Premium.................. $768,714 100.0% $799,835 100.0% $797,855 100.0% Other income............. 3,349 0.4 3,268 0.4 2,538 0.3 -------- ----- -------- ----- -------- ----- Total revenues.......... 772,063 100.4 803,103 100.4 800,393 100.3 Policy obligations....... 458,066 59.5 486,856 60.9 491,343 61.6 Required reserve inter- est..................... (25,710) (3.3) (24,572) (3.1) (22,712) (2.9) -------- ----- -------- ----- -------- ----- Net policy obligations.. 432,356 56.2 462,284 57.8 468,631 58.7 Amortization of acquisi- tion costs.............. 74,701 9.7 83,385 10.4 89,766 11.3 Commissions and premium taxes................... 102,224 13.3 107,317 13.4 108,105 13.5 Other expense............ 42,673 5.6 44,194 5.6 44,298 5.6 -------- ----- -------- ----- -------- ----- Total................... 651,954 84.8 697,180 87.2 710,800 89.1 -------- ----- -------- ----- -------- ----- Insurance operating in- come.................... $120,109 15.6% $105,923 13.2% $ 89,593 11.2% ======== ===== ======== ===== ======== =====
Health Insurance: Torchmark's individual health products include Medicare ----------------- Supplement insurance, cancer insurance, and other under-age 65 medical and hospitalization products. As a percentage of annualized individual health premium in force at December 31, 1994, Medicare Supplement accounted for 71%, cancer accounted for 14%, and other products accounted for 15%. Health premium was $769 million in 1994, declining 4% over premium of $800 million in 1993. Health premium increased slightly in 1993 over the prior year. Annualized health premium in force stood at $808 million at December 31, 1994, decreasing 2% from 1994 premium in force of $823 million. Year-end 1993 annualized health premium in force declined 1% from the December 31, 1992 amount of $832 million. The declines in health premium in force resulted from falling sales of most health products. Sales of health insurance products in terms of annualized premium issued declined 31% to $121 million in 1994 after having declined 22% to $176 million in 1993. The declines in premium sales in both years and the 1994 decline in premium in force are primarily attributable to Torchmark's Medicare Supplement product. Annualized premium in force for this product rose from $581 million at year-end 1992 to $601 million for year-end 1993, but fell 5% to $572 million in 1994. In terms of annualized premium issued, sales of Medicare Supplement insurance declined 13% to $136 million in 1993 and further declined 36% in 1994 to $88 million. Throughout all of 1993 and most of 1994, there was considerable uncertainty regarding various health care reforms proposed by both the Clinton Administration and Congress which had bearing on the Medicare Supplement market. Additionally, this market has also experienced a great deal of regulatory change in recent years, including increased government regulation in the form of mandated policy forms, a required minimum 65% loss ratio on products sold, and a required leveling of agents' commissions. The mandated loss ratio and policy forms have put significant pressure on margins for Torchmark as well as the rest of the industry, discouraging sales. Torchmark has also encountered considerable competition in this market with regard to price and "attained-age" pricing, whereby premium may be increased on a basis of increased age as well as increased medical costs. This increased competition has negatively affected sales. 21 Torchmark intends to continue its efforts to increase Medicare Supplement production. It is seeking approval in certain key states to sell the "attained-age" policy in order to compete more effectively and expects to receive approval in these states during 1995. Additionally, Torchmark plans to market a new group Medicare Supplement product and a variety of other new life and health products directed at the senior citizen market. Cancer insurance annualized premium in force declined 3.4% to $106 million at year-end 1993 but rose 8% in 1994 to $114 million at year-end 1994. Sales of this product declined 45% in 1993 to $10 million and further declined 19% in 1994 to $8 million. Annualized premium in force for under age 65 health insurance stabilized in 1994, standing at $113 million at both year-end 1994 and 1993. Annualized premium in force for under age 65 declined 19% in 1993 from $141 million. Sales of a number of these products were discontinued in 1992 because of poor margins, causing the premium in force to decline in both 1992 and 1993. Margins have improved in each of the years considered. As a percentage of premium, insurance operating income for health insurance grew from 11.2% in 1992 to 13.2% in 1993 to 15.6% in 1994, representing an increase of 18% in both 1993 and 1994 over the prior year. There were two primary reasons for this improvement. First, the amortization of acquisition costs declined in each period due to improved persistency. The improvements were caused at least in part by the requirement in many states to level agents' commissions on Medicare Supplement products instead of paying a larger first-year commission. This leveling of commissions has encouraged persistency through the payment of a higher renewal commission. It has also encouraged persistency through the payment of a lower first-year commission, which discourages replacement. Additionally, policy obligations for health products as a percentage of premium declined .7% in 1993 and 1.4% in 1994. These declines were a result of the decline in lower margin non-Medicare business in 1993 and in 1994, as well as favorable experience in certain Medicare and other non-Medicare blocks of business. Not included in the above 1994 presentation of health results was a one-time increase in health benefits resulting primarily from the reclassification described on page 19. ANNUITIES Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 ------------------- ------------------- ------------------- % OF MEAN % OF MEAN % OF MEAN AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE -------- --------- -------- --------- -------- --------- Policy charges.......... $ 13,888 1.0% $ 9,454 0.7% $ 8,771 0.9% Allocated investment in- come*.................. 8,576 0.6 8,387 0.6 8,903 1.0 -------- ---- -------- ---- -------- ---- Total revenue.......... 22,464 1.6 17,841 1.3 17,674 1.9 Policy obligations...... 42,275 3.0 43,032 3.3 43,187 4.6 Required reserve inter- est.................... (42,765) (3.0) (43,090) (3.3) (43,513) (4.6) -------- ---- -------- ---- -------- ---- Net policy obligations. (490) 0.0 (58) 0.0 (326) 0.0 Amortization of acquisi- tion costs............. 5,772 0.4 4,596 0.3 6,133 0.6 Commissions and premium taxes.................. 605 0.0 708 0.1 848 0.1 Other expense........... 2,345 0.2 663 0.0 994 0.1 -------- ---- -------- ---- -------- ---- Total.................. 8,232 0.6 5,909 0.4 7,649 0.8 -------- ---- -------- ---- -------- ---- Insurance operating in- come................... $ 14,232 1.0% $ 11,932 0.9% $ 10,025 1.1% ======== ==== ======== ==== ======== ====
- -------- *Investment income in excess of required. Annuities: Torchmark's annuity products serve a wide range of markets, such ---------- as providing retirement income, funding prearranged funerals, and offering long-term tax deferred growth opportunities. Annuity products are sold on both a fixed and a variable basis. The premium is accounted for as a deposit and is not reflected in income. Amounts deposited for variable annuities are invested at the policyholder's direction into his choice among nine W&R managed mutual funds which vary in degree of risk and return. These investments are reported as Separate Account Assets and the corresponding deposit balances for variable annuities are reported as Separate Account Liabilities. 22 Fixed annuity deposits are added to policy reserves and the funds collected are invested by Torchmark. Revenues on fixed and variable annuity products are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the contract's structure. Variable accounts are also charged an investment management fee and a sales charge. Torchmark profits to the extent these policy charges exceed actual costs and to the extent actual investment income exceeds the investment income which is credited to policyholders on fixed annuities. The following table presents the annuity account balance at each year end and the annuity collections for each year for both fixed and variable annuities:
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS -------------------------- -------------------------- (DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN MILLIONS) THOUSANDS) 1994 1993 1992 1994 1993 1992 -------- -------- -------- -------- -------- -------- Fixed..................... $ 801.2 $ 782.8 $ 755.7 $ 43,339 $ 46,573 $ 69,381 Variable.................. 692.8 529.7 282.0 196,105 213,982 125,688 -------- -------- -------- -------- -------- -------- Total.................... $1,494.0 $1,312.5 $1,037.7 $239,444 $260,555 $195,069 ======== ======== ======== ======== ======== ========
Variable annuity collections declined from $214 million in 1993 to $196 million in 1994, the first year of lower year-over-year collections since these products were introduced in 1987. The rapid growth experienced in variable annuities prior to 1994 resulted from increased customer interest in these investment-type products, due at least in part to stronger financial markets. Weaker financial markets in 1994 are thought to have caused decreased demand. Sales of fixed annuities have declined in each year in large part because of the increased interest in variable annuities. Although sales declined in 1994, the combined annuity account balance grew 14% in 1994 over the prior year end to $1.4 billion. Annuity policy charges, which are included in other premium in the financial statements, climbed 47% to $13.9 million, after having risen 8% in 1993 to $9.5 million. The large increase in policy charges in 1994 was attributable to the increase in size of the variable annuity account balance over the prior year, the increase in the number of variable annuity contracts in force, and the cumulative effect of growth in sales over the past few years on which the sales charge is based. Allocated investment income, or investment income earned in excess of policy requirements, was $8.6 million in 1994, a slight increase over 1993, due to the increase in deposit balance size for fixed annuities. Insurance operating income for the annuity line has grown in each of the years 1992 through 1994, increasing 19% to $14 million in 1994 and also 19% to $11.9 million in 1993. Profitability margins as measured by the mean reserve have been relatively stable, declining slightly in 1993 but increasing slightly in 1994. 23 ASSET MANAGEMENT FINANCIAL SERVICES Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 --------------- ---------------- ---------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE ------- ------- -------- ------- -------- ------- Commission revenue........... $72,223 43.1% $ 78,067 46.8% $ 76,793 49.2% Asset management fees........ 70,651 42.2 64,181 38.5 56,056 36.0 Service fees................. 22,297 13.3 21,273 12.7 19,890 12.8 Real estate fees............. -0- -0- -0- 0.0 436 0.3 ------- ----- -------- ----- -------- ----- Financial services revenue*. 165,171 98.6 163,521 98.0 153,175 98.3 Investment and other income.. 2,264 1.4 3,293 2.0 2,736 1.7 ------- ----- -------- ----- -------- ----- Total revenue............... 167,435 100.0 166,814 100.0 155,911 100.0 Commissions and selling expenses.................... 62,285 37.2 70,735 42.4 70,005 44.9 Other expenses............... 21,252 12.7 23,265 14.0 21,619 13.9 ------- ----- -------- ----- -------- ----- Total expenses.............. 83,537 49.9 94,000 56.4 91,624 58.8 ------- ----- -------- ----- -------- ----- Pretax income................ $83,898 50.1% $ 72,814 43.6% $ 64,287 41.2% ======= ===== ======== ===== ======== =====
- -------- *Financial services revenue includes $25.9 million in 1994, $26.2 million in 1993, and $19.7 million in 1992 representing revenues from other Torchmark segments which are eliminated in consolidation. Financial services: Torchmark's financial services revenues increased 1% in ------------------- 1994 to $165 million from the prior-year amount of $164 million, which reflected a 7% increase over 1992. Financial services revenue consists of commission revenue derived primarily from the sale of mutual funds and other investment products, insurance, and annuity products by the W&R sales representatives. It is also comprised of asset management and service fees for mutual fund management and administration. Financial services revenues were comprised of the following at December 31, 1994: asset management fees 43%, commissions 44%, and service fees 13%. Asset management fees rose 10% in 1994 to $71 million, after having risen 14% in 1993 to $64 million. Growth in management fees in both periods was caused by the increase in average mutual fund and institutional assets under management, to which the fees correlate. The 1994 growth in average assets under management resulted from additional product sales. This growth was achieved even though financial markets weakened somewhat during the year as a result of rising interest rates. The 1993 increase in assets under management resulted largely from the stronger financial markets experienced in 1993 over prior periods as well as from additional product sales. Average assets under management grew 9% over the prior year. Assets under management were $14.5 billion at both December 31, 1993 and 1994, and $12.1 billion at December 31, 1992. Commission revenue from sales of investment products, which include mutual funds and variable annuity products, represented 82% of total commission revenue. The remaining source of commission revenue was from insurance product sales. Commissions from the sale of insurance products and variable annuity products are derived primarily from UILIC, and are eliminated in consolidation. Investment product commissions declined 10% to $59 million, after having risen 2% in 1993 to $66 million. Investment product sales were $1.18 billion in 1994, decreasing 5% over 1993 sales of $1.24 billion. Sales of these products climbed 10% in 1993 from $1.13 billion. Investment product sales for 1994 consisted of United Funds (75%), variable annuities (16%), and Waddell & Reed Funds (9%). Sales of the United Funds declined 5% to $939 million in 1993, and further declined 6% in 1994 to $881 million. On the other hand, sales of the Waddell & Reed Funds, which were introduced in 1992 as a deferred-load product to give investors five new mutual funds as additional investment alternatives, almost tripled to $94 million in 1993 and grew another 13% in 1994 to $107 million. W&R sales of variable annuities declined 6% in 1994 to $192 million, after experiencing a 74% increase in 1993 to $204 million. Growth in 1993 commission revenue for investment products was less than the growth in sales and the decline in 1994 commission revenue was greater than the decline in sales. These effects in both years were caused by declines in the sales of the 24 United Funds, for which commission revenue is earned at the point of sale, and increases in sales of the Waddell & Reed Funds, for which distribution revenues are deferred and earned subsequent to the point of sale. Waddell & Reed Funds' distribution fees are derived from an annual asset-based charge. In addition, the maximum sales charge on the United Funds was reduced in August, 1993 to improve their competitive position. This reduction in revenue was partially offset by an increased annual fee. Service fees were $22.3 million in 1994, rising 5% over the prior year. Service fees grew 7% to $21.3 million in 1993. The number of accounts serviced was 1.15 million at December 31, 1994, compared to 1.09 million a year earlier, increasing 6%. Commissions and selling expenses as a percentage of commission revenue were stable at 91% in both 1993 and 1992, but declined to 86% in 1994. The 1994 decline resulted from an increase in the 12-b service fee which offsets certain direct expenses. Margin improvement for financial services operations was mainly caused by a larger proportion of asset management fees to revenues than commissions to revenues in each year over the prior year. The asset management fees have a significantly higher profit margin than commission revenues. ENERGY Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 -------------------- -------------------- ------------------- % OF % OF % OF RECURRING RECURRING RECURRING AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE --------- --------- --------- --------- -------- --------- Recurring energy reve- nues: Product marketing reve- nues.................. $ 350,034 $ 174,080 $ 98,352 Less product costs..... (332,550) (165,068) (91,356) --------- --------- -------- Net product marketing revenues.............. 17,484 26.1% 9,012 10.4% 6,996 9.3% Production revenues.... 19,008 28.4 45,427 52.4 38,155 50.5 Asset management reve- nues.................. 17,105 25.5 15,233 17.6 15,057 19.9 Well operations reve- nues.................. 10,768 16.0 14,310 16.5 13,806 18.3 --------- ----- --------- ----- -------- ----- Total recurring operat- ing revenues.......... 64,365 96.0 83,982 96.9 74,014 98.0 Investment income....... 2,657 4.0 2,674 3.1 1,525 2.0 --------- ----- --------- ----- -------- ----- Total recurring reve- nue................... 67,022 100.0 86,656 100.0 75,539 100.0 --------- ----- --------- ----- -------- ----- Depletion............... 11,700 17.5 22,328 25.8 19,450 25.8 Direct expenses......... 4,515 6.7 10,494 12.1 10,353 13.7 --------- ----- --------- ----- -------- ----- Energy operations ex- pense................. 16,215 24.2 32,822 37.9 29,803 39.5 Administrative expenses. 37,623 56.1 34,905 40.2 29,920 39.6 Interest................ 1,279 1.9 7,591 8.8 5,365 7.1 --------- ----- --------- ----- -------- ----- Total expense.......... 55,117 82.2 75,318 86.9 65,088 86.2 --------- ----- --------- ----- -------- ----- Pretax operating income. 11,905 17.8 11,338 13.1 10,451 13.8 Gain from sale of prop- erties*................ 0 0.0 22,030 25.4 0 0.0 --------- ----- --------- ----- -------- ----- Pretax income........... $ 11,905 17.8% $ 33,368 38.5% $ 10,451 13.8% ========= ===== ========= ===== ======== =====
- -------- *Included in energy operations revenues. Energy operations: The energy operations of Torchmark include the management ------------------ of proven producing oil and gas properties for both affiliates and unrelated parties by its subsidiary Torch Energy. Energy operations also include drilling of developmental wells, acquisition of properties and facilities, and marketing of oil and gas products by Torch Energy. Additionally, Torchmark and its insurance subsidiaries have invested in energy properties. While these investments are not included in the above table, they are discussed in this report under the caption "Investment Operations." 25 Energy operations revenues for 1993 included a one-time gain from the sale of an offshore producing property in the amount of $22 million. Excluding this gain, energy revenues declined 23% from $84 million in 1993 to $64 million in 1994. In 1993, revenues excluding the one-time gain rose 13% over 1992. Profitability in energy operations improved in each of the years 1992 through 1994, with recurring pretax income rising from $10.5 million in 1992 to $11.3 million in 1993 and to $11.9 million in 1994, an increase of 8% in 1993 and 5% in 1994. The component of energy operations which has grown the most in the past two years was product marketing activities. These activities involve selling certain energy products which were acquired through purchase agreements with affiliated and unaffiliated parties. Net product revenues are computed after deducting the costs of the production sold from the gross marketing revenues. Net product marketing revenues grew 94% in 1994 after having gained 29% in 1993. These activities were the largest contributor to recurring energy profits in both 1993 and 1994, adding $5.5 million to pre-tax operating income in 1993 and $11.3 million in 1994. Although producing properties were another source of energy operation profits in 1992 and 1993, production activity declined due to the sale of the previously-mentioned offshore property. Production revenues are derived from Torch Energy's participation, as a working interest owner, in properties purchased for certain institutional clients as well as drilling and workover activities in directly-owned properties. Prior to 1994, production activities generally were centered around offshore producing properties acquired from Placid Oil Company ("Placid") in 1991. These properties were sold in late 1993, resulting in the previously-mentioned $22 million gain. Depletion and direct expenses are related to production activities and declined as production declined. The interest expense reported for energy operations is also associated with producing activities, because of the cost of financing properties. The sharp decline in 1994 interest expense resulted from the 1993 property sale, although replacement properties were acquired in the amount of $24 million in 1994. Torch Energy and its subsidiaries are also involved in asset management and well operations. Assets under management were $1.2 billion at year-end 1992 and 1993, and $1.3 billion at year-end 1994. A total of 7,500 wells were operated at December 31, 1994, compared to 1,200 at year-end 1993 and 1,800 at year-end 1992. Torchmark is presently evaluating various alternatives concerning the possible sale of Torch Energy. Investment operations: Net investment income declined 9.5% in 1994 to $330 ---------------------- million from $365 million in 1993, after adjustment for Vesta's investment income. It declined 2.7% in 1993 (including Vesta). The three main factors causing the 1994 decrease were increased losses in energy investment income, accelerated GNMA repayments which caused increased acquisition of lower yielding securities, and increased investment in municipal securities which involve lower pretax yields. These factors also affected the decline in 1993 net investment income to a lesser extent. Additionally, the low yields available in 1993 on new investments for Torchmark's cash flow negatively affected 1993 and 1994 investment income growth. Torchmark's energy investments, which were valued at $331 million at December 31, 1994 and $346 million at the same date in 1993, resulted in a loss of $24 million in 1994, compared to a loss of $4 million in 1993 and a gain of $15 million in 1992. While lower gas prices were a factor in the decline in both years, the primary cause for the decrease in earnings in both years was the completion during 1993 of the Black Warrior Basin development in Alabama. This development, for which Torchmark had a total investment of $235 million at December 31, 1994, involves wells which produce methane gas from coal seam formations. Prior to 1993, during the development process, development costs including interest were capitalized. As wells were dewatered and production of gas was phased in during 1993, capitalization of costs was phased out. There was no capitalization in 1994. Therefore, rising costs were recognized during a period of time when gas prices were trending lower. The effect of the capitalization of costs resulted in a $12 million, or $.17 per share, reduction in net investment income between 1993 and 1994. Earnings from the production of methane gas in the Black Warrior Basin development are primarily derived from Federal income tax credits available estimated to be $1.00 per thousand cubic feet of gas produced for 1994 and will continue through 2003. Torchmark's tax credits are reported as a reduction of income tax expense and do not increase investment income. Credits were recognized in the amounts of $8.0 million in 1994, $10.5 million in 1993, and $2.9 million in 1992. 26 The decline in interest rates during 1993 encouraged refinancing of mortgages, causing increased GNMA prepayments in 1993 and early 1994. These funds were reinvested at lower prevailing rates, causing a reduction in Torchmark's investment income in both 1993 and 1994. It is estimated that GNMA repayments reduced investments income $26.4 million in 1994 and $10.3 million in 1993, resulting in an after-tax decline of $.24 per share in 1994 and $.09 per share in 1993. Because of rising interest rates in 1994, however, refinancings have declined and Torchmark has been able to invest repayments as well as new cash flow in slightly higher yielding securities, reversing this trend. Torchmark has also reduced its exposure to GNMA's during 1994, decreasing the portfolio from $2.05 billion at year-end 1993 to $1.72 billion at year-end 1994. The relative attractiveness of tax-exempt securities improved in late 1993 because of the increase in corporate tax rates. While pretax returns on tax- exempt securities are lower than taxables, net after-tax returns are higher. Torchmark's holdings in tax-exempt securities represented 13.6% of total investments at December 31, 1994, compared to 11% at year-end 1993 and 1.7% at year-end 1992. Tax-equivalent investment income, excluding energy income and Vesta, was $370 million in 1994, compared to $376 million in 1993 and $374 million in 1992. Torchmark made fixed-maturity acquisitions at an average tax-equivalent yield of 7.27% in 1994 compared to 6.71% in 1993 and 7.75% in 1992. Principal components of 1994 acquisitions were noncallable corporate obligations, mortgage-backed securities, and to a lesser degree, insured municipal bonds. The rise in interest rates in 1994 caused the market value of Torchmark's fixed-maturity investments to decline, resulting in a $248 million decline in shareholders' equity, net of related taxes and deferred acquisition costs. At December 31, 1994, the book value of Torchmark's fixed maturities was $4.6 billion, compared to $4.4 billion at year-end 1993. At December 31, 1994, book value exceeded market by $242 million, compared to an excess of market over book at year-end 1993 of $192 million. Torchmark's fixed-maturities are reported at market value because they have been designated "available for sale." Torchmark's investments are very high quality and are primarily in U.S. Government or U.S. Government-backed securities and other investment-grade bonds. Torchmark's emphasis on such investments varies significantly with the insurance industry, which is demonstrated in the following table at December 31, 1994 including information provided by the American Council of Life Insurance:
TORCHMARK ---------------- INDUSTRY % $ AMOUNTS % (1) ---------- ----- ---------- Investment Grade Bonds & Short Terms............... $4,469,502 85.4% 63.9% Noninvestment Grade Bonds.......................... 25,490 0.5 5.7 Equities........................................... 41,590 0.8 5.3 Mortgage loans..................................... 17,997 0.3 15.3 Real estate........................................ 132,554 2.5 2.9 Policy loans....................................... 181,988 3.5 5.3 Other.............................................. 366,476 7.0 1.6 ---------- ----- ----- $5,235,597 100.0% 100.0% ========== ===== =====
- -------- (1) Latest data available from the American Council of Life Insurance Torchmark's investment strategy continues to concentrate on high quality, medium-term, fixed income securities. At 1994 year-end, government or government-guaranteed securities totalled $2.05 billion, approximately 46% of the bond and short-term portfolio. This represents a decrease from 61% at year-end 1993 due to a reduction in holdings of GNMA securities. Despite the reduction, a substantial portion of the fixed-income portfolio was represented by U.S. Government obligations. The quality of Torchmark's portfolio is evidenced by the fact that rating agencies rated 61.3% of the fixed income portfolio "AAA" and 98.8% were considered to be investment grade. Torchmark's mortgage-backed holdings have resulted in a bond portfolio which provides substantial cash flow but one in which the principal repayments are impacted by interest rate changes. As indicated 27 by the following table, 30% of the fixed income portfolio should repay within five years, and almost 75% within ten years. This compares with 46% and almost 90%, respectively, for year-end 1993. The table presents maturities determined by schedule or by estimated repayment in the case of mortgaged-backed securities.
DECEMBER 31, ------------ 1994 1993 ----- ----- Short-terms................... 2.4% 1.4% Under 1 year.................. 6.0 13.2 2-5 years..................... 21.7 31.7 6-10 years.................... 44.0 43.1 11-15 years................... 18.9 8.8 16-20 years................... 3.9 1.3 Over 20 years................. 3.1 .5 ----- ----- Total......................... 100.0% 100.0% ===== =====
Because of rising rates in 1994, the average life of the investment portfolio was extended as a result of a reduction in expected prepayments of mortgage-backed holdings and the acquisition of longer-term securities. At December 31, 1994, the average life of Torchmark's investment portfolio was estimated to be 8.0 years, compared with 6.0 years at year-end 1993 and 6.1 years at year-end 1992. The year-end duration of the portfolio increased to 5.2 years from 4.2 years at year-end 1993. ACQUISITION On November 3, 1994, Torchmark acquired American Income for a total cash purchase price of approximately $552 million. American Income sells life insurance to union and credit union members through exclusive agents. The addition of American Income's quality line of products and low-cost operation fits well with Torchmark's strategy of growing life insurance operations in niche markets. The results of operations of American Income were consolidated with those of Torchmark after the purchase date, adding $33.1 million to Torchmark's 1994 revenues and $2.2 million or $.03 per share to net income, after deduction of charges for goodwill amortization and the cost of funds for the purchase. Funds for the purchase were provided through a $200 million preferred stock offering which is discussed in more detail in the capital resources section found on page 29 of this report, a $175 million bridge loan from a group of banks, the sale of investments available for sale, and internal cash flow. LIQUIDITY AND CAPITAL RESOURCES Liquidity: Torchmark's high level of liquidity is represented by its strong ---------- positive cash flow, its liquid assets, and the availability of a line of credit facility and a commercial paper program. As is typical of established life insurance companies, Torchmark generates cash flow from premium, investment, and other income generally well in excess of its immediate needs for policy obligations, expenses, and other requirements. Additionally, because of the nature of the life insurance business, cash flow is also quite stable and predictable. Torchmark's cash flow has been strong and more than adequate to meet current needs. Cash provided from operations, including cash provided from deposit- product operations, was $370 million in 1994, compared to $488 million in 1993 and $554 million in 1992. In addition, Torchmark received $838 billion in 1994, $1.16 billion in 1993, and $808 million in 1992 from scheduled investment maturities as well as unscheduled GNMA and other principal repayments. Cash flow from operations and investment repayments in excess of debt service and shareholder dividends are generally invested to enhance return. Cash and short-term investments were $116 million at December 31, 1994, compared to $237 million at December 31, 1993. These liquid assets represented 1.4% of total assets at December 31, 1994, compared to 3.1% at the prior year end. In addition to Torchmark's liquid assets, Torchmark has marketable fixed and equity securities with a value of $4.4 billion at December 31, 1994, which are available for sale should the need arise. At year-end 1994, Torchmark had in place a line of credit facility with a group of banks which allowed borrowings up to $400 million. This line of credit agreement was entered into in December, 1994 and 28 replaced a then existing $250 million credit line and the previously-mentioned $175 million bridge loan associated with the American Income purchase. The $400 million credit line is further designed as a backup credit line for a commercial paper program not to exceed $400 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time but may not borrow in excess of a total of $400 million on the combined facilities. At December 31, 1994, $250 million was borrowed on the line of credit and no commercial paper was outstanding. A facility fee is charged on the entire $400 million balance. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1994, Torchmark was in full compliance with these covenants. Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations on an annual noncumulative basis or 10% of surplus, not to exceed earned surplus, in the absence of special approval, and distributions are not permitted in excess of statutory net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent-company operations. At December 31, 1994, a maximum amount of $213 million was available to Torchmark from insurance subsidiaries without regulatory approval. Capital Resources: On October 11, 1994, a wholly-owned finance subsidiary of ------------------ Torchmark issued 8 million shares or $200 million face amount Cumulative Monthly Income Preferred Securities, Series A ("MIPS") at an annual dividend rate of 9.18%. These securities were issued pursuant to a registration with the Securities and Exchange Commission in January, 1994. The MIPS are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option after September 30, 1999. While obligated to pay dividends at a fixed rate of 9.18%, Torchmark subsequently entered into a ten-year interest-rate swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. Additionally, Torchmark acquired a five-year interest-rate cap on the swap agreement that insures the variable rate cannot exceed 10.39%. At December 31, 1994, the variable rate was 7.0%. Net proceeds from the issue, which were $193 million after issue expenses, were used to acquire American Income. Torchmark's long-term debt stood at $793 million at December 31, 1994, compared to $792 million at December 31, 1993. Torchmark's major debt issues outstanding at both December 31, 1994 and December 31, 1993 consisted of the following: (1) 8 5/8% Sinking Fund Debentures due 2017, $200 million principal amount; (2) 9 5/8% Senior Notes due 1998, $200 million principal amount; (3) 8 1/4% Senior Debentures due 2009, $100 million principal amount; (4) 7 7/8% Notes due 2023, $200 million principal amount; and (5) 7 3/8% Notes due 2013, $100 million principal amount. The latter two issues were issued in 1993, proceeds of which were used primarily to fund the United Management purchase. All major debt issues were carried at a balance of $791 million at December 31, 1994, after deducting the unamortized discount, compared to $790 million at December 31, 1993. During 1994, Torchmark's short-term debt rose to $255 million at December 31, 1994 from $107 million at year-end 1993. Torchmark increased its line of credit borrowings from $107 million to $250 million during 1994. Also, at year-end 1994, there was an additional $5 million outstanding in energy short- term debt. In 1994, Torchmark acquired 1.5 million shares of its common stock on the open market at an aggregate cost of $59 million. While Torchmark is not actively acquiring shares of its common stock at the current time, it may do so from time to time at favorable prices. Torchmark acquired 850 thousand shares at a cost of $42 million in 1993 and 4.2 million shares at a cost of $158 million in 1992. In March, 1994, Torchmark acquired the remaining outstanding shares of its adjustable-rate preferred stock at its face amount of $47 million. Prior to 1994, Torchmark had acquired $53 million face amount of this stock on the open market at an aggregate cost of $48 million. These shares were retired immediately. 29 Shareholders' equity was $1.2 billion at December 31, 1994, a decrease of 12% when compared to the $1.4 billion at December 31, 1993. Book value per share was $17.37 at December 31, 1994, compared to $18.80 at December 31 1993. After adjusting the fixed-maturity portfolio to remove the market value fluctuation required by accounting rules, book value was $19.31 at year-end 1994, compared to $17.29 at year-end 1993, an increase of 12%. Return on common shareholders' equity was 21% in 1994, compared to 24% in 1993. Total debt as a percentage of total capitalization was 40% at December 31, 1994, compared to 41% at December 31, 1993, with the MIPS counted as equity and excluding the mark up or down of fixed investments. The multiple of earnings before interest and taxes to interest requirements was 5.9 for 1994, compared to 7.5 for 1993 and 8.0 for 1992. OTHER ITEMS Litigation: Torchmark and its subsidiaries continue to be named as parties ----------- to pending or threatened litigation, most of which involve punitive damage claims based upon allegations of agent misconduct at Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive damage litigation has the potential for significant adverse results. It is impossible to predict the extent of punitive damages that may be awarded if liability is found in any given case, since the amount of punitive damages in Alabama is left largely to the discretion of the jury in each case. While provision has been made in the financial statements for litigation costs, it is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable nature of this type of litigation. Also, the class action litigation in Alabama over an exchange of Liberty's cancer policies continued in 1994. Although in May, 1994, a settlement was approved involving both equitable and monetary relief, valued by the court at $55 million, the appeal from the trial court's final approval is pending before the Alabama Supreme Court. Final briefs in the case were submitted to the Court in February, 1995. It is impossible to determine when a ruling will be issued. Merger with United Management: On October 1, 1993, Torchmark acquired the ------------------------------ approximately 16% of United Management that it did not already own through the payment of $31.25 per share in cash for the remaining outstanding shares. Accordingly, United Management was merged into Torchmark. Including share purchases made in 1993, the total amount of consideration paid to the remaining United Management shareholders was approximately $230 million. Divestiture of Vesta Insurance Group: During 1993, Torchmark announced that ------------------------------------- it was considering a public offering of shares of common stock of its wholly- owned subsidiary, Vesta Insurance Group, Inc. ("Vesta"), which was at that time the holding company for Torchmark's property and casualty operations. On November 11, 1993, Vesta sold 9 million shares of common stock in a public offering of which 6.8 million shares were owned by Torchmark prior to the sale and 2.2 million were newly issued shares. Torchmark's 6.8 million shares were sold for $25 per share less expenses, amounting to proceeds of approximately $161 million and resulting in a $57 million pretax gain. After the transaction, Torchmark continued to own 3.4 million shares of Vesta outstanding common stock or approximately 27% of the company. Torchmark also loaned Vesta $28 million in December, 1993, which continued to be outstanding at December 31, 1994. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Independent Auditors' Report.............................................. 31 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1994 and 1993................. 32 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1994..................................... 33 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1994........................... 34 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1994..................................... 35 Notes to Consolidated Financial Statements............................... 36
30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Torchmark Corporation Birmingham Alabama We have audited the consolidated financial statements of Torchmark Corporation and subsidiaries as listed in item 8 and the supporting schedules as listed in Item 14(a). These financial statements and financial statement schedules are the responsibility of Torchmark's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 and financial statement schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 10 to the consolidated financial statements, Torchmark changed its method of accounting for income taxes to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 109, Accounting for Income Taxes, in 1993. As discussed in Note 1, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities at December 31, 1993. Also, as discussed in Note 11, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, in 1993. KPMG PEAT MARWICK LLP Birmingham, Alabama February 1, 1995 31 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- Assets: Investments: Fixed maturities--available for sale, at market value 1992 (cost: 1994--$4,634,594; 1993--$4,387,026)..... $4,392,259 $4,579,034 Equity securities, at market value (cost: 1994-- $35,985; 1993--$31,221)............................. 31,547 40,961 Mortgage loans on real estate, at cost (estimated market value: 1994--$17,956; 1993--$4,024).......... 17,997 4,147 Investment real estate, at cost (less allowance for depreciation: 1994--$28,620; 1993--$24,250)......... 132,554 110,730 Policy loans......................................... 181,988 149,890 Energy investments................................... 330,543 345,805 Other long-term investments (at market value)........ 35,933 26,989 Short-term investments............................... 112,776 183,166 ---------- ---------- Total investments................................... 5,235,597 5,440,722 Cash (includes restricted cash: 1994--$13,091; 1993-- $18,191)............................................. 2,758 53,408 Investment in unconsolidated subsidiaries............. 86,386 79,319 Accrued investment income............................. 67,116 56,801 Other receivables..................................... 223,811 152,910 Deferred acquisition costs............................ 1,017,467 901,565 Value of insurance purchased.......................... 274,124 131,602 Property and equipment................................ 103,806 80,511 Goodwill.............................................. 570,455 178,645 Other assets.......................................... 106,911 26,432 Separate account assets............................... 715,203 544,327 ---------- ---------- Total assets........................................ $8,403,634 $7,646,242 ========== ========== Liabilities: Future policy benefits................................ $4,229,916 $3,745,416 Unearned and advance premiums......................... 90,871 96,206 Policy claims and other benefits payable.............. 201,754 159,451 Other policyholders' funds............................ 72,783 4,313 ---------- ---------- Total policy liabilities............................. 4,595,324 4,005,386 Accrued income taxes.................................. 235,124 413,072 Other liabilities..................................... 374,449 366,759 Short-term debt....................................... 255,116 107,108 Long-term debt (estimated market value: 1994-- $751,603; 1993--$857,715)............................ 792,763 792,335 Separate account liabilities.......................... 715,203 544,327 ---------- ---------- Total liabilities.................................... 6,967,979 6,228,987 Commitments and contingencies Monthly income preferred securities.................... 193,052 -0- Shareholders' equity: Preferred stock, par value $1 per share--Authorized 5,000,000 shares; outstanding: 0 in 1994 and 1,000,000 issued less 530,180 shares held in treasury in 1993............................. -0- 1,000 Common stock, par value $1 per share--Authorized 160,000,000 shares; outstanding: 74,384,228 issued in 1994 and 1993, less 2,850,193 shares and 1,489,134 shares held in treasury in 1994 and 1993, respective- ly................................................... 73,784 73,784 Additional paid-in capital............................ 139,045 232,432 Unrealized gains (losses), net of applicable taxes.... (140,756) 120,138 Retained earnings..................................... 1,267,545 1,082,031 Treasury stock........................................ (97,015) (92,130) ---------- ---------- Total shareholders' equity........................... 1,242,603 1,417,255 ---------- ---------- Total liabilities and shareholders' equity........... $8,403,634 $7,646,242 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 32 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1993 1992 ---------- ---------- ---------- Revenue: Life premium.............................. $ 601,633 $ 555,859 $ 544,745 Health premium............................ 768,714 799,835 797,855 Other premium............................. 18,527 137,216 111,362 ---------- ---------- ---------- Total premium........................... 1,388,874 1,492,910 1,453,962 Net investment income..................... 330,492 372,470 382,744 Financial services revenue................ 139,276 137,422 133,462 Energy operations revenue................. 64,365 106,013 74,014 Realized investment gains (losses)........ (2,551) 8,009 (948) Gain from sale of Vesta shares............ -0- 57,234 -0- Other income.............................. 2,101 2,777 2,576 ---------- ---------- ---------- Total revenue........................... 1,922,557 2,176,835 2,045,810 Benefits and expenses: Life policyholder benefits................ 389,976 377,017 366,194 Health policyholder benefits.............. 488,066 486,855 491,343 Other policyholder benefits............... 43,235 107,684 96,011 ---------- ---------- ---------- Total policyholder benefits............. 921,277 971,556 953,548 Amortization of deferred acquisition costs.................................... 178,107 187,073 195,434 Commissions and premium taxes............. 141,158 172,801 165,932 Financial services selling expense........ 39,962 47,055 51,902 Energy operations expense................. 16,214 32,822 29,803 Other operating expense................... 162,560 174,861 170,008 Nonoperating expenses..................... -0- 82,000 5,652 Interest expense.......................... 76,355 67,261 55,661 ---------- ---------- ---------- Total benefits and expenses............. 1,535,633 1,735,429 1,627,940 Income before income taxes and equity in earnings of unconsolidated subsidiaries............... 386,924 441,406 417,870 Income taxes............................... (124,317) (153,086) (140,844) Equity in earnings of unconsolidated sub- sidiaries................................. 8,476 1,952 828 Minority interests in consolidated subsidi- aries..................................... -0- (10,696) (12,377) Monthly income preferred securities divi- dend...................................... (2,137) -0- -0- ---------- ---------- ---------- Net income before cumulative effect of changes in accounting principles............................. 268,946 279,576 265,477 Cumulative effect of changes in accounting principles................................ -0- 18,403 -0- ---------- ---------- ---------- Net income.............................. 268,946 297,979 265,477 Dividends to preferred shareholders........ (804) (3,289) (3,453) ---------- ---------- ---------- Net income available to common share- holders................................ $ 268,142 $ 294,690 $ 262,024 ========== ========== ========== Net income per share before cumulative ef- fect of changes in accounting principles..................... $ 3.72 $ 3.76 $ 3.58 Cumulative effect of changes in accounting principles................................ -0- .25 -0- ---------- ---------- ---------- Net income per share....................... $ 3.72 $ 4.01 $ 3.58 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 33 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ADDITIONAL UNREALIZED TOTAL PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS' STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY --------- ------- ---------- ---------- ---------- --------- ------------- Year Ended December 31, 1992 Balance at January 1, 1992................... $1,000 $50,763 $165,979 $ 5,140 $ 872,655 $ (16,286) $1,079,251 Net income for the year. 265,477 265,477 Common dividends de- clared ($1.07 a share). (77,961) (77,961) Preferred dividends declared and accrued... (3,453) (3,453) Three-for-two stock split in the form of a dividend............... 24,175 (24,175) -0- Issuance of common stock.................. 2,192 81,867 84,059 Acquisition of treasury stock--common.......... (204,288) (204,288) Acquisition of treasury stock-- preferred.............. (31,467) (31,467) Retirement of treasury stock--common.......... (3,618) (35,825) (164,845) 204,288 -0- Net change in unrealized gains (losses)......... 4,042 4,042 ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1992.................. 1,000 73,512 212,021 9,182 867,698 (47,753) 1,115,660 Year Ended December 31, 1993 Net income for the year. 297,979 297,979 Common dividends de- clared ($1.09 a share). (80,357) (80,357) Preferred dividends declared and accrued... (3,289) (3,289) Issuance of common stock.................. 272 15,290 312 15,874 Grant of stock options.. 5,121 5,121 Acquisition of treasury stock--common.......... (44,689) (44,689) Net change in unrealized gains (losses)......... 110,956 110,956 ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1993.................. 1,000 73,784 232,432 120,138 1,082,031 (92,130) 1,417,255 Year Ended December 31, 1994 Net income for the year. 268,946 268,946 Common dividends de- clared ($1.12 a share). (80,602) (80,602) Preferred dividends declared and accrued... (804) (804) Acquisition of treasury stock--preferred....... (46,982) (46,982) Acquisition of treasury stock--common.......... (59,072) (59,072) Retirement of treasury stock--preferred....... (1,000) (93,736) 94,736 -0- Exercise of stock op- tions.................. 349 (2,026) 6,433 4,756 Net change in unrealized gains (losses)......... (260,894) (260,894) ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1994.................. $ -0- $73,784 $139,045 $(140,756) $1,267,545 $ (97,015) $1,242,603 ====== ======= ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 34 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Net income.............................. $ 268,946 $ 297,979 $ 265,477 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits.... 81,062 140,867 114,335 Increase in other policy benefits..... 23,990 7,548 26,435 Deferral of policy acquisition costs.. (225,409) (214,318) (220,630) Amortization of deferred acquisition costs................................ 178,107 187,073 195,434 Change in accrued income taxes........ (70,121) (9,411) (2,505) Depreciation and depletion............ 25,335 35,607 33,481 Realized (gains) losses on sale of in- vestments, subsidiaries, and properties......... 2,551 (65,243) 948 Change in accounts payable and other liabilities.......................... (12,395) 91,635 66,445 Change in receivables................. (41,382) (18,528) (43,580) Change in payables and receivables of unconsolidated affiliates............ 31,997 (28,506) 5,430 Other accruals and adjustments........ 18,750 (25,596) (5,803) ----------- ----------- ----------- Cash provided from operations........... 281,431 399,107 435,467 Cash used for investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................. 582,611 245,689 -0- Fixed maturities available for sale-- matured, called, and repaid.......... 796,064 485,112 -0- Fixed maturities held to maturity-- sold................................. -0- 58,028 403,034 Fixed maturities held to maturity--ma- tured, called, and repaid............ -0- 669,998 808,132 Equity securities..................... 23,179 9,909 11,302 Mortgage loans........................ 1,128 2,654 1,685 Real estate........................... 1,292 7,351 3,987 Other long-term investments........... 51,696 49,776 17,062 ----------- ----------- ----------- Total investments sold or matured.... 1,455,970 1,528,517 1,245,202 Acquisition of investments: Fixed maturities--available for sale.. (1,264,056) (99,453) -0- Fixed maturities--held to maturity.... -0- (1,761,776) (1,540,775) Equity securities..................... (23,739) (830) (19,786) Real estate........................... (20,587) (10,129) (19,560) Net increase in policy loans.......... (8,305) (5,093) (3,185) Energy investments.................... (58,466) (11,642) (59,764) Other long-term investments........... (12,655) (6,287) (9,085) ----------- ----------- ----------- Total acquisition of investments..... (1,387,808) (1,895,210) (1,652,155) Net (increase) decrease in short-term investments........................... 94,873 (119,815) 39,309 Purchase of American Income............ (551,501) -0- -0- Purchase of Minority Interest.......... -0- (229,063) -0- Proceeds from sale of stock in subsidi- aries................................. -0- 187,220 -0- Loans made to affiliates............... -0- (28,000) (34,854) Loans repaid by affiliates............. -0- 550 49,704 Dispositions of properties............. 4,436 68,650 957 Additions to properties................ (48,988) (15,849) (40,366) Additions to properties held for re- sale.................................. (74,233) -0- -0- Dividends from unconsolidated affili- ates.................................. 513 620 -0- ----------- ----------- ----------- Cash used for investment activities..... (506,738) (502,380) (392,203) Cash provided from (used for) financing activities: Issuance of common stock............... 4,408 6,669 15,472 Issuance of monthly income preferred securities............................ 193,046 -0- -0- Additions to debt...................... 148,000 359,110 237,261 Cash dividends paid to shareholders.... (82,336) (82,932) (82,373) Cash distributions to minority inter- ests.................................. -0- (1,968) (1,830) Repayments on debt..................... (70,108) (189,682) (137,048) Acquisition of treasury stock.......... (106,054) (41,897) (189,144) Net receipts from deposit product oper- ations................................ 87,701 88,675 118,385 ----------- ----------- ----------- Cash provided from (used for) financing activities............................. 174,657 137,975 (39,277) ----------- ----------- ----------- Increase (decrease) in cash............ (50,650) 34,702 3,987 Cash at beginning of year.............. 53,408 18,706 14,719 ----------- ----------- ----------- Cash at end of year.................... $ 2,758 $ 53,408 $ 18,706 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 35 TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATE) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying financial statements have been --------------------- prepared in conformity with generally accepted accounting principles ("GAAP"). Principles of Consolidation: The financial statements include the results of --------------------------- Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries and United Investors Management Company ("United Management"). United Management was approximately 83% owned through October 1, 1993 at which time Torchmark acquired all of the publicly held shares. Torchmark deducts the interests of minority shareholders from its shareholders' equity and operating results. Subsidiaries which are not majority-owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments. Torchmark adopted the provisions of SFAS 115 at December 31, ----------- 1993. This standard prescribes the accounting for investments in debt and equity securities. Also at December 31, 1993, Torchmark elected to classify all of its fixed maturity investments, which include bonds and redeemable preferred stocks, as available for sale. The Standard requires that investments classified as available for sale be carried at market value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at market value. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest- bearing time deposits with original maturities within three months. Other long-term investments consist primarily of investments in mutual funds managed by a Torchmark subsidiary. They are carried at market value. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value. Gains and losses realized on the disposition of investments are recognized as revenues and are determined on a specific identification basis. Unrealized gains and losses on equity securities and fixed maturities available for sale, net of deferred income taxes, are reflected directly in shareholders' equity. Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark's net income. Investment income attributable to other policyholders is included in Torchmark's net investment income. Net investment income for the years ended December 31, 1994, 1993 and 1992 included $240.7 million, $229.5 million, and $221.2 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders. Determination of Fair Values of Financial Instruments: Fair value for cash, ----------------------------------------------------- short-term investments, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. Mortgages are valued using discounted cash flows. The carrying amounts of short-term borrowings approximate their fair value. Substantially all of Torchmark's long-term debt is valued based on quoted market prices. Cash: Cash consists of balances on hand and on deposit in banks and ---- financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit. Recognition of Premium Revenue and Related Expenses: Premiums for insurance --------------------------------------------------- contracts which are not defined as universal life-type according to SFAS 97 are recognized as revenue over the premium-paying period of the policy. Profits for limited-payment life insurance contracts as defined by SFAS 97 are recognized over the contract period. Premiums for universal life-type and annuity contracts are added to the policy account value, and revenues for such products are recognized as charges to the policy account value for mortality, administration, and surrenders (retrospective deposit method). Variable annuity products are also assessed an investment management fee and a sales charge. Life premium includes 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) policy charges of $74.2 million, $76.2 million, and $79.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. Other premium includes annuity policy charges for the years ended December 31, 1994, 1993, and 1992 of $13.9 million, $9.5 million, and $8.8 million, respectively. Profits are also earned to the extent that investment income exceeds policy requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period. Future Policy Benefits: The liability for future policy benefits for ---------------------- universal life-type products according to SFAS 97 is represented by policy account value. The liability for future policy benefits for all other life and health products is provided on the net level premium method based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on Torchmark's experience as adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience. If it is determined future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred Acquisition Costs and Value of Insurance Purchased: The costs of ----------------------------------------------------------- acquiring new insurance business are deferred. Such costs consist of sales commissions, underwriting expenses, and certain other selling expenses. The costs of acquiring new business through the purchase of other companies and blocks of insurance business are also deferred. Deferred acquisition costs, including the value of life insurance purchased, for policies other than universal life-type policies according to SFAS 97 are amortized with interest over an estimate of the premium-paying period of the policies in a manner which charges each year's operations in proportion to the receipt of premium income. For universal life-type policies, acquisition costs are amortized with interest in proportion to estimated gross profits. The assumptions used as to interest, persistency, morbidity and mortality are consistent with those used in computing the liability for future policy benefits and expenses. If it is determined that future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred acquisition costs are adjusted to reflect the amounts associated with unrealized investment gains and losses pertaining to universal life-type products. Income Taxes: Income taxes are accounted for under the asset and liability ------------ method in accordance with SFAS 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, Torchmark adopted SFAS 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of operations. Prior years' financial statements have not been restated to reflect Statement 109's provisions. Prior to the adoption of SFAS 109, income taxes were accounted for under APB Opinion 11, which required the deferred method. Under this method, deferred income taxes were recognized for revenue and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Deferred taxes were not adjusted for subsequent changes in tax rates. Property and Equipment: Property and equipment is reported at cost less ---------------------- allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from two to twenty years for equipment and two to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Energy: Torchmark uses the successful-efforts method of accounting for its ------ energy operations. All costs associated with property acquisitions and development of proved oil and gas reserves are capitalized. Capitalized costs are amortized by the unit-of-production method based on estimated proved oil and gas reserves. All costs relating to production activities are charged to income as incurred. Energy properties owned by Torchmark's energy subsidiaries are accounted for as "properties" and revenue therefrom is accounted for as "energy operations revenues." Investments in oil and gas properties by Torchmark's insurance subsidiaries are accounted for as "investments" and income therefrom is accounted for as "investment income." Goodwill: The excess cost of businesses acquired over the fair value of -------- their net assets is reported as goodwill and is amortized on a straight-line basis over a period not exceeding 40 years. Torchmark's unamortized goodwill is periodically reviewed to ensure that conditions are present to indicate the recorded amount of goodwill is recoverable from the estimated future profitability of the related business. If events or changes in circumstances indicate that future profits will not be sufficient to support the carrying amount of goodwill, goodwill is written down to the recoverable amount and is amortized over the original period or a reduced period if appropriate. Treasury Stock: Torchmark accounts for purchases of treasury stock on the -------------- cost method. Reclassification: Certain amounts in the financial statements presented have ---------------- been reclassified from amounts previously reported in order to be comparable between years. These reclassifications have no effect on previously reported shareholders' equity or net income during the periods involved. Stock Split: On August 19, 1992, Torchmark distributed one share for every ----------- two shares owned by shareholders on record as of August 5, 1992 in the form of a stock dividend. The dividend was accounted for as a stock split. All prior- year share and per share data have been restated to give effect for this split. Litigation: Provision has been made for litigation in the financial ---------- statements. Torchmark reports litigation costs as operating expenses except for large and unusual awards for actual and punitive damages, which are reported as nonoperating expense. Earnings Per Share: Earnings available to holders of common stock are ------------------ computed after deducting dividends on the Adjustable Rate Cumulative Preferred Stock. Primary earnings per share are then calculated by dividing the earnings available to holders of common stock by the weighted average number of common shares outstanding during the period. The weighted average numbers of common shares outstanding for each period are as follows: 1994--72,095,657, 1993-- 73,501,654, 1992--73,236,849. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 2--STATUTORY ACCOUNTING Insurance subsidiaries of Torchmark are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. Consolidated net income and shareholders' equity on a statutory basis for the insurance subsidiaries were as follows:
NET INCOME SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, AT DECEMBER 31, --------------------------- --------------------- 1994 1993 1992 1994 1993 -------- -------- -------- ---------- ---------- Life...................... $228,754 $364,421* $268,807* $552,906 $ 653,403 Property and casualty..... -0- 6,449 3,049 -0- -0-
*Includes equity in earnings of property and casualty subsidiaries The excess, if any, of shareholders' equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to Torchmark without regulatory approval. A reconciliation of Torchmark's insurance subsidiaries' statutory net income to Torchmark's consolidated GAAP net income is as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1993 1992 ---------- ---------- -------- Statutory net income................... $228,754 $ 364,421 $268,807 Deferral of acquisition costs.......... 225,409 214,318 220,630 Amortization of acquisition costs...... (178,107) (187,073) (195,434) Differences in insurance policy liabil- ities................................. 30,271 (42,364) (6,796) Deferred income taxes.................. (2,052) (22,281) (18,502) Inter-affiliate dividends.............. -0- (194,442) (10,583) Income of noninsurance affiliates...... 11,372 136,748 (2,147) Other.................................. (18,229) 28,652 9,502 Pre-acquisition adjustments............ (28,472) -0- -0- ---------- ---------- -------- GAAP net income........................ $268,946 $ 297,979 $265,477 ========== ========== ======== A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows: YEAR ENDED DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- Statutory shareholders' equity......... $ 552,906 $ 653,403 Differences in insurance policy liabil- ities................................. 321,084 236,181 Deferred acquisition costs............. 1,017,467 908,065 Value of insurance purchased........... 274,124 131,602 Deferred income taxes.................. (223,385) (343,843) Debt of parent company................. (1,040,972) (897,429) Asset valuation reserves............... 96,814 103,520 Nonadmitted assets..................... 43,610 15,199 Net assets of noninsurance affiliates . 230,671 533,978 Other.................................. (29,716) 76,579 ---------- ---------- GAAP shareholders' equity.............. $1,242,603 $1,417,255 ========== ==========
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------- 1994 1993 1992 --------- -------- -------- Investment income is summarized as follows: Fixed maturities.......................... $ 329,626 $349,403 $354,972 Equity securities......................... 1,323 2,214 2,378 Mortgage loans on real estate............. 631 1,163 742 Investment real estate.................... 7,778 6,804 9,354 Policy loans.............................. 10,003 9,070 8,581 Energy investments........................ (24,371) (3,585) 15,097 Other long-term investments............... 10,244 10,110 997 Short-term investments.................... 8,986 10,019 5,374 --------- -------- -------- 344,220 385,198 397,495 Less investment expense................... (13,728) (12,728) (14,751) --------- -------- -------- Net investment income..................... $ 330,492 $372,470 $382,744 ========= ======== ======== An analysis of gains (losses) from invest- ments is as follows: Realized investment gains (losses): Fixed maturities......................... $ (5,049) $ 12,387 $ 7,837 Equity securities........................ 1,610 702 513 Other.................................... 888 (5,080) (9,298) --------- -------- -------- $ (2,551) $ 8,009 $ (948) ========= ======== ======== Net change in unrealized investment gains (losses) on equity securities before tax............. $ (16,240) $ (1,855) $ 6,682 Net change in unrealized investment gains on fixed maturities available for sale before tax............................... (434,365) 192,380 0 Adjustment to deferred acquisition costs.. 52,334 (23,264) 0 Applicable tax............................ 139,456 (59,055) (2,271) --------- -------- -------- Net change in unrealized gains (losses) on equity and fixed maturity securities available for sale....................... $(258,815) $108,206 $ 4,411 ========= ======== ======== Net increase (decrease) in market value relative to carrying value of fixed matu- rities during the year................... $ 0 $ 0 $(41,436) ========= ======== ========
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1994 and 1993 is as follows:
GROSS GROSS AMOUNT PER AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE 1994: COST GAINS LOSSES VALUE SHEET - ----- ---------- ---------- ---------- ---------- ----------- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 105,239 $ 502 $ (3,985) $ 101,756 $ 101,756 GNMAs................. 1,775,852 18,007 (78,796) 1,715,063 1,715,063 Mortgage-backed securities, GNMA collateral........... 242,567 1,661 (7,676) 236,552 236,552 Other mortgage-backed securities........... 161,216 804 (2,441) 159,579 159,579 State, municipalities and political subdivisions......... 835,740 1,693 (69,078) 768,355 768,355 Foreign governments... 104,478 190 (3,702) 100,966 100,966 Public utilities...... 243,776 247 (20,168) 223,855 223,855 Industrial and miscellaneous........ 1,155,968 2,377 (82,255) 1,076,090 1,076,090 Redeemable preferred stocks................ 9,758 290 (5) 10,043 10,043 ---------- -------- --------- ---------- ---------- Total fixed maturities ..................... 4,634,594 25,771 (268,106) 4,392,259 4,392,259 Equity securities: Common stocks: Banks and insurance companies............ 33,272 6,852 (11,542) 28,582 28,582 Industrial and all others............... 1,165 65 (103) 1,127 1,127 Non-redeemable preferred stocks...... 1,548 291 (1) 1,838 1,838 ---------- -------- --------- ---------- ---------- Total equity securities........... 35,985 7,208 (11,646) 31,547 31,547 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,670,579 $ 32,979 $(279,752) $4,423,806 $4,423,806 ========== ======== ========= ========== ========== 1993: - ----- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 190,239 $ 7,916 $ (123) $ 198,032 $ 198,032 GNMAs................. 1,954,912 96,385 (1,599) 2,049,698 2,049,698 Mortgage-backed securities, GNMA collateral........... 424,828 24,393 (80) 449,141 449,141 Other mortgage-backed securities........... 24,690 1,453 0 26,143 26,143 State, municipalities and political subdivisions......... 624,037 18,518 (1,827) 640,728 640,728 Foreign governments... 75,127 5,894 0 81,021 81,021 Public utilities...... 315,872 15,623 (976) 330,519 330,519 Industrial and miscellaneous........ 763,965 29,788 (5,000) 788,753 788,753 Redeemable preferred stocks................ 13,356 1,643 0 14,999 14,999 ---------- -------- --------- ---------- ---------- Total fixed maturities........... 4,387,026 201,613 (9,605) 4,579,034 4,579,034 Equity securities: Common stocks: Banks and insurance companies............ 7,264 7,610 0 14,874 14,874 Industrial and all others............... 10,471 555 (736) 10,290 10,290 Non-redeemable preferred stocks...... 13,486 2,311 0 15,797 15,797 ---------- -------- --------- ---------- ---------- Total equity securities........... 31,221 10,476 (736) 40,961 40,961 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,418,247 $212,089 $ (10,341) $4,619,995 $4,619,995 ========== ======== ========= ========== ==========
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A schedule of fixed maturities by contractual maturity at December 31, 1994 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
AMORTIZED MARKET COST VALUE ---------- ---------- Fixed maturities available for sale: Due in one year or less... $ 35,877 $ 36,184 Due from one to five years.................... 263,098 258,971 Due from five to ten years.................... 1,472,151 1,368,106 Due after ten years....... 611,477 545,769 ---------- ---------- 2,382,603 2,209,030 Redeemable preferred stocks................... 9,758 10,043 Mortgage- and asset-backed securities............... 2,242,233 2,173,186 ---------- ---------- $4,634,594 $4,392,259 ========== ==========
Proceeds from sales of fixed maturities available for sale were $583 million in 1994 and $246 million in 1993. Gross gains realized on those sales were $14.6 million in 1994 and $8.3 million in 1993. Gross losses were $20.8 million in 1994 and $176 thousand in 1993. Proceeds from sales of fixed investments held to maturity were $58 million in 1993 and $403 million in 1992. Gross gains realized on those sales were $2.6 million in 1993 and $8.6 million in 1992. Gross losses on those sales were $138 thousand in 1993 and $1.7 million in 1992. The 1993 sales of fixed investments held to maturity were made for various reasons including changes in regulatory requirements, credit deterioration, and sales within 90 days of maturity. Torchmark had $26.3 million and $22.0 million in investment real estate at December 31, 1994 and 1993, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed investments and mortgage loans which were nonincome producing during the previous twelve months were $0.6 million, and $.4 million at December 31, 1994 and 1993, respectively. Derivative investments are immaterial to Torchmark at December 31, 1994. Torchmark's total carrying value of these investments was $26.5 million at December 31, 1994 and Torchmark has no off-balance sheet exposure in connection with these investments. NOTE 4--PROPERTY AND EQUIPMENT A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1994 DECEMBER 31, 1993 --------------------- --------------------- ACCUMULATED ACCUMULATED COST DEPRECIATION COST DEPRECIATION -------- ------------ -------- ------------ Company occupied real estate........ $65,584 $29,742 $65,037 $28,792 Data processing equipment........... 31,556 23,878 25,417 20,719 Transportation equipment............ 17,281 9,903 16,812 8,634 Furniture and office equipment...... 43,804 37,006 39,668 31,910 Energy properties................... 82,131 36,021 49,695 26,063 -------- -------- -------- -------- $240,356 $136,550 $196,629 $116,118 ======== ======== ======== ========
Depreciation expense on property used in the business was $9.9 million, $9.6 million, and $10.4 million in each of the years 1994, 1993 and 1992. Depletion of energy properties was $11.7 million, $22.4 million, and $19.6 million in 1994, 1993 and 1992, respectively. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 5--DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE PURCHASED An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
1994 1993 1992 ---------------------- --------------------- --------------------- DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED ----------- --------- ----------- --------- ----------- --------- Balance at beginning of year................... $ 901,565 $131,602 $904,147 $152,421 $855,498 $172,193 Additions: Deferred during peri- od: Commissions........... 134,032 -0- 142,869 -0- 154,939 -0- Other expenses........ 91,377 -0- 71,449 -0- 65,691 -0- ----------- -------- -------- -------- -------- -------- Total deferred....... 225,409 -0- 214,318 -0- 220,630 -0- Value of Insurance purchased -0- 158,788 -0- -0- -0- -0- Adjustment attributable to unrealized investment losses(1)............ 52,334 -0- -0- -0- -0- -0- Reassumed business.... -0- -0- -0- -0- 3,681 -0- ----------- -------- -------- -------- -------- -------- Total additions...... 277,743 158,788 214,318 -0- 224,311 -0- ----------- -------- -------- -------- -------- -------- Deductions: Amortized during peri- od................... (154,697) (16,266) (166,863) (20,210) (175,662) (19,772) Adjustment attributable to unrealized investment gains(1)............. -0- -0- (23,264) -0- -0- -0- Adjustment attribut- able to realized in- vestment gains(1).... (7,144) -0- -0- -0- -0- -0- Business disposed..... -0- -0- (26,773) (609) -0- -0- ----------- -------- -------- -------- -------- -------- Total deductions..... (161,841) (16,266) (216,900) (20,819) (175,662) (19,772) ----------- -------- -------- -------- -------- -------- Balance at end of year.. $ 1,017,467 $274,124 $901,565 $131,602 $904,147 $152,421 =========== ======== ======== ======== ======== ========
- -------- (1)Represents amounts pertaining to investments relating to universal life- type products. The amount of interest accrued on the unamortized balance of value of insurance purchased was $11.7 million, $10.8 million, and $12.7 million for the years ended December 31, 1994, 1993 and 1992, respectively. The average interest accrual rates used for the years ended December 31, 1994, 1993 and 1992 were 7.72%, 7.57% and 7.81%, respectively. The estimated amount of the unamortized balance at December 31, 1994 to be amortized during each of the next five years is: 1995, $29.3 million; 1996, $25.9 million; 1997, $22.9 million; 1998, $19.4 million; and 1999, $17.8 million. In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs and the value of insurance purchased may not be recoverable. NOTE 6--SALE OF VESTA SHARES In November, 1993, Torchmark sold approximately 73% of Vesta Insurance Group, Inc. ("Vesta"), Torchmark's holding company for its property and casualty insurance operations. The sale was made through an initial public offering of common stock for net proceeds of $161 million for a pretax gain of $57.2 million. Torchmark maintains a 27% interest in Vesta and accounts for its investment on the equity method, recording its investment as an unconsolidated subsidiary. In connection with the public offering, Torchmark loaned Vesta $28 million at an interest rate of 6.1 % for a term of five years, which was outstanding at both December 31, 1994 and 1993. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 7--ACQUISITIONS On October 1, 1993, the United Management public shareholders approved Torchmark's offer to acquire the remaining approximately 17% of United Management which it did not already own for cash consideration of $31.25 per share. The transaction was completed for a total purchase price of $234 million resulting in goodwill of $126 million which will be amortized over approximately 40 years on a straight line basis. All other purchase accounting adjustments were immaterial. On November 3, 1994, Torchmark acquired all of the outstanding common stock of American Income Holding, Inc., whose primary operating subsidiary is American Income Life Insurance Company ("American Income") for $35 per share or a total purchase price of $552 million, including expenses. American Income is a life insurance company which sells individual supplemental life and fixed-benefit accident and health insurance through labor union locals, credit unions, and other employment related associations. The purchase was financed with a combination of internal funds, sales of securities, bank borrowings, and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill of approximately $403 million which will be amortized on a straight line basis over 40 years. The acquisition was accounted for as a purchase, and the results of operations since the acquisition date have been consolidated. A summary of the net assets acquired is as follows: Assets acquired: Investments.................................................. $ 434,677 Cash......................................................... 0 Value of insurance purchased................................. 158,788 Goodwill..................................................... 402,791 Other assets................................................. 62,808 --------- Total....................................................... 1,059,064 Liabilities assumed: Policy liabilities........................................... 397,184 Other liabilities............................................ 110,379 --------- Total....................................................... 507,563 --------- Total purchase price.......................................... $ 551,501 =========
The table below presents supplemental pro forma information for 1994 and 1993 as if the American Income acquisition were made at January 1, 1993 at the same purchase price, based on estimates and assumptions considered appropriate:
YEAR ENDED DECEMBER 31, --------------------- 1994 1993 ---------- ---------- Revenues.......................................... $2,086,987 $2,350,691 Net income before extraordinary items............. 278,533 301,209 Net income........................................ 277,014 301,209 Net income per common share before extraordinary items............................................ 3.86 4.10 Net income per common share....................... 3.84 4.10
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--FUTURE POLICY BENEFIT RESERVES A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1994 is as follows: INDIVIDUAL LIFE INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1917-1994 3.00% 3% 1947-1954 3.25% 1 1927-1989 3.50% 1 1955-1961 3.75% 2 1925-1994 4.00% 14 1962-1969 4.50% graded to 4.00% 3 1970-1980 5.50% graded to 4.00% 6 1970-1994 5.50% 1 1929-1994 6.00% 4 1986-1994 7.00% graded to 6.00% 10 1943-1992 7.50% graded to 6.00% 1 1954-1994 8.00% graded to 6.00% 10 1951-1985 8.50% graded to 6.00% 12 1980-1987 8.50% graded to 7.00% 1 1975-1991 9.50% graded to 8.00% 7 1984-1993 Interest Sensitive 24 --- 100% ===
MORTALITY ASSUMPTIONS: For individual life, the mortality tables used are various statutory mortality tables and modifications of: 1950-54 Select and Ultimate Table 1954-68 Industrial Experience Table 1955-60 Ordinary Experience Table 1965-70 Select and Ultimate Table 1955-60 Inter-Company Table 1970 United States Life Table 1979-81 United States Life Table 1975-80 Select and Ultimate Table X-18 Ultimate Table WITHDRAWAL ASSUMPTIONS: Withdrawal assumptions are based on Torchmark's experience. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED) HEALTH INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1962-1982 3.00% 1% 1969-1980 5.50% graded to 4.00% 4 1982-1994 4.50% 1 1993-1994 6.00% 11 1986-1992 7.00% graded to 6.00% 59 1955-1994 8.00% graded to 6.00% 8 1951-1986 8.50% graded to 6.00% 16 --- 100% ===
MORBIDITY ASSUMPTIONS: For health, the morbidity assumptions are based on either Torchmark's experience or the assumptions used in calculating statutory reserves. TERMINATION ASSUMPTIONS: Termination assumptions are based on Torchmark's experience. OVERALL INTEREST ASSUMPTIONS The overall average interest assumption for determining the liability for future life and health insurance benefits in 1994 was 6.0%. NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1994 1993 1992 -------- -------- -------- Balance at beginning of year: $130,639 $136,540 $127,717 Addition due to acquisition of American In- come....................................... 9,185 -0- -0- Incurred related to: Current year............................... 514,672 471,375 473,875 Prior year................................. (14,823) (24,865) (8,285) -------- -------- -------- Total incurred.............................. 499,849 446,510 465,590 -------- -------- -------- Paid related to: Current year............................... 332,266 321,175 316,476 Prior year................................. 141,016 131,236 140,291 -------- -------- -------- Total paid.................................. 473,282 452,411 456,767 -------- -------- -------- Balance at end of year...................... $166,391 $130,639 $136,540 ======== ======== ========
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. Health benefits include a $30 million charge for 1994 resulting from a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--INCOME TAXES Torchmark and its eligible subsidiaries file a life-nonlife consolidated federal income tax return. Famlico and Sentinel file a separate federal income tax return and will not be eligible to join the consolidated return group until 1996 and 1997, respectively. American Income and its parent, Trust Life Insurance Company, will file a separate federal income tax return and will not be eligible to join the consolidated return group until 2000. As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993. The cumulative effect of this change in accounting for income taxes is a $26.1 million addition to net income for the year ended December 31, 1993. This amount is included in the cumulative effect of changes in accounting principles line on the consolidated statement of operations. Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1993 ------------ ----------- Income before equity in earnings of unconsoli- dated affiliates.............................. $ 124,317 $153,086 Change in accounting standards for post-retire- ment benefits other than pensions............. -0- (4,124) Monthly income preferred securities dividend... (1,148) -0- Shareholders' equity Unrealized gains (losses)..................... (147,520) 60,768 Tax basis compensation expense in excess of amounts recognized for financial reporting purposes from the exercise of stock options.. (348) (6,845) Deferred intercompany transactions............ (3,886) -0- Other......................................... 8,848 -0- ------------ ----------- $ (19,737) $202,885 ============ ===========
Income tax expense before the cumulative effect of the change in accounting principles and adjustments to shareholders' equity is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1994 1993 1992 -------- -------- -------- Current income tax expense................ $ 98,228 $152,154 $124,782 Increase in January 1, 1993 deferred in- come tax liability due to increase in corporate income tax rate to 35%......... -0- 9,411 -0- Deferred income tax expense (benefit)..... 26,089 (8,479) 16,062 -------- -------- -------- Total................................... $124,317 $153,086 $140,844 ======== ======== ========
The effective income tax rate differed from the expected 35% rate in 1994 and 1993 and 34% rate in 1992 as shown below:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1994 % 1993 % 1992 % -------- --- -------- --- -------- --- Expected income taxes............. $135,423 35% $154,492 35% $142,076 34% Increase (reduction) in income taxes resulting from: Tax-exempt investment income..... (10,625) (3) (4,404) (1) (1,955) 0 Tax credits...................... (9,366) (2) (11,203) (2) (2,903) (1) Effect of tax rate change on de- ferred liability................ -0- 0 9,411 2 -0- 0 Other............................ 8,885 2 4,790 1 3,626 1 -------- --- -------- --- -------- --- Income taxes...................... $124,317 32% $153,086 35% $140,844 34% ======== === ======== === ======== ===
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--INCOME TAXES (CONTINUED) The significant components of deferred income tax expense before the cumulative effect of the change in accounting principles and adjustments to shareholders' equity are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1993 ----------- ------------ Deferred income tax expense (exclusive of the effect of the component listed below)....... $ 26,089 $ (8,479) Adjustments to deferred tax assets and lia- bilities for the increase in the corporate income tax rate from 34% to 35%............. -0- 9,411 ----------- ------------ $ 26,089 $ 932 =========== ============
For the year ended December 31, 1992, deferred income tax expense of $16,062 resulted from timing differences in the recognition of revenue and expense for financial reporting versus income tax reporting. The sources and tax effect of those timing differences are presented below: Deferred acquisition costs.................................... $(16,914) Reserve and premium adjustments............................... 16 Oil and gas costs............................................. 37,094 Other......................................................... (4,134) -------- $ 16,062 ========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ------------------ 1994 1993 -------- -------- Deferred tax assets: Fixed maturities, equity securities, and investment real estate, principally due to write-downs of investments to net realizable value for financial reporting purposes..... $ 13,754 $ 7,471 Future policy benefits, unearned and advance premiums, and policy claims............................................. 20,628 27,634 Other liabilities, principally due to the current nonde- ductibility for tax purposes of certain accrued expenses.. 35,715 46,278 Unrealized investment losses............................... 82,792 -0- -------- -------- Total gross deferred tax assets............................ 152,889 81,383 Less valuation allowance................................... (2,111) -0- -------- -------- Net deferred tax assets.................................... 150,778 81,383 -------- -------- Deferred tax liabilities: Energy investments and other unconsolidated affiliates, principally due to accelerated depletion deductions for tax purposes......... 101,214 95,760 Deferred acquisition costs................................. 286,444 238,114 Unrealized investment gains................................ -0- 64,728 Other...................................................... 9,921 64,590 -------- -------- Total gross deferred tax liabilities....................... 397,579 463,192 -------- -------- Net deferred tax liability.................................. $246,801 $381,809 ======== ========
The valuation allowance for deferred tax assets as of January 1, 1994 was $- 0-. The net change in the total valuation allowance for the year ended December 31, 1993 was an increase of $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the valuation allowance for deferred tax assets as of December 31, 1994 will be allocated to goodwill. Torchmark has not recognized a deferred tax liability for the undistributed earnings of its wholly-owned subsidiaries because such earnings are remitted to Torchmark on a tax-free basis. A deferred tax liability will be recognized in the future if the remittance of such earnings becomes taxable to Torchmark. In addition, Torchmark has not recognized a deferred tax liability of approximately $60 million that arose prior to 1984 on temporary differences related to the policyholders' surplus accounts in the life insurance subsidiaries. A current tax expense will be recognized in the future if and when these amounts are distributed. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS Pension Plans: Torchmark has retirement benefit plans and savings plans ------------- which cover substantially all employees. There is also a nonqualified excess benefit plan which covers certain employees. The total cost of these retirement plans charged to operations was as follows:
DEFINED EXCESS DEFINED BENEFIT BENEFIT YEAR ENDED CONTRIBUTION PENSION PENSION DECEMBER 31, PLANS PLANS PLAN ------------ ------------ ------- ------- 1994.................... $3,201 $6,922 $1,800 1993.................... $ 740 $6,733 $1,450 1992.................... $3,293 $3,143 $3,732
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $11.8 million and $12.4 million at December 31, 1994 and 1993, respectively. The plans are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market. The excess benefit pension plan provides the benefits that an employee would have otherwise received from a defined benefit pension plan in the absence of the Internal Revenue Code's limitation on benefits payable under a qualified plan. Although this plan is unfunded, pension cost is determined in a similar manner as for the funded plans. Liability for the excess benefit plan was $3.2 million and $1.5 million as of December 31, 1994 and 1993, respectively. Net periodic pension cost for the defined benefit plans by expense component was as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1994 1993 1992 -------- ------- ------- Service cost--benefits earned during the period.................................... $ 8,323 $ 8,298 $ 7,415 Interest cost on projected benefit obliga- tion...................................... 8,242 7,711 7,228 Actual return on assets.................... (2,302) (8,697) (6,831) Net amortization and deferral.............. (5,541) 871 (937) -------- ------- ------- Net periodic pension cost.................. $ 8,722 $ 8,183 $ 6,875 ======== ======= =======
A reconciliation of the funded status of the defined benefit plans with Torchmark's pension liability was as follows:
AT DECEMBER 31, ------------------- 1994 1993 -------- --------- Fair market value of assets available for bene- fits............................................. $ 94,207 $ 95,191 Projected benefit obligation: Vested........................................... 72,119 78,477 Nonvested........................................ 4,141 4,878 -------- --------- Accumulated benefit obligation.................. 76,260 83,355 Effect of projected future salary increases 27,195 27,875 -------- --------- Total projected benefit obligation.............. 103,455 111,230 -------- --------- Funded status..................................... (9,248) (16,039) Unamortized prior service costs................... (1,531) 1,616 Unamortized transition asset...................... (2,183) (2,774) Unrecognized (gain) or loss....................... (2,061) 3,278 -------- --------- Accrued pension costs included in liabilities... $(15,023) $ (13,919) ======== =========
The weighted average assumed discount rates used in determining the actuarial benefit obligations were 8.0% in 1994 and 7.25% in 1993. The rate of assumed compensation increase was 5.0% in 1994 and 1993 and the expected long- term rate of return on plan assets was 8.0% in 1994 and 1993. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED) Torchmark accrues expense for the defined contribution plans based on a percentage of the employees' contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense. Post Retirement Benefit Plans Other Than Pensions; Torchmark provides ------------------------------------------------- postretirement life insurance benefits for most retired employees, and also provides additional postretirement life insurance benefits for certain key employees. The majority of the life insurance benefits are accrued over the working lives of active employees. For retired employees over age sixty-five, Torchmark does not provide postretirement benefits other than pensions. Torchmark does provide a portion of the cost for health insurance benefits for employees who retired before February 1, 1993 and before age sixty-five, covering them until they reached age sixty-five. Eligibility for this benefit was generally achieved at age fifty-five with at least fifteen years of service. This subsidy is minimal to employees who did not retire before February 1, 1993. This plan is unfunded. Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993. This statement requires that the expected cost of providing future benefits to employees be accrued during the employees' service period until each employee reaches full eligibility. Torchmark elected to recognize the effect of the adoption of this standard immediately as a change in accounting principle as permitted by SFAS 106. The cumulative effect of this change in accounting resulted in a $7.7 million after-tax charge to net income in 1993. It was reported as part of the cumulative effect of changes in accounting principles. In accordance with the provisions of SFAS 106, prior years' financial statements were not restated to apply the provisions of this statement. Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31, -------------- 1994 1993 ------ ------ Service cost............ $ 444 $ 411 Interest cost on accumu- lated postretirement benefit obligation..... 831 954 Actual return on plan assets................. -0- -0- Net amortization and de- ferral................. (237) (14) ------ ------ Net periodic postretirement benefit cost................... $1,038 $1,351 ====== ======
The following table sets forth the plans' combined benefit obligation with the amount shown in Torchmark's balance sheet:
AT DECEMBER 31, --------------- 1994 1993 ------- ------- Accumulated postretirement benefit obligation: Retirees....................................................... $ 5,811 $ 6,919 Fully eligible active plan participants........................ 1,386 1,354 Other active plan participants................................. 3,546 3,348 ------- ------- Total accumulated postretirement benefit obligation........... 10,743 11,621 Plan assets at fair value....................................... -0- -0- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets......................................................... 10,743 11,621 Unrecognized net gain from past experience different from that assumed and from changes in assumptions........................ 734 327 Prior service cost not yet recognized in net periodic post re- tirement benefit cost.......................................... 280 -0- ------- ------- Accrued postretirement benefit cost included in liabilities..... $11,757 $11,948 ======= =======
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED) For measurement purposes, a 11% to 13% annual rate of increase in a per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 4.5% by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $3.1 million and would increase the net periodic postretirement cost for the year ended December 31, 1994 by approximately $486 thousand. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.00%. NOTE 12--NOTES PAYABLE An analysis of notes payable is as follows:
DECEMBER 31, ----------------------------------------- 1994 1993 -------------------- -------------------- SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM DEBT DEBT DEBT DEBT ---------- --------- ---------- --------- Sinking Fund Debentures........... $197,941 $197,856 Senior Notes, due 1998............ 199,103 198,885 Senior Debentures, due 2009....... 99,703 99,539 Notes, due 2023................... 195,836 195,798 Notes, due 2013................... 98,390 98,351 Borrowings under Torchmark line of credit........................... $250,000 $107,000 Borrowings under energy credit fa- cilities......................... 5,000 Other notes and mortgages payable at various interest rates; collateralized by buildings and energy properties................ 116 1,790 108 1,906 -------- -------- -------- -------- $255,116 $792,763 $107,108 $792,335 ======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is: 1995, $255 million; 1996, $123 thousand; 1997, $132 thousand; 1998, $200 million; and 1999, $150 thousand. Additionally, during the thirty-day period beginning June 15, 1996, senior debenture debt holders have the option to require Torchmark to repay $100 million. The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million principal amount less unamortized issue expenses and bear interest at 8 5/8%, payable on March 1 and September 1. A sinking fund provides for mandatory repayment at par of not less than $8 million principal amount per year from March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12 million principal amount per year may be redeemed at par according to the same schedule. The option to make such additional repayments is not cumulative and if not availed of in any year will terminate. Furthermore, Torchmark may, at its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of par, subject to certain restrictions. The Sinking Fund Debentures have equal priority with other Torchmark unsecured indebtedness. The Senior Notes, due May 1, 1998, are not redeemable prior to maturity. They were issued in the principal amount of $200 million. Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have equal priority with other Torchmark unsecured indebtedness. The Senior Debentures, principal amount of $100 million, are due August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures, which are not redeemable at the option of Torchmark prior to maturity, provide the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--NOTES PAYABLE (CONTINUED) The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million. Proceeds of the issue, net of issue costs, were $196 million. Interest is payable on May 15 and November 15 of each year at a rate of 7 7/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. The Notes, due August 1, 2013, were issued in July, 1993 in the principal amount of $100 million for net proceeds of $98 million. Interest is payable on February 1 and August 1 of each year at a rate of 7 3/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. Torchmark has entered into revolving credit agreements with a group of lenders under which it may borrow on an unsecured basis up to $400 million. One-half of the commitment matures December 5, 1995 and the balance matures December 6, 1999. Borrowings, pro rata under each facility, are at interest rates selected by Torchmark based on either the prime rate or the Eurodollar rate at the time of borrowing. At December 31, 1994, borrowings totalled $250 million and were made at an average rate of 6.40%. Torchmark is subject to certain covenants regarding capitalization and earnings, for which it was in compliance at December 31, 1994, and pays a facility fee based on size of the lines. The revolving credit agreements are designed to back up a commercial paper program with borrowings expected to begin in the first quarter of 1995. Torch Energy Advisors Incorporated ("Torch Energy"), a wholly-owned subsidiary of Torchmark, also maintains a line of credit agreement which at December 31, 1994 allowed borrowings up to $50 million. The interest rate is charged at variable rates and is based on the prime or Libor rates, and a commitment fee is charged for the unused balance. The agreement matures on January 1, 1996 and is secured by any assets acquired with the funds and by the approximately 1.5 million shares of Nuevo common stock owned by Torch Energy. There was $5 million outstanding on this line of credit at December 31, 1994. Interest in the amount of $1.8 million, $10.5 million and $20.4 million was capitalized during 1994, 1993, 1992, respectively. NOTE 13--MONTHLY INCOME PREFERRED SECURITIES In October, 1994, Torchmark through its wholly-owned finance subsidiary, Torchmark Capital L.L.C., completed a public offering of eight million shares of 9.18% MIPS at a face amount of $200 million through an underwriting syndicate. The securities are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option after September 30, 1999. Torchmark subsequently entered into a ten-year swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. In a related transaction, Torchmark purchased a five-year cap on the swap agreement that insures that the variable rate cannot exceed 10.39% through September 30, 1999. The interest rate was 7.02% at December 31, 1994. Torchmark pays a yearly fee of $860 thousand for the cap agreement. The market value of the swap agreement was an obligation of $4.1 million at December 31, 1994. The market value of the cap agreement, net of the present value of future annual payments, was a benefit of $517 thousand at December 31, 1994. Except as otherwise described in "Note 3--Investments" on page 42 of this report, Torchmark is a party to no other derivative instruments as defined by SFAS 119. Net proceeds from the MIPS offering of approximately $193 million were loaned from Torchmark Capital to Torchmark to provide part of the financing of the acquisition of American Income Holding, Inc. The carrying value of the MIPS at December 31, 1994 was $193 million. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 14--SHAREHOLDERS' EQUITY Share Data: A summary of preferred and common share activity is as follows: ----------
PREFERRED STOCK COMMON STOCK --------------------- ---------------------- TREASURY TREASURY ISSUED STOCK ISSUED STOCK ---------- --------- ---------- ---------- 1992: Balance at January 1, 1992...... 1,000,000 (192,560) 76,744,637 (600,000) Issuance of common stock due to exercise of stock options..... 2,396,100 Treasury stock acquired in Repurchase Program............ (4,200,937) Other treasury stock acquired.. (337,620) (827,766) Retirement of treasury stock... (5,028,703) 5,028,703 ---------- --------- ---------- ---------- Balance at December 31, 1992... 1,000,000 (530,180) 74,112,034 (600,000) 1993: Issuance of common stock due to exercise of stock options..... 272,194 6,341 Other treasury stock acquired.. (895,475) ---------- --------- ---------- ---------- Balance at December 31, 1993... 1,000,000 (530,180) 74,384,228 (1,489,134) 1994: Issuance of common stock due to exercise of stock options..... 130,641 Other treasury stock acquired.. (469,820) (1,491,700) Retirement of treasury stock... (1,000,000) 1,000,000 ---------- --------- ---------- ---------- -0- -0- 74,384,228 (2,850,193) ========== ========= ========== ==========
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993 --------------------- --------------------- PREFERRED COMMON PREFERRED COMMON STOCK STOCK STOCK STOCK --------- ----------- --------- ----------- Par value per share................ $1.00 $1.00 $1.00 $1.00 Authorized shares.................. 5,000,000 160,000,000 5,000,000 160,000,000
Adjustable Rate Preferred Stock: One million shares of adjustable rate ------------------------------- preferred stock were issued in 1983 at an issue price of $100 per share. During 1992, Torchmark acquired 338 thousand shares of this preferred stock at a cost of $31.5 million, representing a redemption value of $33.7 million. Prior to 1992, Torchmark acquired 192 thousand shares at a cost of $16.3 million or a redemption value of $19.2 million. These shares were reported as treasury stock and had a total cost basis of $47.8 million and a total redemption value of $52.9 million. During 1994, Torchmark acquired the remaining 470 thousand shares at a cost of $100 per share plus accrued dividends. The acquisition was completed at an aggregate price of $47 million. The preferred treasury stock was immediately retired. Acquisition of Common Shares: Torchmark commenced a program in 1986 to ---------------------------- purchase shares of its common stock from time to time. Under this program, Torchmark purchased 4.2 million shares in 1992 at a cost of $157.7 million. The other common treasury stock acquired was shares received by Torchmark from employees for the exercise proceeds and payment of taxes for stock options as well as shares purchased in the open market for the issuance of shares in conjunction with the exercise of stock options. In October, 1993, Torchmark implemented a policy to issue shares for the exercise of stock options out of treasury stock. Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock ------------- Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"), certain employees and directors have been granted options to buy shares of Torchmark stock at the market value of the stock on the date of grant. In conjunction with the buyback of the minority interest of United Management, the United Investors Management Company 1986 Employee Stock Incentive Plan was amended to allow the granting of Torchmark stock options. The options are exercisable during the period commencing from three months to three years after grant until expiring ten years or ten years and two days after grant. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED) A summary of option activity in terms of shares is as follows:
AVAILABLE FOR GRANT OUTSTANDING ----------------------------- -------------------------------- 1994 1993 1992 1994 1993 1992 --------- -------- -------- --------- --------- ---------- Balance at January 1.... 289,091 533,175 890,278 3,660,391 3,051,883 5,090,880 Additional shares avail- able due to United Man- agement merger......... 642,959 Additional shares avail- able due to amendment of plan ............... 2,000,000 Granted................. (316,600) (910,789) (357,052) 316,600 910,789 357,052 Exercised............... (130,641) (278,535) (2,396,100) Expired................. 23,746 (23,746) Adjustment due to stock dividend............... 25,643 (51) (25,643) 51 --------- -------- -------- --------- --------- ---------- Balance at December 31.. 1,998,134 289,091 533,175 3,820,707 3,660,391 3,051,883 ========= ======== ======== ========= ========= ==========
Option information by exercise price is listed in the following table. Those options shown as granted on October 1, 1993 represent United Management options which were converted to Torchmark options in conjunction with the merger.
OUTSTANDING AT DECEMBER 31, EXERCISED DURING EXERCISE ----------------------------- ------------------------- PRICE GRANT DATE 1994 1993 1992 1994 1993 1992 -------- -------------------- --------- --------- --------- ------- ------- --------- $11.300 October 1, 1993(3) 18,393 18,393 -0- -0- 12.625 October 4, 1985 33,004 34,004 36,145 1,000 2,141 29,950 13.110 October 1, 1993(3) 13,828 13,828 -0- -0- 14.000 March 26, 1985 11,246 15,746 20,996 4,500 5,250 -0- 14.125 January 30, 1986 16,875 16,875 17,875 -0- 1,000 3,125 15.000 December 3, 1987 854 854 1,254 -0- 400 6,000 16.000 December 16, 1987 7,500 7,500 7,500 -0- -0- 61,872 19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0- 20.375 December 15, 1988 -0- -0- -0- -0- -0- 202,384 20.375 January 3, 1989 30,003 30,003 30,003 -0- -0- 20,000 22.600 October 1, 1993(3) 35,981 35,981 -0- -0- 24.410 October 1, 1993(3) 5,532 5,532 -0- -0- 25.625 October 11, 1990(1) 840,055 852,955 873,120 12,900 7,313 1,654,575 28.480 October 1, 1993(3) 85,158 85,158 -0- -0- 31.125 January 15, 1991 532,926 538,856 640,896 5,930 97,118 216,258 32.500 January 2, 1991 63,000 63,000 63,000 -0- -0- 9,000 33.125 January 25, 1990(1) 63,000 63,000 63,000 -0- -0- 9,000 34.000 October 1, 1993(4) 60,682 -0- -0- 34.000 December 14, 1993(4) 301,881 -0- -0- 34.000 December 7, 1992(4) 142,433 -0- -0- -0- 34.000 December 16, 1994 292,600 -0- 34.350 October 1, 1993(3) 35,611 35,611 -0- -0- 34.375 December 12, 1991 673,666 679,977 712,618 6,311 27,869 183,936 36.000 February 7, 1991 -0- 100,000 237,444 100,000 137,444 -0- 36.610 October 1, 1993(3) 27,997 65,774 -0- -0- 38.375 January 2, 1992 63,000 63,000 63,000 -0- -0- -0- 43.500 December 14, 1993(2) 253,900 567,781 -0- -0- 45.000 January 3, 1994 24,000 -0- 46.560 October 1, 1993(3) 33,651 57,130 -0- -0- 52.000 December 7, 1992 124,714 280,216 279,815 -0- -0- -0- 57.750 January 3, 1993 24,000 24,000 -0- -0- --------- --------- --------- ------- ------- --------- 3,820,707 3,660,391 3,051,883 130,641 278,535 2,396,100 ========= ========= ========= ======= ======= ========= Exercisable at December 31, 2,936,867 2,668,264 2,772,068 ========= ========= =========
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989 at $37.13 per share, 521,100 shares previously granted January 25, 1990 at $33.13 per share, and 389,870 shares originally granted August 1, 1990 at $33.88 per share were allowed by recipients to expire voluntarily and were reissued October 11, 1990 along with 675,200 additional shares at $25.63 per share. (2) Includes 173,650 shares granted under the United Investors Management Company 1986 Employee Stock Incentive Plan. (3) Issued from the United Investors Management Company 1986 Employee Stock incentive plan. (4) Options to purchase 37,777 shares previously granted at $36.61, options to purchase 301,881 shares previously granted at $43.50, options to purchase 22,905 shares previously granted at $46.56, and options to purchase 142,433 shares previously granted at $52.00 were repriced to $34.00 per share on December 16, 1994. The vesting schedules of these options did not change. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED) Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on ------------------------- May 1, 1991 to a Torchmark senior officer. The shares are restricted as to resale, vesting 6,000 shares per year for 10 years on the anniversary date of the grant. The market value of Torchmark stock was $34.92 per share on the grant date. Restrictions: Restrictions exist on the flow of funds to Torchmark from its ------------ insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. These restrictions generally limit the payment of dividends by insurance subsidiaries to statutory net gain from operations on an annual noncumulative basis in the absence of special approval. Additionally, insurance companies are not permitted to distribute the excess of shareholders' equity as determined on a GAAP basis over that determined on a statutory basis. In 1995, $213 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. NOTE 15--COMMITMENTS AND CONTINGENCIES Reinsurance: Insurance affiliates of Torchmark reinsure that portion of ----------- insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2 million per life. Life insurance ceded represents 1% of total life insurance in force at December 31, 1994. Insurance ceded on life and accident and health products represents 1.3% of premium income for 1994. Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations. Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents less than 0.1% of life insurance in force at December 31, 1994 and reinsurance assumed on life and accident and health products represents 0.1% of premium income for 1994. Leases: Torchmark leases office space and office equipment under a variety ------ of operating lease arrangements. These leases contain various renewal options, purchase options, and escalation clauses. Rental expense for operating leases was $7.9 million, $7.6 million, and $8.2 million for 1994, 1993, and 1992, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1994 are as follows: 1995, $5.8 million; 1996, $4.1 million; 1997, $3.0 million; 1998, $1.8 million; 1999, $199 thousand; and in the aggregate, $14.9 million. Restrictions on cash: A portion of the cash held in financial service -------------------- subsidiaries that function as broker-dealers has been segregated for the benefit of customers in compliance with security regulations. This amount was $13.1 million at December 31, 1994 and $18.2 million at December 31, 1993. Concentrations of Credit Risk: Torchmark maintains a highly-diversified ----------------------------- investment portfolio with limited concentration in any given region, industry, or economic characteristic. At December 31, 1994, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (39%); short-term investments, which generally mature within one month (2%); securities of state and municipal governments (14%); securities of foreign governments (2%); and investment-grade corporate bonds (27%). The remainder of the portfolio was in oil and gas investments (6%) and real estate (3%), which are not considered financial instruments according to GAAP; equity securities (1%); policy loans (4%), which are secured by the underlying insurance policy values; and mortgages, noninvestment grade corporate securities and other long-term investments (2%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Substantially all investments in foreign government securities are in Canadian government obligations. Corporate equity and debt investments are made in a wide range of industries. At December 31, 1994, 1% or more of the portfolio was invested in the following industries or security types: Financial services (8%); regulated utilities (5%); nongovernment-guaranteed mortgage-backed securities (3%); chemicals (2%); petroleum (2%); transportation (2%); asset-backed securities (1%); foods (1%); and retailing (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1994, less than 1% of the carrying value of fixed maturities was rated below investment grade (Ba or lower as rated by 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED) Moody's service or the equivalent NAIC designation). Par value of these investments was $29.8 million, amortized cost was $26.4 million, and market value was $25.5 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value. Collateral Requirements: Torchmark requires collateral for investments in ----------------------- instruments where collateral is available and is typically required because of the nature of the investment. Since the majority of Torchmark's investments are in government, government-secured, or corporate securities, the requirement for collateral is rare. Torchmark's mortgages are secured by collateral, although new mortgages are no longer being acquired. Litigation: Torchmark and its subsidiaries continue to be named as parties ---------- to pending or threatened legal proceedings. These suits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages. In particular, Torchmark's subsidiary Liberty is a party to a number of such actions which seek punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. Some of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is virtually unlimited under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. As of December 31, 1994, Liberty was a party to approximately 172 active lawsuits (excluding interpleaders and stayed cases), more than 120 of which were Alabama proceedings in which punitive damages were sought. As previously reported, litigation was filed in May 1992 against Liberty in the Circuit Court for Barbour County, Alabama (Robertson v. Liberty National ----------------------------- Life Insurance Company). This suit was amended in October 1992 to include - ---------------------- claims on behalf of a class of Liberty policyholders alleging fraud in the exchange of certain cancer insurance policies. The complaint sought substantial equitable and injunctive relief and unspecified compensatory and punitive damages. A policyholder class was certified by the Barbour County Court in March 1993. Additionally, subsequent to the class certification, a number of individual lawsuits based on substantially the same allegations as in Robertson were filed by plaintiffs in Alabama, Georgia, Florida and --------- Mississippi. Four additional class action suits also based upon substantially the same allegations as in Robertson were filed in Mobile County, Alabama (Adair v. Liberty National Life Insurance Company and Lamey v. Liberty ------------------------------------------------ ---------------- National Life Insurance Company) and in Polk County, Florida (Howell v. - ------------------------------- --------- Liberty National Life Insurance Company and Scott v. Liberty National Life - --------------------------------------- ------------------------------ Insurance Company) after the class certification. Adair, Lamey, Howell and - ----------------- ----- ----- ------ Scott have been settled on an individual basis. - ----- On October 25, 1993, a jury in the Circuit Court for Mobile County, Alabama rendered a one million dollar verdict ($1,000 actual damages) against Liberty in McAllister v. Liberty National Life Insurance Company, one of twenty-five ----------------------------------------------------- suits involving cancer policy exchanges which were filed prior to class certification in the Barbour County litigation and therefore were excluded from the Robertson class action. The McAllister decision was appealed to the ---------- Alabama Supreme Court. On February 25, 1995, the verdict was affirmed. A petition for rehearing has been filed by Liberty. Previously, another judge in the Mobile County Court had granted a summary judgment in favor of Liberty in another substantially similar suit in which no cancer claims had been submitted (Boswell v. Liberty National Life Insurance Company), which was -------------------------------------------------- appealed to the Alabama Supreme Court. On May 13, 1994, the Alabama Supreme Court reversed and remanded Boswell. The Court held the plaintiffs had alleged ------- injury or damages in the form of the additional policy premium payments and these allegations were sufficient to withstand a motion to dismiss the complaint. Following this order and pending a petition for rehearing, the Boswell case was settled. Excluding the McAllister case, no pre-class - ------- ---------- certification individual cancer exchange cases remain active, all having been settled or stayed. As reported previously, a fairness hearing was held on January 20, 1994, in the Robertson cancer policy exchange class action. Prior to that hearing, --------- class members had been mailed notice of the hearing and the proposed settlement. On February 4, 1994, the Circuit Court for Barbour County, Alabama ruled that with a $16 million increase in the total value of the equitable and monetary relief contained in the proposed Robertson --------- 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED) settlement (from approximately $39 million to $55 million in total value), the settlement would be fair and would be approved, provided that the parties to the litigation accepted the amended settlement within fourteen days of the issuance of the ruling. On February 17, 1994, the Court extended for two weeks the period for filing objections to or accepting the court's order conditionally approving the class action settlement. On February 22, 1994, the Court entered an order in the Robertson litigation, which delayed any final decision on the proposed class action settlement and various motions to modify it (including motions to delete Torchmark from the settlement release), pending certain specified discovery to be completed within 90 days from the date the order was entered. In the order, the Court directed limited additional discovery regarding whether Torchmark had any active involvement in the cancer policy exchanges. Pending completion of limited additional discovery, the Court reserved jurisdiction and extended the deadline for acceptance or rejection of the modifications set forth in the February 4, 1994, Order. On May 6, 1994, the Court entered an order in the Robertson litigation settling a hearing on May 19, 1994, on all outstanding motions in that case. On May 26, 1994, the Barbour County Court entered an Order and Final Judgment in the Robertson litigation, making final the findings and conclusions of its February 4, 1994 Order. That Order has been accepted by the parties to the action. The discovery regarding the propriety of Torchmark's release by the settlement agreement was concluded prior to the entry of the Order and Final Judgment, and Torchmark was included in the release given on behalf of the class. The $55 million proposed amended settlement charge was provided for in Torchmark's 1993 financial reports. On July 5, 1994, certain intervenors in the Robertson litigation filed a --------- notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. The appeal is currently pending. Purported class action litigation was filed in December 1993, against Liberty in the Circuit Court for Mobile County, Alabama asserting fraud and misrepresentation in connection with exclusionary provisions of accident and hospital accident policies sold to persons holding multiple accident policies (Cofield v. Liberty National Life Insurance Company). A hearing on class -------------------------------------------------- certification in Cofield has been postponed and has not been rescheduled. On March 17, 1994, litigation was filed against Liberty, a subsidiary of Torchmark, certain officers and present and former directors of Torchmark, and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court for Marion County, Alabama (Miles v. -------- Liberty National Life Insurance Company). The lawsuit asserts that it is - --------------------------------------- brought on behalf of a class composed of the shareholders of Torchmark. The complaint alleges a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount are sought. In April 1994, the complaint in Miles was amended to add an additional shareholder plaintiff and to name Torchmark as a defendant. A second similar action (Oakley v. Torchmark Corporation) was filed on August 16, 1994 in the ------------------------------- Circuit Court for Bibb County, Alabama, but plaintiff has moved to dismiss that action without prejudice. Thereafter, a third such action was filed in the United States District Court for the Southern District of Alabama (Dismukes v. Torchmark Corporation), all of which seek punitive damages. The --------------------------------- Dismukes case was subsequently transferred to the United States District Court - -------- for the Northern District of Alabama. No class has been certified in any of these cases, all of which seek punitive damages. Torchmark, Liberty and the individual defendants intend to vigorously defend these actions. Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in litigation filed April 22, 1994 as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation). The suit claims damages on behalf of ------------------------------ individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint has been amended to include 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED) new plaintiffs purporting to represent the class. No class has been certified, however, and a motion to dismiss has been filed by the defendants, who intend to vigorously defend the action. In July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company). The ------------------------------------------------- complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no proceedings of any materiality have occurred in this case. Liberty has removed this case to federal court. Additionally, Liberty had filed a declaratory judgment action essentially seeking an accounting in this matter in the U.S. District Court for the Northern District of Georgia on the same day Bryant was filed. Liberty intends to vigorously defend the Bryant ------ ------ action. Also in July 1994, a purported class action (Bosarge v. Liberty National --------------------------- Life Insurance Company) was filed against Liberty and Torchmark in the Circuit - ---------------------- Court for Mobile County, Alabama which alleges that Liberty agents have made misrepresentations in connection with converting policyholder accounts to bank budget from other modes of premium payment. The lawsuit claims that agents have represented that insureds would receive additional "free insurance" if they changed to bank budget payment while charges for such "free insurance" were actually made through bank budget payments. Injunctive relief and unspecified actual and punitive damages are sought. No class has been certified and no proceedings of any materiality have occurred in this case. Liberty intends to vigorously defend this action. On November 17, 1994, a Circuit Court jury in Mobile County, Alabama returned a $4.6 million verdict against Liberty in Coram v. Liberty National ------------------------- Life Insurance Company. This case involved allegations of fraud by an agent of - ---------------------- Liberty and was consolidated for trial with another case involving the same sales agent. A verdict was returned in favor of Liberty in the companion case. Liberty plans to vigorously pursue post-trial motions for relief and, if necessary, an appeal. The $4.6 million verdict was provided for in the 1994 financial statements. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance ----------------------------------------- Company, et al., class action litigation involving Liberty, a class composed - -------------- of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion was filed to challenge the final judgment under Federal Rule of Civil Procedure 60(b), in February of 1990, but the final judgment was upheld and the Rule 60(b) challenge was rejected by both the District Court and the Eleventh Circuit Court of Appeals. In November, 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. The relief sought is unclear, but includes a request that the District Court rule that the final judgment no longer has prospective application. Liberty has filed discovery requests seeking the identity of the funeral directors involved in the petition and information and materials necessary to evaluate the funeral directors' allegations and to clarify the relief sought. Provision has been made in the financial statements for certain anticipated litigation costs. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not considered material. It should be noted, however, that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama, continues to increase universally. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--INDUSTRY SEGMENTS Torchmark operates primarily in two industry segments, insurance and asset management. Operations in the insurance industry involve the sale and administration of life insurance, health insurance and annuities. It also includes investment operations related to insurance segment investments. Operations in the asset management industry include the management, distribution, and servicing of various mutual funds, the management of energy properties, the direct ownership of energy properties, and other energy related activities. Certain insurance company investments are managed by the asset management segment. Included in these investments are energy investments in the amount of $331 million and $346 million at December 31, 1994 and 1993, respectively. Additionally, the asset management segment markets certain insurance products for the insurance segment and manages the mutual funds for the insurance segment's variable products. Total revenues by segment include revenues from other segments in addition to unaffiliated parties. Intersegment revenues include commission revenue and investment income which eliminate in consolidation. Pre-tax income for operating segments is total revenue less operating costs and expenses for the segment. Corporate pre-tax income includes transactions which are nonoperating in nature and are not related to the activities of a segment. Such items include parent company interest expense, goodwill amortization, and similar items. A summary of segment data is as follows:
ADJUSTMENTS ASSET AND CONSOLIDATED INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL ---------- ---------- --------- ------------ ------------ 1994: Revenues--unaffiliated.. $1,694,983 $208,829 $ 18,745 $ $1,922,557 Intersegment revenues... 29,909 25,883 (4,556) (51,236) -0- ---------- -------- -------- -------- ---------- Total revenues.......... $1,724,892 $234,712 $ 14,189 $(51,236) $1,922,557 ========== ======== ======== ======== ========== Pre-tax income.......... $ 403,080 $ 96,628 $(74,965) $(37,819) $ 386,924 Depreciation............ 6,059 15,425 142 21,626 Capital expenditures.... 2,940 45,888 160 48,988 Identifiable assets at year end............... 7,697,454 456,971 442,639 (193,430) 8,403,634 1993: Revenues--unaffiliated.. $1,821,314 $250,666 $104,855 $ $2,176,835 Intersegment revenues... 24,385 26,392 (2,196) (48,581) -0- ---------- -------- -------- -------- ---------- Total revenues.......... $1,845,699 $277,058 $102,659 $(48,581) $2,176,835 ========== ======== ======== ======== ========== Pre-tax income.......... $ 415,028 $106,674 $(48,302) $(31,994) $ 441,406 Depreciation............ 5,544 26,006 157 31,707 Capital expenditures.... 2,599 13,133 116 15,848 Identifiable assets at year end............... 6,809,570 414,298 510,879 (88,505) 7,646,242 1992: Revenues--unaffiliated.. $1,817,253 $210,886 $ 17,671 $ $2,045,810 Intersegment revenues... 8,356 21,108 3,798 (33,262) -0- ---------- -------- -------- -------- ---------- Total revenues.......... $1,825,609 $231,994 $ 21,469 $(33,262) $2,045,810 ========== ======== ======== ======== ========== Pre-tax income.......... $ 408,551 $ 72,387 $(53,268) $ (9,800) $ 417,870 Depreciation............ 6,479 23,308 153 29,940 Capital expenditures.... 5,687 34,473 206 40,366 Identifiable assets at year end............... 6,073,602 406,292 381,776 (91,555) 6,770,115
59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 17--RELATED PARTY TRANSACTIONS Investment in Related Parties: Other long-term investments include ------------------------------ investment by Torchmark subsidiaries in the United Group of Mutual Funds and certain other funds for which Waddell & Reed, Inc. is sole advisor. These investments were $24.4 million and $26.2 million at December 31, 1994 and 1993, respectively. Investment income derived from these investments is included in net investment income. NOTE 18--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT The following table summarizes Torchmark's noncash transactions, which are not reflected on the Statement of Cash Flow as required by GAAP:
YEAR ENDED DECEMBER 31, -------------------- 1994 1993 1992 ---- ------ -------- Treasury stock accepted for exercise of stock options. $-0- $2,480 $ 46,612 Paid in capital from tax benefit for stock option ex- ercises.............................................. 349 6,412 21,976 Grant of options in conjunction with United Management merger............................................... -0- 5,122 -0-
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31, -------------------------- 1994 1993 1992 -------- -------- -------- Interest paid.................................... $ 77,114 $ 64,193 $ 62,543 Income taxes paid................................ $182,052 $133,392 $142,045
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 19--SELECTED QUARTERLY DATA (UNAUDITED) The following is a summary of quarterly results for the two years ended December 31, 1994. The information is unaudited but includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods.
THREE MONTHS ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 1994: - ----- Premium and policy charges..... $348,148 $340,166 $336,533 $364,027 Financial services revenue..... 36,544 35,572 33,747 33,413 Energy operations revenue...... 17,303 16,147 14,293 16,622 Net investment income.......... 83,801 81,092 79,585 86,014 Realized investment gains (losses)...................... 12,595 (9,304) (1,278) (4,564) Total revenues................. 498,681 464,429 463,289 496,158 Policy benefits................ 232,482 222,924 223,757 242,114 Amortization of acquisition ex- penses........................ 49,822 40,106 41,327 46,852 Pretax operating income........ 109,930 92,610 89,896 94,488 Net income..................... 75,572 64,903 64,698 63,773 Net income per common share.... 1.03 0.90 0.90 0.89 Net income per common share ex- cluding realized gains and the related DPAC adjustment....... 0.98 0.98 0.92 0.93 1993: - ----- Premium and policy charges..... $371,440 $381,636 $382,659 $357,175 Financial services revenue..... 34,013 34,831 33,652 34,926 Energy operations revenue...... 21,414 24,064 19,662 40,873 Net investment income.......... 96,643 101,467 93,983 80,377 Realized investment gains...... 1,070 416 778 5,745 Total revenues................. 525,276 543,302 531,201 577,056 Policy benefits................ 240,900 248,251 249,960 232,445 Amortization of acquisition ex- penses........................ 46,655 46,891 47,492 46,035 Pretax operating income........ 81,042 119,156 114,359 126,849 Cumulative effect of changes in accounting principles......... 22,444 -0- -0- (4,041) Net income..................... 73,489 78,246 64,412 81,832 Net income per common share.... 0.99 1.05 0.86 1.11 Net income per common share ex- cluding realized gains........ 0.98 1.05 0.86 1.06 Net income per common share ex- cluding cumulative effect of changes in accounting princi- ples.......................... 0.68 1.05 0.86 1.16
61 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this item is incorporated by reference from the sections entitled "Election of Directors," "Profiles of Directors and Nominees," "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act" in the Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 1995 (the "Proxy Statement"), which is to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT (a) Security ownership of certain beneficial owners: Information required by this item is incorporated by reference from the section entitled "Principal Stockholders" in the Proxy Statement. (b) Security ownership of management: Information required by this item is incorporated by reference from the section entitled "Stock Ownership" in the Proxy Statement. (c) Changes in control: Torchmark knows of no arrangements, including any pledges by any person of its securities, the operation of which may at a subsequent date result in a change of control. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. 62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a)Index of documents filed as a part of this report:
PAGE OF THIS REPORT ----------- Financial Statements: Torchmark Corporation and Subsidiaries: Independent Auditors' Report.................................... 31 Consolidated Balance Sheet at December 31, 1994 and 1993........ 32 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1994.................. 33 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1994......... 34 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1994...................... 35 Notes to Consolidated Financial Statements...................... 36 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1994 II. Condensed Financial Information of Registrant (Parent Company)................................................... 68 III. Supplementary Insurance Information (Consolidated)......... 71 IV. Reinsurance (Consolidated)................................. 72
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. 63 EXHIBITS
Page of this Report ------- (3)(a) Restated Certificate of Incorporation of Torchmark Corpora- tion, as amended (incorporated by reference from Exhibit 19(a) to Form 10-Q for the quarter ended September 30, 1987) (b) By-Laws of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1989) (4)(a) Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to Form 10-K for the fiscal year ended De- cember 31, 1989) (b) Trust Indenture dated as of February 1, 1987 between Torchmark Corporation and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4(b) to Form S-3 for $300,000,000 of Torchmark Corporation Debt Securities and Warrants (Registration No. 33-11816)) (10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve Agreement, as amended, and Trust (incorporated by reference from Exhibit 10(b) to Form 10-K for the fiscal year ended December 31, 1991) (b) Capital Accumulation and Bonus Plan of Torchmark Corpora- tion, as amended, (incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1988) (c) Torchmark Corporation Supplementary Retirement Plan (incor- porated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992) (d) Certified Copies of Resolutions Establishing Retirement Pol- icy for Officers and Directors of Torchmark Corporation, Providing for Advisory Directors, and Providing Retirement Benefits for Directors (incorporated by reference from Ex- hibit 10(e) to Form 10-K for the fiscal year ended December 31, 1989) (e) Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory Directors, Directors Emeritus and Officers, as amended (incorporated by reference from Exhibit 10(e) to Form 10-K for the fiscal year ended December 31, 1992) (f) The Torchmark Corporation 1987 Stock Incentive Plan (incorporated by reference from Definitive 14A File No. 001-08052) (g) The 1984 Torchmark Corporation Stock Option Plan (incorpo- rated by reference from Form S-8 for The 1984 Torchmark Cor- poration Stock Option Plan (Registration No. 2-93760)) (h) General Agency Contract between Liberty National Life Insur- ance Company and Independent Research Agency For Life Insur- ance, Inc. (incorporated by reference from Exhibit 10(i) to Form 10-K for the fiscal year ended December 31, 1990) (i) Form of Marketing and Administrative Services Agreement be- tween Liberty National Fire Insurance Company, Liberty Na- tional Insurance Corporation and Liberty National Life In- surance Company (incorporated by reference from Exhibit 10.2 to Form S-1 Registration Statement No. 33-68114) (j) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Not Eligible to Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement (incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended December 31, 1991)
64
Page of this Report ------- (k) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to Form 10-K for the fiscal year ended December 31, 1991) (l) Form of Deferred Compensation Agreement between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not Eligible to Retire Prior to December 31, 1986 (in- corporated by reference from Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991) (m) Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by reference from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31, 1992) (n) Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and Liberty National Life Insurance Company (prototype for agreements between Torchmark Corpora- tion and other principal operating subsidiaries) (incorpo- rated by reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1992) (o) The Torchmark Corporation Pension Plan (incorporated by ref- erence from Exhibit 10(o) to Form 10-K for the fiscal year ended December 31, 1992) (p) United Investors Management Company Retirement Income Plan (incorporated by reference from Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 1992) (q) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo- rated by reference from Exhibit 10(q) to Form 10-K for the fiscal year ended December 31, 1992) (r) United Investors Management Company 1986 Employee Stock In- centive Plan (incorporated by reference from Exhibit 10(r) to Form 10-K for the fiscal year ended December 31, 1993) (s) The Torchmark Corporation Savings and Investment Plan (in- corporated by reference from Exhibit 10(s) to Form 10-K for the fiscal year ended December 31, 1992) (t) Credit Agreements dated as of December 6, 1994 among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year) (u) United Investors Management Company Savings and Investment Plan (incorporated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1992) (11) Statement re computation of per share earnings 67 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 27, 1995 (incorporated by reference from Definitive 14A Filing No. 001-08052) (21) Subsidiaries of the registrant 67 (23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report of February 1, 1995 into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378) (b) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report of February 1, 1995 into Form S-8 of The United Investors Management Company Savings and In- vestment Plan (Registration No. 2-76912) (c) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report of February 1, 1995 into Form S-8 and the accompanying Form S-3 Prospectus of The 1984 Torchmark Corporation Stock Option Plan (Registration No. 2- 93760)
65
Page of this Report ------- (d) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report of February 1, 1995 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33- 23580) (e) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report of February 1, 1995 into Form S-8 and the accompanying Form S-3 Prospectus of The Capital Ac- cumulation and Bonus Plan of Torchmark Corporation (Regis- tration No. 33-1032) (24) Powers of attorney (27) Financial Data Schedule (99)(a) Form 11-K for The Torchmark Corporation Savings and Invest- ment Plan for the fiscal year ended December 31, 1994* (b) Form 11-K for The United Investors Management Company Sav- ings and Investment Plan for the fiscal year ended December 31, 1994*
- -------- *To be filed under cover of a Form 10-K/A as an Amendment to Form 10-K for the fiscal year ended December 31, 1994. 66 (b) Reports on Form 8-K A Form 8-K dated November 11, 1994 was filed during the fourth quarter of 1994 to report the acquisition of the common stock of American Income Holding, Inc. ("AIH") in a cash tender offer and subsequent statutory merger. The following financial statements were a part of the Form 8-K and were incorporated by reference from the Form 8-K dated September 29, 1994: (1) Consolidated Financial Statements of AIH as of December 31, 1992 and 1993 and for each of the three years ended December 31, 1993. (2) Consolidated Financial Statements of AIH as of June 30, 1994 and for the three-month and six-month periods ended June 30, 1994. (3) Pro Forma Consolidated Condensed Financial Statements (Unaudited) of Torchmark and AIH. (c) Exhibits Exhibit 11. Statement re computation of per share earnings - ---------------------------------------------------------- TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1994 1993 1992 ------------ ------------ ------------ Net income............................ $268,946,268 $297,978,880 $265,477,484 Preferred dividends................... (804,130) (3,289,568) (3,453,976) ------------ ------------ ------------ Adjusted net income................... $268,142,138 $294,689,312 $262,023,508 ============ ============ ============ Weighted average shares outstanding... 72,095,657 73,501,654 73,236,849 ============ ============ ============ Primary earnings per share: Net income........................... $ 3.72 $ 4.01 $ 3.58 ============ ============ ============
Exhibit 22. Subsidiaries of the Registrant - ------------------------------------------ The following table lists subsidiaries of the registrant which meet the definition of "significant subsidiary" according to Regulation S-X:
STATE OF NAME UNDER WHICH COMPANY INCORPORATION COMPANY DOES BUSINESS ----------------------- ------------- --------------------- Family Service Life Family Service Life Insurance Company Texas Insurance Company Globe Life And Accident Globe Life And Accident Insurance Company Delaware Insurance Company Liberty National Life Liberty National Life Insurance Company Alabama Insurance Company United American United American Insurance Company Delaware Insurance Company United Investors Life United Investors Life Insurance Company Missouri Insurance Company Waddell & Reed, Inc. Delaware Waddell & Reed, Inc. American Income Life American Income Life Insurance Company Indiana Insurance Company
All other exhibits required by Regulation S-K are listed as to location in the "Index of documents filed as a part of this report" on pages 64 through 66 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 67 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (AMOUNTS IN THOUSANDS)
DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- Assets: Investments: Long-term investments--available for sale......... $ 20,466 $ 61,931 Short-term investments............................ 806 2,335 ---------- ---------- Total investments.................................. 21,272 64,266 Investment in affiliates........................... 2,404,431 2,193,764 Due from affiliates................................ 194,836 174,170 Accrued investment income.......................... 83 386 Other assets....................................... 3,822 3,484 ---------- ---------- Total assets...................................... $2,624,444 $2,436,070 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt................................... $ 250,000 $ 107,000 Long-term debt.................................... 790,972 790,429 Due to affiliates................................. 97,523 -- Other liabilities................................. 50,294 121,386 ---------- ---------- Total liabilities................................. 1,188,789 1,018,815 Monthly income preferred securities................ 193,052 -0- Shareholders' equity: Preferred stock................................... -0- 1,000 Common stock...................................... 73,784 73,784 Additional paid-in capital........................ 139,045 232,432 Unrealized investment gains (losses).............. (140,756) 120,138 Retained earnings................................. 1,267,545 1,082,031 Treasury stock.................................... (97,015) (92,130) ---------- ---------- Total shareholders' equity........................ 1,242,603 1,417,255 ---------- ---------- Total liabilities and shareholders' equity........ $2,624,444 $2,436,070 ========== ==========
See accompanying Notes to Condensed Financial Statements. 68 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1994 1993 1992 -------- -------- -------- Net investment income............................ $ 8,274 $ 8,705 $ 11,067 Realized investment gains (losses)............... (4,422) 9,301 1,859 Other income..................................... 11 27,435 -0- -------- -------- -------- Total revenue.................................. 3,863 45,441 12,926 General operating expenses....................... 14,442 15,174 18,809 Non-operating expenses--related to affiliates.... (71,417) 67,718 -- Reimbursements from affiliates................... (15,218) (18,599) (16,179) Interest expense................................. 79,762 64,859 52,278 -------- -------- -------- Total expenses................................. 7,569 129,152 54,908 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates................................... (3,706) (83,711) (41,982) Income taxes .................................... 2,797 34,023 13,901 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (909) (49,688) (28,081) Equity in earnings of affiliates................. 271,992 360,991 305,934 Minority interests............................... -0- (11,073) (12,376) Monthly income preferred securities dividend..... (2,137) -0- -0- -------- -------- -------- Net income before cumulative effect of changes in accounting principles.................................... 268,946 300,230 265,477 Cumulative effect of changes in accounting prin- ciples.......................................... -0- (2,251) -0- -------- -------- -------- Net income..................................... $268,946 $297,979 $265,477 ======== ======== ========
See accompanying Notes to Condensed Financial Statements. 69 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1993 1992 --------- --------- --------- Cash provided from operations before dividends from subsidiaries............................ $ (48,378) $ (20,435) $ (35,115) Cash dividends from subsidiaries............. 270,500 188,709 194,128 --------- --------- --------- Cash provided from operations................. 222,122 168,274 159,013 Cash provided from (used for) investing activ- ities: Disposition of investments................... 225,573 478,859 190,559 Acquisition of investments................... (202,579) (526,421) (199,119) Sale of subsidiaries......................... -0- 76,744 -0- Investment in subsidiaries................... (70,000) (55,651) -0- Purchase of minority interest................ -0- (229,063) -0- Purchase of American Income.................. (476,501) -0- -0- Loans to subsidiaries........................ (28,916) (8,881) (114,931) Repayment of loans by subsidiaries........... -0- 31,924 5,450 Net decrease (increase) in temporary invest- ments....................................... 1,529 (799) 2,709 Additions to properties...................... (113) (74) (124) --------- --------- --------- Cash used for investing activities............ (551,007) (233,362) (115,456) Cash provided from (used for) financing activ- ities: Issuance of debt............................. 143,000 294,110 190,000 Issuance of monthly income preferred securi- ties........................................ 193,046 -0- -0- Repayments of debt........................... -0- (88,000) -0- Issuance of stock............................ 4,408 6,670 7,175 Acquisitions of treasury stock............... (106,054) (41,897) (178,698) Borrowed from subsidiaries................... 176,821 -0- 24,000 Repayment on borrowings from subsidiaries.... -0- (24,000) -0- Payment of dividends......................... (82,336) (83,646) (84,485) --------- --------- --------- Cash provided from (used for) financing activ- ities........................................ 328,885 63,237 (42,008) Net increase in cash.......................... -0- (1,851) 1,549 Cash balance at beginning of period........... -0- 1,851 302 --------- --------- --------- Cash balance at end of period................. $ -0- $ -0- $ 1,851 ========= ========= =========
See accompanying Notes to Condensed Financial Statements. TORCHMARK CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS) NOTE A--DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to Torchmark from the consolidated subsidiaries were as follows:
1994 1993 1992 -------- -------- -------- Consolidated subsidiaries..................... $270,500 $188,709 $194,128 ======== ======== ========
70 TORCHMARK CORPORATION SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED) (AMOUNTS IN THOUSANDS)
AMORTIZATION OF DEFERRED PREMIUM AND NET BENEFITS POLICY OTHER POLICY INVESTMENT OTHER AND ACQUISITION OPERATING CHARGES INCOME INCOME CLAIMS COSTS EXPENSES ----------- ---------- -------- -------- ------------ --------- FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ------------------------ Insurance.............. $1,388,874 $332,196 $ 3,822 $914,100 $172,493 $235,219 Asset management....... 5,088 229,624 138,084 Corporate.............. 16,714 (2,525) 89,154 Eliminations and ad- justments............. (23,506) (27,730) 7,177 5,614 (26,208) ---------- -------- -------- -------- -------- -------- Total................. $1,388,874 $330,492 $203,191 $921,277 $178,107 $436,249 ========== ======== ======== ======== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ------------------------ Insurance.............. $1,492,910 $348,844 $ 3,945 $971,556 $188,283 $270,832 Asset management....... 7,215 269,843 170,384 Corporate.............. 37,358 65,301 150,961 Eliminations and ad- justments............. (20,947) (27,634) (1,210) (15,377) ---------- -------- -------- -------- -------- -------- Total................. $1,492,910 $372,470 $311,455 $971,556 $187,073 $576,800 ========== ======== ======== ======== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1992: - ------------------------ Insurance.............. $1,453,962 $368,220 $ 3,427 $953,548 $196,406 $269,104 Asset management....... 4,765 227,229 159,607 Corporate.............. 22,414 (945) 72,737 Eliminations and ad- justments............. (12,655) (20,607) (972) (22,490) ---------- -------- -------- -------- -------- -------- Total................. $1,453,962 $382,744 $209,104 $953,548 $195,434 $478,958 ========== ======== ======== ======== ======== ========
71 TORCHMARK CORPORATION SCHEDULE IV. REINSURANCE (CONSOLIDATED) (AMOUNTS IN THOUSANDS)
PERCENTAGE CEDED ASSUMED OF AMOUNT GROSS TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ----------- --------- ---------- ----------- ---------- FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ---------------------- Life insurance in force $74,834,644 $633,485 $ 23,570 $74,224,729 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2% Health insurance....... 781,207 12,493 -0- 768,714 0.0% ----------- -------- -------- ----------- Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ---------------------- Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1% Health insurance....... 814,456 14,621 -0- 799,835 0.0% Property and liability insurance............. 78,512 60,245 104,790 123,057 85.2% ----------- -------- -------- ----------- Total premiums........ $ 1,381,600 $ 79,728 $105,366 $ 1,407,238 7.5% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1992: - ---------------------- Life insurance in force $58,286,641 $688,880 $ 19,654 $57,617,415 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 474,516 $ 5,350 $ 275 $ 469,441 0.1% Health insurance....... 813,547 15,693 -0- 797,854 0.0% Property and liability insurance............. 73,523 51,472 76,332 98,383 77.6% ----------- -------- -------- ----------- Total premiums........ $ 1,361,586 $ 72,515 $ 76,607 $ 1,365,678 5.6% =========== ======== ======== =========== =====
- -------- * Excludes policy charges 72 SIGNATURES Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Torchmark Corporation /s/ R.K. Richey By: ------------------------------- R.K. RICHEY, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ Keith A. Tucker By: ------------------------------- KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) /s/ Gary L. Coleman By: ------------------------------- GARY L. COLEMAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: March 9, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ J.P. Bryan* /s/ Harold T. McCormick* By: --------------------------- By: ------------------------------ J.P. BRYAN HAROLD T. MCCORMICK DIRECTOR DIRECTOR /s/ Joseph M. Farley* /s/ Joseph W. Morris* By: --------------------------- By: ------------------------------ JOSEPH M. FARLEY JOSEPH W. MORRIS DIRECTOR DIRECTOR /s/ Louis T. Hagopian* /s/ George J. Records* By: --------------------------- By: ------------------------------ LOUIS T. HAGOPIAN GEORGE J. RECORDS DIRECTOR DIRECTOR /s/ C.B. Hudson* /s/ Yetta G. Samford, Jr.* By: --------------------------- By: ------------------------------ C.B. HUDSON YETTA G. SAMFORD, JR. DIRECTOR DIRECTOR /s/ Joseph L. Lanier, Jr.* By: --------------------------- JOSEPH L. LANIER, JR. DIRECTOR Date: March 9, 1995 /s/ Gary L. Coleman *By: -------------------------- GARY L. COLEMAN ATTORNEY-IN-FACT Date: March 9, 1995 73 EX-10.T 2 CREDIT AGREEMENT [364 Day] CREDIT AGREEMENT Dated as of December 6, 1994 among TORCHMARK CORPORATION, THE LENDERS and THE FIRST NATIONAL BANK OF CHICAGO, as Agent TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS........................................... 1 ARTICLE II THE FACILITY.......................................... 15 2.1. The Facility.......................................... 15 2.1.1. Description of Facility.......................... 15 2.1.2. Facility Amount.................................. 15 2.1.3. Availability of Facility......................... 15 2.2. Ratable Advances...................................... 15 2.2.1. Ratable Advances................................. 15 2.2.2. Ratable Advance Rate Options..................... 15 2.2.3. Method of Selecting Types and Interest Periods for Ratable Advances..................... 16 2.2.4. Conversion and Continuation of Outstanding Ratable Advances..................... 16 2.3. Competitive Bid Advances.............................. 17 2.3.1. Competitive Bid Option........................... 17 2.3.2. Competitive Bid Quote Request.................... 17 2.3.3. Invitation for Competitive Bid Quotes............ 18 2.3.4. Submission and Contents of Competitive Bid Quotes....................................... 18 2.3.5. Notice to Borrower............................... 20 2.3.6. Acceptance and Notice by Borrower................ 20 2.3.7. Allocation by Agent.............................. 20 2.4. Availability of Funds................................. 21 2.5. Facility Fee; Reductions in Aggregate Commitment............................................ 21 2.6. Minimum Amount of Each Advance........................ 21 2.7. Optional Principal Payments........................... 21 2.8. Changes in Interest Rate, etc......................... 22 2.9. Rates Applicable After Default........................ 22 2.10. Method of Payment..................................... 22 2.11. Notes; Telephonic Notices............................. 23 2.12. Interest Payment Dates; Interest and Fee Basis................................................. 23 2.13. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions................. 24 2.14. Lending Installations................................. 24 2.15. Non-Receipt of Funds by the Agent..................... 24 2.16. Withholding Tax Exemption............................. 25 2.17. Extension of Termination Date......................... 25 ARTICLE III CHANGE IN CIRCUMSTANCES............................... 26 3.1. Yield Protection...................................... 26 3.2. Changes in Capital Adequacy Regulations............... 27 3.3. Availability of Types of Advances..................... 27 3.4. Funding Indemnification............................... 27
(i) 3.5. Lender Statements; Survival of Indemnity............... 28 3.6. Right to Substitute Lender............................. 28 ARTICLE IV CONDITIONS PRECEDENT................................... 29 4.1. Initial Advance........................................ 29 4.2. Each Advance........................................... 30 ARTICLE V REPRESENTATIONS AND WARRANTIES......................... 30 5.1. Corporate Existence and Standing....................... 30 5.2. Authorization and Validity............................. 30 5.3. No Conflict; Government Consent........................ 31 5.4. Financial Statements................................... 31 5.5. Material Adverse Change................................ 31 5.6. Taxes.................................................. 31 5.7. Litigation and Contingent Obligations.................. 32 5.8. Subsidiaries........................................... 32 5.9. ERISA.................................................. 32 5.10. Accuracy of Information................................ 32 5.11. Regulation U........................................... 33 5.12. Material Agreements.................................... 33 5.13. Compliance With Laws................................... 33 5.14. Ownership of Properties................................ 33 5.15. Investment Company Act................................. 33 5.16. Public Utility Holding Company Act..................... 33 5.17. Insurance Licenses..................................... 34 ARTICLE VI COVENANTS.............................................. 34 6.1. Financial Reporting.................................... 34 6.2. Use of Proceeds........................................ 36 6.3. Certain Notices........................................ 36 6.4. Conduct of Business.................................... 37 6.5. Taxes.................................................. 37 6.6. Insurance.............................................. 37 6.7. Compliance with Laws................................... 37 6.8. Maintenance of Properties.............................. 38 6.9. Inspection............................................. 38 6.10. Merger................................................. 38 6.11. Sale of Assets......................................... 38 6.12. Sale and Leaseback..................................... 38 6.13. Investments and Acquisitions........................... 38 6.14. Liens.................................................. 39 6.15. Consolidated Net Worth................................. 39 6.16. Ratio of Consolidated Indebtedness to Consolidated Capitalization............................ 39 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest Expense.......................... 39 6.18. Affiliates............................................. 40 ARTICLE VII DEFAULTS............................................... 40 ARTICLE VIII ACCELERATION, WAIVERS, AMENDENTS AND REMEDIES............................................... 42 8.1. ACCELERATION........................................... 42
(ii) ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES............................................... 43 8.1. Acceleration........................................... 43 8.2. Amendments............................................. 43 8.3. Preservation of Rights................................. 44 ARTICLE IX GENERAL PROVISIONS..................................... 44 9.1. Survival of Representations............................ 44 9.2. Governmental Regulation................................ 44 9.3. Taxes.................................................. 44 9.4. Headings............................................... 44 9.5. Entire Agreement....................................... 44 9.6. Several Obligations; Benefits of this Agreement.............................................. 45 9.7. Expenses; Indemnification.............................. 45 9.8. Numbers of Documents................................... 45 9.9. Accounting............................................. 46 9.10. Severability of Provisions............................. 46 9.11. Nonliability of Lenders................................ 46 9.12. CHOICE OF LAW.......................................... 46 9.13. CONSENT TO JURISDICTION................................ 46 9.14. Confidentiality........................................ 46 Nonreliance............................................ 47 9.16. WAIVER OF JURY TRIAL................................... 47 9.17. Disclosure............................................. 47 ARTICLE X THE AGENT.............................................. 47 10.1. Appointment............................................ 47 10.2. Powers................................................. 47 10.3. General Immunity....................................... 48 10.4. No Responsibility for Loans, Recitals, etc............. 48 10.5. Action on Instructions of Lenders...................... 48 10.6. Employment of Agents and Counsel....................... 48 10.7. Reliance on Documents; Counsel......................... 49 10.8. Agent's Reimbursement and Indemnification.............. 49 10.9. Notice of Default...................................... 49 10.10. Rights as a Lender..................................... 49 10.11. Lender Credit Decision................................. 50 10.12. Successor Agent........................................ 50 10.13. Agent's Fee............................................ 51 ARTICLE XI SETOFF; RATABLE PAYMENTS............................... 51 11.1. Setoff................................................. 51 11.2. Ratable Payments....................................... 51 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS......................................... 51 12.1. Successors and Assigns................................. 51 12.2. Participations......................................... 52 12.2.1. Permitted Participants; Effect......................... 52 12.2.2. Voting Rights.......................................... 52 12.2.3. Benefit of Setoff...................................... 52
(iii) 12.3. Assignments................................................. 53 12.3.1. Permitted Assignments.................................. 53 12.3.2. Effect; Effective Date................................. 53 12.4. Dissemination of Information............................... 54 12.5. Tax Treatment.............................................. 54 ARTICLE XIII NOTICES.................................................... 54 13.1. Giving Notice.............................................. 54 13.2. Change of Address.......................................... 54 ARTICLE XIV COUNTERPARTS............................................... 54
(iv) Exhibit "A" - Note (Ratable Loan) Exhibit "B" - Note (Competitive Bid Loan) Exhibit "C" - Competitive Bid Quote Request Exhibit "D" - Invitation for Competitive Bid Quotes Exhibit "E" - Competitive Bid Quote Exhibit "F" - Opinion Exhibit "G" - Compliance Certificate Schedule I to Compliance Certificate Exhibit "H" - Assignment Agreement Exhibit "I" - to Assignment Agreement (Notice of Assignment) Exhibit "II" - to Assignment Agreement (Consent and Release of the Borrower and Agent) Exhibit "I" - Transfer Instructions Schedule "1" - Significant Subsidiaries Schedule "2" - Material Liens on Properties Schedule "3" - Insurance Licenses (v) CREDIT AGREEMENT This Agreement, dated as of December 6, 1994, is among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: "Absolute Rate" means, with respect to an Absolute Rate Loan made by a given Lender for the relevant Absolute Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender and accepted by the Borrower. "Absolute Rate Advance" means a borrowing hereunder consisting of the aggregate amount of the several Absolute Rate Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Absolute Rate Auction" means a solicitation of Competitive Bid Quotes setting forth Absolute Rates pursuant to Section 2.3. "Absolute Rate Interest Period" means, with respect to an Absolute Rate Advance, a period of not less than 30 and not more than 180 days commencing on a Business Day selected by the Borrower pursuant to this Agreement. If such Absolute Rate Interest Period would end on a day which is not a Business Day, such Absolute Rate Interest Period shall end on the next succeeding Business Day. "Absolute Rate Loan" means a Loan which bears interest at the Absolute Rate. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by some or all of the Lenders to the Borrower on the same Borrowing Date, of the same Type (or on the same interest basis in the case of Competitive Bid Advances) and, when applicable, for the same Interest Period and includes a Competitive Bid Advance. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means The First National Bank of Chicago in its capacity as agent for the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X. "Agent Balance Transaction" means one or more receivables sales transactions with respect to receivables arising out of advances made by AIL to insurance agents in connection with life insurance policies underwritten by AIL. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. "Agreement" means this credit agreement, as it may be amended, modified or restated and in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4. "AIL" means American Income Life Insurance Company, an Indiana insurance company. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of Federal Funds Effective Rate for such day plus 1/2% per annum. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements recommended by the NAIC to be used for filing annual statutory financial statements and shall contain the type of information Page 2 recommended by the NAIC to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Eurodollar Margin" means (i) .23% at any time the Borrower Debt Rating is "AA-" or better, (ii) .25% at any time the Borrower Debt Rating is "A- " or better, (iii) .35% at any time the Borrower Debt Rating is "BBB-" or better and (iv) .5% at any time the Borrower Debt Rating is below "BBB-" or if there exists no Borrower Debt Rating. If more than one of the above margins applies at any time, the Applicable Eurodollar Margin shall be the lowest of such margins. The Applicable Eurodollar Margin shall change as and when the Borrower Debt Rating changes. The initial Applicable Eurodollar Margin shall be .25%. "Applicable Facility Fee Percentage" means (i) .07% at any time the Borrower Debt Rating is "AA-" or better, (ii) .08% at any time the Borrower Debt Rating is "A-" or better, (iii) .15% at any time the Borrower Debt Rating is "BBB-" or better and (iv) .25% at any time the Borrower Debt Rating is below "BBB-", or if there exists no Borrower Debt Rating. If more than one of the above percentages applies at any time, the Applicable Facility Fee Percentage shall be the lowest of such percentages. The Applicable Facility Fee Percentage shall change as and when the Borrower Debt Rating changes. The initial Applicable Facility Fee Percentage shall be .08%. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any of the Chairman, Vice Chairman, President, Chief Financial Officer, Chief Accounting Officer, Treasurer, any Vice President or any Assistant Treasurer of the Borrower, acting singly. "Borrower" means Torchmark Corporation, a Delaware corporation, and its successors and assigns. "Borrower Debt Rating" means the senior unsecured long term debt (without credit enhancement) rating of the Borrower as determined by Standard & Poor's Corporation. "Borrowing Date" means a date on which an Advance is made hereunder. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York Page 3 for the conduct of substantially all of their commercial lending activities. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Change" means (i) any change after the date of this Agreement in the Risk- Based Capital Guidelines for banks or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Change in Control" means the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Borrower. "Closing Date" means December 2, 1994. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment" means, for each Lender, the obligation of such Lender to make Loans not exceeding the amount set forth opposite its signature below or as set forth in any Notice of Assignment relating to any assignment that has become effective pursuant to Section 12.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Competitive Bid Advance" means a borrowing hereunder consisting of the aggregate amount of the several Competitive Bid Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Competitive Bid Borrowing Notice" is defined in Section 2.3.6. "Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute Rate Loan, or both, as the case may be. Page 4 "Competitive Bid Margin" means the margin above or below the applicable Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan, expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added or subtracted from such Eurodollar Base Rate. "Competitive Bid Note" means a promissory note in substantially the form of Exhibit "B" hereto, with appropriate insertions, duly executed and delivered to the Agent by the Borrower for the account of a Lender and payable to the order of such Lender, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Quote" means a Competitive Bid Quote substantially in the form of Exhibit "E" hereto completed and delivered by a Lender to the Agent in accordance with Section 2.3.4. "Competitive Bid Quote Request" means a Competitive Bid Quote Request substantially in the form of Exhibit "C" hereto completed and delivered by the Borrower to the Agent in accordance with Section 2.3.2. "Condemnation" is defined in Section 7.8. "Consolidated Adjusted Net Income" means, for any period of calculation, Consolidated Net Income plus (to the extent deducted in determining Consolidated Net Income) (i) the provision for taxes in respect of, or measured by, income or excess profits and (ii) Consolidated Interest Expense, in each case calculated for such period for the Borrower and its Subsidiaries on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Capitalization" means, at any date of determination, the sum of (i) Consolidated Net Worth as at such date plus (ii) Consolidated Indebtedness as at such date. "Consolidated Indebtedness" means the Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Interest Expense" means, for any period of calculation, interest expense, whether paid or accrued, of the Borrower and its Subsidiaries calculated on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Net Income" means, for any period of calculation, the net income of the Borrower and the Subsidiaries calculated on a consolidated basis in accordance with Agreement Accounting Principles consistently applied. Page 5 "Consolidated Net Worth" means, at any date of determination, the amount of consolidated common and preferred shareholders' equity of the Borrower and its Subsidiaries (including, without limitation, the Series A Preferred Securities), determined as at such date in accordance with Agreement Accounting Principles; provided, however, that the effect of the application of FAS 115 shall be - -------- ------- excluded when computing Consolidated Net Worth. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or application for a Letter of Credit, but excluding (i) the endorsement of instruments for deposit or collection in the ordinary course of business, (ii) the Payment and Guarantee Agreement and (iii) obligations arising in connection with the Agent Balance Transaction. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.2.4. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. The Corporate Base Rate is a reference rate and does not necessarily represent the lowest or best rate of interest actually charged to any customer. First Chicago may make commercial loans or other loans at rates of interest at, above or below the Corporate Base Rate. "Default" means an event described in Article VII. "Energy Assets" means Energy Assets International Corporation, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Advance" means a Eurodollar Bid Rate Advance or a Eurodollar Ratable Advance, or both, as the case may be. Page 6 "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Eurodollar Interest Period, the rate determined by the Agent to be the rate at which deposits in U.S. dollars are offered by First Chicago to first- class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Loan and having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate Loan made by a given Lender for the relevant Eurodollar Interest Period, the sum of (i) the Eurodollar Base Rate and (ii) the Competitive Bid Margin offered by such Lender and accepted by the Borrower. "Eurodollar Bid Rate Advance" means a Competitive Bid Advance which bears interest at a Eurodollar Bid Rate. "Eurodollar Bid Rate Loan" means a Loan which bears interest at the Eurodollar Bid Rate. "Eurodollar Interest Period" means, with respect to a Eurodollar Ratable Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Loan" means a Eurodollar Ratable Loan or Eurodollar Bid Rate Loan, or both, as the case may be. "Eurodollar Ratable Advance" means an Advance which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. "Eurodollar Ratable Loan" means a Loan which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. Page 7 "Eurodollar Rate" means, with respect to a Eurodollar Ratable Advance for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (ii) the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Existing Credit Agreements" means (i) that certain Credit Agreement dated as of June 30, 1992 among the Borrower, First Chicago, as agent, and the lenders party thereto, as amended and (ii) that certain Credit Agreement dated as of October 31, 1994 among the Borrower, First Chicago, as agent, and the lenders party thereto. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors. "Floating Rate Advance" means an Advance which bears interest at the Alternate Base Rate. "Floating Rate Loan" means a Ratable Loan which bears interest at the Alternate Base Rate. "Governmental Authority" means the federal government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government including, without limitation, any board of insurance, insurance department or insurance commissioner. "Indebtedness" of a Person means, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (excluding accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade and obligations of Insurance Subsidiaries arising under insurance or annuity products), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Page 8 property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or similar instruments, (v) Capitalized Lease Obligations, (vi) net liabilities under interest rate swap, exchange or cap agreements, and (vii) Contingent Obligations, but excluding any indebtedness of the Borrower arising under or in connection with the Series A Preferred Securities Loan Agreement. "Insurance Subsidiary" means any Subsidiary of the Borrower which is engaged in the life, health or accident insurance business. "Interest Period" means a Eurodollar Interest Period or an Absolute Rate Interest Period. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person. "Invitation for Competitive Bid Quotes" means an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto, completed and delivered by the Agent to the Lenders in accordance with Section 2.3.3. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "License" means any license, certificate of authority, permit or other authorization which is required to be obtained from the Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without Page 9 limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement but excluding rights in agent balances which are sold in an Agent Balance Transaction). "Loan" means, with respect to a Lender, such Lender's portion of any Advance and "Loans" means, with respect to the Lenders, the aggregate of all Advances. "Loan Documents" means this Agreement, the Notes and the other documents and agreements contemplated hereby and executed by the Borrower in favor of the Agent or any Lender. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder. "Modified Required Lenders" means Lenders in the aggregate having at least 75% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 75% of the aggregate unpaid principal amount of the outstanding Advances. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissions and similar Governmental Authorities of the various states of the United States of America toward the promotion of uniformity in the practices of such Governmental Authorities. "Notes" means, collectively, the Competitive Bid Notes and the Ratable Notes; and "Note" means any one of the Notes. "Notice of Assignment" is defined in Section 12.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party hereunder arising under the Loan Documents. Page 10 "Participants" is defined in Section 12.2.1. "Payment and Guarantee Agreement" means the Payment and Guarantee Agreement issued by the Borrower for the benefit of the holders of the Series A Preferred Securities, the terms and conditions of which (including, without limitation, the terms of subordination) were substantially similar to those set forth in the Registration Statement. "Payment Date" means the last day of each March, June, September and December. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means the Acquisition of any Person which has been approved and recommended by the board of directors (or the functional equivalent thereof) of the Person being acquired. "Person" means any natural person, corporation, firm, joint venture, partnership, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Purchasers" is defined in Section 12.3.1. "Ratable Advance" means a borrowing hereunder consisting of the aggregate amount of the several Ratable Loans made by the Lenders to the Borrower at the same time, of the same Type and for the same Interest Period. "Ratable Borrowing Notice" is defined in Section 2.2.3. "Ratable Loan" means a Loan made by a Lender pursuant to Section 2.2 hereof. "Ratable Note" means a promissory note in substantially the form of Exhibit "A" hereto, duly executed and delivered to the Agent by the Borrower for the account of each Lender and payable to the order of a Lender in the amount of its' Commitment, including any amendment, modification, renewal or replacement of such promissory note. Page 11 "Registration Statement" means the Prospectus Supplement of the Borrower and Torchmark Capital L.L.C. dated September 30, 1994 (which supplemented the Prospectus dated July 1, 1994) and issued under Section 4.24(b) of the Securities Act of 1933, as amended, copies of which have been furnished to the Lenders. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Required Lenders" means Lenders in the aggregate having at least 66 2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 66 2/3% of the aggregate unpaid principal amount of the outstanding Advances. "Reserve Requirement" means, with respect to an Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities . "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. Page 12 "SAP" means, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) as of the Closing Date in the jurisdiction of incorporation of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Series A Preferred Securities" means the 9.18% Preferred Securities, Series A, issued by Torchmark Capital L.L.C. on October 11, 1994. "Series A Preferred Securities Loan Agreement" means the Loan Agreement dated as of October 11, 1994 between the Borrower and Torchmark Capital L.L.C. entered into in connection with the Series A Preferred Securities, as in effect on the date hereof. "Significant Insurance Subsidiary" means any Significant Subsidiary which is an Insurance Subsidiary. "Significant Subsidiary" of a Person means a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X of the Securities and Exchange Commission (17 CFR Part 210), but excluding Torch Operating Company and Velasco. Unless otherwise expressly provided, all references herein to a "Significant Subsidiary" shall mean a Significant Subsidiary of the Borrower. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made, or (ii) is responsible for more than Page 13 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries as reflected in the financial statements referred to in clause (i) above. "Termination Date" means (i) December 5, 1995, as such date may be from time to time extended pursuant to Section 2.17, or (ii) such earlier date on ------------ which the obligations of the Lenders to make Loans hereunder are terminated pursuant to the terms of this Agreement. "Torch Energy" means Torch Energy Advisors Incorporated, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "Torch Operating Company" means Torch Operating Company, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "Transferee" is defined in Section 12.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance, Eurodollar Advance or Absolute Rate Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Velasco" means Velasco Gas Company, Ltd., a Texas limited partnership and Wholly-Owned Subsidiary of the Borrower. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Wholly-Owned Subsidiary" shall mean a Wholly-Owned Subsidiary of the Borrower. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Page 14 ARTICLE II THE FACILITY ------------ 2.1. The Facility. ------------ 2.1.1. Description of Facility. The Lenders grant to the Borrower a ----------------------- revolving credit facility pursuant to which, and upon the terms and subject to the conditions herein set out: (i) each Lender severally agrees to make Ratable Loans to the Borrower in accordance with Section 2.2 in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment less the amount of such Lender's pro rata (relative to its Commitment amount) share of the outstanding principal amount of all Competitive Bid Advances (regardless of which Lender or Lenders made such Competitive Bid Advances); and (ii) each Lender may, in its sole discretion, make bids to make Competitive Bid Loans to the Borrower, and make such Loans, in accordance with Section 2.3. 2.1.2. Facility Amount. In no event may the aggregate principal --------------- amount of all outstanding Advances (including both the Ratable Advances and the Competitive Bid Advances) exceed the Aggregate Commitment. 2.1.3. Availability of Facility. Subject to the terms hereof, the ------------------------ facility is available from the date hereof to the Termination Date. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Termination Date. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Termination Date. 2.2. Ratable Advances. ---------------- 2.2.1. Ratable Advances. Each Ratable Advance hereunder shall ---------------- consist of borrowings made from the several Lenders ratably in proportion to the amounts of their respective Commitments. Ratable Advances shall be evidenced by the Ratable Notes. 2.2.2. Ratable Advance Rate Options. The Ratable Advances may be ---------------------------- Floating Rate Advances or Eurodollar Ratable Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.2.3 or 2.2.4. No Ratable Advance may mature after, or have an Interest Period which extends beyond, the Termination Date. Page 15 2.2.3. Method of Selecting Types and Interest Periods for Ratable ---------------------------------------------------------- Advances. The Borrower shall select the Type of each Ratable Advance and, in - -------- the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable to each Ratable Advance from time to time; provided, however, that -------- ------- for a period of at least three Business Days after the initial Advances the Borrower shall maintain all Ratable Advances as Floating Rate Advances. The Borrower shall give the Agent irrevocable notice (a "Ratable Borrowing Notice") not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Ratable Advance. Notwithstanding the foregoing, a Ratable Borrowing Notice for a Floating Rate Advance may be given not later than 15 minutes after the time which the Borrower is required to reject one or more bids offered in connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Ratable Borrowing Notice for a Eurodollar Ratable Advance may be given not later than 15 minutes after the time the Borrower is required to reject one or more bids offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. A Ratable Borrowing Notice shall specify: (i) the Borrowing Date, which shall be a Business Day, of such Ratable Advance; (ii) the aggregate amount of such Ratable Advance, which, when added to all outstanding Ratable Advances and Competitive Bid Advances and after giving effect to the repayment of any such outstanding Advances out of the proceeds of the requested Ratable Advance, shall not exceed the Aggregate Commitment; (iii) the Type of Advance selected; and (iv) in the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable thereto (which may not end after the Termination Date). 2.2.4. Conversion and Continuation of Outstanding Ratable -------------------------------------------------- Advances. Floating Rate Advances shall continue as Floating Rate Advances unless - -------- and until such Floating Rate Advances are converted into Eurodollar Ratable Advances. Each Eurodollar Ratable Advance shall continue as a Eurodollar Ratable Advance until the end of the then applicable Eurodollar Interest Period therefor, at which time such Eurodollar Ratable Advance shall be automatically converted into a Floating Rate Advance unless the Borrower shall have given the Agent a Conversion/Continuation Notice requesting that, at the end of such Eurodollar Interest Period, such Eurodollar Ratable Advance continue as a Eurodollar Ratable Advance for the same or another Eurodollar Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Ratable Advance of any Type into any other Type or Types of Page 16 Ratable Advances; provided that any conversion of any Eurodollar Ratable Advance shall be made on, and only on, the last day of the Eurodollar Interest Period applicable thereto. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Ratable Advance or continuation of a Eurodollar Ratable Advance not later than 10:00 a.m. (Chicago time) at least three Business Days, in the case of a conversion into or continuation of a Eurodollar Ratable Advance, prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of Ratable Advance which is to be converted or continued; and (iii) the amount and Type(s) of Ratable Advance(s) into which such Ratable Advance is to be converted or continued and, in the case of a conversion into or continuation of an Eurodollar Ratable Advance, the duration of the Eurodollar Interest Period applicable thereto. 2.3. Competitive Bid Advances. ------------------------ 2.3.1. Competitive Bid Option. In addition to Ratable Advances ---------------------- pursuant to Section 2.2, but subject to the terms and conditions of this Agreement (including, without limitation, the limitation set forth in Section 2.1.2 as to the maximum aggregate principal amount of all outstanding Advances hereunder), the Borrower may, as set forth in this Section 2.3, request the Lenders, prior to the Termination Date, to make offers to make Competitive Bid Advances to the Borrower. Each Lender may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.3. Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. 2.3.2. Competitive Bid Quote Request. When the Borrower wishes to ----------------------------- request offers to make Competitive Bid Loans under this Section 2.3, it shall transmit to the Agent by telex or telecopy a Competitive Bid Quote Request substantially in the form of Exhibit "C" hereto so as to be received no later than (i) 10:00 a.m. (Chicago time) at least four Business Days prior to the Borrowing Date proposed therein, in the case of a Eurodollar Auction or (ii) 9:00 a.m. (Chicago time) at least one Business Day prior to the Borrowing Date proposed therein, in the case of an Absolute Rate Auction specifying: (i) the proposed Borrowing Date, which shall be a Business Day, for the proposed Competitive Bid Advance; Page 17 (ii) the aggregate principal amount of such Competitive Bid Advance; (iii) whether the Competitive Bid Quotes requested are to set forth a Eurodollar Bid Rate, an Absolute Rate, or both; and (iv) the Interest Period applicable thereto (which may not end after the Termination Date). The Borrower may request offers to make Competitive Bid Loans for more than one Interest Period in a single Competitive Bid Quote Request. No Competitive Bid Quote Request shall be given within 5 Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Competitive Bid Quote Request. A Competitive Bid Quote Request that does not conform substantially to the format of Exhibit "C" hereto shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telex or telecopy. 2.3.3. Invitation for Competitive Bid Quotes. Promptly and in any ------------------------------------- event before the close of business on the same Business Day of receipt of a Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2, the Agent shall send to each of the Lenders by telex or telecopy an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto, which shall constitute an invitation by the Borrower to each Lender to submit Competitive Bid Quotes offering to make the Competitive Bid Loans to which such Competitive Bid Quote Request relates in accordance with this Section 2.3. 2.3.4. Submission and Contents of Competitive Bid Quotes. ------------------------------------------------- (i) Each Lender may, in its sole discretion, submit a Competitive Bid Quote containing an offer or offers to make Competitive Bid Loans in response to any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must comply with the requirements of this Section 2.3.4 and must be submitted to the Agent by telex or telecopy at its offices specified in or pursuant to Article XIII not later than (a) 9:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (b) 9:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree); provided that Competitive Bid Quotes submitted by First Chicago may only be -------- submitted if the Agent or First Chicago notifies the Borrower of the terms of the offer or offers contained therein not later than 15 minutes prior to the latest time at which the relevant Competitive Bid Quotes Page 18 must be submitted by the other Lenders. Subject to Articles IV and VIII, any Competitive Bid Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Competitive Bid Quote shall be in substantially the form of Exhibit "E" hereto and shall in any case specify: (a) the proposed Borrowing Date, which shall be the same as that set forth in the applicable Invitation for Competitive Bid Quotes; (b) the principal amount of the Competitive Bid Loan for which each such offer is being made, which principal amount (1) may be greater than, less than or equal to the Commitment of the quoting Lender, (2) must be at least $10,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the principal amount of Competitive Bid Loans for which offers were requested; (c) in the case of a Eurodollar Auction, the Competitive Bid Margin offered for each such Competitive Bid Loan; (d) the minimum amount, if any, of the Competitive Bid Loan which may be accepted by the Borrower; (e) in the case of an Absolute Rate Auction, the Absolute Rate offered for each such Competitive Bid Loan; and (f) the identity of the quoting Lender. (iii) The Agent shall reject any Competitive Bid Quote that: (a) is not substantially in the form of Exhibit "E" hereto or does not specify all of the information required by Section 2.3.4(ii); (b) contains qualifying, conditional or similar language, other than any such language contained in Exhibit "E" hereto; (c) proposes terms other than or in addition to those set forth in the applicable Invitation for Competitive Bid Quotes; or (d) arrives after the time set forth in Section 2.3.4(i). Page 19 If any Competitive Bid Quote shall be rejected pursuant to this Section 2.3.4(iii), then the Agent shall notify the relevant Lender of such rejection promptly. 2.3.5. Notice to Borrower. The Agent shall promptly notify the ------------------ Borrower of the terms (i) of any Competitive Bid Quote submitted by a Lender that is in accordance with Section 2.3.4 and (ii) of any Competitive Bid Quote that amends, modifies or is otherwise inconsistent with a previous Competitive Bid Quote submitted by such Lender with respect to the same Competitive Bid Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded by the Agent unless such subsequent Competitive Bid Quote specifically states that it is submitted solely to correct a manifest error in such former Competitive Bid Quote. The Agent's notice to the Borrower shall specify the aggregate principal amount of Competitive Bid Loans for which offers have been received for each Interest Period specified in the related Competitive Bid Quote Request and the respective principal amounts and Eurodollar Bid Rates or Absolute Rates, as the case may be, so offered. 2.3.6. Acceptance and Notice by Borrower. Not later than (i) 10:00 --------------------------------- a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (ii) 10:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree), the Borrower shall notify the Agent of its acceptance or rejection of the offers so notified to it pursuant to Section 2.3.5; provided, however, that the failure by the Borrower to give such -------- ------- notice to the Agent shall be deemed to be a rejection of all such offers. In the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Competitive Bid Quote in whole or in part (subject to the terms of Section 2.3.4(ii)(d)); provided that: -------- (i) the aggregate principal amount of each Competitive Bid Advance may not exceed the applicable amount set forth in the related Competitive Bid Quote Request, (ii) acceptance of offers may only be made on the basis of ascending Eurodollar Bid Rates or Absolute Rates, as the case may be, and (iii) the Borrower may not accept any offer that is described in Section 2.3.4(iii) or that otherwise fails to comply with the requirements of this Agreement. 2.3.7. Allocation by Agent. If offers are made by two or more ------------------- Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may be, for a greater aggregate principal amount Page 20 than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Competitive Bid Loans in respect of which such offers are accepted shall be allocated by the Agent among such Lenders as nearly as possible (in such multiples, not greater than $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers; provided, however, that no Lender shall be allocated a portion of any -------- ------- Competitive Bid Advance which is less than the minimum amount which such Lender has indicated that it is willing to accept. Allocations by the Agent of the amounts of Competitive Bid Loans shall be conclusive in the absence of manifest error. The Agent shall promptly, but in any event on the same Business Day, notify each Lender of its receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount of such Competitive Bid Advance allocated to each participating Lender. 2.4. Availability of Funds. Not later than noon (Chicago time) (or, --------------------- in the event that a Lender shall have failed to be notified of the Agent's receipt of a Borrowing Notice for a Floating Rate Advance prior to 11:00 a.m. (Chicago time) on the applicable Borrowing Date, 2:00 p.m. (Chicago time)) on each Borrowing Date, each Lender shall make available its Loan or Loans, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. 2.5. Facility Fee; Reductions in Aggregate Commitment. The Borrower ------------------------------------------------ agrees to pay to the Agent for the ratable account of each Lender a facility fee equal to the Applicable Facility Fee Percentage times such Lender's Commitment from the date hereof to and including the Termination Date applicable to such Lender, payable on each Payment Date hereafter and on the Termination Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $10,000,000, upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued facility fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder. 2.6. Minimum Amount of Each Advance. Each Advance shall be in the ------------------------------ minimum amount of $3,000,000 (and in multiples of $1,000,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the unused Aggregate Commitment. 2.7. Optional Principal Payments. The Borrower may from time to time --------------------------- pay, without penalty or premium, all outstanding Advances, or, in a minimum aggregate amount of $3,000,000 or any Page 21 integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Advances upon two Business Days' prior notice to the Agent. Any prepayment of a Eurodollar Advance prior to the last day of the applicable Eurodollar Interest Period shall be subject to the indemnity provisions of Section 3.4. 2.8. Changes in Interest Rate, etc. Each Floating Rate Advance shall ------------------------------ bear interest at the Floating Rate on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is converted from a Ratable Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.2.4 to but excluding the date it becomes due or is converted into a Eurodollar Ratable Advance pursuant to Section 2.2.4 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance and Absolute Rate Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Eurodollar Interest Period at the interest rate determined as applicable to such Eurodollar Advance or Absolute Rate Advance. No Interest Period may end after the Termination Date. 2.9. Rates Applicable After Default. Notwithstanding anything to the ------------------------------ contrary contained in Section 2.2.3 or 2.2.4, no Advance may be made as, converted into or continued as a Eurodollar Ratable Advance (except with the consent of the Required Lenders) when any Default or Unmatured Default has occurred and is continuing. During the continuance of a Default, the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance and Absolute Rate Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Alternate Base Rate plus 2% per annum. 2.10. Method of Payment. All payments of the Obligations hereunder ----------------- shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by 12:00 noon (local time) on the date when due and shall be applied ratably by the Agent (i) first, ratably among the Lenders with respect to any principal and interest due in connection with Ratable Advances, (ii) second, after all amounts described in clause (i) have been satisfied, ratably among those Lenders for whom any payment of principal and interest is due in connection with any Competitive Bid Advances and (iii) third, after Page 22 all amounts described in clauses (i) and (ii) have been satisfied, ratably to any other Obligations then due. Each payment delivered to the Agent for the account of any Lender shall be delivered by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. If such payment is received by the Agent by 1:00 p.m. (Chicago time) such delivery to the Lenders shall be made on the same day and if received thereafter shall be made on the next succeeding Business Day. The Agent is hereby authorized to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder. 2.11. Notes; Telephonic Notices. Each Lender is hereby authorized to ------------------------- record the principal amount of each of its Loans and each repayment on the schedule attached to its Note, provided, however, that neither the failure to so record nor any error in such recordation shall affect the Borrower's obligations under such Note. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances, submit Competitive Bid Quotes and to transfer funds based on telephonic notices made by any one of the Chairman, Vice Chairman, Treasurer, the Chief Accounting Officer, any Vice-President or any Assistant Treasurer of the Borrower or any person who identifies himself or herself to be any such officer; provided that, without written notice from the Borrower, no proceeds of any Advance shall be transferred based upon telephonic notice to any bank account other than a bank account maintained by the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 2.12. Interest Payment Dates; Interest and Fee Basis. Interest accrued ---------------------------------------------- on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Ratable Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance or Absolute Rate Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance or Absolute Rate Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance or Absolute Rate Advance having an Interest Period longer than three months shall also be payable on the last Page 23 day of each three-month interval during such Interest Period. Interest and facility fees shall be calculated for actual days elapsed on the basis of a 360- day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 12:00 noon (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.13. Notification of Advances, Interest Rates, Prepayments and --------------------------------------------------------- Commitment Reductions. Promptly after receipt thereof, the Agent will notify - --------------------- each Lender of the contents of each Aggregate Commitment reduction notice, Ratable Borrowing Notice, Conversion/Continuation Notice, Invitation for Competitive Quotes and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.14. Lending Installations. Each Lender may book its Loans at any --------------------- Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written or telex notice to the Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.15. Non-Receipt of Funds by the Agent. Unless the Borrower or a --------------------------------- Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. Page 24 2.16. Withholding Tax Exemption. At least five Business Days prior to the ------------------------- first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. 2.17. Extension of Termination Date. The Borrower may request an ----------------------------- extension of the Termination Date by submitting a request for an extension to the Agent (an "Extension Request") no more than 60 days, but no less than 40 days, prior to the then effective Termination Date. Each extension effected pursuant to this Section 2.17 shall commence on the then effective Termination ------------ Date (the "Extension Date"). The Extension Request must specify the new Termination Date requested by the Borrower, which date shall be no more than 364 days (the "Extension Period") after the Extension Date, including the Extension Date as one of the days in the calculation of the days elapsed. Promptly upon receipt of an Extension Request, the Agent shall notify each Lender of the contents thereof and shall request each Lender to approve the Extension Request. Each Lender approving the Extension Request shall deliver its written consent to the Agent no earlier than 30 days prior to the then effective Termination Date and no later than 30 days after receipt of the Extension Request. Any consent delivered by a Lender prior to such response date may be revoked prior to the Extension Date by the Lender giving written notice of such revocation to the Agent before the Extension Date. If the consent of the Required Lenders is received by the Agent and remains in effect on the Extension Date, the new Termination Date Page 25 specified in the Extension Request shall become effective on the Extension Date as to such consenting Lenders only (and not as to any Lender which has not consented to such extension) and the Agent shall promptly notify the Borrower and each consenting Lender of the new Termination Date. Notwithstanding anything contained in this Agreement to the contrary, (a) all Obligations owing to the non-extending Lenders shall be due and payable on the Termination Date without giving effect to any requested extension, (b) the Aggregate Commitment as of the commencement of the Extension Period shall be reduced to an amount equal to the sum of the Commitments of the Lenders ultimately granting the Extension Request, and (c) each Lender may, in its sole discretion, grant or deny its consent with respect to any proposed extension of the Termination Date. Any Lender not granting the Extension Request shall, if the Borrower has selected a "Purchaser" (as defined in Section 12.3.1) for such Lender reasonably -------------- acceptable to the Agent prior to the Extension Date, promptly assign to such Purchaser its rights and obligations under the Loan Documents in respect of all or that portion of such Lender's Commitment as such Purchaser is willing to accept, all in accordance with Section 12.3. ------------ ARTICLE III CHANGE IN CIRCUMSTANCES ----------------------- 3.1. Yield Protection. If, after the date hereof, in connection with ---------------- a Eurodollar Loan the adoption of or any change in any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof, or the compliance of any Lender therewith, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of any Lender or applicable Lending Installation imposed by the jurisdiction in which such Lender or Lending Installation is incorporated or has its principal place of business), or changes the basis of taxation of payments to any Lender or Lending Installation in respect of its Loans or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or Page 26 (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by such Lender, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans and its Commitment. 3.2. Changes in Capital Adequacy Regulations. If a Lender determines --------------------------------------- the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy). 3.3. Availability of Types of Advances. If any Lender determines that --------------------------------- maintenance of any of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, the Agent shall suspend the availability of the affected Type of Advance and require any Eurodollar Advances to be repaid or converted into a Floating Rate Advance within five days after Borrower's receipt of notice by such Lender; or if the Required Lenders determine that (i) deposits of a type or maturity appropriate to match fund Eurodollar Advances are not available, the Agent shall suspend the availability of Eurodollar Advances with respect to any Eurodollar Advances made after the date of any such determination, or (ii) an interest rate applicable to an Eurodollar Advance does not accurately reflect the cost of making a Eurodollar Advance of such Type, then, if for any reason whatsoever the provisions of Section 3.1 are inapplicable, the Agent shall suspend the availability of Eurodollar Advances with respect to any Eurodollar Advances made after the date of any such determination. 3.4. Funding Indemnification. If any payment of an Eurodollar Advance ----------------------- occurs on a date which is not the last day of the applicable Eurodollar Interest Period, whether because of acceleration, prepayment or otherwise, or an Eurodollar Advance is Page 27 not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Advance. 3.5. Lender Statements; Survival of Indemnity. To the extent ---------------------------------------- reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. 3.6. Right to Substitute Lender. Any Lender claiming any additional -------------------------- amounts payable pursuant to Section 3.1 or 3.2 materially in excess of those being charged by other Lenders or unable to make a Eurodollar Advance available in accordance with Section 3.3, shall, so long as no Default or Unmatured Default has occurred and is continuing, upon the written request of the Borrower delivered to such Lender and the Agent, assign, pursuant to and in accordance with the provisions of Section 12.3, all of its rights and obligations under this Agreement and under the Loan Documents to another Lender or to a commercial bank, other financial institution, commercial finance company or other business lender selected by the Borrower and reasonably acceptable to the Agent in consideration for (a) the payment by such assignee to such assigning Lender of the principal of, and interest accrued and unpaid to the date of such assignment on, the Notes held by such assigning Lender, (b) the payment by the Borrower to such assigning Lender of any and all other amounts owing to such assigning Lender under any provision of this Agreement accrued and unpaid to the date of such assignment and (c) the Borrower's release of such assigning Lender from any further obligation or liability under this Agreement and the Loan Documents. Notwithstanding anything to Page 28 the contrary contained in this Section 3.6, in no event shall the replacement of ----------- any Lender result in a decrease or reallocation of the aggregate Commitments without the prior written consent of the remaining Lenders. ARTICLE IV CONDITIONS PRECEDENT -------------------- 4.1. Initial Advance. The Lenders shall not be required to make the --------------- initial Advance hereunder unless the Borrower has furnished to the Agent with sufficient copies for the Lenders: (i) Copies of the articles of incorporation of the Borrower, together with all amendments thereto, and a certificate of good standing, both certified by the appropriate governmental officer in its jurisdiction of incorporation. (ii) Copies, certified by the Secretary or an Assistant Secretary of the Borrower, of its by-laws and Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution of the Loan Documents. (iii) An incumbency certificate, executed by the Secretary or an Assistant Secretary of the Borrower, which shall identify by name and title and bear the signature of the officers of the Borrower authorized to sign the Loan Documents and to make borrowings hereunder, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (iv) A certificate, signed by the Chief Financial Officer or the Treasurer of the Borrower, stating that on the initial Borrowing Date no Default or Unmatured Default has occurred and is continuing. (v) A written opinion of the Borrower's counsel, addressed to the Lenders in substantially the form of Exhibit "F" hereto. (vi) Notes payable to the order of each of the Lenders. (vii) Written money transfer instructions, in substantially the form of Exhibit "I" hereto, addressed to the Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Agent may have reasonably requested. Page 29 (viii) The Existing Credit Agreements shall have been terminated and all amounts owing thereunder shall have been paid (or shall contemporaneously be paid) in full. (ix) Such other documents as any Lender or its counsel may have reasonably requested. 4.2. Each Advance. The Lenders shall not be required to make any ------------ Advance, unless on the applicable Borrowing Date: (i) There exists no Default or Unmatured Default. (ii) The representations and warranties contained in Article V (other than Section 5.4 and 5.5) are true and correct as of such Borrowing Date except for changes in the Schedules hereto reflecting transactions permitted by this Agreement. Each Ratable Borrowing Notice and Competitive Bid Quote Request with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit "G" hereto as a condition to making an Advance. ARTICLE V REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower represents and warrants to the Lenders that: 5.1. Corporate Existence and Standing. Each of the Borrower and its -------------------------------- Significant Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.2. Authorization and Validity. The Borrower has the corporate power -------------------------- and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. Page 30 5.3. No Conflict: Government Consent. Neither the execution and -------------------------------- delivery by the Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or the Borrower's or any of its Subsidiaries' articles of incorporation or by-laws or the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such indenture, instrument or agreement, other than such violations, conflicts or defaults which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents. 5.4. Financial Statements. The December 31, 1993 audited consolidated -------------------- financial statements of the Borrower and its Subsidiaries and the September 30, 1994 unaudited consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 5.5. Material Adverse Change. Since September 30, 1994, there has ----------------------- been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. 5.6. Taxes. The Borrower and its Subsidiaries have filed all United ----- States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which, in the good faith judgment of the Borrower, adequate reserves have been provided. The United States income tax returns of the Borrower and its Subsidiaries have been audited by the Internal Revenue Service through the fiscal year ended December 31, 1986. No tax liens have been filed with respect to any such taxes. The charges, accruals Page 31 and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate in the good faith judgment of the Borrower. 5.7. Litigation and Contingent Obligations. There is no litigation, ------------------------------------- arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect (after giving effect to reserves which have been provided with respect thereto on the books of the Borrower and its Subsidiaries). The Borrower has no material Contingent Obligations not provided for or disclosed in the financial statements referred to in Section 5.4. Solely for purposes of any reaffirmation of the foregoing representations pursuant to Section 4.2(ii) in connection with any Loans the proceeds of which are used to repay maturing commercial paper, such representations shall not extend to any proceeding in which a punitive damages judgment has been entered against the Borrower or any Subsidiary, such judgment has been stayed on appeal or the time for appeal from such judgment has not expired and such judgment could not reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under the Loan Documents. 5.8. Subsidiaries. Schedule "1" hereto contains an accurate list of ------------ all of the Significant Subsidiaries of the Borrower in existence on the date of this Agreement, setting forth their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable. 5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do ----- not in the aggregate exceed $10,000,000. Each Plan complies in all material respects with all applicable requirements of law and regulations. No Reportable Event has occurred with respect to any Plan and neither the Borrower nor any other members of the Controlled Group has withdrawn from any Plan or initiated steps to do so, which occurrence or withdrawal could result in a Material Adverse Effect. No steps have been taken to terminate any Plan which has Unfunded Liabilities. 5.10. Accuracy of Information. No information, exhibit or report ----------------------- furnished by the Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact, omitted to state a material fact or omitted to state any fact necessary to make the statements contained therein not misleading in any material respect. Page 32 5.11. Regulation U. Margin stock (as defined in Regulation U) ------------ constitutes less than 25% of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge or other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary is ------------------- a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Significant Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument evidencing or governing Indebtedness. 5.13. Compliance With Laws. The Borrower and its Subsidiaries have -------------------- complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable federal, state and local environmental, health and safety statutes and regulations or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. 5.14. Ownership of Properties. Except as set forth on Schedule "2" ----------------------- hereto, on the date of this Agreement, the Borrower and its Subsidiaries will have good title to all of the Property and assets reflected in the financial statements as owned by it, free of all Liens other than those Liens which, if executed or realized upon, could not reasonably be expected to have a Material Adverse Effect. 5.15. Investment Company Act. Neither the Borrower nor any Subsidiary ---------------------- thereof is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.16. Public Utility Holding Company Act. Neither the Borrower nor any ---------------------------------- Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", Page 33 within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.17. Insurance Licenses. Schedule "3" attached hereto (as said ------------------ Schedule "3" shall be revised or supplemented from time to time to reflect withdrawals or changes in jurisdictions permitted by Section 6.4 or additional jurisdictions set forth in the Annual Statements furnished pursuant to Section 6.1(vii)) lists all of the jurisdictions in which any Significant Insurance Subsidiary holds active Licenses and is authorized to transact insurance business. No such License is the subject of a proceeding for suspension or revocation, there is no sustainable basis for such suspension or revocation, and to the Borrower's knowledge no such suspension or revocation has been threatened by any Governmental Authority. Schedule "3" also indicates the type or types of insurance in which each such Insurance Subsidiary is permitted to engage with respect to each License therein listed. None of the Insurance Subsidiaries transacts any insurance business, directly or indirectly, in any state other than those enumerated in Schedule "3". ARTICLE VI COVENANTS --------- During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. The Borrower will maintain, for itself and ------------------- each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders: (i) Within 90 days after the close of each of its fiscal years, an unqualified audit report certified by independent certified public accountants, acceptable to the Lenders, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and the Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by certificate of said accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default, or if, in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof. (ii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and the Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period Page 34 and consolidated and consolidating profit and loss statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its Chief Financial Officer. (iii) Together with the financial statements required hereunder, a compliance certificate in substantially the form of Exhibit "G" hereto signed by the Chief Financial Officer, Chief Accounting Officer or Treasurer of the Borrower showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (iv) Within 330 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA. (v) As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the Chief Financial Officer, Chief Accounting Officer, Treasurer or Executive Vice President of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto. (vi) As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in either the case of either (a) or (b) above, could reasonably be expected to have a Material Adverse Effect. (vii) Upon the earlier of (i) fifteen days after the regulatory filing date or (ii) 75 days after the close of each fiscal year of each Insurance Subsidiary, copies of the Annual Statement of each of the Insurance Subsidiaries, as certified by the president, secretary and treasurer of and the actuary for each such Insurance Subsidiary and prepared on the NAIC annual statement blanks (or such other form as shall be required by the jurisdiction of incorporation of each such Insurance Subsidiary), all such statements to be prepared in accordance with SAP consistently applied throughout the periods reflected therein and to be certified by independent certified public accounts reasonably acceptable to the Agent if so required by any Governmental Authority. Page 35 (viii) Promptly upon the filing thereof, copies of all Forms 10Q, 10K and 8K which the Borrower or any Subsidiary files with the Securities and Exchange Commission and any Forms A and B which any Insurance Subsidiary files with any insurance commission or department or analogous Governmental Authority, and, together with copies of each Form 10K so furnished, a list of such revisions to Schedule "1", if any, as shall be necessary to cause Schedule "1" to accurately set forth all then existing Significant Subsidiaries of the Borrower, their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrower or other Subsidiaries. (ix) Promptly upon the Borrower's receipt thereof, copies of reports or valuations prepared by any Governmental Authority or actuary in respect of any action or event which has resulted in the reduction by 5% or more in the capital and surplus of any Insurance Subsidiary. (x) Promptly and in any event within ten days after learning thereof, notification of any decrease after the Closing Date in the rating given by A.M. Best & Co. in respect of any Insurance Subsidiary. (xi) Such other information (including, without limitation, non- financial information) as the Agent or any Lender may from time to time reasonably request. 6.2. Use of Proceeds. The Borrower will, and will cause each --------------- Subsidiary to, use the proceeds of the Advances (i) for general corporate purposes, including, without limitation, the repayment of Indebtedness and (ii) to finance Permitted Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U). 6.3. Certain Notices. The Borrower will give prompt notice in writing --------------- to the Agent and the Lenders of (i) the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, relating specifically to the Borrower which could reasonably be expected to have a Material Adverse Effect, (ii) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of, or the institution of any proceedings to revoke or suspend, any License now or hereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable laws and regulations, other than such expiration, revocation or suspension which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (iii) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Page 36 Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if adversely determined, could reasonably be expected to have a Material Adverse Effect or (iv) any judicial or administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which could reasonably be expected to have a Material Adverse Effect. Any such notice shall state that it is given pursuant to this Section 6.3. 6.4. Conduct of Business. The Borrower will, and will cause each ------------------- Significant Subsidiary to, do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. The Borrower will cause each Significant Insurance Subsidiary to (i) carry on or otherwise be associated with the business of a licensed insurance carrier and (ii) do all things necessary to renew, extend and continue in effect all Licenses which may at any time and from time to time be necessary for such Significant Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, however, that any such -------- ------- Significant Insurance Subsidiary may withdraw from one or more states as an admitted insurer or change the state of its domicile, if such withdrawal or change is in the best interests of the Borrower and such Significant Insurance Subsidiary and could not reasonably be expected to have a Material Adverse Effect. 6.5. Taxes. The Borrower will, and will cause each Subsidiary to, pay ----- when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. 6.6. Insurance. The Borrower will, and will cause each Subsidiary to, --------- maintain with financially sound and reputable insurance companies insurance on all or substantially all of its Property, or shall maintain self-insurance, in such amounts and covering such risks as is consistent with sound business practice for Persons in substantially the same industry as the Borrower or such Subsidiary, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. 6.7. Compliance with Laws. The Borrower will, and will cause each -------------------- Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Page 37 6.8. Maintenance of Properties. The Borrower will, and will ------------------------- cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, except where the failure to so maintain, preserve, protect and repair could not reasonably be expected to have a Material Adverse Effect. 6.9. Inspection. The Borrower will, and will cause each Subsidiary ---------- to, permit the Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers upon reasonable notice and at such reasonable times and intervals as the Lenders may designate. 6.10. Merger. The Borrower will not, nor will it permit any Subsidiary ------ to, merge or consolidate with or into any other Person, except that (i) a Subsidiary may merge with the Borrower or a Wholly-Owned Subsidiary and (ii) the Borrower and any Subsidiary may merge or consolidate with or into any other Person provided that the Borrower or such Subsidiary shall be the continuing or surviving corporation and, after giving effect to such merger or consolidation, no Default or Unmatured Default shall exist. 6.11. Sale of Assets. The Borrower will not, nor will it permit any -------------- Subsidiary to, lease, sell or otherwise dispose of all or a Substantial Portion of its Property (exclusive of Investments sold in the ordinary course of business) to any other Person(s) in any calendar year. 6.12. Sale and Leaseback. The Borrower will not, nor will it permit ------------------ any Subsidiary to, sell or transfer a Substantial Portion of its Property in order to concurrently or subsequently lease as lessee such or similar Property. 6.13. Investments and Acquisitions. ---------------------------- (a) The Borrower will not make any Acquisitions except Permitted Acquisitions. (b) The Borrower will not permit any Insurance Subsidiary to make or suffer to exist any Investments or to make any Acquisitions, except: (i) Investment assets permitted under the applicable insurance laws in the respective state of domicile of such Insurance Subsidiary; provided, however, -------- ------- Page 38 that in the event such Insurance Subsidiary receives notice or becomes aware that any of its Investment assets are not permitted under the applicable insurance laws of such state, such Investment assets which are subject to such notice shall be permitted so long as (x) such Insurance Subsidiary is contesting in good faith the issue of whether any such Investment assets are permitted or reinvests such Investment assets in a manner permitted under the applicable insurance laws of such state within 90 days of the later of receipt of such notice and cessation of such contest and (y) the aggregate amount of all Investment assets of all Insurance Subsidiaries of the Borrower which are subject to a notice of the type contemplated by this proviso and which have not been reinvested pursuant to clause (x) of this proviso shall not exceed, in the case of any Insurance Subsidiary at any one time, 3% of the admitted assets of such Insurance Subsidiary as disclosed on Exhibit 13, Column 4, Line 24, Page 20 of the most recent Annual Statement of such Insurance Subsidiary; (ii) Permitted Acquisitions; and (iii) Investment assets not included in the computations of Statutory Assets as scheduled on Exhibit 13, Column 3, Line 22, Page 20 of the most recent Annual Statement of each Insurance Subsidiary. 6.14. Liens. The Borrower will not, nor will it permit any Subsidiary ----- to, create, incur, or suffer to exist any Lien in, of or on a Substantial Portion of its Property. 6.15. Consolidated Net Worth. The Borrower will maintain at all times ---------------------- Consolidated Net Worth equal to not less than the sum of (i) $1,116,000,000 plus (ii) 25% of the Borrower's Consolidated Net Income, if positive, for each fiscal quarter ending after September 30, 1994. 6.16. Ratio of Consolidated Indebtedness to Consolidated -------------------------------------------------- Capitalization. The Borrower will maintain at all times a ratio of Consolidated Indebtedness to Consolidated Capitalization of not greater than .5 to 1.0. 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated --------------------------------------------------------- Interest Expense. The Borrower will maintain, as at the last day of each fiscal - ---------------- quarter, a ratio of (i) Consolidated Adjusted Net Income to (ii) Consolidated Interest Expense, in each case calculated for the four fiscal quarters then ending, of not less than 2.5 to 1.0. Page 39 6.18. Affiliates. The Borrower will not, and will not permit any ---------- Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than a Wholly-Owned Subsidiary) except (i) any such transactions, payments or transfers with or to such Affiliates as are made in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction and (ii) any such other transactions, payments or transfers with or to such Affiliates as could not reasonably be expected to have a Material Adverse Effect. 6.19 Series A Preferred Securities. The Borrower will not, and will not ----------------------------- permit Torchmark Capital L.L.C. to, declare or pay dividends or distributions on, or redeem, purchase or otherwise acquire, the Series A Preferred Securities or any portion thereof if, after giving effect thereto, a Default or Unmatured Default would exist. ARTICLE VII DEFAULTS -------- The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in connection with this Agreement, any Loan, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false or misleading on the date as of which made. 7.2. Nonpayment of principal of any Note when due, or nonpayment of interest upon any Note or of any facility fee or other obligations under any of the Loan Documents within five days after the same becomes due. 7.3. The breach by the Borrower of any of the terms or provisions of Section 6.2, 6.3, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17 or 6.19; or the breach by the Borrower of any of the terms or provisions of Section 6.14 or 6.18 which is not remedied within ten days after the Borrower learns thereof. 7.4. The breach by the Borrower (other than a breach which constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or provisions of this Agreement which is not remedied within twenty days after written notice from the Agent or any Lender. Page 40 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due (a) any Indebtedness in excess of, singly or in the aggregate for all such Subsidiaries, $10,000,000; or the default by the Borrower or any of its Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any such Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity (which default, condition or event, in the case of Torch Energy, Energy Assets or Velasco, shall continue for at least 30 days beyond any applicable grace period); or any such Indebtedness of the Borrower or any Subsidiary shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.6. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days. 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of the Borrower or any of its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so Page 41 condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion of its Property. 7.9. The Borrower or any of its Subsidiaries shall fail within 45 days to pay, bond or otherwise discharge any judgment or order for the payment of money, either singly or in the aggregate, in excess of $10,000,000, which is not stayed on appeal or otherwise being appropriately contested in good faith. 7.10. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $10,000,000 or any Reportable Event shall occur in connection with any Plan. 7.11. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $5,000,000 or requires payments exceeding $500,000 per annum. 7.12. The Borrower or any of its Subsidiaries shall be the subject of any proceeding or investigation pertaining to the release by the Borrower or any of its Subsidiaries, or any other person of any toxic or hazardous waste or substance into the environment, or any violation of any federal, state or local environmental, health or safety law or regulation, which, in either case, could reasonably be expected to have a Material Adverse Effect. 7.13. Any Change in Control shall occur. 7.14. Any License of any Insurance Subsidiary held by such Insurance Subsidiary on the Closing Date or acquired by such Insurance Subsidiary thereafter, the loss of which would have, in the reasonable judgment of the Lenders, a Material Adverse Effect, (i) shall be revoked by a final non- appealable order by the state which shall have issued such License, or any action (whether administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary which shall not have been dismissed or contested in good faith within 30 days of the commencement thereof, (ii) shall be suspended by such state for a period in excess of 30 days or (iii) shall not be reissued or renewed by such state upon the expiration thereof following application for such reissuance or renewal by such Insurance Subsidiary. Page 42 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ---------------------------------------------- 8.1. Acceleration. If any Default described in Section 7.6 or 7.7 ------------ occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. If, before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Modified Required Lenders (or, in the case of an automatic termination upon the occurrence of a Default under Section 7.6 or 7.7, all the Lenders), in their sole discretion, shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Article VIII, ---------- the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or thereunder or waiving any Default hereunder or thereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender: (i) Extend the Termination Date (other than as provided in Section 2.17), or compromise or forgive the principal amount of any Loan, ------------ or reduce the rate of interest or compromise payment of interest on any Loan, or reduce the amount of any fee payable hereunder. (ii) Reduce the percentage specified in the definition of Required Lenders or Modified Required Lenders. (iii) Increase the amount of the Commitment of any Lender hereunder, or permit the Borrower to assign its rights under this Agreement. (iv) Amend this Section 8.2. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. Page 43 The Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders or ---------------------- the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS ------------------ 9.1. Survival of Representations. All representations and warranties --------------------------- of the Borrower contained in this Agreement shall survive delivery of the Notes and the making of the Loans herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to ----------------------- the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Taxes. Any taxes (excluding federal income taxes on the overall ----- net income of any Lender) or other similar assessments or charges payable or ruled payable by any governmental or revenue authority in respect of the Loan Documents shall be paid by the Borrower, together with interest and penalties, if any. 9.4. Headings. Section headings in the Loan Documents are for -------- convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.5. Entire Agreement. The Loan Documents embody the entire agreement ---------------- and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof other than the Commitment Letter dated September 21, 1994 and that certain fee letter Page 44 agreement dated November 23, 1994, in each case by and between the Borrower and First Chicago. 9.6. Several Obligations; Benefits of this Agreement. The respective ----------------------------------------------- obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns. 9.7. Expenses; Indemnification. The Borrower shall reimburse the ------------------------- Agent for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, negotiation, execution, delivery, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Agent and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent and the Lenders, which attorneys may be employees of the Agent or the Lenders) paid or incurred by the Agent or any Lender in connection with the collection of the Obligations or the enforcement of the Loan Documents. The Borrower further agrees to indemnify the Agent and each Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (collectively, the "indemnified obligations") (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto, but excluding those indemnified obligations arising solely from any Lender's failure to perform its obligations under this Agreement) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder, except that no indemnified party shall be indemnified for any indemnified obligations arising from its own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The obligations of the Borrower under this Section 9.7 shall survive the termination of this Agreement. 9.8. Numbers of Documents. All statements, notices, closing -------------------- documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders. The Agent shall promptly remit same to the Lenders. Page 45 9.9. Accounting. Except as provided to the contrary herein, all ---------- accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. 9.10. Severability of Provisions. Any provision in any Loan Document -------------------------- that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.11. Nonliability of Lenders. The relationship between the Borrower ----------------------- and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. 9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A ------------- CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS ----------------------- TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. 9.14. Confidentiality. Each Lender agrees to hold any confidential --------------- information which it may receive from the Borrower pursuant to this Agreement in confidence and for use in connection with this Agreement, including without limitation, for use in connection with its rights and remedies hereunder, except for disclosure (i) to other Lenders and their respective Affiliates, Page 46 (ii) to legal counsel, accountants, and other professional advisors to that Lender, (iii) to regulatory officials, (iv) as requested pursuant to or as required by law, regulation, or legal process, (v) in connection with any legal proceeding to which that Lender is a party, and (vi) permitted by Section 12.4. 9.15. Nonreliance. Each Lender hereby represents that it is not ----------- relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Loans provided for herein. 9.16. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER -------------------- HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. 9.17. Disclosure. The Borrower and each Lender hereby (a) acknowledge ---------- and agree that First Chicago and/or its Affiliates from time to time may hold other investments in, make other loans to or have other relationships with the Borrower and its Subsidiaries, including, without limitation, acting as commercial paper dealer or in connection with any securitizations, interest rate hedging instruments or agreements or swap transactions, and (b) waive any liability of First Chicago or such Affiliate to the Borrower or any Lender, respectively, arising out of or resulting from such investments, loans or other relationships other than liabilities arising out of the gross negligence or willful misconduct of First Chicago or its Affiliates. ARTICLE X THE AGENT --------- 10.1. Appointment. The First National Bank of Chicago is hereby ----------- appointed Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the agent of such Lender. The Agent agrees to act as such upon the express conditions contained in this Article X. The Agent shall not have a fiduciary relationship in respect of the Borrower or any Lender by reason of this Agreement or any other Loan Document. 10.2. Powers. The Agent shall have and may exercise such powers under ------ the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. Page 47 10.3. General Immunity. Neither the Agent nor any of its directors, ---------------- officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent ------------------------------------------- nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (iii) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered to the Agent; or (iv) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith. Except for notices or reports which the Agent is expressly hereby required to provide to the Lenders, the Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. The Agent shall in all cases --------------------------------- be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. 10.6. Employment of Agents and Counsel. The Agent may execute any of -------------------------------- its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters Page 48 pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. The Agent shall be entitled to ------------------------------ rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.8. Agent's Reimbursement and Indemnification. The Lenders agree to ----------------------------------------- reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. The Agent shall not be deemed to have ----------------- knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event the Agent is a Lender, the ------------------ Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or Page 49 any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, ---------------------- independently and without reliance upon the Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Agent. The Agent may resign at any time by giving --------------- written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intent to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lenders and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a Lender or another commercial bank having capital and retained earnings of at least $200,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent, and the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. Page 50 10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its ----------- own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated November 23, 1994, or as otherwise agreed from time to time. ARTICLE XI SETOFF; RATABLE PAYMENTS ------------------------ 11.1. Setoff. In addition to, and without limitation of, any rights of ------ the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default or Unmatured Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.2. Ratable Payments. Except for payments received from the Agent ---------------- pursuant to Section 2.4, if any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Sections 3.1, 3.2 or 3.4) in a proportion greater than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of Loans. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ------------------------------------------------- 12.1. Successors and Assigns. The terms and provisions of the Loan ---------------------- Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3. Notwithstanding clause (ii) of the immediately preceding sentence, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment to a Federal Page 51 Reserve Bank shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 12.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 12.2. Participations. -------------- 12.2.1. Permitted Participants; Effect. Any Lender may, in the ------------------------------ ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2. Voting Rights. Each Lender shall retain the sole right to ------------- approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, or extends the Termination Date. 12.2.3. Benefit of Setoff. The Borrower agrees that each ----------------- Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with Page 52 respect to the amount of participating interests sold to each Participant. Each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3. Assignments. ----------- 12.3.1. Permitted Assignments. Any Lender may, in the ordinary --------------------- course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents; provided, -------- however, that in the case of an assignment to an entity which is not a ------- Lender or an Affiliate of a Lender, such assignment shall be in a minimum amount of $5,000,000. Such assignment shall be substantially in the form of Exhibit "H" hereto or in such other form as may be agreed to by the parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that the consent of the Borrower shall not be required if, on the date of such assignment, a Default shall have occurred and be continuing. Such consent shall not be unreasonably withheld or delayed. 12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a ---------------------- notice of assignment, substantially in the form attached as Exhibit "I" to Exhibit "H" hereto (a "Notice of Assignment"), together with any consents required by Section 12.3.1, and (ii) payment of a $3,000 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that a replacement Note is issued to such transferor Lender and a new Note or, as appropriate, replacement Note, is issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. Page 53 12.4. Dissemination of Information. The Borrower authorizes each ---------------------------- Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.14 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is ------------- transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.16. ARTICLE XIII NOTICES ------- 13.1. Giving Notice. Except as otherwise permitted by Section 2.11 ------------- with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing and shall be delivered or mailed (or in the case of telegraphic communication, delivered by telecopy or telex) addressed to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties. Any notice, if personally delivered or mailed (properly addressed with postage prepaid), shall be deemed given when received; any notice, if transmitted by telecopy or telex, shall be deemed given when transmitted (receipt confirmed by telephone in the case of telecopies and answerback confirmed in the case of telexes). 13.2. Change of Address. The Borrower, the Agent and any Lender may ----------------- each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XIV COUNTERPARTS ------------ This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by telex or telephone, that it has taken such action. Page 54 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. Commitments TORCHMARK CORPORATION - ----------- By:_______________________________________ Print Name: Michael J. Klyce Title: Vice President and Treasuer 2001 Third Avenue South Birmingham, Alabama 35233 Attention: Mr. Michael J. Klyce Telephone No.: (205) 325-2051 Telecopier No.: (205) 325-4157 $ 22,500,000 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By:________________________________________ Print Name:________________________________ Title:_____________________________________ One First National Plaza Chicago, Illinois 60670 Attention: Financial Services Division Telephone No.: (312) 732-7074 Telecopier No.: (312) 732-4033 Telex No.: 4330253 Page 55 $17,500,000 AMSOUTH BANK OF ALABAMA By:________________________________________ Print Name:________________________________ Title:_____________________________________ 1900 Fifth Avenue North Birmingham, Alabama 35203 Attention: Mr. John Kettig Senior Vice President Telephone No.: (205) 326-5924 Telecopier No.: (205) 801-0157 $15,000,000 BANK OF AMERICA ILLINOIS By:________________________________________ Print Name:________________________________ Title:_____________________________________ 231 South LaSalle Street Chicago, Illinois 60697 Attention: Ms. Ann M. Benschoter Vice President Telephone No.: (312) 828-6723 Telecopier No.: (312) 987-0889 $15,000,000 BANK OF MONTREAL By:________________________________________ Print Name:________________________________ Title:_____________________________________ 115 South LaSalle Street Chicago, IL 60603 Attention: Mr. Dan Streiff Telephone No.: (312) 750-3775 Telecopier No.: (312) 750-3783 Page 56 $17,500,000 THE BANK OF NEW YORK By:________________________________________ Print Name:________________________________ Title:_____________________________________ One Wall Street, 17th Floor New York, New York 10286 Attention: Mr. Timothy J. Stambaugh Vice President Telephone No.: (212) 635-6463 Telecopier No.: (212) 809-9520/9499 $10,000,000 BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY By:________________________________________ Print Name:________________________________ Title:_____________________________________ 10th and Baltimore Kansas City, MO 64183 Attention: Mr. Michael J. Helak Senior Vice President Telephone No.: (816) 691-7032 Telecopier No.: (816) 691-7426 $17,500,000 CHEMICAL BANK By:________________________________________ Print Name:________________________________ Title:_____________________________________ 270 Park Avenue, 9th Floor New York, New York 10017 Attention: Ms. Irene Math Vice President Telephone No.: (212) 270-5281 Telecopier No.: (212) 270-5222 Page 57 $15,000,000 COMPASS BANK By:________________________________________ Print Name:________________________________ Title:_____________________________________ 15 South 20th Street, 2nd Floor Birmingham, AL 35233 Attention: Mr. Austin S. Landry Vice President Telephone No.: (205) 933-3689 Telecopier No.: (205) 933-3926 $15,000,000 FIRST ALABAMA BANK By:________________________________________ Print Name:________________________________ Title:_____________________________________ 417 North 20th St., 2nd Floor Birmingham, Alabama 35203 Attention: Mr. Robert Kuhn Executive Vice President Telephone No.: (205) 326-7104 Telecopier No.: (205) 326-7662 $10,000,000 SHAWMUT BANK CONNECTICUT, N.A. By:________________________________________ Print Name:________________________________ Title:_____________________________________ 777 Main Street Hartford, CT 06115 Attention: Mr. Larry Gloekler Vice President Telephone No.: (203) 240-7932 Telecopier No.: (203) 250-1264 Page 58 $17,500,000 SOUTHTRUST BANK OF ALABAMA, NATIONAL ASSOCIATION By:________________________________________ Print Name:________________________________ Title:_____________________________________ 420 North 20th Street Birmingham, Alabama 35203 Attention: Mr. Curtis J. Perry Vice President Telephone No.: (205) 254-5799 Telecopier No.: (205) 254-5022 $10,000,000 UMB BANK, n.a. By:________________________________________ Print Name:________________________________ Title:_____________________________________ 1010 Grand Avenue Kansas City, MO 64103 Attention: Mr. Jim Sangster Divisional Executive Vice President Telephone No.: (816) 860-7919 Telecopier No.: (816) 860-7143 $17,500,000 UNION BANK OF SWITZERLAND By:________________________________________ Print Name:________________________________ Title:_____________________________________ 299 Park Avenue New York, New York 10171 Attention: Mr. Robert W. Casey, Jr. Assistant Vice President Telephone No.: (212) 715-3329 Telecopier No.: (212) 715-3878 $200,000,000 ============ Page 59 [5 Year] CREDIT AGREEMENT Dated as of December 6, 1994 among TORCHMARK CORPORATION, THE LENDERS and THE FIRST NATIONAL BANK OF CHICAGO, as Agent TABLE OF CONTENTS Page ----
ARTICLE I DEFINITIONS........................................ 1 ARTICLE II THE FACILITY...................................... 14 2.1. The Facility...................................... 14 2.1.1. Description of Facility...................... 14 2.1.2. Facility Amount.............................. 15 2.1.3. Availability of Facility..................... 15 2.2. Ratable Advances.................................. 15 2.2.1. Ratable Advances............................. 15 2.2.2. Ratable Advance Rate Options................. 15 2.2.3. Method of Selecting Types and Interest Periods for Ratable Advances................. 15 2.2.4. Conversion and Continuation of Outstanding Ratable Advances................. 16 2.3. Competitive Bid Advances.......................... 17 2.3.1. Competitive Bid Option....................... 17 2.3.2. Competitive Bid Quote Request................ 17 2.3.3. Invitation for Competitive Bid Quotes........ 18 2.3.4. Submission and Contents of Competitive Bid Quotes................................... 18 2.3.5. Notice to Borrower........................... 19 2.3.6. Acceptance and Notice by Borrower............ 20 2.3.7. Allocation by Agent.......................... 20 2.4. Availability of Funds............................. 21 2.5. Facility Fee; Reductions in Aggregate Commitment........................................ 21 2.6. Minimum Amount of Each Advance.................... 21 2.7. Optional Principal Payments....................... 21 2.8. Changes in Interest Rate, etc..................... 22 2.9. Rates Applicable After Default.................... 22 2.10. Method of Payment................................. 22 2.11. Notes; Telephonic Notices......................... 23 2.12. Interest Payment Dates; Interest and Fee Basis............................................. 23 2.13. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions............. 24 2.14. Lending Installations............................. 24 2.15. Non-Receipt of Funds by the Agent................. 24 2.16. Withholding Tax Exemption......................... 24 ARTICLE III CHANGE IN CIRCUMSTANCES........................... 25 3.1. Yield Protection.................................. 25 3.2. Changes in Capital Adequacy Regulations........... 26 3.3. Availability of Types of Advances................. 26 3.4. Funding Indemnification........................... 27 3.5. Lender Statements; Survival of Indemnity.......... 27
(i)
3.6. Right to Substitute Lender......................... 27 ARTICLE IV CONDITIONS PRECEDENT............................... 28 4.1. Initial Advance.................................... 28 4.2. Each Advance....................................... 29 ARTICLE V REPRESENTATIONS AND WARRANTIES..................... 29 5.1. Corporate Existence and Standing................... 29 5.2. Authorization and Validity......................... 29 5.3. No Conflict; Government Consent.................... 30 5.4. Financial Statements............................... 30 5.5. Material Adverse Change............................ 30 5.6. Taxes.............................................. 30 5.7. Litigation and Contingent Obligations.............. 31 5.8. Subsidiaries....................................... 31 5.9. ERISA.............................................. 31 5.10. Accuracy of Information............................ 31 5.11. Regulation U....................................... 32 5.12. Material Agreements................................ 32 5.13. Compliance With Laws............................... 32 5.14. Ownership of Properties............................ 32 5.15. Investment Company Act............................. 32 5.16. Public Utility Holding Company Act................. 33 5.17. Insurance Licenses................................. 33 ARTICLE VI COVENANTS.......................................... 33 6.1. Financial Reporting................................ 33 6.2. Use of Proceeds.................................... 35 6.3. Certain Notices.................................... 35 6.4. Conduct of Business................................ 36 6.5. Taxes.............................................. 36 6.6. Insurance.......................................... 36 6.7. Compliance with Laws............................... 37 6.8. Maintenance of Properties.......................... 37 6.9. Inspection......................................... 37 6.10. Merger............................................. 37 6.11. Sale of Assets..................................... 37 6.12. Sale and Leaseback................................. 37 6.13. Investments and Acquisitions....................... 37 6.14. Liens.............................................. 38 6.15. Consolidated Net Worth............................. 38 6.16. Ratio of Consolidated Indebtedness to Consolidated Capitalization........................ 38 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest Expense...................... 39 6.18. Affiliates......................................... 39 ARTICLE VII DEFAULTS........................................... 39 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES........................................... 42 8.1. Acceleration....................................... 42
(ii)
8.2. Amendments......................................... 42 8.3. Preservation of Rights............................. 43 ARTICLE IX GENERAL PROVISIONS................................. 43 9.1. Survival of Representations........................ 43 9.2. Governmental Regulation............................ 43 9.3. Taxes.............................................. 43 9.4. Headings........................................... 44 9.5. Entire Agreement................................... 44 9.6. Several Obligations; Benefits of this Agreement.......................................... 44 9.7. Expenses; Indemnification.......................... 44 9.8. Numbers of Documents............................... 45 9.9. Accounting......................................... 45 9.10. Severability of Provisions......................... 45 9.11. Nonliability of Lenders............................ 45 9.12. CHOICE OF LAW...................................... 45 9.13. CONSENT TO JURISDICTION............................ 45 9.14. Confidentiality.................................... 46 9.15. Nonreliance........................................ 46 9.16. WAIVER OF JURY TRIAL............................... 46 9.17. Disclosure......................................... 46 ARTICLE X THE AGENT.......................................... 46 10.1. Appointment........................................ 46 10.2. Powers............................................. 47 10.3. General Immunity................................... 47 10.4. No Responsibility for Loans, Recitals, etc......... 47 10.5. Action on Instructions of Lenders.................. 47 10.6. Employment of Agents and Counsel................... 48 10.7. Reliance on Documents; Counsel..................... 48 10.8. Agent's Reimbursement and Indemnification.......... 48 10.9. Notice of Default.................................. 48 10.10. Rights as a Lender................................. 49 10.11. Lender Credit Decision............................. 49 10.12. Successor Agent.................................... 49 10.13. Agent's Fee........................................ 50 ARTICLE XI SETOFF; RATABLE PAYMENTS........................... 50 11.1. Setoff............................................. 50 11.2. Ratable Payments................................... 50 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS..................................... 51 12.1. Successors and Assigns............................. 51 12.2. Participations..................................... 51 12.2.1. Permitted Participants; Effect................ 51 12.2.2. Voting Rights................................. 51 12.2.3. Benefit of Setoff............................. 52 12.3. Assignments........................................ 52 12.3.1. Permitted Assignments......................... 52 12.3.2. Effect; Effective Date........................ 52
(iii)
12.4. Dissemination of Information................. 53 12.5. Tax Treatment................................ 53 ARTICLE XIII NOTICES...................................... 53 13.1. Giving Notice................................ 53 13.2. Change of Address............................ 54 ARTICLE XIV COUNTERPARTS................................. 54
(iv) Exhibit "A" - Note (Ratable Loan) Exhibit "B" - Note (Competitive Bid Loan) Exhibit "C" - Competitive Bid Quote Request Exhibit "D" - Invitation for Competitive Bid Quotes Exhibit "E" - Competitive Bid Quote Exhibit "F" - Opinion Exhibit "G" - Compliance Certificate Schedule I to Compliance Certificate Exhibit "H" - Assignment Agreement Exhibit "I" - to Assignment Agreement (Notice of Assignment) Exhibit "II" - to Assignment Agreement (Consent and Release of the Borrower and Agent) Exhibit "I" - Transfer Instructions Schedule "1" - Significant Subsidiaries Schedule "2" - Material Liens on Properties Schedule "3" - Insurance Licenses (v) CREDIT AGREEMENT This Agreement, dated as of December 6, 1994, is among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: "Absolute Rate" means, with respect to an Absolute Rate Loan made by a given Lender for the relevant Absolute Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender and accepted by the Borrower. "Absolute Rate Advance" means a borrowing hereunder consisting of the aggregate amount of the several Absolute Rate Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Absolute Rate Auction" means a solicitation of Competitive Bid Quotes setting forth Absolute Rates pursuant to Section 2.3. "Absolute Rate Interest Period" means, with respect to an Absolute Rate Advance, a period of not less than 30 and not more than 180 days commencing on a Business Day selected by the Borrower pursuant to this Agreement. If such Absolute Rate Interest Period would end on a day which is not a Business Day, such Absolute Rate Interest Period shall end on the next succeeding Business Day. "Absolute Rate Loan" means a Loan which bears interest at the Absolute Rate. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by some or all of the Lenders to the Borrower on the same Borrowing Date, of the same Type (or on the same interest basis in the case of Competitive Bid Advances) and, when applicable, for the same Interest Period and includes a Competitive Bid Advance. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means The First National Bank of Chicago in its capacity as agent for the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X. "Agent Balance Transaction" means one or more receivables sales transactions with respect to receivables arising out of advances made by AIL to insurance agents in connection with life insurance policies underwritten by AIL. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. "Agreement" means this credit agreement, as it may be amended, modified or restated and in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4. "AIL" means American Income Life Insurance Company, an Indiana insurance company. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of Federal Funds Effective Rate for such day plus 1/2% per annum. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements recommended by the NAIC to be used for filing annual statutory financial statements and shall contain the type of information Page 2 recommended by the NAIC to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Eurodollar Margin" means (i) .19% at any time the Borrower Debt Rating is "AA-" or better, (ii) .205% at any time the Borrower Debt Rating is "A-" or better, (iii) .25% at any time the Borrower Debt Rating is "BBB-" or better and (iv) .375% at any time the Borrower Debt Rating is below "BBB-" or if there exists no Borrower Debt Rating. If more than one of the above margins applies at any time, the Applicable Eurodollar Margin shall be the lowest of such margins. The Applicable Eurodollar Margin shall change as and when the Borrower Debt Rating changes. The initial Applicable Eurodollar Margin shall be .205%. "Applicable Facility Fee Percentage" means (i) .11% at any time the Borrower Debt Rating is "AA-" or better, (ii) .125% at any time the Borrower Debt Rating is "A-" or better, (iii) .25% at any time the Borrower Debt Rating is "BBB-" or better and (iv) .375% at any time the Borrower Debt Rating is "BBB- " or below, or if there exists no Borrower Debt Rating. If more than one of the above percentages applies at any time, the Applicable Facility Fee Percentage shall be the lowest of such percentages. The Applicable Facility Fee Percentage shall change as and when the Borrower Debt Rating changes. The initial Applicable Facility Fee Percentage shall be .125%. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any of the Chairman, Vice Chairman, President, Chief Financial Officer, Chief Accounting Officer, Treasurer, any Vice President or any Assistant Treasurer of the Borrower, acting singly. "Borrower" means Torchmark Corporation, a Delaware corporation, and its successors and assigns. "Borrower Debt Rating" means the senior unsecured long term debt (without credit enhancement) rating of the Borrower as determined by Standard & Poor's Corporation. "Borrowing Date" means a date on which an Advance is made hereunder. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York Page 3 for the conduct of substantially all of their commercial lending activities. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Change" means (i) any change after the date of this Agreement in the Risk- Based Capital Guidelines for banks or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Change in Control" means the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Borrower. "Closing Date" means December 2, 1994. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment" means, for each Lender, the obligation of such Lender to make Loans not exceeding the amount set forth opposite its signature below or as set forth in any Notice of Assignment relating to any assignment that has become effective pursuant to Section 12.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Competitive Bid Advance" means a borrowing hereunder consisting of the aggregate amount of the several Competitive Bid Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Competitive Bid Borrowing Notice" is defined in Section 2.3.6. "Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute Rate Loan, or both, as the case may be. Page 4 "Competitive Bid Margin" means the margin above or below the applicable Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan, expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added or subtracted from such Eurodollar Base Rate. "Competitive Bid Note" means a promissory note in substantially the form of Exhibit "B" hereto, with appropriate insertions, duly executed and delivered to the Agent by the Borrower for the account of a Lender and payable to the order of such Lender, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Quote" means a Competitive Bid Quote substantially in the form of Exhibit "E" hereto completed and delivered by a Lender to the Agent in accordance with Section 2.3.4. "Competitive Bid Quote Request" means a Competitive Bid Quote Request substantially in the form of Exhibit "C" hereto completed and delivered by the Borrower to the Agent in accordance with Section 2.3.2. "Condemnation" is defined in Section 7.8. "Consolidated Adjusted Net Income" means, for any period of calculation, Consolidated Net Income plus (to the extent deducted in determining Consolidated Net Income) (i) the provision for taxes in respect of, or measured by, income or excess profits and (ii) Consolidated Interest Expense, in each case calculated for such period for the Borrower and its Subsidiaries on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Capitalization" means, at any date of determination, the sum of (i) Consolidated Net Worth as at such date plus (ii) Consolidated Indebtedness as at such date. "Consolidated Indebtedness" means the Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Interest Expense" means, for any period of calculation, interest expense, whether paid or accrued, of the Borrower and its Subsidiaries calculated on a consolidated basis in accordance with Agreement Accounting Principles. "Consolidated Net Income" means, for any period of calculation, the net income of the Borrower and the Subsidiaries calculated on a consolidated basis in accordance with Agreement Accounting Principles consistently applied. "Consolidated Net Worth" means, at any date of determination, the amount of consolidated common and preferred shareholders' Page 5 equity of the Borrower and its Subsidiaries (including, without limitation, the Series A Preferred Securities), determined as at such date in accordance with Agreement Accounting Principles; provided, however, that the effect of the -------- ------- application of FAS 115 shall be excluded when computing Consolidated Net Worth. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or application for a Letter of Credit, but excluding (i) the endorsement of instruments for deposit or collection in the ordinary course of business, (ii) the Payment and Guarantee Agreement and (iii) obligations arising in connection with the Agent Balance Transaction. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.2.4. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. The Corporate Base Rate is a reference rate and does not necessarily represent the lowest or best rate of interest actually charged to any customer. First Chicago may make commercial loans or other loans at rates of interest at, above or below the Corporate Base Rate. "Default" means an event described in Article VII. "Energy Assets" means Energy Assets International Corporation, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Advance" means a Eurodollar Bid Rate Advance or a Eurodollar Ratable Advance, or both, as the case may be. "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Eurodollar Interest Period, the rate Page 6 determined by the Agent to be the rate at which deposits in U.S. dollars are offered by First Chicago to first-class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Loan and having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate Loan made by a given Lender for the relevant Eurodollar Interest Period, the sum of (i) the Eurodollar Base Rate and (ii) the Competitive Bid Margin offered by such Lender and accepted by the Borrower. "Eurodollar Bid Rate Advance" means a Competitive Bid Advance which bears interest at a Eurodollar Bid Rate. "Eurodollar Bid Rate Loan" means a Loan which bears interest at the Eurodollar Bid Rate. "Eurodollar Interest Period" means, with respect to a Eurodollar Ratable Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Loan" means a Eurodollar Ratable Loan or Eurodollar Bid Rate Loan, or both, as the case may be. "Eurodollar Ratable Advance" means an Advance which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. "Eurodollar Ratable Loan" means a Loan which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. "Eurodollar Rate" means, with respect to a Eurodollar Ratable Advance for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (b) one minus the Reserve Page 7 Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (ii) the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Existing Credit Agreements" means (i) that certain Credit Agreement dated as of June 30, 1992 among the Borrower, First Chicago, as agent, and the lenders party thereto, as amended and (ii) that certain Credit Agreement dated as of October 31, 1994 among the Borrower, First Chicago, as agent, and the lenders party thereto. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors. "Floating Rate Advance" means an Advance which bears interest at the Alternate Base Rate. "Floating Rate Loan" means a Ratable Loan which bears interest at the Alternate Base Rate. "Governmental Authority" means the federal government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government including, without limitation, any board of insurance, insurance department or insurance commissioner. "Indebtedness" of a Person means, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (excluding accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade and obligations of Insurance Subsidiaries arising under insurance or annuity products), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or similar instruments, (v) Capitalized Lease Obligations, (vi) net liabilities under interest rate swap, exchange or cap agreements, Page 8 and (vii) Contingent Obligations, but excluding any indebtedness of the Borrower arising under or in connection with the Series A Preferred Securities Loan Agreement. "Insurance Subsidiary" means any Subsidiary of the Borrower which is engaged in the life, health or accident insurance business. "Interest Period" means a Eurodollar Interest Period or an Absolute Rate Interest Period. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person. "Invitation for Competitive Bid Quotes" means an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto, completed and delivered by the Agent to the Lenders in accordance with Section 2.3.3. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "License" means any license, certificate of authority, permit or other authorization which is required to be obtained from the Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement but excluding rights in agent balances which are sold in an Agent Balance Transaction). Page 9 "Loan" means, with respect to a Lender, such Lender's portion of any Advance and "Loans" means, with respect to the Lenders, the aggregate of all Advances. "Loan Documents" means this Agreement, the Notes and the other documents and agreements contemplated hereby and executed by the Borrower in favor of the Agent or any Lender. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder. "Modified Required Lenders" means Lenders in the aggregate having at least 75% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 75% of the aggregate unpaid principal amount of the outstanding Advances. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissions and similar Governmental Authorities of the various states of the United States of America toward the promotion of uniformity in the practices of such Governmental Authorities. "Notes" means, collectively, the Competitive Bid Notes and the Ratable Notes; and "Note" means any one of the Notes. "Notice of Assignment" is defined in Section 12.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party hereunder arising under the Loan Documents. "Participants" is defined in Section 12.2.1. "Payment and Guarantee Agreement" means the Payment and Guarantee Agreement issued by the Borrower for the benefit of the holders of the Series A Preferred Securities, the terms and Page 10 conditions of which (including, without limitation, the terms of subordination) were substantially similar to those set forth in the Registration Statement. "Payment Date" means the last day of each March, June, September and December. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means the Acquisition of any Person which has been approved and recommended by the board of directors (or the functional equivalent thereof) of the Person being acquired. "Person" means any natural person, corporation, firm, joint venture, partnership, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Purchasers" is defined in Section 12.3.1. "Ratable Advance" means a borrowing hereunder consisting of the aggregate amount of the several Ratable Loans made by the Lenders to the Borrower at the same time, of the same Type and for the same Interest Period. "Ratable Borrowing Notice" is defined in Section 2.2.3. "Ratable Loan" means a Loan made by a Lender pursuant to Section 2.2 hereof. "Ratable Note" means a promissory note in substantially the form of Exhibit "A" hereto, duly executed and delivered to the Agent by the Borrower for the account of each Lender and payable to the order of a Lender in the amount of its' Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Registration Statement" means the Prospectus Supplement of the Borrower and Torchmark Capital L.L.C. dated September 30, 1994 (which supplemented the Prospectus dated July 1, 1994) and issued Page 11 under Section 4.24(b) of the Securities Act of 1933, as amended, copies of which have been furnished to the Lenders. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Required Lenders" means Lenders in the aggregate having at least 66 2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 66 2/3% of the aggregate unpaid principal amount of the outstanding Advances. "Reserve Requirement" means, with respect to an Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities . "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. "SAP" means, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) as of the Page 12 Closing Date in the jurisdiction of incorporation of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Series A Preferred Securities" means the 9.18% Preferred Securities, Series A, issued by Torchmark Capital L.L.C. on October 11, 1994. "Series A Preferred Securities Loan Agreement" means the Loan Agreement dated as of October 11, 1994 between the Borrower and Torchmark Capital L.L.C. entered into in connection with the Series A Preferred Securities, as in effect on the date hereof. "Significant Insurance Subsidiary" means any Significant Subsidiary which is an Insurance Subsidiary. "Significant Subsidiary" of a Person means a "significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X of the Securities and Exchange Commission (17 CFR Part 210), but excluding Torch Operating Company and Velasco. Unless otherwise expressly provided, all references herein to a "Significant Subsidiary" shall mean a Significant Subsidiary of the Borrower. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made, or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries as reflected in the financial statements referred to in clause (i) above. Page 13 "Termination Date" means (i) December 6, 1999, or (ii) such earlier date on which the obligations of the Lenders to make Loans hereunder are terminated pursuant to the terms of this Agreement. "Torch Energy" means Torch Energy Advisors Incorporated, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "Torch Operating Company" means Torch Operating Company, a Delaware corporation and Wholly-Owned Subsidiary of the Borrower. "Transferee" is defined in Section 12.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance, Eurodollar Advance or Absolute Rate Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Velasco" means Velasco Gas Company, Ltd., a Texas limited partnership and Wholly-Owned Subsidiary of the Borrower. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Wholly-Owned Subsidiary" shall mean a Wholly-Owned Subsidiary of the Borrower. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE FACILITY ------------ 2.1. The Facility. ------------ 2.1.1. Description of Facility. The Lenders grant to the Borrower ----------------------- a revolving credit facility pursuant to which, and upon the terms and subject to the conditions herein set out: Page 14 (i) each Lender severally agrees to make Ratable Loans to the Borrower in accordance with Section 2.2 in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment less the amount of such Lender's pro rata (relative to its Commitment amount) share of the outstanding principal amount of all Competitive Bid Advances (regardless of which Lender or Lenders made such Competitive Bid Advances); and (ii) each Lender may, in its sole discretion, make bids to make Competitive Bid Loans to the Borrower, and make such Loans, in accordance with Section 2.3. 2.1.2. Facility Amount. In no event may the aggregate principal --------------- amount of all outstanding Advances (including both the Ratable Advances and the Competitive Bid Advances) exceed the Aggregate Commitment. 2.1.3. Availability of Facility. Subject to the terms hereof, the ------------------------ facility is available from the date hereof to the Termination Date. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Termination Date. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Termination Date. 2.2. Ratable Advances. ---------------- 2.2.1. Ratable Advances. Each Ratable Advance hereunder shall ---------------- consist of borrowings made from the several Lenders ratably in proportion to the amounts of their respective Commitments. Ratable Advances shall be evidenced by the Ratable Notes. 2.2.2. Ratable Advance Rate Options. The Ratable Advances may be ---------------------------- Floating Rate Advances or Eurodollar Ratable Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.2.3 or 2.2.4. No Ratable Advance may mature after, or have an Interest Period which extends beyond, the Termination Date. 2.2.3. Method of Selecting Types and Interest Periods for Ratable ---------------------------------------------------------- Advances. The Borrower shall select the Type of each Ratable Advance and, in - -------- the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable to each Ratable Advance from time to time; provided, however, that for a period of at least three Business Days after the initial Advances the Borrower shall maintain all Ratable Advances as Floating Rate Advances. The Borrower shall give the Agent irrevocable notice (a "Ratable Borrowing Notice") not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Ratable Page 15 Advance. Notwithstanding the foregoing, a Ratable Borrowing Notice for a Floating Rate Advance may be given not later than 15 minutes after the time which the Borrower is required to reject one or more bids offered in connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Ratable Borrowing Notice for a Eurodollar Ratable Advance may be given not later than 15 minutes after the time the Borrower is required to reject one or more bids offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. A Ratable Borrowing Notice shall specify: (i) the Borrowing Date, which shall be a Business Day, of such Ratable Advance; (ii) the aggregate amount of such Ratable Advance, which, when added to all outstanding Ratable Advances and Competitive Bid Advances and after giving effect to the repayment of any such outstanding Advances out of the proceeds of the requested Ratable Advance, shall not exceed the Aggregate Commitment; (iii) the Type of Advance selected; and (iv) in the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable thereto (which may not end after the Termination Date). 2.2.4. Conversion and Continuation of Outstanding Ratable Advances. -------------------------------------------------- - -------- Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Ratable Advances. Each Eurodollar Ratable Advance shall continue as a Eurodollar Ratable Advance until the end of the then applicable Eurodollar Interest Period therefor, at which time such Eurodollar Ratable Advance shall be automatically converted into a Floating Rate Advance unless the Borrower shall have given the Agent a Conversion/Continuation Notice requesting that, at the end of such Eurodollar Interest Period, such Eurodollar Ratable Advance continue as a Eurodollar Ratable Advance for the same or another Eurodollar Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Ratable Advance of any Type into any other Type or Types of Ratable Advances; provided that any conversion of any Eurodollar Ratable Advance shall be made on, and only on, the last day of the Eurodollar Interest Period applicable thereto. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Ratable Advance or continuation of a Eurodollar Ratable Advance not later than 10:00 a.m. (Chicago time) at least three Business Days, in the case of a conversion into or continuation of a Eurodollar Ratable Advance, prior to the date of the requested conversion or continuation, specifying: Page 16 (i) the requested date, which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of Ratable Advance which is to be converted or continued; and (iii) the amount and Type(s) of Ratable Advance(s) into which such Ratable Advance is to be converted or continued and, in the case of a conversion into or continuation of an Eurodollar Ratable Advance, the duration of the Eurodollar Interest Period applicable thereto. 2.3. Competitive Bid Advances. ------------------------ 2.3.1. Competitive Bid Option. In addition to Ratable Advances ---------------------- pursuant to Section 2.2, but subject to the terms and conditions of this Agreement (including, without limitation, the limitation set forth in Section 2.1.2 as to the maximum aggregate principal amount of all outstanding Advances hereunder), the Borrower may, as set forth in this Section 2.3, request the Lenders, prior to the Termination Date, to make offers to make Competitive Bid Advances to the Borrower. Each Lender may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.3. Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. 2.3.2. Competitive Bid Quote Request. When the Borrower wishes to ----------------------------- request offers to make Competitive Bid Loans under this Section 2.3, it shall transmit to the Agent by telex or telecopy a Competitive Bid Quote Request substantially in the form of Exhibit "C" hereto so as to be received no later than (i) 10:00 a.m. (Chicago time) at least four Business Days prior to the Borrowing Date proposed therein, in the case of a Eurodollar Auction or (ii) 9:00 a.m. (Chicago time) at least one Business Day prior to the Borrowing Date proposed therein, in the case of an Absolute Rate Auction specifying: (i) the proposed Borrowing Date, which shall be a Business Day, for the proposed Competitive Bid Advance; (ii) the aggregate principal amount of such Competitive Bid Advance; (iii) whether the Competitive Bid Quotes requested are to set forth a Eurodollar Bid Rate, an Absolute Rate, or both; and (iv) the Interest Period applicable thereto (which may not end after the Termination Date). Page 17 The Borrower may request offers to make Competitive Bid Loans for more than one Interest Period in a single Competitive Bid Quote Request. No Competitive Bid Quote Request shall be given within 5 Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Competitive Bid Quote Request. A Competitive Bid Quote Request that does not conform substantially to the format of Exhibit "C" hereto shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telex or telecopy. 2.3.3. Invitation for Competitive Bid Quotes. Promptly and in any ------------------------------------- event before the close of business on the same Business Day of receipt of a Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2, the Agent shall send to each of the Lenders by telex or telecopy an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "D" hereto, which shall constitute an invitation by the Borrower to each Lender to submit Competitive Bid Quotes offering to make the Competitive Bid Loans to which such Competitive Bid Quote Request relates in accordance with this Section 2.3. 2.3.4. Submission and Contents of Competitive Bid Quotes. ------------------------------------------------- (i) Each Lender may, in its sole discretion, submit a Competitive Bid Quote containing an offer or offers to make Competitive Bid Loans in response to any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must comply with the requirements of this Section 2.3.4 and must be submitted to the Agent by telex or telecopy at its offices specified in or pursuant to Article XIII not later than (a) 9:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (b) 9:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree); provided that Competitive Bid Quotes submitted by First Chicago may only be -------- submitted if the Agent or First Chicago notifies the Borrower of the terms of the offer or offers contained therein not later than 15 minutes prior to the latest time at which the relevant Competitive Bid Quotes must be submitted by the other Lenders. Subject to Articles IV and VIII, any Competitive Bid Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Competitive Bid Quote shall be in substantially the form of Exhibit "E" hereto and shall in any case specify: Page 18 (a) the proposed Borrowing Date, which shall be the same as that set forth in the applicable Invitation for Competitive Bid Quotes; (b) the principal amount of the Competitive Bid Loan for which each such offer is being made, which principal amount (1) may be greater than, less than or equal to the Commitment of the quoting Lender, (2) must be at least $10,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the principal amount of Competitive Bid Loans for which offers were requested; (c) in the case of a Eurodollar Auction, the Competitive Bid Margin offered for each such Competitive Bid Loan; (d) the minimum amount, if any, of the Competitive Bid Loan which may be accepted by the Borrower; (e) in the case of an Absolute Rate Auction, the Absolute Rate offered for each such Competitive Bid Loan; and (f) the identity of the quoting Lender. (iii) The Agent shall reject any Competitive Bid Quote that: (a) is not substantially in the form of Exhibit "E" hereto or does not specify all of the information required by Section 2.3.4(ii); (b) contains qualifying, conditional or similar language, other than any such language contained in Exhibit "E" hereto; (c) proposes terms other than or in addition to those set forth in the applicable Invitation for Competitive Bid Quotes; or (d) arrives after the time set forth in Section 2.3.4(i). If any Competitive Bid Quote shall be rejected pursuant to this Section 2.3.4(iii), then the Agent shall notify the relevant Lender of such rejection promptly. 2.3.5. Notice to Borrower. The Agent shall promptly notify the ------------------ Borrower of the terms (i) of any Competitive Bid Quote submitted by a Lender that is in accordance with Section 2.3.4 and (ii) of any Competitive Bid Quote that amends, modifies or is Page 19 otherwise inconsistent with a previous Competitive Bid Quote submitted by such Lender with respect to the same Competitive Bid Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded by the Agent unless such subsequent Competitive Bid Quote specifically states that it is submitted solely to correct a manifest error in such former Competitive Bid Quote. The Agent's notice to the Borrower shall specify the aggregate principal amount of Competitive Bid Loans for which offers have been received for each Interest Period specified in the related Competitive Bid Quote Request and the respective principal amounts and Eurodollar Bid Rates or Absolute Rates, as the case may be, so offered. 2.3.6. Acceptance and Notice by Borrower. Not later than (i) 10:00 --------------------------------- a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (ii) 10:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree), the Borrower shall notify the Agent of its acceptance or rejection of the offers so notified to it pursuant to Section 2.3.5; provided, however, that the failure by the Borrower to give such -------- ------- notice to the Agent shall be deemed to be a rejection of all such offers. In the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Competitive Bid Quote in whole or in part (subject to the terms of Section 2.3.4(ii)(d)); provided that: -------- (i) the aggregate principal amount of each Competitive Bid Advance may not exceed the applicable amount set forth in the related Competitive Bid Quote Request, (ii) acceptance of offers may only be made on the basis of ascending Eurodollar Bid Rates or Absolute Rates, as the case may be, and (iii) the Borrower may not accept any offer that is described in Section 2.3.4(iii) or that otherwise fails to comply with the requirements of this Agreement. 2.3.7. Allocation by Agent. If offers are made by two or more ------------------- Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Competitive Bid Loans in respect of which such offers are accepted shall be allocated by the Agent among such Lenders as nearly as possible (in such multiples, not greater than $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers; provided, however, -------- ------- that no Lender shall be allocated a portion of any Competitive Bid Advance which is less than the Page 20 minimum amount which such Lender has indicated that it is willing to accept. Allocations by the Agent of the amounts of Competitive Bid Loans shall be conclusive in the absence of manifest error. The Agent shall promptly, but in any event on the same Business Day, notify each Lender of its receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount of such Competitive Bid Advance allocated to each participating Lender. 2.4. Availability of Funds. Not later than noon (Chicago time) (or, --------------------- in the event that a Lender shall have failed to be notified of the Agent's receipt of a Borrowing Notice for a Floating Rate Advance prior to 11:00 a.m. (Chicago time) on the applicable Borrowing Date, 2:00 p.m. (Chicago time)) on each Borrowing Date, each Lender shall make available its Loan or Loans, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. 2.5. Facility Fee; Reductions in Aggregate Commitment. The Borrower ------------------------------------------------ agrees to pay to the Agent for the ratable account of each Lender a facility fee equal to the Applicable Facility Fee Percentage times such Lender's Commitment from the date hereof to and including the Termination Date applicable to such Lender, payable on each Payment Date hereafter and on the Termination Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $10,000,000, upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued facility fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder. 2.6. Minimum Amount of Each Advance. Each Advance shall be in the ------------------------------ minimum amount of $3,000,000 (and in multiples of $1,000,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the unused Aggregate Commitment. 2.7. Optional Principal Payments. The Borrower may from time to time --------------------------- pay, without penalty or premium, all outstanding Advances, or, in a minimum aggregate amount of $3,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Advances upon two Business Days' prior notice to the Agent. Any prepayment of a Eurodollar Advance prior to the last day of the applicable Eurodollar Interest Period shall be subject to the indemnity provisions of Section 3.4. Page 21 2.8. Changes in Interest Rate, etc. Each Floating Rate Advance ------------------------------ shall bear interest at the Floating Rate on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is converted from a Ratable Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.2.4 to but excluding the date it becomes due or is converted into a Eurodollar Ratable Advance pursuant to Section 2.2.4 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance and Absolute Rate Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Eurodollar Interest Period at the interest rate determined as applicable to such Eurodollar Advance or Absolute Rate Advance. No Interest Period may end after the Termination Date. 2.9. Rates Applicable After Default. Notwithstanding anything to the ------------------------------ contrary contained in Section 2.2.3 or 2.2.4, no Advance may be made as, converted into or continued as a Eurodollar Ratable Advance (except with the consent of the Required Lenders) when any Default or Unmatured Default has occurred and is continuing. During the continuance of a Default, the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance and Absolute Rate Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Alternate Base Rate plus 2% per annum. 2.10. Method of Payment. All payments of the Obligations hereunder ----------------- shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by 12:00 noon (local time) on the date when due and shall be applied ratably by the Agent (i) first, ratably among the Lenders with respect to any principal and interest due in connection with Ratable Advances, (ii) second, after all amounts described in clause (i) have been satisfied, ratably among those Lenders for whom any payment of principal and interest is due in connection with any Competitive Bid Advances and (iii) third, after all amounts described in clauses (i) and (ii) have been satisfied, ratably to any other Obligations then due. Each payment delivered to the Agent for the account of any Lender shall be delivered by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Page 22 Agent from such Lender. If such payment is received by the Agent by 1:00 p.m. (Chicago time) such delivery to the Lenders shall be made on the same day and if received thereafter shall be made on the next succeeding Business Day. The Agent is hereby authorized to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder. 2.11. Notes; Telephonic Notices. Each Lender is hereby authorized to ------------------------- record the principal amount of each of its Loans and each repayment on the schedule attached to its Note, provided, however, that neither the failure to so record nor any error in such recordation shall affect the Borrower's obligations under such Note. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances, submit Competitive Bid Quotes and to transfer funds based on telephonic notices made by any one of the Chairman, Vice Chairman, Treasurer, the Chief Accounting Officer, any Vice-President or any Assistant Treasurer of the Borrower or any person who identifies himself or herself to be any such officer; provided that, without written notice from the Borrower, no proceeds of any Advance shall be transferred based upon telephonic notice to any bank account other than a bank account maintained by the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 2.12. Interest Payment Dates; Interest and Fee Basis. Interest accrued ---------------------------------------------- on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Ratable Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance or Absolute Rate Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance or Absolute Rate Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance or Absolute Rate Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest and facility fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 12:00 noon (local time) at the place of payment. If any payment of principal Page 23 of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.13. Notification of Advances, Interest Rates, Prepayments and --------------------------------------------------------- Commitment Reductions. Promptly after receipt thereof, the Agent will notify - --------------------- each Lender of the contents of each Aggregate Commitment reduction notice, Ratable Borrowing Notice, Conversion/Continuation Notice, Invitation for Competitive Quotes and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.14. Lending Installations. Each Lender may book its Loans at any --------------------- Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written or telex notice to the Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.15. Non-Receipt of Funds by the Agent. Unless the Borrower or a --------------------------------- Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.16. Withholding Tax Exemption. At least five Business Days prior to ------------------------- the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower Page 24 and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. ARTICLE III CHANGE IN CIRCUMSTANCES ----------------------- 3.1. Yield Protection. If, after the date hereof, in connection with ---------------- a Eurodollar Loan the adoption of or any change in any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof, or the compliance of any Lender therewith, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of any Lender or applicable Lending Installation imposed by the jurisdiction in which such Lender or Lending Installation is incorporated or has its principal place of business), or changes the basis of taxation of payments to any Lender or Lending Installation in respect of its Loans or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and Page 25 assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by such Lender, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans and its Commitment. 3.2. Changes in Capital Adequacy Regulations. If a Lender determines --------------------------------------- the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy). 3.3. Availability of Types of Advances. If any Lender determines that --------------------------------- maintenance of any of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, the Agent shall suspend the availability of the affected Type of Advance and require any Eurodollar Advances to be repaid or converted into a Floating Rate Advance within five days after Borrower's receipt of notice by such Lender; or if the Required Lenders determine that (i) deposits of a type or maturity appropriate to match fund Eurodollar Advances are not available, the Agent shall suspend the availability of Eurodollar Advances with respect to any Eurodollar Advances made after the date of any such determination, or (ii) an interest rate applicable to an Eurodollar Advance does not accurately reflect the cost of making a Eurodollar Advance of such Type, then, if for any reason whatsoever the provisions of Section 3.1 are inapplicable, the Agent shall suspend the availability of Eurodollar Advances with respect to any Eurodollar Advances made after the date of any such determination. Page 26 3.4. Funding Indemnification. If any payment of an Eurodollar ----------------------- Advance occurs on a date which is not the last day of the applicable Eurodollar Interest Period, whether because of acceleration, prepayment or otherwise, or an Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Advance. 3.5. Lender Statements; Survival of Indemnity. To the extent ---------------------------------------- reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. 3.6. Right to Substitute Lender. Any Lender claiming any additional -------------------------- amounts payable pursuant to Section 3.1 or 3.2 materially in excess of those being charged by other Lenders or unable to make a Eurodollar Advance available in accordance with Section 3.3, shall, so long as no Default or Unmatured Default has occurred and is continuing, upon the written request of the Borrower delivered to such Lender and the Agent, assign, pursuant to and in accordance with the provisions of Section 12.3, all of its rights and obligations under this Agreement and under the Loan Documents to another Lender or to a commercial bank, other financial institution, commercial finance company or other business lender selected by the Borrower and reasonably acceptable to the Agent in consideration for (a) the payment by such assignee to such assigning Lender of the principal of, and interest accrued and unpaid to the date of such assignment on, the Notes held by such assigning Lender, (b) the payment by the Borrower to such assigning Lender of any and all other amounts owing to such assigning Lender Page 27 under any provision of this Agreement accrued and unpaid to the date of such assignment and (c) the Borrower's release of such assigning Lender from any further obligation or liability under this Agreement and the Loan Documents. Notwithstanding anything to the contrary contained in this Section 3.6, in no ----------- event shall the replacement of any Lender result in a decrease or reallocation of the aggregate Commitments without the prior written consent of the remaining Lenders. ARTICLE IV CONDITIONS PRECEDENT -------------------- 4.1. Initial Advance. The Lenders shall not be required to make the --------------- initial Advance hereunder unless the Borrower has furnished to the Agent with sufficient copies for the Lenders: (i) Copies of the articles of incorporation of the Borrower, together with all amendments thereto, and a certificate of good standing, both certified by the appropriate governmental officer in its jurisdiction of incorporation. (ii) Copies, certified by the Secretary or an Assistant Secretary of the Borrower, of its by-laws and Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution of the Loan Documents. (iii) An incumbency certificate, executed by the Secretary or an Assistant Secretary of the Borrower, which shall identify by name and title and bear the signature of the officers of the Borrower authorized to sign the Loan Documents and to make borrowings hereunder, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (iv) A certificate, signed by the Chief Financial Officer or the Treasurer of the Borrower, stating that on the initial Borrowing Date no Default or Unmatured Default has occurred and is continuing. (v) A written opinion of the Borrower's counsel, addressed to the Lenders in substantially the form of Exhibit "F" hereto. (vi) Notes payable to the order of each of the Lenders. (vii) Written money transfer instructions, in substantially the form of Exhibit "I" hereto, addressed to the Agent and signed by an Authorized Officer, together with such Page 28 other related money transfer authorizations as the Agent may have reasonably requested. (viii) The Existing Credit Agreements shall have been terminated and all amounts owing thereunder shall have been paid (or shall contemporaneously be paid) in full. (ix) Such other documents as any Lender or its counsel may have reasonably requested. 4.2. Each Advance. The Lenders shall not be required to make any ------------ Advance, unless on the applicable Borrowing Date: (i) There exists no Default or Unmatured Default. (ii) The representations and warranties contained in Article V (other than Section 5.4 and 5.5) are true and correct as of such Borrowing Date except for changes in the Schedules hereto reflecting transactions permitted by this Agreement. Each Ratable Borrowing Notice and Competitive Bid Quote Request with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit "G" hereto as a condition to making an Advance. ARTICLE V REPRESENTATIONS AND WARRANTIES ------------------------------ The Borrower represents and warrants to the Lenders that: 5.1. Corporate Existence and Standing. Each of the Borrower and its -------------------------------- Significant Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.2. Authorization and Validity. The Borrower has the corporate power -------------------------- and authority and legal right to execute and deliver the Loan Documents and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, Page 29 insolvency or similar laws affecting the enforcement of creditors' rights generally. 5.3. No Conflict; Government Consent. Neither the execution and ------------------------------- delivery by the Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or the Borrower's or any of its Subsidiaries' articles of incorporation or by-laws or the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such indenture, instrument or agreement, other than such violations, conflicts or defaults which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents. 5.4. Financial Statements. The December 31, 1993 audited consolidated -------------------- financial statements of the Borrower and its Subsidiaries and the September 30, 1994 unaudited consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 5.5. Material Adverse Change. Since September 30, 1994, there has ----------------------- been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. 5.6. Taxes. The Borrower and its Subsidiaries have filed all United ----- States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which, in the good faith judgment of the Borrower, adequate reserves have been provided. The United States income tax returns of the Borrower and Page 30 its Subsidiaries have been audited by the Internal Revenue Service through the fiscal year ended December 31, 1986. No tax liens have been filed with respect to any such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate in the good faith judgment of the Borrower. 5.7. Litigation and Contingent Obligations. There is no litigation, ------------------------------------- arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect (after giving effect to reserves which have been provided with respect thereto on the books of the Borrower and its Subsidiaries). The Borrower has no material Contingent Obligations not provided for or disclosed in the financial statements referred to in Section 5.4. Solely for purposes of any reaffirmation of the foregoing representations pursuant to Section 4.2(ii) in connection with any Loans the proceeds of which are used to repay maturing commercial paper, such representations shall not extend to any proceeding in which a punitive damages judgment has been entered against the Borrower or any Subsidiary, such judgment has been stayed on appeal or the time for appeal from such judgment has not expired and such judgment could not reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under the Loan Documents. 5.8. Subsidiaries. Schedule "1" hereto contains an accurate list of ------------ all of the Significant Subsidiaries of the Borrower in existence on the date of this Agreement, setting forth their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable. 5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do ----- not in the aggregate exceed $10,000,000. Each Plan complies in all material respects with all applicable requirements of law and regulations. No Reportable Event has occurred with respect to any Plan and neither the Borrower nor any other members of the Controlled Group has withdrawn from any Plan or initiated steps to do so, which occurrence or withdrawal could result in a Material Adverse Effect. No steps have been taken to terminate any Plan which has Unfunded Liabilities. 5.10. Accuracy of Information. No information, exhibit or report ----------------------- furnished by the Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact, omitted to state a material fact or omitted Page 31 to state any fact necessary to make the statements contained therein not misleading in any material respect. 5.11. Regulation U. Margin stock (as defined in Regulation U) -------------- constitutes less than 25% of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge or other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary ------------------- is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Significant Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument evidencing or governing Indebtedness. 5.13. Compliance With Laws. The Borrower and its Subsidiaries have -------------------- complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable federal, state and local environmental, health and safety statutes and regulations or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. 5.14. Ownership of Properties. Except as set forth on Schedule "2" ----------------------- hereto, on the date of this Agreement, the Borrower and its Subsidiaries will have good title to all of the Property and assets reflected in the financial statements as owned by it, free of all Liens other than those Liens which, if executed or realized upon, could not reasonably be expected to have a Material Adverse Effect. 5.15. Investment Company Act. Neither the Borrower nor any ---------------------- Subsidiary thereof is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. Page 32 5.16. Public Utility Holding Company Act. Neither the Borrower nor any ---------------------------------- Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.17. Insurance Licenses. Schedule "3" attached hereto (as said ------------------ Schedule "3" shall be revised or supplemented from time to time to reflect withdrawals or changes in jurisdictions permitted by Section 6.4 or additional jurisdictions set forth in the Annual Statements furnished pursuant to Section 6.1(vii)) lists all of the jurisdictions in which any Significant Insurance Subsidiary holds active Licenses and is authorized to transact insurance business. No such License is the subject of a proceeding for suspension or revocation, there is no sustainable basis for such suspension or revocation, and to the Borrower's knowledge no such suspension or revocation has been threatened by any Governmental Authority. Schedule "3" also indicates the type or types of insurance in which each such Insurance Subsidiary is permitted to engage with respect to each License therein listed. None of the Insurance Subsidiaries transacts any insurance business, directly or indirectly, in any state other than those enumerated in Schedule "3". ARTICLE VI COVENANTS --------- During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. The Borrower will maintain, for itself and ------------------- each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders: (i) Within 90 days after the close of each of its fiscal years, an unqualified audit report certified by independent certified public accountants, acceptable to the Lenders, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and the Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by certificate of said accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default, or if, in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof. Page 33 (ii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and the Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its Chief Financial Officer. (iii) Together with the financial statements required hereunder, a compliance certificate in substantially the form of Exhibit "G" hereto signed by the Chief Financial Officer, Chief Accounting Officer or Treasurer of the Borrower showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (iv) Within 330 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA. (v) As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the Chief Financial Officer, Chief Accounting Officer, Treasurer or Executive Vice President of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto. (vi) As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in either the case of either (a) or (b) above, could reasonably be expected to have a Material Adverse Effect. (vii) Upon the earlier of (i) fifteen days after the regulatory filing date or (ii) 75 days after the close of each fiscal year of each Insurance Subsidiary, copies of the Annual Statement of each of the Insurance Subsidiaries, as certified by the president, secretary and treasurer of and the actuary for each such Insurance Subsidiary and prepared on the NAIC annual statement blanks (or such other form as shall be required by the jurisdiction of incorporation of each such Insurance Subsidiary), all such statements to be prepared in page 34 accordance with SAP consistently applied throughout the periods reflected therein and to be certified by independent certified public accounts reasonably acceptable to the Agent if so required by any Governmental Authority. (viii) Promptly upon the filing thereof, copies of all Forms 10Q, 10K and 8K which the Borrower or any Subsidiary files with the Securities and Exchange Commission and any Forms A and B which any Insurance Subsidiary files with any insurance commission or department or analogous Governmental Authority, and, together with copies of each Form 10K so furnished, a list of such revisions to Schedule "1", if any, as shall be necessary to cause Schedule "1" to accurately set forth all then existing Significant Subsidiaries of the Borrower, their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrower or other Subsidiaries. (ix) Promptly upon the Borrower's receipt thereof, copies of reports or valuations prepared by any Governmental Authority or actuary in respect of any action or event which has resulted in the reduction by 5% or more in the capital and surplus of any Insurance Subsidiary. (x) Promptly and in any event within ten days after learning thereof, notification of any decrease after the Closing Date in the rating given by A.M. Best & Co. in respect of any Insurance Subsidiary. (xi) Such other information (including, without limitation, non- financial information) as the Agent or any Lender may from time to time reasonably request. 6.2. Use of Proceeds. The Borrower will, and will cause each --------------- Subsidiary to, use the proceeds of the Advances (i) for general corporate purposes, including, without limitation, the repayment of Indebtedness and (ii) to finance Permitted Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U). 6.3. Certain Notices. The Borrower will give prompt notice in writing --------------- to the Agent and the Lenders of (i) the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, relating specifically to the Borrower which could reasonably be expected to have a Material Adverse Effect, (ii) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of, or the institution of any proceedings to revoke or suspend, any License now or hereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable laws and regulations, Page 35 other than such expiration, revocation or suspension which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (iii) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if adversely determined, could reasonably be expected to have a Material Adverse Effect or (iv) any judicial or administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which could reasonably be expected to have a Material Adverse Effect. Any such notice shall state that it is given pursuant to this Section 6.3. 6.4. Conduct of Business. The Borrower will, and will cause each ------------------- Significant Subsidiary to, do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. The Borrower will cause each Significant Insurance Subsidiary to (i) carry on or otherwise be associated with the business of a licensed insurance carrier and (ii) do all things necessary to renew, extend and continue in effect all Licenses which may at any time and from time to time be necessary for such Significant Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, however, that any such -------- ------- Significant Insurance Subsidiary may withdraw from one or more states as an admitted insurer or change the state of its domicile, if such withdrawal or change is in the best interests of the Borrower and such Significant Insurance Subsidiary and could not reasonably be expected to have a Material Adverse Effect. 6.5. Taxes. The Borrower will, and will cause each Subsidiary to, pay ----- when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. 6.6. Insurance. The Borrower will, and will cause each Subsidiary to, --------- maintain with financially sound and reputable insurance companies insurance on all or substantially all of its Property, or shall maintain self-insurance, in such amounts and covering such risks as is consistent with sound business practice for Persons in substantially the same industry as the Borrower or such Subsidiary, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. Page 36 6.7. Compliance with Laws. The Borrower will, and will cause -------------------- each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. 6.8. Maintenance of Properties. The Borrower will, and will cause ------------------------- each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, except where the failure to so maintain, preserve, protect and repair could not reasonably be expected to have a Material Adverse Effect. 6.9. Inspection. The Borrower will, and will cause each Subsidiary ---------- to, permit the Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers upon reasonable notice and at such reasonable times and intervals as the Lenders may designate. 6.10. Merger. The Borrower will not, nor will it permit any Subsidiary ------ to, merge or consolidate with or into any other Person, except that (i) a Subsidiary may merge with the Borrower or a Wholly-Owned Subsidiary and (ii) the Borrower and any Subsidiary may merge or consolidate with or into any other Person provided that the Borrower or such Subsidiary shall be the continuing or surviving corporation and, after giving effect to such merger or consolidation, no Default or Unmatured Default shall exist. 6.11. Sale of Assets. The Borrower will not, nor will it permit any -------------- Subsidiary to, lease, sell or otherwise dispose of all or a Substantial Portion of its Property (exclusive of Investments sold in the ordinary course of business) to any other Person(s) in any calendar year. 6.12. Sale and Leaseback. The Borrower will not, nor will it permit ------------------ any Subsidiary to, sell or transfer a Substantial Portion of its Property in order to concurrently or subsequently lease as lessee such or similar Property. 6.13. Investments and Acquisitions. ---------------------------- (a) The Borrower will not make any Acquisitions except Permitted Acquisitions. Page 37 (b) The Borrower will not permit any Insurance Subsidiary to make or suffer to exist any Investments or to make any Acquisitions, except: (i) Investment assets permitted under the applicable insurance laws in the respective state of domicile of such Insurance Subsidiary; provided, however, that in the event such Insurance -------- ------- Subsidiary receives notice or becomes aware that any of its Investment assets are not permitted under the applicable insurance laws of such state, such Investment assets which are subject to such notice shall be permitted so long as (x) such Insurance Subsidiary is contesting in good faith the issue of whether any such Investment assets are permitted or reinvests such Investment assets in a manner permitted under the applicable insurance laws of such state within 90 days of the later of receipt of such notice and cessation of such contest and (y) the aggregate amount of all Investment assets of all Insurance Subsidiaries of the Borrower which are subject to a notice of the type contemplated by this proviso and which have not been reinvested pursuant to clause (x) of this proviso shall not exceed, in the case of any Insurance Subsidiary at any one time, 3% of the admitted assets of such Insurance Subsidiary as disclosed on Exhibit 13, Column 4, Line 24, Page 20 of the most recent Annual Statement of such Insurance Subsidiary; (ii) Permitted Acquisitions; and (iii) Investment assets not included in the computations of Statutory Assets as scheduled on Exhibit 13, Column 3, Line 22, Page 20 of the most recent Annual Statement of each Insurance Subsidiary. 6.14. Liens. The Borrower will not, nor will it permit any Subsidiary ----- to, create, incur, or suffer to exist any Lien in, of or on a Substantial Portion of its Property. 6.15. Consolidated Net Worth. The Borrower will maintain at all times ---------------------- Consolidated Net Worth equal to not less than the sum of (i) $1,116,000,000 plus (ii) 25% of the Borrower's Consolidated Net Income, if positive, for each fiscal quarter ending after September 30, 1994. 6.16. Ratio of Consolidated Indebtedness to Consolidated -------------------------------------------------- Capitalization. The Borrower will maintain at all times a ratio of Consolidated Indebtedness to Consolidated Capitalization of not greater than .5 to 1.0. Page 38 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated --------------------------------------------------------- Interest Expense. The Borrower will maintain, as at the last day of each fiscal - ---------------- quarter, a ratio of (i) Consolidated Adjusted Net Income to (ii) Consolidated Interest Expense, in each case calculated for the four fiscal quarters then ending, of not less than 2.5 to 1.0. 6.18. Affiliates. The Borrower will not, and will not permit any ---------- Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than a Wholly-Owned Subsidiary) except (i) any such transactions, payments or transfers with or to such Affiliates as are made in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction and (ii) any such other transactions, payments or transfers with or to such Affiliates as could not reasonably be expected to have a Material Adverse Effect. 6.19 Series A Preferred Securities. The Borrower will not, and will not ----------------------------- permit Torchmark Capital L.L.C. to, declare or pay dividends or distributions on, or redeem, purchase or otherwise acquire, the Series A Preferred Securities or any portion thereof if, after giving effect thereto, a Default or Unmatured Default would exist. ARTICLE VII DEFAULTS -------- The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in connection with this Agreement, any Loan, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false or misleading on the date as of which made. 7.2. Nonpayment of principal of any Note when due, or nonpayment of interest upon any Note or of any facility fee or other obligations under any of the Loan Documents within five days after the same becomes due. 7.3. The breach by the Borrower of any of the terms or provisions of Section 6.2, 6.3, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17 or 6.19; or the breach by the Borrower of any of the terms or Page 39 provisions of Section 6.14 or 6.18 which is not remedied within ten days after the Borrower learns thereof. 7.4. The breach by the Borrower (other than a breach which constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or provisions of this Agreement which is not remedied within twenty days after written notice from the Agent or any Lender. 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due (a) any Indebtedness in excess of, singly or in the aggregate for all such Subsidiaries, $10,000,000; or the default by the Borrower or any of its Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any such Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity (which default, condition or event, in the case of Torch Energy, Energy Assets or Velasco, shall continue for at least 30 days beyond any applicable grace period); or any such Indebtedness of the Borrower or any Subsidiary shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.6. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be Page 40 instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days. 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of the Borrower or any of its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion of its Property. 7.9. The Borrower or any of its Subsidiaries shall fail within 45 days to pay, bond or otherwise discharge any judgment or order for the payment of money, either singly or in the aggregate, in excess of $10,000,000, which is not stayed on appeal or otherwise being appropriately contested in good faith. 7.10. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $10,000,000 or any Reportable Event shall occur in connection with any Plan. 7.11. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $5,000,000 or requires payments exceeding $500,000 per annum. 7.12. The Borrower or any of its Subsidiaries shall be the subject of any proceeding or investigation pertaining to the release by the Borrower or any of its Subsidiaries, or any other person of any toxic or hazardous waste or substance into the environment, or any violation of any federal, state or local environmental, health or safety law or regulation, which, in either case, could reasonably be expected to have a Material Adverse Effect. 7.13. Any Change in Control shall occur. 7.14. Any License of any Insurance Subsidiary held by such Insurance Subsidiary on the Closing Date or acquired by such Insurance Subsidiary thereafter, the loss of which would have, in the reasonable judgment of the Lenders, a Material Adverse Effect, (i) shall be revoked by a final non- appealable order by the state which shall have issued such License, or any action (whether administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary which shall not have Page 41 been dismissed or contested in good faith within 30 days of the commencement thereof, (ii) shall be suspended by such state for a period in excess of 30 days or (iii) shall not be reissued or renewed by such state upon the expiration thereof following application for such reissuance or renewal by such Insurance Subsidiary. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ---------------------------------------------- 8.1. Acceleration. If any Default described in Section 7.6 or 7.7 ------------ occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. If, before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Modified Required Lenders (or, in the case of an automatic termination upon the occurrence of a Default under Section 7.6 or 7.7, all the Lenders), in their sole discretion, shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Article VIII, the ---------- Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or thereunder or waiving any Default hereunder or thereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender: (i) Extend the Termination Date or compromise or forgive the principal amount of any Loan, or reduce the rate of interest or compromise payment of interest on any Loan, or reduce the amount of any fee payable hereunder. (ii) Reduce the percentage specified in the definition of Required Lenders or Modified Required Lenders. Page 42 (iii) Increase the amount of the Commitment of any Lender hereunder, or permit the Borrower to assign its rights under this Agreement. (iv) Amend this Section 8.2. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. The Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders or ---------------------- the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS ------------------ 9.1. Survival of Representations. All representations and warranties --------------------------- of the Borrower contained in this Agreement shall survive delivery of the Notes and the making of the Loans herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to ----------------------- the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Taxes. Any taxes (excluding federal income taxes on the overall ----- net income of any Lender) or other similar assessments or charges payable or ruled payable by any governmental or revenue authority in respect of the Loan Documents shall be paid by the Borrower, together with interest and penalties, if any. Page 43 9.4. Headings. Section headings in the Loan Documents are for -------- convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.5. Entire Agreement. The Loan Documents embody the entire agreement ---------------- and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof other than the Commitment Letter dated September 21, 1994 and that certain fee letter agreement dated November 23, 1994, in each case by and between the Borrower and First Chicago. 9.6. Several Obligations; Benefits of this Agreement. The respective ----------------------------------------------- obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns. 9.7. Expenses; Indemnification. The Borrower shall reimburse the ------------------------- Agent for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, negotiation, execution, delivery, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Agent and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent and the Lenders, which attorneys may be employees of the Agent or the Lenders) paid or incurred by the Agent or any Lender in connection with the collection of the Obligations or the enforcement of the Loan Documents. The Borrower further agrees to indemnify the Agent and each Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (collectively, the "indemnified obligations") (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto, but excluding those indemnified obligations arising solely from any Lender's failure to perform its obligations under this Agreement) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder, except that no indemnified party shall be indemnified for any indemnified obligations arising from its own gross negligence or willful misconduct as finally determined by a court of competent Page 44 jurisdiction. The obligations of the Borrower under this Section 9.7 shall survive the termination of this Agreement. 9.8. Numbers of Documents. All statements, notices, closing -------------------- documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders. The Agent shall promptly remit same to the Lenders. 9.9. Accounting. Except as provided to the contrary herein, all ---------- accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. 9.10. Severability of Provisions. Any provision in any Loan Document -------------------------- that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.11. Nonliability of Lenders. The relationship between the Borrower ----------------------- and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. 9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A ------------- CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS ----------------------- TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY Page 45 LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. 9.14. Confidentiality. Each Lender agrees to hold any confidential --------------- information which it may receive from the Borrower pursuant to this Agreement in confidence and for use in connection with this Agreement, including without limitation, for use in connection with its rights and remedies hereunder, except for disclosure (i) to other Lenders and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to that Lender, (iii) to regulatory officials, (iv) as requested pursuant to or as required by law, regulation, or legal process, (v) in connection with any legal proceeding to which that Lender is a party, and (vi) permitted by Section 12.4. 9.15. Nonreliance. Each Lender hereby represents that it is not ----------- relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Loans provided for herein. 9.16. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER -------------------- HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. 9.17. Disclosure. The Borrower and each Lender hereby (a) acknowledge ---------- and agree that First Chicago and/or its Affiliates from time to time may hold other investments in, make other loans to or have other relationships with the Borrower and its Subsidiaries, including, without limitation, acting as commercial paper dealer or in connection with any securitizations, interest rate hedging instruments or agreements or swap transactions, and (b) waive any liability of First Chicago or such Affiliate to the Borrower or any Lender, respectively, arising out of or resulting from such investments, loans or other relationships other than liabilities arising out of the gross negligence or willful misconduct of First Chicago or its Affiliates. ARTICLE X THE AGENT --------- 10.1. Appointment. The First National Bank of Chicago is hereby ----------- appointed Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the agent of such Lender. The Agent agrees to act as such upon the express conditions contained in this Article X. The Agent shall not have a fiduciary relationship in respect of the Borrower or any Lender by reason of this Agreement or any other Loan Document. Page 46 10.2. Powers. The Agent shall have and may exercise such powers under ------ the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. 10.3. General Immunity. Neither the Agent nor any of its directors, ---------------- officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent ------------------------------------------- nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (iii) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered to the Agent; or (iv) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith. Except for notices or reports which the Agent is expressly hereby required to provide to the Lenders, the Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. The Agent shall in all cases --------------------------------- be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Page 47 10.6. Employment of Agents and Counsel. The Agent may execute any of -------------------------------- its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. The Agent shall be entitled to ------------------------------ rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.8. Agent's Reimbursement and Indemnification. The Lenders agree to ----------------------------------------- reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. The Agent shall not be deemed to have ----------------- knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. Page 48 10.10. Rights as a Lender. In the event the Agent is a Lender, the ------------------ Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, ---------------------- independently and without reliance upon the Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Agent. The Agent may resign at any time by giving --------------- written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intent to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lenders and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a Lender or another commercial bank having capital and retained earnings of at least $200,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become Page 49 vested with all the rights, powers, privileges and duties of the resigning or removed Agent, and the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. 10.13. Agent's Fee. The Borrower agrees to pay to the Agent, for its ----------- own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated November 23, 1994, or as otherwise agreed from time to time. ARTICLE XI SETOFF; RATABLE PAYMENTS ------------------------ 11.1. Setoff. In addition to, and without limitation of, any rights of ------ the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default or Unmatured Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.2. Ratable Payments. Except for payments received from the Agent ---------------- pursuant to Section 2.4, if any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Sections 3.1, 3.2 or 3.4) in a proportion greater than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of Loans. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. Page 50 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ------------------------------------------------- 12.1. Successors and Assigns. The terms and provisions of the Loan ---------------------- Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3. Notwithstanding clause (ii) of the immediately preceding sentence, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment to a Federal Reserve Bank shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 12.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 12.2. Participations. -------------- 12.2.1. Permitted Participants; Effect. Any Lender may, in the ------------------------------ ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2. Voting Rights. Each Lender shall retain the sole right to ------------- approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Page 51 Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, or extends the Termination Date. 12.2.3. Benefit of Setoff. The Borrower agrees that each Participant ----------------- shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. Each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3. Assignments. ----------- 12.3.1. Permitted Assignments. Any Lender may, in the ordinary --------------------- course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents; provided, -------- however, that in the case of an assignment to an entity which is not a ------- Lender or an Affiliate of a Lender, such assignment shall be in a minimum amount of $5,000,000. Such assignment shall be substantially in the form of Exhibit "H" hereto or in such other form as may be agreed to by the parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that the consent of the Borrower shall not be required if, on the date of such assignment, a Default shall have occurred and be continuing. Such consent shall not be unreasonably withheld or delayed. 12.3.2. Effect; Effective Date. Upon (i) delivery to the Agent of a ---------------------- notice of assignment, substantially in the form attached as Exhibit "I" to Exhibit "H" hereto (a "Notice of Assignment"), together with any consents required by Section 12.3.1, and (ii) payment of a $3,000 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed Page 52 by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that a replacement Note is issued to such transferor Lender and a new Note or, as appropriate, replacement Note, is issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. 12.4. Dissemination of Information. The Borrower authorizes each ---------------------------- Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.14 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is ------------- transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.16. ARTICLE XIII NOTICES ------- 13.1. Giving Notice. Except as otherwise permitted by Section 2.11 ------------- with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing and shall be delivered or mailed (or in the case of telegraphic communication, delivered by telecopy or telex) addressed to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties. Any notice, if personally delivered or mailed (properly addressed with postage prepaid), shall be deemed given when received; any notice, if transmitted by telecopy or telex, shall be deemed given when transmitted (receipt confirmed by telephone in the case of telecopies and answerback confirmed in the case of telexes). Page 53 13.2. Change of Address. The Borrower, the Agent and any Lender may ----------------- each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XIV COUNTERPARTS ------------ This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by telex or telephone, that it has taken such action. Page 54 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. Commitments TORCHMARK CORPORATION - ----------- By: _________________________________ Print Name: _________________________ Title: ______________________________ 2001 Third Avenue South Birmingham, Alabama 35233 Attention: Mr. Michael J. Klyce Telephone No.: (205) 325-2051 Telecopier No.: (205) 325-4157 $ 22,500,000 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: _________________________________ Print Name: _________________________ Title: ______________________________ One First National Plaza Chicago, Illinois 60670 Attention: Financial Services Division Telephone No.: (312) 732-7074 Telecopier No.: (312) 732-4033 Telex No.: 4330253 $17,500,000 AMSOUTH BANK OF ALABAMA By: ______________________________ Print Name:_______________________ Title: __________________________ 1900 Fifth Avenue North Birmingham, Alabama 35203 Attention: Mr. John Kettig Senior Vice President Telephone No.: (205) 326-5924 Telecopier No.: (205) 801-0157 Page 55 $15,000,000 BANK OF AMERICA ILLINOIS By: _____________________________ Print Name:_______________________ Title: __________________________ 231 South LaSalle Street Chicago, Illinois 60697 Attention: Ms. Ann M. Benschoter Vice President Telephone No.: (312) 828-6723 Telecopier No.: (312) 987-0889 $15,000,000 BANK OF MONTREAL By: _____________________________ Print Name: ______________________ Title: ___________________________ 115 South LaSalle Street Chicago, IL 60603 Attention: Mr. Dan Streiff Telephone No.: (312) 750-3775 Telecopier No.: (312) 750-3783 $17,500,000 THE BANK OF NEW YORK By: _____________________________ Print Name: ______________________ Title: ___________________________ One Wall Street, 17th Floor New York, New York 10286 Attention: Mr. Timothy J. Stambaugh Vice President Telephone No.: (212) 635-6463 Telecopier No.: (212) 809-9520/9499 Page 56 $10,000,000 BOATMEN'S NATIONAL BANK OF KANSAS CITY By: ________________________________ Print Name:_________________________ Title: _____________________________ 10th and Baltimore Kansas City, MO 64183 Attention: Mr. Mike Helak Senior Vice President Telephone No.: (816) 691-7032 Telecopier No.: (816) 691-7426 $17,500,000 CHEMICAL BANK By: ________________________________ Print Name: ________________________ Title: _____________________________ 270 Park Avenue, 9th Floor New York, New York 10017 Attention: Mr. Brian J. Turrentine Vice President Telephone No.: (212) 270-5281 Telecopier No.: (212) 270-5222 $15,000,000 COMPASS BANK By:________________________________ Print Name: _______________________ Title: ____________________________ 15 South 20th Street, 2nd Floor Birmingham, AL 35233 Attention: Mr. Austin S. Landry Vice President Telephone No.: (205) 933-3689 Telecopier No.: (205) 933-3926 Page 57 $15,000,000 FIRST ALABAMA BANK By: ______________________________ Print Name: _______________________ Title: ____________________________ 417 North 20th St., 2nd Floor Birmingham, Alabama 35203 Attention: Mr. Robert Kuhn Executive Vice President Telephone No.: (205) 326-7104 Telecopier No.: (205) 326-7662 $10,000,000 SHAWMUT BANK CONNECTICUT, N.A. By: _______________________________ Print Name: _______________________ Title: ____________________________ 777 Main Street Hartford, CT 06115 Attention: Mr. Larry Gloekler Vice President Telephone No.: (203) 240-7932 Telecopier No.: (203) 250-1264 $17,500,000 SOUTHTRUST BANK OF ALABAMA, NATIONAL ASSOCIATION By: _____________________________ Print Name: ______________________ Title: ___________________________ 420 North 20th Street Birmingham, Alabama 35203 Attention: Mr. Curtis J. Perry Vice President Telephone No.: (205) 254-5799 Telecopier No.: (205) 254-5022 Page 58 $10,000,000 UMB BANK, n.a. By: ______________________________ Print Name: ______________________ Title: ___________________________ 1010 Grand Avenue Kansas City, MO 64103 Attention: Mr. Jim Sangster Divisional Executive Vice President Telephone No.: (816) 860-7919 Telecopier No.: (816) 860-7143 $17,500,000 UNION BANK OF SWITZERLAND By: ______________________________ Print Name: ______________________ Title: ___________________________ 299 Park Avenue New York, New York 10171 Attention: Mr. Robert W. Casey, Jr. Assistant Vice President Telephone No.: (212) 715-3329 Telecopier No.: (212) 715-3878 $200,000,000 ============ Page 59 EX-23 3 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Gary L. Coleman ------------------------------- Gary L. Coleman, Vice President & Chief Accounting Officer Date: March 9, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ J. P. Bryan ------------------------------- J. P. Bryan, Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer and Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Keith A. Tucker ------------------------------- Keith A. Tucker, Vice Chairman and Director (Principal Financial Officer) Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ C. B. Hudson ------------------------------- C. B. Hudson, Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer and Director of Torchmark Corporation does hereby constitute and appoint Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ R. K. Richey ------------------------------- R. K. Richey, Director, Chairman and Chief Executive Officer Date: February 26, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Yetta G. Samford, Jr. ------------------------------- Yetta G. Samford, Jr., Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ George J. Records ------------------------------- George J. Records, Director Date: February 27, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph W. Morris ------------------------------- Joseph W. Morris, Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Harold T. McCormick ------------------------------- Harrold T. McCormick, Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph L. Lanier, Jr. ------------------------------- Joseph J. Lanier, Jr., Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Louis T. Hagopian ------------------------------- Louis T. Hagopian, Director Date: February 28, 1995 ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1994. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph M. Farley ------------------------------- Joseph M. Farley, Director Date: February 28, 1995 ------------------------- EX-23.A 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23(a) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statement No. 2-76378 on Form S-8 for the Torchmark Corporation Savings and Investment Plan of our report dated February 1, 1995, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Torchmark Corporation. Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109 Accounting for Income Taxes and SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1995 EX-23.B 5 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23(b) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statement No. 2-76912 on Form S-8 for the United Investors Management Company Savings and Investment plan of our report dated February 1, 1995, relating to the consolidated balance sheet or Torchmark Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Torchmark Corporation Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109 Accounting for Income Taxes and SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1995 EX-23.C 6 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Exhibit 23(c) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statement No. 2-93760 on Form S-8 for the 1984 Torchmark Corporation Stock Option Plan of our report dated February 1, 1995, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Torchmark Corporation. Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109 Accounting for Income Taxes and SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1995 EX-23.D 7 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23(d) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statement No. 33-23580 on Form S-8 for the Torchmark Corporation 1987 Stock Incentive Plan of our report dated February 1, 1995, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Torchmark Corporation. Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109 Accounting for Income Taxes and SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1995 EX-23.E 8 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23(e) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statement No. 33-1032 on Form S-8 for the Capital Accumulation and Bonus Plan of Torchmark Corporation of our report dated February 1, 1995, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Torchmark Corporation. Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109 Accounting for Income Taxes and SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1995 EX-27 9 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 4,392,259 0 0 31,547 17,997 132,554 5,235,597 2,758 0 1,291,591 8,403,634 4,229,916 90,871 201,754 72,783 1,047,879 73,784 193,052 0 1,168,819 8,403,634 1,388,874 330,492 (2,551) 205,742 921,277 178,107 436,249 386,924 124,317 268,946 0 0 0 268,946 3.72 3.72 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----