-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtOg+BRjPY+d1Wb1Lgops4R++AGd9Fy1JczmNYPVsJPFsdW00HszhlH37dKy4hyK 8UN45SXe9Zrs0dwK8zhZjw== 0000950109-97-002410.txt : 19970326 0000950109-97-002410.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950109-97-002410 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TORCHMARK CORP CENTRAL INDEX KEY: 0000320335 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] 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: 97562140 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 FOR FISCAL YEAR ENDED DECEMBER 31, 1996 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, 1996 1-8052 TORCHMARK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-0780404 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 2001 Third Ave. South, 35233 Birmingham, AL (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 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 CUSIP NUMBER: CLASS: 8 5/8% Sinking Fund 891027 AB 0 Debentures due 2017 9 5/8% Senior Notes 891027 AD 6 due 1998 8 1/4% Senior 891027 AE 4 Debentures due 2009 7 7/8% Notes due 891027 AF 1 2023 7 3/8% Notes due 891027 AG 9 2013 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: $4,181,248,001 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 28, 1997: 69,832,952 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997, PART III INDEX OF EXHIBITS (PAGES 67 THROUGH 69) TOTAL NUMBER OF PAGES INCLUDED ARE 76 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 Life Insurance Company ("American Income") was purchased in November, 1994. The following table presents Torchmark's business by primary distribution method:
PRIMARY DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE - ----------------------------------------------------------------------------------------------------------------- DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television, ACCIDENT surance including special senior magazine; nationwide. INSURANCE COMPANY life coverage, Medicare Oklahoma City, OK Supplement, long-term care. - ----------------------------------------------------------------------------------------------------------------- LIBERTY NATIONAL LIBERTY NATIONAL LIFE Individual life and 1,750 full-time sales repre- EXCLUSIVE AGENCY INSURANCE COMPANY health insurance. sentatives; 111 district offices Birmingham, Alabama in the Southeastern U.S. - ----------------------------------------------------------------------------------------------------------------- AMERICAN INCOME AMERICAN INCOME LIFE Individual life and health in- 1,450 agents. EXCLUSIVE AGENCY INSURANCE COMPANY surance to union and credit Waco, Texas union members and other associations. - ----------------------------------------------------------------------------------------------------------------- UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,170 Waddell & Reed EXCLUSIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen- Kansas institutional investment dent agents; 172 offices UNITED INVESTORS LIFE management services includ- nationwide. INSURANCE COMPANY ing assets of Torchmark. Birmingham, Alabama Individual life insurance and annuities. - ----------------------------------------------------------------------------------------------------------------- MILITARY LIBERTY NATIONAL LIFE Individual life insurance Independent Agency through INSURANCE COMPANY career agents nationwide. Birmingham, Alabama GLOBE LIFE AND ACCIDENT INSURANCE COMPANY Oklahoma City, Oklahoma - ----------------------------------------------------------------------------------------------------------------- UNITED AMERICAN UNITED AMERICAN Senior life and health 46,000 independent agents INDEPENDENT AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and AND EXCLUSIVE INDEPEN- McKinney, Texas Medicare Supplement Canada; 1,100 exclusive DENT AGENCY coverage and long-term care. agents in 73 branch offices.
Additional information concerning industry segments may be found in Management's Discussion and Analysis and in Note 17--Industry Segments in the Notes to Consolidated Financial Statements. INSURANCE LIFE INSURANCE Torchmark writes a variety of nonparticipating ordinary life insurance products. These include traditional and interest sensitive whole-life insurance, 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 -------------------------- -------------------------- 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Whole life: Traditional.............. $112,817 $107,288 $ 63,108 $521,015 $469,581 $445,025 Interest-sensitive....... 16,638 29,287 34,633 167,912 174,675 171,264 Term...................... 82,331 79,849 48,392 243,210 212,213 167,973 Other..................... 2,955 1,564 3,700 14,388 12,897 12,693 -------- -------- -------- -------- -------- -------- $214,741 $217,988 $149,833 $946,525 $869,366 $796,955 ======== ======== ======== ======== ======== ========
1 The distribution methods for life insurance products include sales efforts conducted by direct response, exclusive agents and independent agents. 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 -------------------------- --------------------------- 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Direct response......... $ 62,029 $ 63,900 $ 48,267 $202,370 $180,530 $154,130 Exclusive Agents: Liberty National....... 45,394 48,549 51,461 297,581 297,418 291,813 American Income........ 54,382 51,190 7,393 188,039 169,599 147,008 United Investors....... 10,715 10,609 8,674 84,495 78,666 73,148 United American........ 15,874 19,080 18,175 59,760 60,470 59,459 Independent Agents: Military............... 8,165 8,268 7,292 74,150* 48,402 42,595 United American........ 18,182 16,392 8,571 40,130 34,281 28,802 -------- -------- -------- -------- -------- -------- $214,741 $217,988 $149,833 $946,525 $869,366 $796,955 ======== ======== ======== ======== ======== ========
- -------- * Annualized premium in force for 1996 includes $21 million acquired from another carrier originally produced by this agency. Permanent insurance products sold by Torchmark 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, 1996 was $207 million and the average interest rate earned on these loans was 6.58% in 1996. Interest income earned on policy loans was $13.2 million in 1996, $12.1 million in 1995, and $10.0 million in 1994. Torchmark had 188 thousand and 182 thousand policy loans outstanding at year- end 1996 and 1995, 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 17.1% in 1996, 17.2% in 1995 and 14.7% in 1994. The following table presents an analysis of changes to Torchmark's life insurance business in force:
(AMOUNTS IN THOUSANDS) 1996 1995 1994 --------------------- --------------------- --------------------- NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE --------- ----------- --------- ----------- --------- ----------- In force at January 1,.. 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933 New issues.............. 1,320 18,718,479 1,413 19,359,923 1,147 14,958,141 Business acquired....... 38 2,573,996 -0- -0- 595 8,983,055 Other increases......... 1 104,490 1 64,128 1 10,961 Death benefits.......... (111) (289,687) (110) (271,451) (105) (228,354) Lapses.................. (880) (13,008,065) (856) (12,185,540) (688) (8,940,980) Surrenders.............. (140) (1,296,744) (135) (1,187,581) (106) (1,048,117) Other decreases......... (32) (245,694) (30) (246,317) (41) (243,425) ----- ----------- ----- ----------- ----- ----------- In force at December 31,.................... 9,392 $86,948,151 9,196 $80,391,376 8,913 $74,858,214 ===== =========== ===== =========== ===== =========== Average policy size (in dollar amounts): Direct response--Juve- nile.................. $ 6,776 $ 6,854 $ 6,933 Other.................. 10,246 9,491 9,039
2 HEALTH INSURANCE Torchmark offers an assortment of supplemental health insurance products. These are generally classified as (1) Medicare Supplement, (2) cancer and (3) other health policies. Medicare Supplement policies are offered on both an individual and group basis through exclusive and independent agents, and direct response. These guaranteed renewable policies provide reimbursement for certain expenses not covered by the federal Medicare program. One popular feature available under Torchmark's Medicare Supplements is an automatic claim filing system for Medicare Part B benefits whereby policyholders do not have to file most claims because they are paid directly by Torchmark from Medicare records. Cancer policies are offered on an individual basis through exclusive and independent agents as well as direct response. These guaranteed renewable policies are designed to fill gaps in existing medical coverage. Benefits are triggered by a diagnosis of cancer or health related events or medical expenses related to the treatment of cancer. Benefits may be in the form of a lump sum payment, stated amounts per diem, per medical procedure, or reimbursement for certain medical expenses. Other health policies include accident, long term care and limited benefit hospital and surgical coverages. These policies are generally issued as guaranteed-renewable and are offered on an individual basis through exclusive and independent agents, and direct response. They are designed to supplement existing medical coverages. Benefits are triggered by certain health related events or incurred expenses. Benefit amounts are per diem, per health related event or defined expenses incurred up to a stated maximum. The following table presents supplemental health annualized premium for the three years ended December 31, 1996 by marketing method:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Direct response........... 4,990 171 674 5,141 929 1,162 Exclusive agents: Liberty National......... 11,258 16,701 24,904 122,305 122,147 127,962 American Income.......... 10,645 9,585 1,232 42,140 39,693 36,215 United American.......... 31,565 32,596 33,765 131,250 127,599 130,738 Independent agents: United American.......... 42,523 44,438 62,088 447,317 468,691 516,294 -------- -------- -------- -------- -------- -------- $100,981 $103,491 $122,663 $748,153 $759,059 $812,371 ======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium information for the three years ended December 31, 1996 by product category:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Medicare Supplement...... $ 65,767 $ 64,638 $ 87,547 $523,902 $529,616 $572,221 Cancer................... 10,676 11,338 8,101 119,428 114,972 114,495 Other health related pol- icies................... 24,538 27,515 27,015 104,823 114,471 125,655 -------- -------- -------- -------- -------- -------- $100,981 $103,491 $122,663 $748,153 $759,059 $812,371 ======== ======== ======== ======== ======== ========
3 ANNUITIES Annuity products offered by Torchmark include single-premium deferred annuities, flexible-premium deferred annuities, and variable annuities. Single-premium and flexible-premium products 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, -------------------------------- -------------------------- 1996 1995 1994 1996 1995 1994 ---------- ---------- ---------- -------- -------- -------- Fixed annuities......... $ 87,133 $ 133,461 $ 43,339 $ 974.6 $ 927.9 $ 801.2 Variable annuities...... 247,461 189,188 196,105 1,375.5 1,052.2 692.8 ---------- ---------- ---------- -------- -------- -------- $ 334,594 $322,649 $239,444 $2,350.1 $1,980.1 $1,494.0 ========== ========== ========== ======== ======== ========
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. Torchmark's investments consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 90% of total investments at December 31, 1996. Approximately 25% 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 70% 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, agency securities or collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations in the 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, 1996. 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...................... $ 179,178 3.4% GNMA and MBS backed by GNMA collateral............. 1,083,860 20.3 Other U.S. Government guaranteed................... 58,035 1.1 Other investment grade............................. 3,763,846 70.6 Non-investment grade corporates.................... 243,357 4.6 ---------- ----- $5,328,276 100.0% ========== =====
The following table presents Torchmark's fixed maturity investments at December 31, 1996 on the basis of ratings as determined primarily by Standard & Poor's Corporation. Moody's Investors Services' bond ratings are used when Standard & Poor's ratings are not available. Ratings of BBB and higher (or their equivalent) are considered investment grade by the rating services.
AMOUNT RATING (IN THOUSANDS) % ------ -------------- ----- AAA................................................ $2,098,390 39.4% AA................................................. 787,542 14.8 A.................................................. 1,910,726 35.9 BBB................................................ 277,915 5.2 BB................................................. 170,522 3.2 B.................................................. 6,991 0.1 Less than B........................................ 88 0.0 Not rated.......................................... 76,102 1.4 ---------- ----- $5,328,276 100.0% ========== =====
4 The following table presents the fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1996 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.. $4,788,405 90.2% 2. High quality..... 277,087 5.2 3. Medium quality... 211,316 4.0 4. Low quality...... 31,372 0.6 5. Lower quality.... 669 0.0 6. In or near de- fault.............. 0 0.0 ---------- ----- $5,308,849 100.0% ========== =====
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 using assumptions as to future mortality, morbidity, persistency, and expenses, all of which are generally based on Torchmark'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 and certain life 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 the deposits invested in excess of the amounts credited to policy accounts. UNDERWRITING The underwriting standards of Torchmark are established by management. Torchmark uses 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. Torchmark requires medical information or 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 information is $100,000 through age 40. Torchmark requests medical information of all applicants, regardless of age or amount, if information obtained from the application or other sources indicates that such information is warranted. In recent years, there has been considerable concern regarding the impact of the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS"). Torchmark has implemented certain underwriting tests to detect the presence of the HIV virus and continues 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 cedes insurance to other unaffiliated insurance companies on policies they issue in excess of retention limits. Reinsurance is an effective method for keeping insurance risk within acceptable limits. In the event insurance business is ceded, Torchmark remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations it assumes (See Note 16-- Commitments and Contingencies in the 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 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 Torchmark is licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada. Distribution is through direct response, independent and exclusive agents. Direct Response. Torchmark offers life insurance products directly to consumers through direct mail, co-op mailings, national cable and local spot television, national newspaper supplements and national magazines. Torchmark operates a full service letterpress which enables the direct response operation to maintain high quality standards while producing materials much more efficiently than they could be purchased from outside vendors. Exclusive Agents. Torchmark sells and services life and health insurance through 1,750 Liberty National agents primarily in the seven state area of Alabama, Florida, Georgia, Tennessee, Mississippi, South Carolina, and North Carolina. These agents are employees of Liberty and are primarily compensated by commissions based on sales. During the past several years this operation has emphasized bank draft and direct bill collection of premium rather than agent collection, because of the resulting lower cost and improved persistency. Agent collected sales were discontinued in 1996. Through the American Income Agency, Torchmark sells individual life and fixed-benefit accident and health insurance through approximately 1,450 exclusive agents who target moderate income wage earners through the cooperation of labor unions, credit unions, and other associations. These agents are authorized to use the "union label" because this sales force is represented by organized labor. Torchmark sells life insurance as well as fixed and variable annuity products through the 2,170 W&R financial planners. (See Asset Management-- Mutual Funds for additional marketing information about the W&R sales force.) Torchmark offers life and health insurance targeted to various special markets through approximately 1,100 United American exclusive independent agents in 73 branch offices throughout the United States. Independent Agents. Torchmark offers a variety of life and health insurance policies through approximately 46 thousand independent agents, brokers, and licensed sales representatives. Torchmark is not committed or obligated in any way to accept a fixed portion of the business submitted by any independent agent. All policy applications, both new and renewal, are subject to approval and acceptance by Torchmark. 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. 6 Torchmark distributes life insurance through a nationwide independent agency whose sales force is comprised of former commissioned and non-commissioned military officers who sell exclusively to commissioned and non-commissioned military officers and their families. RATINGS The following list indicates the ratings currently held by Torchmark's five largest insurance companies as rated by A.M. Best Company:
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)
A.M. Best states that it assigns A+ (Superior) ratings to those companies which, in its opinion, have demonstrated superior overall performance when compared to the norms of the life/health insurance industry. A+ (Superior) companies have a very strong ability to meet their obligations to policyholders 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 an excellent ability to meet their obligations to policyholders over a long period of time. United Investors Life Insurance Company also has a rating of AA by Standard & Poor's Corporation. This AA rating is assigned by Standard & Poor's Corporation to those companies who offer excellent financial security on an absolute and relative basis and whose capacity to meet policyholders obligations is overwhelming under a variety of economic and underwriting conditions. 7 ASSET MANAGEMENT Torchmark conducts its asset management and financial services businesses through Waddell & Reed Financial Services, Inc. and its subsidiaries. This segment's activity is mutual fund distribution, management, and servicing. MUTUAL FUNDS Torchmark's mutual fund operations are carried out by a subsidiary of United Management, W&R, which markets and manages the seventeen mutual funds in the United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund, Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc. ("TMK/United Funds") which are used exclusively as the investment funds for variable annuities sold by UILIC. These funds were valued as follows at December 31, 1996 and 1995:
(AMOUNTS IN MILLIONS) 1996 1995 ------- ------- United Funds $15,130 $13,569 W&R Funds 643 419 TMK/United Funds 1,434 1,099 ------- ------- Total mutual fund assets under management 17,207 15,087 Institutional and private accounts 1,651 3,201 ------- ------- Total assets under management $18,858 $18,288 ======= =======
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, 1996, the average industry experience of the fund managers for W&R was 20 years, and average company experience was 13 years. The following table indicates W&R revenues by component for the three years ending December 31, 1996:
(AMOUNTS IN THOUSANDS) 1996 1995 1994 -------- -------- -------- Asset management fees........................ $103,127 $ 85,999 $ 70,651 Investment product commissions*.............. 71,991 56,927 59,450 Insurance product commissions*............... 13,897 13,531 12,773 Service fees................................. 28,419 23,528 22,297 -------- -------- -------- $217,434 $179,985 $165,171 ======== ======== ========
*Commissions received from affiliates for variable annuities and insurance product sales are eliminated in consolidation. W&R markets its mutual funds and other financial products, including life insurance, through a sales force of approximately 2,170 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 172 sales offices at December 31, 1996. 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 COMPETITION The insurance industry is highly competitive. Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales effort. In addition to competition with other insurance companies, Torchmark also faces 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 companies operate at lower administrative expense levels than its peer companies, allowing Torchmark 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. 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, the 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. 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 December 31, 1995; American Income as of December 31, 1990; Globe, as of December 31, 1994; Liberty, as of December 31, 1991; United American, as of December 31, 1993; 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. IRIS identifies twelve insurance industry ratios from the statutory financial statements of insurance companies, which 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 9 presents the IRIS ratios as determined by the NAIC for Torchmark's five largest insurance subsidiaries, which varied unfavorably from the "usual value" range for the years 1995 and 1994.
USUAL REPORTED COMPANY RATIO NAME RANGE VALUE - --------- ------------------------------------------------- --------- -------- 1995: - ----- Liberty Investment in Affiliate to Capital and Surplus 0 to 100 238 Globe Change in Capital and Surplus 50 to -10 -18 United American Change in Capital and Surplus 50 to -10 -11 Liberty Change in Reserving Ratio 20 to -20 24 American Income Non-admitted to Admitted Assets 10 11 1994: - ----- Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202 Liberty Change in Capital and Surplus 50 to -10 -29 Globe Change in Capital and Surplus 50 to -10 -12
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 1995 and 1994 is brought about by its ownership of other large Torchmark insurance companies and the ownership of 81% 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 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. Liberty's ratio of minus 29% in 1994 was due to the payment of a large dividend by United Management, an 81% owned subsidiary, directly to Torchmark. Because Liberty waived its interest in this dividend, it reduced Liberty's capital and surplus. United American's ratio of minus 11% in 1995 and Globe's ratios of minus 18% in 1995 and minus 12% in 1994 were caused by the payment of dividends to Torchmark in excess of their statutory net income. These transactions did not affect the consolidated equity of Torchmark at December 31, 1995 and 1994. Change in Reserving Ratio--The change in reserving ratio represents the number of percentage points of difference between the reserving ratio for current and prior years. Liberty's ratio was slightly over the usual range because it assumed a block of business in late 1995. The assumption of this business caused an increase in year-end reserves. No allowance is made for special transactions such as this in the calculation. Non-admitted Assets to Admitted Assets--This ratio measures the degree to which a company has acquired assets which cannot be carried on its statutory balance sheet. American Income's ratio of 11% in 1995 was due to a large amount of agent balances that arose from comissions that are advanced to agents when a policy is submitted. Due to the growth of American Income's business, these advances have grown and caused a variance in this particular ratio. 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. 10 Guaranty Assessments. State solvency or guaranty laws provide for assessments from insurance companies into a fund which is used, in the event of failure 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, and the TMK/United Funds is or was a registered investment company under the Investment Company Act of 1940. W&R and Waddell & Reed Asset Management Company ("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. PERSONNEL At the end of 1996, Torchmark had 2,312 employees and 2,516 licensed employees under sales contracts. Additionally, approximately 54,000 independent and exclusive 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 square foot building at 2001 Third Avenue South, Birmingham, Alabama which currently serves as Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately 160,000 square feet of this building to unrelated tenants. Liberty also operates from 61 company-owned district office buildings used for agency sales personnel. Globe owns a 300,000 square foot office building at 204 North Robinson, Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home office and the balance is available for lease. Globe also owns a 330,000 square foot office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants. In 1996, United American relocated to a new home office building. United American owns and is the sole occupant of this 140,000 square foot facility, located in the Stonebridge Ranch development in McKinney, Texas (a North Dallas suburb). The former home office building on Buckner Boulevard in Dallas, Texas is under contract to be sold. 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 square foot office building utilized as its corporate headquarters 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 square feet, which are leased or are available for lease. 11 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 three buildings consisting of 185,000 square feet, 90,000 square feet and 25,000 square feet of office space within a 100 acre commercial development known as Liberty Park along Interstate 459 in Birmingham, Alabama. Approximately 275,000 square feet of this total office area is currently leased. A 110,000 square foot office building is currently under construction in this development and is scheduled for completion in the Spring of 1997. TDC also owns and manages a 70,000 square foot office and retail complex adjacent to Liberty Park of which approximately 60% is leased by an affiliated party. As a part of a joint venture with unaffiliated entities, TDC 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. These policies and procedures provide for the copying, off-site physical storage and retention of significant company computer programs and business data files for backup purposes. ITEM 3. LEGAL PROCEEDINGS Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits 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 state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number 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 not limited by any clear, objective criteria 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, 1996, Liberty was a party to approximately 282 active lawsuits (including 25 employment related cases and excluding interpleaders and stayed cases), more than 250 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment with the Supreme Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously affirmed the Robertson class action settlement and on February 16, 1996, issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. A petition for writ of certiorari to the Supreme Court of the United States was then filed by intervenors. The U.S. Supreme Court granted certiorari in Robertson on October 1, 1996. Oral arguments on the intervenors' petition, which alleged that class members had not received due process in the class certification procedure and should be allowed to opt out of the class action settlement to pursue separate litigation, were heard by the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme Court dismissed, as improvidently granted, the writ of certiorari previously granted in Robertson. The ruling effectively ends direct appeals from the Robertson class action settlement and Liberty will proceed with administration of benefits under the class settlement. As previously reported, Liberty is subject to 76 individual cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of the Robertson case. Liberty will file motions to dismiss these lawsuits based upon the U.S. Supreme Court opinion in Robertson. If these cases are dismissed, no collateral attacks on the cancer class action settlement will remain at this time. As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94- 1006-P-M), which was filed on December 30, 1994 and is presently pending in the U.S. District Court for the Northern District of 12 Alabama, is the only remaining purported class action litigation brought by Torchmark shareholders alleging untimely and inadequate disclosure of material contingent liabilities arising out of insurance policy litigation involving Liberty. The U.S. District Court entered an order granting partial summary judgment on behalf of the defendants on April 16, 1996. Claims for damages based on Section 10b-5 of the Securities Exchange Act, on state securities laws and for common law fraud remain pending in the case. As previously reported, 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 was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. Prior filings have reported that 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 alleged actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. Liberty removed this case to federal court, but the case was subsequently remanded to the state court. The Bryant case was settled on an individual basis by the parties on December 23, 1996. No class was ever certified. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage alleged to be in conflict with provisions of the Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). The Stewart case has been dismissed with prejudice and the other cases remain pending. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims during an approximately two month period in 1993 (Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible by the providers under federal law. In November, 1993 Liberty discontinued this practice and recalculated and repaid all claims in full as it had prior to September 1993 together with interest. Nearly two years after this refund, the Adkins case was filed. The claims made in Adkins are identical to the individual claims in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an individual case reversed and remanded by the Alabama Supreme Court on March 7, 1997 after an appeal regarding the remitted verdict of $2.7 million. A class certification order, which does not address the merits of the litigation, was entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for writ of mandamus or prohibition with the Alabama Supreme Court in August 1996 asserting abuse of discretion by the trial court in certifying the Adkins class. The Alabama Supreme Court has stayed further proceedings as to the class issues in Adkins pending its ruling on the propriety of class certification. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to 13 the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an amended complaint in Smith to allege violations of various provisions of the Employment Retirement Income Security Act of 1974. Discovery is presently proceeding in this case. It has been previously reported that Liberty is a party to individual lawsuits and a purported class action (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County, Alabama, in which allegations are made that an interest sensitive life insurance policy would become paid-up or self-sustaining after a specified number of years. Currently, Liberty is a party to more than 100 individual interest sensitive cases, 53 of which were filed by a single lawyer in Chambers County, Alabama. Additionally, Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company, filed in the Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119), where the plaintiffs were seeking class certification on behalf of such policyholders including those who were allegedly induced to exchange life insurance policies or the existing policy's cash value was allegedly depleted. On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an order conditionally certifying a plaintiffs claim in Lawson in order to preserve the Court's jurisdiction over the class action question, subject to a full evidentiary hearing on class certification at a future date yet to be determined. 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. (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 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. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. 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. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996 on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed economic circumstances. Liberty is actively opposing this petition. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996, Torchmark's motion to change venue was granted and the case has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The Company's motion to dismiss remains pending while discovery is proceeding. It has been previously reported that the Company, its subsidiaries United American and Globe and certain individual corporate officers are parties to purported class action litigation filed April 5, 1996 in the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud, breach of contract, conspiracy, violations of the Oklahoma Consumer Protection Act and breach of the duty of good faith and fair dealing on behalf of all persons who purchased, at any time between 1987 and the present, certain hospitalization and surgical insurance policies issued by Globe and United American. The plaintiffs asserted that they purchased these policies and subsequently incurred improper claim denials, wrongful recision and "rate-ups" and post-claim underwriting. On December 4, 1996, the U.S. District Court dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract counts as to certain defendants and ordered plaintiffs to file an amended complaint. On December 23, 1996, the plaintiffs filed 14 the amended complaint as ordered, alleging breach of contract, fraud, conspiracy and breach of the duty of good faith and fair dealing on behalf of a purported class of persons who purchased Globe, but not United American, policies from 1987 to the present. Defendants have filed motions to dismiss and for partial summary judgment. On April 19, 1996, a $5 million punitive judgment was entered against LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was in his sixties, cancelled several small life insurance policies and purchased a substantial amount of new coverage. The plaintiff contended that certain supplemental benefits which were present in the smaller policies were not included in the new coverage (i.e. accidental death and premium waiver). The trial judge held that Strickland was not entitled to recover compensatory damages. Nevertheless the jury awarded $100 in nominal damages in addition to the punitive award. Liberty has filed various motions for the post-trial relief with the Circuit Court, which held a post-trial hearing on the propriety of the punitive damage award on February 12, 1997. On March 11, 1997, the Circuit Court judge reduced the Strickland judgment to $37,500. A jury in Chambers County, Alabama Circuit Court returned a verdict of $333,000 compensatory damages and $17.2 million in punitive damages against Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance Company (CV-94-234). The case arose out of a claim which had been denied due to an alleged misrepresentation in the application. There was a recorded telephone interview with the applicant in which a statement was given which Liberty alleges was a misrepresentation of the health of the proposed insured. After the litigation was filed, it was learned that one signature on the application was not that of the insured. Upon notice of this fact, Liberty paid the $20,000 claim proceeds into court. Liberty has filed motions for post-trial relief with the Court, subject to completion of post trial discovery. A post-trial hearing on the propriety of the punitive damage award is scheduled for March 28, 1997. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be 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 in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. 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 1996. 15 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 7,262 shareholders of record on December 31, 1996, 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:
1996 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $49.875 $42.500 $ .29 2 45.250 41.000 .29 3 46.250 40.250 .29 4 52.125 45.500 .29
Year-end closing price..................$50.500
1995 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $42.875 $34.250 $ .28 2 42.000 37.375 .28 3 42.250 36.750 .28 4 45.250 40.875 .29
Year-end closing price..................$45.250 16 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)
1996 1995 1994 1993 1992 YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ----------- Premium Revenue: Life................... $ 854,897 $ 772,257 $ 601,633 $ 555,859 $ 544,745 Health................. 732,618 754,983 773,375 804,605 802,536 Other ................. 22,404 19,043 13,866 132,446 106,681 Total................. 1,609,919 1,546,283 1,388,874 1,492,910 1,453,962 Net investment income... 404,608 381,865 347,637 368,494 370,617 Financial services revenue................ 184,295 152,482 139,276 137,422 133,462 Realized investment gains (losses)......... 5,829 (14,323) (2,551) 8,009 (948) Total revenue........... 2,205,810 2,067,482 1,875,337 2,066,846 1,959,668 Net income from continuing operations.. 318,509 271,945 263,814 242,298 247,647 Net income.............. 311,372 143,235 268,946 297,979 265,477 Net income available to common shareholders........... 311,372 143,235 268,142 294,690 262,024 Annualized premium issued: Life................... 214,741 217,988 149,833 128,433 131,726 Health................. 100,981 103,491 122,663 177,701 227,134 Total................. 315,722 321,479 272,496 306,134 358,860 Mutual fund collections. 1,497,259 1,182,594 1,180,477 1,237,747 1,141,928 Per common share: Net income............. 4.37 2.00 3.72 4.01 3.58 Net operating income(1)............. 4.43 3.93 3.74 3.50 3.34 Net income from continuing operations. 4.47 3.80 3.65 3.25 3.33 Cash dividends paid.... 1.16 1.13 1.12 1.08 1.07 Return on average common equity excluding effect of SFAS 115 and discontinued operations............. 20.5% 18.5% 19.7% 21.3% 24.6% Average shares outstanding............ 71,230 71,594 72,096 73,502 73,237 - ------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ----------- Cash and invested assets (2).................... $6,049,629 $5,874,037 $5,036,211 $5,200,588 $ 4,675,577 Total assets............ 9,800,800 9,364,104 8,165,244 7,441,185 6,544,617 Short-term debt......... 40,910 189,372 250,116 107,108 195,102 Long-term debt.......... 791,880 791,988 791,518 791,090 496,622 Shareholders' equity.... 1,629,343 1,588,952 1,242,603 1,417,255 1,115,660 Per common share (3)... 23.38 22.17 17.37 18.80 14.54 Per common share excluding effect of SFAS 115.............. 22.84 20.33 19.31 17.29 14.54 Annualized premium in force: Life.................. 946,525 869,366 796,955(4) 612,656 588,084 Health................ 748,153 759,059 812,371(4) 828,332 837,628 Total................. 1,694,678 1,628,425 1,609,326 1,440,988 1,425,712 Assets under management at W&R................. 18,858,000 18,288,000 14,502,000 14,470,000 12,144,000
- ------------------------------------------------------------------------------- (1) Excludes realized investment gains (losses) and the related adjustment to deferred acquisition costs. (2) Includes accrued investment income. (3) Computed after deduction of preferred shareholders' equity. (4) 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. 17 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 Torchmark's net operating income from continuing operations excludes realized investment gains and losses and the related adjustment to deferred acquisition costs. Net operating income was $4.43 per share in 1996, rising 13% over $3.93 per share in 1995. This increase in net operating income for 1995 was 5% from 1994 per share net operating income of $3.74. Realized investment losses for 1995 included a $15 million after-tax, or $.21 per share, writedown of an investment in Southwestern Life Corporation, which filed for Chapter 11 bankruptcy protection in the third quarter of 1995. Torchmark's net income, including discontinued operations, was $311 million in 1996 compared with $143 million in 1995 and $269 million in 1994. On a per- share basis, net income was $4.37, $2.00, and $3.72 in 1996, 1995, and 1994, respectively. Net income in 1995 was negatively affected by Torchmark's decision to dispose of its energy segment and to exit the energy industry. Accordingly, in 1995, Torchmark modified the presentation in its financial statements to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. Also in the fourth quarter of 1995, as a part of the decision to dispose of the energy segment, Torchmark wrote down its investment in a coalbed methane gas development in the Black Warrior Basin of Alabama to the investment's estimated realizable value. Torchmark had experienced disappointments in methane gas production through increased difficulties in obtaining significant gas production from lower coal seams, resulting in downward revisions to engineering estimates of reserves. In view of these production difficulties, Torchmark's desire to sell its energy segment, and the adoption of FASB Statement 121, an accounting rule regarding impairments, it was determined that a writedown of the investment was appropriate. The writedown amounted to an after-tax charge of $130 million, or $1.82 per share in 1995. The disposition of the energy segment was completed on September 30, 1996 and resulted in an after-tax loss of $7 million or $.10 per share. For more details on this transaction, see "Disposal of Energy Segment" on page 30 of this report. In a comparison of 1996 and 1995 results with those of 1994, attention should be given to the acquisition of American Income on November 3, 1994 for total consideration of $552 million. American Income's results were consolidated with Torchmark's after the acquisition date, being included for a full year in 1995 for the first time. American Income added approximately $17 million and $22 million to Torchmark's 1995 and 1996 net income, respectively, after taking into account goodwill amortization and financing costs. Torchmark's 1996 revenues gained 7% over the prior year to $2.21 billion. Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an increase of $192 million. The American Income acquisition accounted for the 1995 increase after adjusting for lost investment income from the purchase. American Income added $225 million to total revenues in 1995, compared with $31 million in 1994. Premium income increased 4% in 1996 over the prior year to $1.61 billion. Premium in 1995 rose 11% to $1.55 billion from $1.39 billion. The $157 million gain in premium in 1995 was caused by the inclusion of American Income premium for a full year, which increased $168 million over 1994. The components of Torchmark's revenues and operations are described in more detail in the discussion of segments and investment operations found on pages 19 through 27 of this report. Operating expenses, as a percentage of total revenues, were stable at 7% in both 1996 and 1995. This expense ratio increased from 6.3% in 1994. The higher expense ratios in 1995 and 1996 are related to increased legal and litigation costs at Liberty. In 1995, the increases in goodwill amortization, interest expense, and the MIPS dividend were the result of financing the American Income acquisition in late 1994. Please refer to the following sections of this report for a more complete discussion of this purchase 18 and the related financing costs: "Acquisition of American Income" on page 30, and "Capital Resources" on page 28. Interest expense declined 9% in 1996 due to debt paydowns. For a more complete discussion of Torchmark's debt, please see the "Capital Resources" discussion. The following is a discussion of Torchmark's operations by segment. INSURANCE Life insurance. Life insurance premium increased 11% in 1996 to $855 million. Life premium grew 28% to $772 million for the year 1995. The 1995 versus 1994 comparison is distorted somewhat because of the American Income acquisition in late 1994. American Income life premium was $154 million in 1995, compared with $21 million in 1994, accounting for $133 million of the $171 million increase in life premium for 1995. Sales of life insurance in terms of annualized premium were $215 million in 1996 and $218 million in 1995. This represents a 1% decline in 1996 when compared with 1995, a record year for Torchmark, but the 1995 increase was 45% over 1994 sales of $150 million. American Income accounted for $51 million of 1995 sales, or 64% of the 1995 increase. Life insurance premium is Torchmark's largest component of revenue, representing 39% of total revenue and 53% of total premium. In 1995, Torchmark's life annualized premium in force at year end exceeded its health premium for the first time since 1982. In 1996, the gap between life and health premium increased, as annualized life premium in force grew to 56% of total as opposed to health premium's 44%. Torchmark has emphasized increases in sales of life insurance product lines relative to health and other insurance products because profit margins for life insurance are superior. Additionally, assets backing the higher reserves required for life products provide the potential for Torchmark to increase investment income. Profit margins for life insurance operations, as measured by insurance operating income as a percentage of premium, have approximated 29% in each of the three years presented. By contrast, health margins have not exceeded 16% during the same three years. Annualized life premium in force climbed 9% in 1996 to $947 million at December 31. Annualized life premium in force also grew 9% during 1995, rising to $869 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 account charges. Torchmark markets its life insurance products through a variety of different distribution channels. The following table presents life insurance premium income during each of the three years ended December 31, 1996 by distribution method. LIFE INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1996 1995 1994 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- United American Independent Agency........................ $ 33,404 3.9% $ 28,305 3.7% $ 25,971 4.3% United American Exclusive Agency........................ 15,767 1.8 10,713 1.4 7,988 1.3 Direct Response................ 171,983 20.1 149,141 19.3 127,661 21.2 Liberty National Exclusive Agency........................ 279,637 32.7 275,089 35.6 268,460 44.6 American Income Exclusive Agency........................ 173,700 20.3 153,914 19.9 21,055 3.5 Military....................... 71,223 8.3 45,512 5.9 39,802 6.6 United Investors Exclusive Agency........................ 73,836 8.6 69,498 9.0 64,940 10.8 Other.......................... 35,347 4.3 40,085 5.2 45,756 7.7 -------- ----- -------- ----- -------- ----- $854,897 100.0% $772,257 100.0% $601,633 100.0% ======== ===== ======== ===== ======== =====
The direct response operation has experienced premium growth, with premium revenue rising 15% in 1996 to $172 million, after having risen 17% in 1995. Annualized life premium in force was $202 million at December 31, 1996. Direct response marketing is conducted through direct mail, co-op mailings, 19 television and consumer magazine advertising, as well as direct mail solicitations endorsed by groups, unions and associations. The direct response operation accounted for 20% of Torchmark's life insurance premium in 1996. The Liberty National Agency distribution system accounted for the most life insurance premium income in each of the three years presented, with 1996 premium representing 33% of Torchmark's total life premium. Annualized life premium in force grew from $297 million at year-end 1995 to $299 million at the end of 1996. Life premium sales, in terms of annualized premium issued, declined 6% during 1996 to $45 million. During the past two years, this agency has completed the transition from a debit-style renewal premium collection system to a direct bill or bank-draft collection system. At the beginning of 1996, debit or home collection sales were discontinued. Under the new system, agents spend more time developing new customers. As expected, a number of agents did not make the transition. During the two year period, the agency force declined 31% to 1,750 agents. However, life insurance production only declined 12%, which is evidence of the strength of the existing sales force. In the fourth quarter of 1996, emphasis was placed on hiring and training new agents under the new system. The agency expects a growth in the number of productive agents, and in turn, growth in sales and in force. Another Torchmark distribution system which experienced growth in life insurance operations was the American Income Agency. This agency targets members of labor unions, credit unions, and other associations for its life insurance sales. Life premium rose 13% in 1996 to $174 million. Annualized premium in force grew 11% to $188 million at December 31, 1996. Annualized premium in force was $170 million at year-end 1995, rising 15% over year-end 1994. Sales of annualized premium increased 6% to $54 million in 1996. American Income was acquired by Torchmark in late 1994. Torchmark distributes life insurance through a nationwide independent agency whose sales force is comprised of former commissioned and non-commissioned military officers who sell exclusively to commissioned and non-commissioned military officers and their families. The quality of the business, which is comprised of whole life products with term insurance riders, produced by this agency is outstanding. Life premium income from this distribution system was $71 million in 1996, up $26 million from 1995. This increase resulted primarily from the acquisition from another carrier of a block of business with $21 million of annualized premium in force produced by the military agency. In the past, this agency has produced business through Liberty National, but beginning late in the first quarter of 1997, additional sales will be produced through Globe Life. Torchmark's other three distribution channels each experienced premium growth in 1996. The United Investors Exclusive Agency, made up of W&R sales representatives, recorded premium income of $74 million, increasing 6% over 1995. Premium for the United American Exclusive Agency rose 47% to $16 million. Annualized premium sold was $11 million in 1996, gaining 17%. The United American Independent Agency had life premium income growth of 19% to $33 million, and sales growth of 11% to $18 million. The United Investors Agency represents 9% of Torchmark's life premium, while the two United American Agencies represent 6%. 20 LIFE INSURANCE Summary of Results (Dollar amounts in thousands)
1996 1995 1994 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- Premium and policy charges................. $854,897 100.0% $772,257 100.0% $601,633 100.0% Policy obligations....... 558,436 65.3 507,444 65.7 412,799 68.6 Required reserve interest................ (209,126) (24.4) (194,733) (25.2) (163,637) (27.2) -------- ----- -------- ----- -------- ----- Net policy obligations.. 349,310 40.9 312,711 40.5 249,162 41.4 Amortization of acquisition costs....... 146,164 17.1 126,695 16.4 90,573 15.1 Commissions and premium taxes................... 54,182 6.3 50,994 6.6 39,845 6.6 Other expenses........... 61,865 7.2 60,767 7.9 46,814 7.8 -------- ----- -------- ----- -------- ----- Total expense........... 611,521 71.5 551,167 71.4 426,394 70.9 -------- ----- -------- ----- -------- ----- Insurance operating income.................. $243,376 28.5% $221,090 28.6% $175,239 29.1% ======== ===== ======== ===== ======== =====
Torchmark's life insurance margins have remained stable, with insurance operating income at approximately 29%, throughout the three-year period presented. As a percentage of premium, operating expenses resumed their decline in 1996, dropping to 7.2%. This expense ratio was 8.6% five years ago and 11% ten years ago. One major factor in maintaining stable operating income margins in the life insurance business is improved persistency. Persistency is beneficial to margins because it lowers the rate of amortization of acquisition costs, and increases profits because the premium life is extended. Persistency improvements have resulted, at least in part, from previously-mentioned changes in the Liberty National Agency marketing system, including revisions in agents' compensation formulas to encourage lower lapses and changing the premium collection method from agent-collected to bank draft and direct bill methods which are characterized by higher persistency. Another contributing factor to improved persistency in life business is a higher proportion of premium from the military distribution system, which has an extremely low lapse rate. Even though improvements in persistency have occurred in Torchmark's major life insurance lines, acquisition cost ratios rose in each of the years reported. In a comparison of 1996 and 1995 ratios with 1994, the American income purchase must be taken into account. While American Income's life business is very profitable and has a total insurance operating income margin similar to other Torchmark products, it is characterized by lower policy obligations and higher amortization of acquisition costs. The higher acquisition cost ratio is a result of the higher amortization of the value of insurance purchased relative to deferred acquisition costs. Torchmark's discontinuance of active marketing of pre-need funeral insurance has caused the amortization of acquisition cost on this business to increase relative to premium, although the impact on total margins are more than offset by a reduction in policy benefits ratios. The above presentation of life insurance results excludes a $22.8 million benefit in 1994 from the review of reserving assumptions on a block of burial reserves. An evaluation 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 its reserving assumptions for this block on an annual basis to ensure that reserves are adequate 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%. Health insurance. Health products sold by Torchmark include Medicare Supplement insurance, cancer insurance, long-term care, and other under-age 65 limited benefit supplemental medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1996, Medicare Supplement accounted for 70%, cancer 16%, and other products 14%. These products are marketed by exclusive and independent agents, by direct response, and through associations. The table below presents health insurance premium income during each of the three years ended December 31, 1996 by distribution method. 21 HEALTH INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1996 1995 1994 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- United American Independent Agency........................ $440,862 60.2% $466,751 61.8% $509,972 65.9% United American Exclusive Agency........................ 124,037 16.9 123,264 16.3 128,538 16.6 Direct Response................ 3,519 0.5 956 0.1 1,106 0.2 Liberty National Exclusive Agency........................ 120,028 16.4 122,722 16.3 127,672 16.5 American Income Exclusive Agency........................ 44,172 6.0 41,290 5.5 6,087 0.8 -------- ----- -------- ----- -------- ----- $732,618 100.0% $754,983 100.0% $773,375 100.0% ======== ===== ======== ===== ======== =====
The following chart contains health insurance premium data from 1994 through 1996:
($ MILLIONS) % % % HEALTH PREMIUM 1996 CHANGE 1995 CHANGE 1994 CHANGE - -------------- ---- ------ ---- ------ ---- ------ Revenue..................................... $733 (3)% $755 (2)% $773 (4)% Annualized Premium Sales.................... $101 (2)% $103 (16)% $123 (31)%
A major factor leading to the smaller decline in health sales over the three year period was the smaller decline in Medicare Supplement sales over the same period. In 1996, sales of Medicare Supplement insurance, the major component of Torchmark's health insurance, increased over the prior year sales for the first time since 1992. The following chart demonstrates the smaller declines over the past three years for Medicare Supplement annualized premium sales and in force:
($ MILLIONS) % % % MEDICARE SUPPLEMENT 1996 CHANGE 1995 CHANGE 1994 CHANGE - ------------------- ---- ------ ---- ------ ---- ------ Sales....................................... $ 66 2% $ 65 (26)% $ 88 (36)% In Force.................................... $524 (1)% $530 (7)% $572 (5)%
The leveling of Medicare Supplement sales as compared to the prior year is due in part to $4 million annualized premium sold through Direct response, a distribution system not previously marketing this product. In addition to higher sales than the previous year, 1996 Medicare Supplement in force benefited from premium rate increases implemented during the year, the first increase in three years. In recent years, declines in Medicare Supplement premium issued and premium in force were the result of 1990 regulatory requirements that reduced allowable agents commissions on new sales, as well as uncertainties regarding health care reform by the Clinton Administration and Congress. Further, regulatory standardization of policy benefits to 10 standardized plans increased competition because consumers now see these products as a "commodity", differentiated only by price. Increased competition by Health Maintenance Organizations that substitute for traditional Medicare also have dampened sales. Torchmark is using several strategies to maintain sales of new policies and the persistency of existing in force Medicare Supplement policies. Torchmark's premium rate increases year to year have been less than certain competitors, making Torchmark's rates more price competitive. In addition, new markets such as employer and association groups, and distribution methods such as Direct response are being tested. Sales of cancer products declined 6% to $10.7 million in 1996 after rising 40% in 1995 to $11.3 million. In spite of the lower sales, annualized premium in force for cancer increased to $119 million at year-end 1996 from $115 million at December 31, 1995, due primarily to the implementation of rate increases for the first time in two years. Annualized premium in force for other health products experienced an 8% drop in 1996, from $114 million to $105 million at December 31, 1996. Sales also 22 declined 11% in 1996 to $25 million. Torchmark introduced a new series of long-term care products in late 1996, and intends to aggressively market this product line. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands)
1996 1995 1994 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- Premium.................. $732,618 100.0% $754,983 100.0% $773,375 100.0% Other income............. 2,994 0.4 3,001 0.4 3,349 0.4 -------- ----- -------- ----- -------- ----- Total revenues.......... 735,612 100.4 757,984 100.4 776,724 100.4 Policy obligations....... 448,346 61.2 454,107 60.2 459,163 59.4 Required reserve interest................ (26,137) (3.6) (26,139) (3.5) (25,710) (3.4) -------- ----- -------- ----- -------- ----- Net policy obligations.. 422,209 57.6 427,968 56.7 433,453 56.0 Amortization of acquisition costs....... 63,150 8.6 69,698 9.2 76,170 9.8 Commissions and premium taxes................... 87,688 12.0 94,624 12.5 102,603 13.3 Other expense............ 45,812 6.3 47,510 6.3 43,007 5.6 -------- ----- -------- ----- -------- ----- Total expense........... 618,859 84.5 639,800 84.7 655,233 84.7 -------- ----- -------- ----- -------- ----- Insurance operating income.................. $116,753 15.9% $118,184 15.7% $121,491 15.7% ======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income for Torchmark's health insurance was stable, approximating 16% in each of the three years considered. While policy obligations as a percentage of premium have risen each year, these increases have been more than offset by the declines in amortization of acquisition costs and commissions. The decline in the amortization of acquisition costs ratio has been caused by improvements in persistency in Torchmark's health business. Excluded from the above presentation of health results in 1994 is a $30 million charge for cancer policy benefits resulting from a reclassification of non-operating expense to health benefits, since actual payments will be made in the form of health benefits. 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. Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested by Torchmark and are obligations of the company. Variable annuity deposits are invested at the policyholder's direction into his choice among ten W&R managed mutual funds which vary in degree of investment risk and return. A fixed annuity investment account is also available as a variable annuity investment option. These investments pertaining to variable annuity deposits are reported as "Separate Account Assets" and the corresponding deposit balances for variable annuities are reported as "Separate Account Liabilities." Annuity premium is accounted for as a deposit and is not reflected in income. Revenues on both fixed and variable annuities are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the structure of the contract. Variable accounts are also charged an investment fee and a sales charge. Torchmark benefits 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. 23 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) 1996 1995 1994 1996 1995 1994 -------- -------- -------- -------- -------- -------- Fixed..................... $ 974.6 $ 927.9 $ 801.2 $ 87,133 $133,461 $ 43,339 Variable.................. 1,375.5 1,052.2 692.8 247,461 189,188 196,105 -------- -------- -------- -------- -------- -------- Total.................... $2,350.1 $1,980.1 $1,494.0 $334,594 $322,649 $239,444 ======== ======== ======== ======== ======== ========
Annuity premium collections increased 4% in 1996 to $335 million over the prior year. Annuity collections rose 35% to $323 million in 1995. Fixed annuity premium collections declined 35% in 1996 to $87 million from $133 million in 1995, after having risen over three times 1994 collections of $43 million. The 1995 increase was caused by the entry of a United American general agency in the fourth quarter of 1994 that markets to bank customers. These sales generated $76 million in 1995 collections. In 1996, however, these sales declined to $55 million. Additionally, Torchmark's preneed annuity collections declined $19 million in 1996, contributing to the decline in 1996 fixed annuity collections. More than offsetting the decline in 1996 of fixed collections was an increase in 1996 of variable annuity collections of 31%. These collections were $247 million in 1996 as compared with $189 million in 1995. Strong financial markets in 1996 have contributed greatly to the growth in variable collections. Torchmark's variable annuities are issued by UILIC and sold by W&R sales representatives. The variable annuity account balance also gained 31% over the 1995 period, standing at $1.4 billion at December 31, 1996. The deposit account balance is positively affected by additional deposits resulting from heightened investor interest and by the accounts being valued based on the higher market values of the underlying investments. ANNUITIES Summary of Results (Dollar amounts in thousands)
1996 1995 1994 ---------------- ---------------- ---------------- % OF % OF % OF MEAN MEAN MEAN AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE ------- ------- ------- ------- ------- ------- Policy charges.............. $22,404 1.0% $19,049 1.1% $13,888 1.0% Allocated investment income..................... 12,957 0.6 10,206 0.6 8,576 0.6 ------- ---- ------- ---- ------- ---- Total revenue.............. 35,361 1.6 29,255 1.7 22,464 1.6 Policy obligations.......... 51,320 2.3 48,012 2.8 42,275 3.0 Required reserve interest... (50,188) (2.3) (48,541) (2.8) (42,765) (3.0) ------- ---- ------- ---- ------- ---- Net policy obligations..... 1,132 0.0 (529) 0.0 (490) 0.0 Amortization of acquisition costs...................... 10,606 0.5 9,125 0.5 5,772 0.4 Commissions and premium taxes...................... 610 0.0 699 0.0 605 0.0 Other expense............... 2,352 0.1 2,573 0.2 2,345 0.2 ------- ---- ------- ---- ------- ---- Total expense.............. 14,700 0.6 11,868 0.7 8,232 0.6 ------- ---- ------- ---- ------- ---- Insurance operating income.. $20,661 1.0% $17,387 1.0% $14,232 1.0% ======= ==== ======= ==== ======= ====
Insurance operating margins for annuities as measured by the mean reserve have remained fairly stable throughout the three years examined. Annuity policy charges have increased in each period. Policy charges increased 18% to $22 million in 1996. These charges were $19 million in 1995, gaining 37% over 1994 charges of $14 million. Growth in these policy charges resulted from the increase in size of the annuity account balance over each of the prior years, the increase in the number of annuity contracts in force, and the cumulative effect of growth in sales over the past few years on which the sales charge is based. The allocated investment income, or the investment income earned in excess of policy 24 requirements, also grew in each of the periods 1994 through 1996. These increases resulted from the growth in the fixed annuity deposit balances. ASSET MANAGEMENT Financial Services. Torchmark's financial services operations consist of the marketing of 23 mutual funds, including the United Group and the W & R Group of funds through exclusive financial planners. These representatives also market a variety of insurance products of Torchmark subsidiaries. Financial services operations also involve the management of mutual fund portfolios, the management of institutional portfolios, and the servicing of customer accounts. Revenues are derived from commissions from the sale of investment and insurance products, fees for management of investment asset portfolios, and fees for servicing the accounts. Financial services revenues rose 21% to $221 million in 1996 compared with 1995 revenues of $183 million. These revenues grew 9% in 1995 from 1994 revenues of $167 million. Financial services revenues presented in Torchmark's consolidated financial statements will not correspond to total revenues for the financial services segment presented below in the Summary of Results table because certain revenues are eliminated in consolidation. Asset management fees of $103 million in 1996 were the largest component of financial services revenues, representing 47% of 1996 segment revenues. Asset management fees grew 20% in 1996, after having gained 22% to $86 million in 1995. Increases in these fees have occurred due to the daily growth in mutual fund assets and institutional assets under management, on which asset management fees are based. Average assets under management rose 17% in 1996 and 14% in 1995. Growth in average assets under management in 1995 and 1996 resulted from two factors. First, strength in the financial markets caused increases in the values of fund securities. Secondly, new net investment product sales and reinvested dividends in each period contributed to asset growth. Total assets under management were $18.9 billion at December 31, 1996, an increase over the prior year end of 3%. Total assets under management were $18.3 billion at December 31, 1995 and $14.5 billion at December 31, 1994, rising 26% in 1995. Mutual fund assets under management rose 14% in 1996 to $17.2 billion at year-end 1996. Asset management fees grew at a higher rate than assets under management in 1996 primarily because of a change in the type of assets under management. The total increase in assets under management for the period of $.6 billion was the result of a $2.1 billion increase in mutual fund assets partially offset by a $1.5 billion decrease in institutional assets. The mutual fund assets that were added have a higher management fee rate than the institutional assets that were lost. Commission revenues are derived from the sales of both investment and insurance products, with investment product commissions representing 84% of total commission revenues in 1996. The commissions from insurance products and variable annuities are primarily received from Torchmark insurance subsidiaries, and are eliminated in consolidation. Investment product commissions rose 26% to $72 million in 1996, after having declined 4% to $57 million in 1995. Investment product sales climbed 27% in 1996 to $1.5 billion. Investment product sales in 1995 were level with the 1994 sales of $1.2 billion. In 1996, sales of the United Funds, a front-load product, increased 22% or $187 million while sales of the W&R Funds, a deferred-load product, grew 44% or $70 million. Insurance product commissions have grown steadily, with 1996 commissions of $13.9 million, as compared with $13.5 million in 1995 and $12.8 million in 1994. Services fees grew 21% in 1996, after rising 6% in 1995. Service fees are charged based on the number of accounts serviced. The number of accounts serviced was 1.31 million at December 31, 1996, an increase of 7%. Accounts serviced were 1.22 million at year-end 1995 and 1.15 million at year-end 1994. The 1996 fees grew at a rate greater than the number of accounts because of an increase in fees. 25 FINANCIAL SERVICES Summary of Results (Dollar amounts in thousands)
1996 1995 1994 ---------------- ---------------- --------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ------- -------- ------- ------- ------- Commission revenue........... $ 85,888 38.9% $ 70,458 38.5% $72,223 43.1% Asset management fees........ 103,127 46.6 85,999 47.0 70,651 42.2 Service fees................. 28,419 12.9 23,528 12.9 22,297 13.3 -------- ----- -------- ----- ------- ----- Financial services revenue*................... 217,434 98.4 179,985 98.4 165,171 98.6 Investment and other income.. 3,642 1.6 2,947 1.6 2,264 1.4 -------- ----- -------- ----- ------- ----- Total revenue............... 221,076 100.0 182,932 100.0 167,435 100.0 Commissions and selling expenses.................... 78,797 35.6 63,882 34.9 62,285 37.2 Other expenses............... 28,959 13.1 24,708 13.5 21,252 12.7 -------- ----- -------- ----- ------- ----- Total expenses.............. 107,756 48.7 88,590 48.4 83,537 49.9 -------- ----- -------- ----- ------- ----- Pretax income................ $113,320 51.3% $ 94,342 51.6% $83,898 50.1% ======== ===== ======== ===== ======= =====
- -------- * Financial services revenue includes $33.1 million in 1996, $27.5 million in 1995 and $25.9 million in 1994 representing revenues from other Torchmark segments which are eliminated in consolidation. Pretax income for Torchmark's financial services operations has grown very rapidly, rising 20% to $113 million in 1996. This growth follows a 12% increase in 1995 to $94 million and a 15% increase in 1994 to $84 million. As a percentage of total financial services revenues, pretax income rose above 51% in 1995 and remained comparable in 1996. The 1995 margin improvement resulted from a greater percentage of financial services revenues coming from asset management fees. Asset management fees have a significantly greater profit margin than commissions and service fees. The proportion of asset management fees to total revenues remained constant in 1996, contributing to the flat margin ratios. While other expenses as a percentage of revenues declined, asset management fees were up about 17% over 1995. Commissions and selling expenses are the direct expenses associated with producing commission revenue. They consist of the commissions, bonuses, and other compensation paid to the sales force as well as other marketing and promotional costs. Because of the 1996 increase in sales volume, which causes an increase in sales incentive compensation, direct expenses as a percentage of commission revenue rose slightly, from 91% in 1995 to 92%. W&R also increased promotional efforts in 1995 and to an even greater extent in 1996. The 1996 increase in commission revenues resulted, at least in part, from these measures. INVESTMENTS Torchmark's net investment income increased 6% to $405 million during the year, following an increase of 10% in 1995 and a decrease of 6% in 1994. When adjusted for the American Income acquisition in late 1994, however, the 1995 increase was 3%. The 1996 increase in investment income is principally due to the continued accumulation of invested assets, which rose to $5.9 billion by year end. When adjusted for disposition of Torchmark's energy operations, mean invested assets rose 6% in 1996, as compared with a similar 6% increase in 1995. The overall level of interest rates rose sharply during the first half of 1996, then retracted approximately one-half of the advance by year end. In this environment, Torchmark's investment program continued to emphasize investment grade, call-protected corporate securities. New investment acquisitions of fixed income securities totaled $1.08 billion, compared with 1995 acquisitions of $1.87 billion. Acquisitions in 1995, however, were inflated by several sales programs implemented to reduce exposure to prepayments on mortgage-backed securities. During 1996, acquisitions were made at an average yield of 7.12% and an average life of 7.8 years compared with 7.28% and 13.4 years, respectively, for 1995. While there were no significant sales of GNMA holdings as in the past several 26 years, mortgage-backed securities declined because of repayments and the increase in other types of invested assets. Mortgage-backed securities were 25% of fixed income securities and 23% of invested assets at December 31, 1996. They were 27% of invested assets at year-end 1995 and 43% of invested assets at year-end 1994. Torchmark's fixed maturity portfolio is subject to market risk caused by changes in interest rates in financial markets. Because this portfolio is classified as available for sale, it is valued at market. While the portfolio is sensitive to market fluctuations, these temporary changes in market value have no bearing on the ultimate proceeds at maturity. Torchmark limits its market risk by maintaining a high quality portfolio with a relatively short average life. The moderate increase in rates in 1996 caused the unrealized gain of the fixed income portfolio to decline. At December 31, 1996, the market value of fixed income investments exceeded book value by $63 million, compared with an unrealized gain of $226 million at the end of 1995 and an unrealized loss of $242 million at year-end 1994. Despite the fluctuation in market values, the portfolio yield remained relatively stable at 7.55%, compared with 7.66% at year-end 1995 and 7.73% at year-end 1994. With shorter maturity acquisitions, the average life of the bond portfolio decreased from 8.8 years at year-end 1995 to 7.8 years currently. At year end, an estimated 38% of the fixed income portfolio will maturity within five years, and 80% will mature within 10 years. This compares with estimates of 38% and 76%, respectively, at year-end 1995. Presented below is a schedule of Torchmark's fixed-income portfolio by maturity.
1996 1995 ----- ----- Short terms and under 1 year...................................... 8.7% 8.6% 2-5 years......................................................... 29.0 28.9 6-10 years........................................................ 42.0 38.3 11-15 years....................................................... 10.0 10.8 16-20 years....................................................... 3.1 2.5 Over 20 years..................................................... 7.2 10.9 ----- ----- 100.0% 100.0% ===== =====
Torchmark's emphasis on fixed maturity bonds, which represented 90% of invested assets at 1996 year end, caused percentage holdings of other type investments to vary widely with latest industry averages prepared by the American Council of Life Insurance.
TORCHMARK ---------------- INDUSTRY % AMOUNT % (1) ---------- ----- ---------- Investment grade and short-term bonds.......... $5,162,841 86.9% 68.3% Noninvestment grade bonds...................... 243,357 4.1 3.7 Preferred and common stocks.................... 16,035 0.3 5.4 Mortgage loans................................. 64,353 1.1 12.8 Real estate.................................... 150,490 2.5 2.5 Policy loans................................... 206,959 3.5 5.8 Other invested assets.......................... 95,485 1.6 1.5 ---------- ----- ----- $5,939,520 100.0% 100.0% ========== ===== =====
- -------- (1) Latest data available from the American Council of Life Insurance. The quality of fixed income holdings remains very high, with 95% rated investment grade by Standard & Poor's and the NAIC. 27 FINANCIAL CONDITION Liquidity. Liquidity pertains to Torchmark's ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark's liquidity is obtained from three sources: its positive cash flow from operations, its portfolio of short-term investments, and its line of credit facility. Torchmark's insurance and asset management operations generate positive cash flows in excess of its immediate needs. Cash flows provided from operations, including deposit-product operations, were $517 million in 1996, compared with $478 million in 1995, an increase of 8%. Operating cash flows grew 42% in 1995 over 1994 cash flows of $337 million. The 1995 increase was primarily caused by increased deposit-product sales in 1995 and a one-time $48 million tax settlement paid in 1994 related to prior periods. In addition to operating cash flows, Torchmark received $347 million of investment maturities and repayments in 1996, further enhancing total positive cash flow. Such repayments were $351 million in 1995 and $796 million in 1994. Cash flows in excess of immediate requirements are used to build an investment base to fund future requirements. Torchmark's cash and short-term investments were $103 million at December 31, 1996, compared with $86 million at year-end 1995. These liquid assets represented approximately 1% of total assets at December 31, 1996, the same as at the end of the previous year. In addition to Torchmark's liquid assets, Torchmark has a portfolio of marketable fixed and equity securities which are available for sale should the need arise. These securities had a value of $5.3 billion at December 31, 1996. Torchmark has in place a line of credit facility with a group of lenders which allows unsecured borrowings up to a specified maximum amount. The maximum amount was increased during 1996 to $600 million at December 31, 1996. Interest is charged at variable rates for borrowings. This line of credit is further designated as a backup credit line for a commercial paper program not to exceed $600 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 $600 million on the combined facilities. At December 31, 1996, $41 million in commercial paper was outstanding and there were no borrowings on the line of credit. A facility fee is charged on the entire $600 million balance. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1996, 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, 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. During 1997, a maximum amount of $275 million will be available to Torchmark from insurance subsidiaries without regulatory approval. Capital Resources. The carrying amount of Torchmark's long-term debt was $792 million at both year-ends 1996 and 1995. Major debt issues outstanding at December 31, 1996 were as follows:
PRINCIPAL AMOUNT INSTRUMENT DUE RATE ($ THOUSANDS) ---------- ---- ----- ------------- Sinking Fund Debentures............................... 2017 8 5/8% $200,000 Senior Notes.......................................... 1998 9 5/8 200,000 Senior Debentures..................................... 2009 8 1/4 99,450 Notes................................................. 2023 7 7/8 200,000 Notes................................................. 2013 7 3/8 100,000 -------- $799,450 ========
28 Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996 under the terms of a put provision. In connection with the American Income purchase in November, 1994, Torchmark issued eight million shares or $200 million face amount Cumulative Monthly Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were issued at an annual dividend rate of 9.18%. They 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 at any time after September 30, 1999. While Torchmark is 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 to reduce financing costs. The swap agreement calls for Torchmark to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. Torchmark is at risk on this instrument for higher financing costs to the extent interest rates rise during the remaining term. This risk is limited, however, by a five-year interest- rate cap which Torchmark acquired in conjunction with the swap agreement that insures the variable rate cannot exceed 10.39%. At December 31, 1996, the variable rate was 6.95%. During 1996, Torchmark's after-tax dividend cost for the MIPS was $9.7 million, compared with $11.9 million that would have been incurred without the swap and cap transactions. Torchmark's after-tax cost in 1995 was $10.3 million, saving $1.6 million. Short-term debt was $41 million at year-end 1996, compared with $189 million at the end of the previous year. Torchmark repaid $148 million principal amount on this debt in 1996, with funds from internal cash flow. Torchmark paid down a net of $61 million on the credit facility during 1995. During 1996, the Torchmark Board of Directors and its financial advisor, Morgan Stanley, reviewed a number of restructuring options to possibly enhance shareholder value, including splitting the operations into separate publicly traded entities and selling all or portions thereof. However, none of the reasonably achievable restructuring options provided sufficient likelihood of creating more long term shareholder value than the current structure. Accordingly, the following actions were agreed to and accomplished to the extent described in the following sections. (1) Beginning in August 1996, Torchmark renewed its share repurchase program, and acquired 2.3 million shares of its common stock at a cost of $107 million by year end 1996. Torchmark also intends to use excess cash flow to make additional open market purchases, as market conditions warrant, provided that its debt-to-capital ratio does not exceed 40% and that no opportunities for acquisition offering superior returns are available. (2) Monetization of Vesta stock (see discussion below under Other items). (3) Complete the sale of the energy related discontinued operations (see discussion below under Other Items). Shareholders' equity rose to $1.63 billion at December 31, 1996, an increase of 3% from December 31, 1995 shareholders' equity of $1.59 billion. Book value per share was $23.38 at 1996 year end, compared with $22.17 and $17.37 at year-ends 1995 and 1994, respectively. After adjusting for the impact of interest-rate fluctuations on shareholders' equity required by accounting rules, book value per share was $22.84 at year-end 1996, an increase of 12% over $20.33 at year-end 1995. Comparative book value per share was $19.31 at year-end 1994. Return from continuing operations on common shareholders' equity was 20.5% in 1996, compared with 18.5% in 1995, even though average shareholders' equity increased. The return on equity ratios excludes the mark up or down of shareholders' equity for changes in market interest rates required by accounting rules. Total debt as a percentage of total capitalization continues to decline, and was 32% at December 31, 1996. In the computation of this ratio, the MIPS are counted as equity and the effect of the above-mentioned accounting rule is excluded. This debt-to-capitalization ratio was 37% at year-end 1995 and 40% at year-end 1994. Torchmark's ratio of earnings before interest, taxes and discontinued operations to interest requirements was 7.7 for 1996, compared with 6.3 in 1995 and 6.2 in 1994. 29 OTHER ITEMS Acquisition of American Income. 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, credit union, and other association members through exclusive agents. The results of operations of American Income were consolidated with those of Torchmark after the purchase date. Funds for the purchase were provided through a $200 million preferred security offering which is discussed in more detail in the capital resources section above, a $175 million bridge loan from a group of banks, the sale of investments available for sale, and internal cash flow. Disposal of Energy Segment. On September 30, 1996, Torchmark completed the sale of its energy business segment including its energy asset management subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane investment. These operations, which were reclassified as discontinued operations in Torchmark's financial statements at December 31, 1995, were sold to a TEAI management group. After the sale, Torchmark had no controlling ownership interest in any energy asset management organization. In addition to previously transferred securities, warrants, and Section 29 energy-related tax credits, which approximated $112 million at closing, Torchmark received subordinated debt and notes totalling $32.5 million along with $15.5 million in cash. After closing costs and retained liabilities, Torchmark recorded a pre-tax loss of $23 million and an after-tax loss of $7 million from the sale, or $.10 per share. Monetization of Vesta Stock. Torchmark filed a registration statement with the Securities and Exchange Commission during the third quarter of 1996. The purpose of this statement was to monetize a substantial portion of Torchmark's holdings of Vesta Insurance Group, Inc. ("Vesta") common stock, by issuing a security mandatorily exchangeable for Vesta stock at the option of Torchmark. Torchmark currently holds approximately five million shares of Vesta stock. On November 7, 1996, Torchmark withdrew this registration statement because market conditions were not favorable for the monetization of Vesta stock at that time. Depending upon future market conditions, Torchmark may refile the registration statement or otherwise provide for the monetization of a portion of all of the Vesta stock, but currently has no plans to monetize this stock. 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. 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 cancer policy class action litigation in Alabama continued in 1996. In February 1996, the Alabama Supreme Court issued a notice overruling a petition for rehearing of its decision affirming the trial court's final approval of the May 1994 settlement of this litigation. Certain intervenors then filed a petition for writ of certiorari to the U.S. Supreme Court, which granted certiorari in October 1996. Oral arguments were heard on the intervenors' petition in January 1997. On March 3, 1997, the U.S. Supreme Court dismissed, as improvidently granted, the writ of certiorari it had previously granted, effectively ending direct appeals of the cancer policy class action settlement. NEW ACCOUNTING RULES Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB Statement No. 125) is effective for transactions occurring after December 31, 1996, applied prospectively. Earlier or retrospective application is not permitted. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, based on the concept of control. The adoption of this standard will have no material impact on Torchmark's financial condition or results. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Independent Auditors' Report.............................................. 32 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1996 and 1995................. 33 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1996................................................. 34 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1996.......................................... 35 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1996................................................. 36 Notes to Consolidated Financial Statements............................... 37
31 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, 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 Note 1 to the consolidated financial statements, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. KPMG PEAT MARWICK LLP Birmingham, Alabama January 31, 1997, except for Note 16, which is as of March 11, 1997 32 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Assets: Investments: Fixed maturities--available for sale, at fair value (cost: 1996--$5,265,499; 1995--$4,984,223).......... $5,328,276 $5,210,224 Equity securities, at fair value (cost: 1996--$3,799; 1995--$4,758)....................................... 8,858 10,551 Mortgage loans on real estate, at cost (estimated fair value: 1996--$61,970; 1995--$50,686)........... 64,353 52,274 Investment real estate, at cost (less allowance for depreciation: 1996--$40,370; 1995--$32,463)......... 150,490 143,356 Policy loans......................................... 206,959 193,877 Other long-term investments.......................... 95,485 95,744 Short-term investments............................... 85,099 72,847 ---------- ---------- Total investments................................... 5,939,520 5,778,873 Cash (includes restricted cash: 1996--$15,028; 1995-- $11,838)............................................. 18,272 13,158 Investment in unconsolidated subsidiaries............. 88,051 76,101 Accrued investment income............................. 91,837 82,006 Other receivables..................................... 112,291 122,108 Deferred acquisition costs............................ 1,253,727 1,121,325 Value of insurance purchased.......................... 244,368 277,297 Property and equipment................................ 50,323 47,185 Goodwill.............................................. 540,540 555,517 Other assets.......................................... 41,846 30,304 Discontinued operations assets........................ -0- 174,386 Separate account assets............................... 1,420,025 1,085,844 ---------- ---------- Total assets........................................ $9,800,800 $9,364,104 ========== ========== Liabilities: Future policy benefits................................ $4,797,738 $4,566,850 Unearned and advance premiums......................... 83,670 83,473 Policy claims and other benefits payable.............. 220,121 209,773 Other policyholders' funds............................ 80,812 77,039 ---------- ---------- Total policy liabilities............................ 5,182,341 4,937,135 Accrued income taxes.................................. 340,287 362,005 Other liabilities..................................... 202,869 215,712 Short-term debt....................................... 40,910 189,372 Long-term debt (estimated fair value: 1996--$814,082; 1995--$860,258)...................................... 791,880 791,988 Separate account liabilities.......................... 1,420,025 1,085,844 ---------- ---------- Total liabilities................................... 7,978,312 7,582,056 Commitments and contingencies Monthly income preferred securities (estimated fair value: 1996--$210,000; 1995-- $217,040)............................................. 193,145 193,096 Shareholders' equity: Preferred stock, par value $1 per share--Authorized 5,000,000 shares; outstanding: -0- in 1996 and in 1995.............................. -0- -0- Common stock, par value $1 per share--Authorized 160,000,000 shares; outstanding: 73,784,228 issued in 1996 and in 1995, less 4,088,253 and 2,117,091 shares held in treasury in 1996 and 1995, respectively...... 73,784 73,784 Additional paid-in capital............................ 141,701 139,754 Unrealized gains, net of applicable taxes............. 46,581 140,338 Retained earnings..................................... 1,549,391 1,325,534 Treasury stock........................................ (182,114) (90,458) ---------- ---------- Total shareholders' equity.......................... 1,629,343 1,588,952 ---------- ---------- Total liabilities and shareholders' equity.......... $9,800,800 $9,364,104 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 33 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- ---------- ---------- Revenue: Life premium............................... $ 854,897 $ 772,257 $ 601,633 Health premium............................. 732,618 754,983 773,375 Other premium.............................. 22,404 19,043 13,866 --------- ---------- ---------- Total premium............................ 1,609,919 1,546,283 1,388,874 Net investment income...................... 404,608 381,865 347,637 Financial services revenue................. 184,295 152,482 139,276 Realized investment gains (losses)......... 5,829 (14,323) (2,551) Other income............................... 1,159 1,175 2,101 --------- ---------- ---------- Total revenue............................ 2,205,810 2,067,482 1,875,337 Benefits and expenses: Life policyholder benefits................. 558,436 507,444 389,976 Health policyholder benefits............... 448,346 454,107 489,163 Other policyholder benefits................ 51,302 47,785 42,138 --------- ---------- ---------- Total policyholder benefits.............. 1,058,084 1,009,336 921,277 Amortization of deferred acquisition costs. 218,826 204,067 178,107 Commissions and premium taxes.............. 140,515 144,333 141,158 Financial services selling expense......... 50,515 40,080 39,962 Other operating expense.................... 154,150 145,520 118,353 Amortization of goodwill................... 14,977 14,977 6,584 Interest expense........................... 73,611 80,994 75,922 --------- ---------- ---------- Total benefits and expenses.............. 1,710,678 1,639,307 1,481,363 Income from continuing operations before income taxes and equity in earnings of unconsolidated subsidiaries................ 495,132 428,175 393,974 Income taxes................................ (180,622) (157,539) (135,994) Equity in earnings of unconsolidated subsidiaries............................... 13,654 11,626 7,971 Monthly income preferred securities dividend................................... (9,655) (10,317) (2,137) --------- ---------- ---------- Net income from continuing operations.... 318,509 271,945 263,814 Discontinued operations of energy segment: Income (loss) from operations (less applicable income taxes of: 1995--$86,050, 1994--$11,677)............................ -0- (128,710) 5,132 Loss on disposal (less applicable income tax benefit of: 1996--$15,813)............................ (7,137) -0- -0- --------- ---------- ---------- Net income............................... 311,372 143,235 268,946 Dividends to preferred shareholders......... -0- -0- (804) --------- ---------- ---------- Net income available to common shareholders............................ $ 311,372 $ 143,235 $ 268,142 ========= ========== ========== Net income per share: Continuing operations...................... $ 4.47 $ 3.80 $ 3.65 Discontinued operations of energy segment: Income (loss) from operations............. 0.00 (1.80) 0.07 Loss on disposal.......................... (0.10) 0.00 0.00 --------- ---------- ---------- Net income per share..................... $ 4.37 $ 2.00 $ 3.72 ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements. 34 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, 1994 - ----------------------- Balance at January 1, 1994................... $1,000 $73,784 $232,432 $120,138 $1,082,031 $ (92,130) $1,417,255 Net income.............. 268,946 268,946 Common dividends declared ($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 options................ 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 Year Ended December 31, 1995 - ----------------------- Net income.............. 143,235 143,235 Common dividends declared ($1.14 a share)................. (81,643) (81,643) Exercise of stock options................ 709 (3,603) 6,557 3,663 Net change in unrealized gains (losses)......... 281,094 281,094 ------ ------- -------- -------- ---------- --------- ---------- Balance at December 31, 1995.................. -0- 73,784 139,754 140,338 1,325,534 (90,458) 1,588,952 Year Ended December 31, 1996 - ----------------------- Net income.............. 311,372 311,372 Common dividends declared ($1.16 a share)................. (82,320) (82,320) Acquisition of treasury stock-- common................. (106,996) (106,996) Exercise of stock options................ 1,947 (5,195) 15,340 12,092 Net change in unrealized gains (losses)......... (93,757) (93,757) ------ ------- -------- -------- ---------- --------- ---------- Balance at December 31, 1996.................. $ -0- $73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343 ====== ======= ======== ======== ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 35 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Net income................................ $ 311,372 $ 143,235 $ 268,946 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits...... 136,375 178,850 81,062 Increase in other policy benefits....... 14,319 4,877 23,990 Deferral of policy acquisition costs.... (300,461) (362,837) (225,409) Amortization of deferred policy acquisition costs...................... 218,826 204,067 178,107 Change in accrued income taxes.......... 61,519 42,337 (39,942) Depreciation............................ 9,056 9,603 11,271 Realized (gains) losses on sale of investments, subsidiaries, and properties........... (5,829) 14,323 2,551 Change in accounts payable and other liabilities............................ 9,091 (6,623) (45,093) Change in receivables................... (15,501) (31,670) (2,237) Change in payables and receivables of unconsolidated affiliates.............. (3,350) (2,348) (1,251) Other accruals and adjustments.......... (20,158) (2,951) 2,483 Discontinued operations of energy segment................................ 7,137 128,710 (5,132) ---------- ---------- ---------- Cash provided from operations............. 422,396 319,573 249,346 Cash used for investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................... 487,070 1,177,874 582,611 Fixed maturities available for sale-- matured, called, and repaid............ 347,116 351,246 796,064 Equity securities....................... 2,872 16,587 23,179 Mortgage loans.......................... 7,113 1,856 1,128 Real estate............................. 5,780 2,566 1,292 Other long-term investments............. 21,099 21,666 16,552 ---------- ---------- ---------- Total investments sold or matured...... 871,050 1,571,795 1,420,826 Acquisition of investments: Fixed maturities--available for sale.... (1,080,793) (1,870,445) (1,264,056) Equity securities....................... -0- (394) (23,739) Mortgage loans.......................... (18,360) -0- -0- Real estate............................. (9,690) (17,708) (20,587) Net increase in policy loans............ (13,082) (11,889) (8,305) Other long-term investments............. (15,891) (67,241) (15,333) ---------- ---------- ---------- Total investments acquired............. (1,137,816) (1,967,677) (1,332,020) Net (increase) decrease in short-term investments............................. (12,252) 35,514 76,457 Purchase of American Income.............. -0- -0- (551,501) Proceeds from sale of discontinued operations.............................. 15,500 -0- -0- Proceeds from sale of Nuevo Energy Company stock........................... 93,160 -0- -0- Loans made to unconsolidated affiliates.. -0- -0- (20,186) Loans repaid by unconsolidated affiliates.............................. -0- 28,000 -0- Dispositions of properties............... 2,093 1,198 1,332 Additions to properties.................. (15,412) (6,510) (5,632) Dividends from unconsolidated affiliates. 770 684 513 ---------- ---------- ---------- Cash used for investment activities....... (182,907) (336,996) (410,211) Cash provided from (used for) financing activities: Issuance of common stock................. 10,145 2,953 4,408 Issuance of monthly income preferred securities.............................. -0- -0- 193,046 Additions to debt........................ -0- -0- 143,000 Cash dividends paid to shareholders...... (82,893) (80,887) (82,336) Repayments on debt....................... (149,144) (60,867) (70,108) Acquisition of treasury stock............ (106,996) -0- (106,054) Net receipts from deposit product operations.............................. 94,513 158,084 87,701 ---------- ---------- ---------- Cash provided from (used for) financing activities............................... (234,375) 19,283 169,657 ---------- ---------- ---------- Increase in cash......................... 5,114 1,860 8,792 Cash at beginning of year................ 13,158 11,298 2,506 ---------- ---------- ---------- Cash at end of year...................... $ 18,272 $ 13,158 $ 11,298 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 36 TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation: The financial statements include the results of Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries. 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 classifies all of its fixed maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair 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 fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. 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 of investments in mutual funds managed by a Torchmark subsidiary. They are carried at fair value. Other long- term investments also include passive energy limited-partnership investments which are valued at partnership equity. 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. 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, 1996, 1995 and 1994 included $298.4 million, $279.6 million, and $240.7 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, short-term debt, 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. Substantially all of Torchmark's long-term debt, including the monthly income preferred securities, 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 policy charges of $72.8 million, $72.7 million, and $74.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. Other premium includes annuity policy charges for the 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) years ended December 31, 1996, 1995, and 1994 of $22.4 million, $19.0 million, and $13.9 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 book values and tax bases of assets and liabilities. 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. 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. 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. Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective at the issuance of the standard in March, 1995. This standard requires that certain long-lived assets used in Torchmark's business as well as certain intangible assets be reviewed for impairment when circumstances indicate that these assets may not be recoverable, and further provides how such impairment shall be determined and measured. It also requires that long- lived assets and intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Except for the writedown of the energy investment described in Note 7, the adoption of this statement had no material impact on Torchmark's operations or financial position for the years ended December 31, 1996 and 1995. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 remaining 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. Litigation: Torchmark and its subsidiaries continue to be named as parties to legal proceedings. Because much of Torchmark's litigation is brought in Alabama, a jurisdiction known for excessive punitive damage verdicts bearing little or no relationship to actual damages, the ultimate outcome of any particular action cannot be predicted. It is reasonably possible that changes in the expected outcome of these matters could occur in the near term, but such changes should not be material to Torchmark's reported results or financial condition. Earnings Per Share: Earnings available to holders of common stock are computed after deducting dividends on the Preferred Stock in 1994. 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: 1996--71,229,892, 1995-- 71,593,774, 1994--72,095,657. 39 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, -------------------------- --------------------- 1996 1995 1994 1996 1995 -------- -------- -------- ---------- ---------- Life insurance subsidiar- ies...................... $283,881 $245,552 $228,754 $622,326 $ 618,557
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, -------------------------------- 1996 1995 1994 ---------- ---------- -------- Statutory net income................... $ 283,881 $ 245,552 $228,754 Deferral of acquisition costs.......... 300,461 328,598 225,409 Amortization of acquisition costs...... (218,826) (204,067) (178,107) Differences in insurance policy liabil- ities................................. 48,396 1,407 30,271 Deferred income taxes.................. (20,496) (40,380) (2,052) Inter-affiliate dividends.............. (137,200) (684) -0- Income of noninsurance affiliates...... 28,943 (207,164) 11,372 Other.................................. 26,213 19,973 (18,229) Pre-acquisition adjustments............ -0- -0- (28,472) ---------- ---------- -------- GAAP net income........................ $ 311,372 $ 143,235 $268,946 ========== ========== ======== A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows: YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Statutory shareholders' equity......... $ 622,326 $ 618,557 Differences in insurance policy liabil- ities................................. 440,204 371,599 Deferred acquisition costs............. 1,253,727 1,121,325 Value of insurance purchased........... 244,368 277,297 Deferred income taxes.................. (329,609) (407,267) Debt of parent company................. (832,367) (980,814) Monthly income preferred securities.... (193,145) (193,096) Asset valuation reserves............... 133,118 161,573 Nonadmitted assets..................... 137,270 85,240 Net assets of noninsurance affiliates . 69,776 351,355 Other.................................. 83,675 183,183 ---------- ---------- GAAP shareholders' equity.............. $1,629,343 $1,588,952 ========== ==========
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Investment income is summarized as fol- lows: Fixed maturities..................... $ 373,110 $ 350,931 $ 329,626 Equity securities.................... 373 818 1,323 Mortgage loans on real estate........ 6,525 4,343 631 Investment real estate............... 14,629 8,277 7,778 Policy loans......................... 13,192 12,137 10,003 Other long-term investments.......... 5,319 10,410 4,958 Short-term investments............... 6,397 8,890 7,046 --------- --------- --------- 419,545 395,806 361,365 Less investment expense.............. (14,937) (13,941) (13,728) --------- --------- --------- Net investment income................ $ 404,608 $ 381,865 $ 347,637 ========= ========= ========= An analysis of gains (losses) from investments is as follows: Realized investment gains (losses): Fixed maturities.................... $ 3,760 $ 1,285 $ (5,049) Equity securities................... 1,913 (15,033) 1,610 Other............................... 156 (575) 888 --------- --------- --------- $ 5,829 $ (14,323) $ (2,551) ========= ========= ========= An analysis of the net change in unrealized investment gains (losses) is as follows: Equity securities before tax......... $ (734) $ 10,125 $ (15,064) Fixed maturities available for sale before tax.......................... (163,224) 468,336 (434,340) Other long-term investments and foreign exchange translation adjustments......................... 1,907 5,514 (4,088) Adjustment to deferred acquisition costs............................... 17,837 (51,739) 52,334 Applicable tax....................... 50,457 (151,142) 140,264 --------- --------- --------- Net change in unrealized gains (losses)............................ $ (93,757) $ 281,094 $(260,894) ========= ========= =========
41 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, 1996 and 1995 is as follows:
GROSS GROSS AMOUNT PER AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE COST GAINS LOSSES VALUE SHEET ---------- ---------- ---------- ---------- ----------- 1996: - ----- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 231,151 $ 2,260 $ (3,628) $ 229,783 $ 229,783 GNMAs................. 882,036 49,647 (5,170) 926,513 926,513 Mortgage-backed securities, GNMA collateral........... 154,816 2,665 (134) 157,347 157,347 Other mortgage-backed securities........... 266,776 6,931 (1,667) 272,040 272,040 State, municipalities and political subdivisions......... 709,980 14,721 (4,211) 720,490 720,490 Foreign governments... 76,298 3,789 (94) 79,993 79,993 Public utilities...... 265,248 5,036 (3,888) 266,396 266,396 Industrial and miscellaneous........ 2,672,613 35,720 (39,796) 2,668,537 2,668,537 Redeemable preferred stocks................ 6,581 596 0 7,177 7,177 ---------- -------- -------- ---------- ---------- Total fixed maturities 5,265,499 121,365 (58,588) 5,328,276 5,328,276 Equity securities: Common stocks: Banks and insurance companies............ 2,014 4,658 (3) 6,669 6,669 Industrial and all others............... 287 62 (23) 326 326 Non-redeemable preferred stocks...... 1,498 365 0 1,863 1,863 ---------- -------- -------- ---------- ---------- Total equity securities........... 3,799 5,085 (26) 8,858 8,858 ---------- -------- -------- ---------- ---------- Total fixed maturities and equity securities........... $5,269,298 $126,450 $(58,614) $5,337,134 $5,337,134 ========== ======== ======== ========== ==========
1995: - ----- Fixed maturities available for sale: Bonds: U.S. Government direct obligations and agencies................ $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833 GNMAs.................... 1,050,034 68,053 (1,221) 1,116,866 1,116,866 Mortgage-backed securities, GNMA collateral.............. 214,186 8,136 (62) 222,260 222,260 Other mortgage-backed securities.............. 230,981 11,527 (2,960) 239,548 239,548 State, municipalities and political subdivisions.. 762,943 21,383 (3,677) 780,649 780,649 Foreign governments...... 71,489 5,303 (3) 76,789 76,789 Public utilities......... 258,840 13,276 (308) 271,808 271,808 Industrial and miscellaneous........... 2,235,811 103,443 (2,400) 2,336,854 2,336,854 Redeemable preferred stocks................... 7,729 888 0 8,617 8,617 ---------- -------- -------- ---------- ---------- Total fixed maturities... 4,984,223 236,654 (10,653) 5,210,224 5,210,224 Equity securities: Common stocks: Banks and insurance companies............... 2,945 5,304 (10) 8,239 8,239 Industrial and all others.................. 264 151 (7) 408 408 Non-redeemable preferred stocks................... 1,549 355 0 1,904 1,904 ---------- -------- -------- ---------- ---------- Total equity securities.. 4,758 5,810 (17) 10,551 10,551 ---------- -------- -------- ---------- ---------- Total fixed maturities and equity securities... $4,988,981 $242,464 $(10,670) $5,220,775 $5,220,775 ========== ======== ======== ========== ==========
42 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, 1996 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... $ 98,491 $ 99,442 Due from one to five years.................... 913,734 929,238 Due from five to ten years.................... 1,878,153 1,881,091 Due after ten years....... 1,010,817 1,001,220 ---------- ---------- 3,901,195 3,910,991 Redeemable preferred stocks................... 6,581 7,177 Mortgage-backed and asset- backed securities........ 1,357,723 1,410,108 ---------- ---------- $5,265,499 $5,328,276 ========== ==========
Proceeds from sales of fixed maturities available for sale were $487 million in 1996, $1.18 billion in 1995, and $583 million in 1994. Gross gains realized on those sales were $8.7 million in 1996, $13.4 million in 1995, and $14.6 million in 1994. Gross losses were $5.3 million in 1996, $13.5 million in 1995, and $20.8 million in 1994. Torchmark had $39.2 million and $25.7 million in investment real estate at December 31, 1996 and 1995, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed maturity investments, mortgage loans, and other long-term investments which were nonincome producing during the previous twelve months were $0.3 million at December 31, 1995. There were no such investments at December 31, 1996. Derivative investments were immaterial to Torchmark at December 31, 1996. These investments consist of interest-only and principal-only collateralized mortgage obligations and a foreign currency trading account. Torchmark's total carrying value of these investments was $26.3 million and $23.9 million at December 31, 1996 and 1995, respectively. 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, 1996 DECEMBER 31, 1995 --------------------- --------------------- ACCUMULATED ACCUMULATED COST DEPRECIATION COST DEPRECIATION -------- ------------ -------- ------------ Company occupied real estate........ $ 68,925 $27,960 $ 67,528 $31,040 Data processing equipment........... 23,179 20,942 24,507 22,198 Transportation equipment............ 11,396 7,492 12,802 8,005 Furniture and office equipment...... 38,047 34,830 36,979 33,388 -------- ------- -------- ------- $141,547 $91,224 $141,816 $94,631 ======== ======= ======== =======
Depreciation expense on property used in the business was $5.4 million, $5.7 million, and $7.6 million in each of the years 1996, 1995, and 1994, respectively. 43 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:
1996 1995 1994 ---------------------- ---------------------- ---------------------- 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................... $1,121,325 $277,297 $1,017,467 $274,124 $ 901,565 $131,602 Additions: Deferred during peri- od: Commissions........... 185,197 -0- 192,427 -0- 134,032 -0- Other expenses........ 115,264 -0- 136,170 -0- 91,377 -0- ---------- -------- ---------- -------- ---------- -------- Total deferred....... 300,461 -0- 328,597 -0- 225,409 -0- Value of Insurance purchased -0- -0- -0- 34,240 -0- 158,788 Adjustment attributable to unrealized investment losses(1)............ 17,838 -0- -0- -0- 52,334 -0- ---------- -------- ---------- -------- ---------- -------- Total additions...... 318,299 -0- 328,597 34,240 277,743 158,788 ---------- -------- ---------- -------- ---------- -------- Deductions: Amortized during peri- od................... (185,148) (32,929) (172,764) (31,067) (154,697) (16,266) Adjustment attributable to unrealized investment gains(1)............. -0- -0- (51,739) -0- -0- -0- Adjustment attribut- able to realized in- vestment gains(1).... (749) -0- (236) -0- (7,144) -0- ---------- -------- ---------- -------- ---------- -------- Total deductions..... (185,897) (32,929) (224,739) (31,067) (161,841) (16,266) ---------- -------- ---------- -------- ---------- -------- Balance at end of year.. $1,253,727 $244,368 $1,121,325 $277,297 $1,017,467 $274,124 ========== ======== ========== ======== ========== ========
- -------- (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 $18.9 million, $20.0 million, and $11.7 million, for the years ended December 31, 1996, 1995 and 1994, respectively. The average interest accrual rates used for the years ended December 31, 1996, 1995 and 1994 were 7.26%, 7.26% and 7.72%, respectively. The estimated amount of the unamortized balance at December 31, 1996 to be amortized during each of the next five years is: 1997, $27.8 million; 1998, $24.5 million; 1999, $21.6 million; 2000, $18.9 million; and 2001, $16.7 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. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 6--ACQUISITIONS 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 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 ------------ Revenues................................................. $2,086,987 Net income before extraordinary items.................... 278,533 Net income............................................... 277,014 Net income per common share before extraordinary items... 3.86 Net income per common share.............................. 3.84
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 7--DISPOSAL OF ENERGY SEGMENT On September 30, 1996, Torchmark completed the sale of its energy business segment including its energy asset management subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane investment. These operations, which were reclassified as discontinued operations in Torchmark's financial statements at December 31, 1995, were sold to a TEAI management group. After the sale, Torchmark had no controlling ownership interest in any energy asset management organization. In addition to previously transferred securities, warrants, and Section 29 energy-related tax credits, which approximated $112 million at closing, Torchmark received subordinated debt and notes totaling $32.5 million along with $15.5 million in cash. After closing costs and retained liabilities, Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7 million from the sale, or $.10 per share. In the first quarter of 1996, TEAI sold 1.5 million of its shares in Nuevo Energy Company ("Nuevo") common stock for proceeds of $35.6 million. These proceeds were transferred to Torchmark in the form of a dividend prior to the sale of TEAI. Additionally, included in the above mentioned transferred marketable securities were 1.3 million shares of Nuevo common stock which were sold in the fourth quarter of 1996 for proceeds of $57.6 million. At December 31, 1995, discontinued operations assets consisted of: Trade and other receivables.................................. $118,266 Energy properties and investments............................ 158,238 Other assets................................................. 74,639 -------- Total assets................................................ 351,143 Trade and other payables..................................... (157,827) Other liabilities............................................ (18,930) -------- Total liabilities........................................... (176,757) -------- Net discontinued assets................................... $174,386 ========
46 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, 1996 is as follows: INDIVIDUAL LIFE INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1917-1996 3.00% 3% 1947-1954 3.25% 1 1927-1989 3.50% 1 1955-1961 3.75% 1 1925-1995 4.00% 13 1962-1969 4.50% graded to 4.00% 3 1970-1980 5.50% graded to 4.00% 5 1970-1996 5.50% 1 1929-1996 6.00% 9 1986-1994 7.00% graded to 6.00% 11 1954-1996 8.00% graded to 6.00% 10 1951-1985 8.50% graded to 6.00% 10 1980-1987 8.50% graded to 7.00% 1 1975-1991 9.50% graded to 8.00% 6 1984-1996 Interest Sensitive 25 --- 100% ===
MORTALITY ASSUMPTIONS: For individual life, the mortality tables used are various statutory mortality tables and modifications of: 1950-54 Select and Ultimate Table 1954-58 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. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED) INDIVIDUAL HEALTH INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1962-1996 3.00% 2% 1969-1980 5.50% graded to 4.00% 4 1982-1996 4.50% 1 1993-1996 6.00% 16 1986-1992 7.00% graded to 6.00% 54 1955-1996 8.00% graded to 6.00% 9 1951-1986 8.50% graded to 6.00% 14 --- 100% ===
MORBIDITY ASSUMPTIONS: For individual 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 1996 was 6.3%. NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- Balance at beginning of year: $170,566 $166,731 $131,161 Addition due to acquisition of American Income...................................... -0- -0- 9,185 Incurred related to: Current year................................ 495,642 502,018 514,814 Prior year.................................. 179 (8,295) (14,985) -------- -------- -------- Total incurred............................... 495,821 493,723 499,829 -------- -------- -------- Paid related to: Current year................................ 340,310 342,905 332,273 Prior year.................................. 151,859 146,983 141,171 -------- -------- -------- Total paid................................... 492,169 489,888 473,444 -------- -------- -------- Balance at end of year....................... $174,218 $170,566 $166,731 ======== ======== ========
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. Health benefits for 1994 include a $30 million charge resulting from a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--INCOME TAXES Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. Sentinel files its own federal income tax return and will not be eligible to join Torchmark's consolidated return group until 1997. American Income files its own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000. Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Income from continuing operations............. $180,622 $157,539 $135,994 Discontinued operations....................... (15,813) (86,050) (11,677) Monthly income preferred securities dividend.. (5,199) (5,555) (1,148) Shareholders' equity: Unrealized gains (losses).................... (50,457) 157,200 (147,520) Tax basis compensation expense (from the exercise of stock options) in excess of amounts recognized for financial reporting purposes.................................... (1,947) (709) (349) Other......................................... (898) (6,169) 9,424 -------- -------- -------- $106,308 $216,256 $(15,276) ======== ======== ========
Income tax expense attributable to income from continuing operations consists of:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Current income tax expense....................... $130,624 $110,652 $113,215 Deferred income tax expense...................... 49,998 46,887 22,779 -------- -------- -------- $180,622 $157,539 $135,994 ======== ======== ========
In 1996, 1995, and 1994, deferred income tax expense was incurred because of the difference between net operating income before income taxes as reported on the consolidated statement of operations and taxable income as reported on Torchmark's income tax returns. As explained in Note 1, this difference caused the financial statement book values of some assets and liabilities to be different from their respective tax bases. The effective income tax rate differed from the expected 35% rate as shown below:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 % 1995 % 1994 % -------- --- -------- --- -------- --- Expected income taxes............ $173,296 35% $149,861 35% $137,891 35% Increase (reduction) in income taxes resulting from: Tax-exempt investment income.... (7,014) (1) (7,965) (2) (10,625) (2) Other........................... 14,340 3 15,643 4 8,728 2 -------- --- -------- --- -------- --- Income taxes..................... $180,622 37% $157,539 37% $135,994 35% ======== === ======== === ======== ===
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--INCOME TAXES (CONTINUED) 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, ------------------ 1996 1995 -------- -------- Deferred tax assets: Investments, principally due to (in the acquisition of a subsidiary) the use of market value in recording the cost of fixed maturities for financial reporting purposes but not for tax purposes..................................... $ 2,996 $ 6,897 Future policy benefits, unearned and advance premiums, and policy claims............................................ 9,264 27,432 Present value of future policy surrender charges.......... 9,636 4,083 Other assets and other liabilities, principally due to the current nondeductibility of certain accrued expenses for tax purposes............................................. 30,025 18,344 -------- -------- Total gross deferred tax assets........................... 51,921 56,756 Less valuation allowance.................................. (2,111) (2,111) -------- -------- Net deferred tax assets................................... 49,810 54,645 -------- -------- Deferred tax liabilities: Unconsolidated affiliates, principally due to the use of equity method accounting for financial reporting purposes but not for tax purposes................................. 24,368 11,305 Deferred acquisition costs................................ 333,640 322,900 Unrealized investment gains............................... 23,952 74,408 Other..................................................... 12,625 12,404 -------- -------- Total gross deferred tax liabilities...................... 394,585 421,017 -------- -------- Net deferred tax liability................................. $344,775 $366,372 ======== ========
The valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1996 valuation allowance 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. 50 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 ------------ ------------ ------- ------- 1996.................... $2,595 $4,804 $ 467 1995.................... 3,208 6,820 524 1994.................... 3,201 6,922 1,800
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 $6.2 million and $9.5 million at December 31, 1996 and 1995, respectively. The plans covering the majority of employees 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 $4.8 million and $5.5 million as of December 31, 1996 and 1995, respectively. Net periodic pension cost for the defined benefit plans by expense component was as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- --------- -------- Service cost--benefits earned during the period.................................. $ 6,581 $ 7,190 $ 8,323 Interest cost on projected benefit obli- gation.................................. 9,097 8,867 8,242 Actual return on assets.................. (17,798) (17,927) (2,302) Net amortization and deferral............ 7,391 9,214 (5,541) -------- --------- -------- Net periodic pension cost................ $ 5,271 $ 7,344 $ 8,722 ======== ========= ========
A reconciliation of the funded status of the defined benefit plans with Torchmark's pension liability was as follows:
AT DECEMBER 31, ------------------ 1996 1995 -------- -------- Fair market value of assets available for benefits. $123,288 $113,193 Projected benefit obligation: Vested............................................ 90,189 89,170 Nonvested......................................... 3,453 5,441 -------- -------- Accumulated benefit obligation................... 93,642 94,611 Effect of projected future salary increases 25,710 27,003 -------- -------- Total projected benefit obligation............... 119,352 121,614 -------- -------- Funded status...................................... 3,936 (8,421) Unamortized prior service costs.................... 1,433 147 Unamortized transition asset....................... (725) (1,220) Unrecognized (gain) or loss........................ (15,669) (5,462) -------- -------- Accrued pension costs included in liabilities.... $(11,025) $(14,956) ======== ========
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED) The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.5% in 1996 and 7.25% in 1995. The rate of assumed compensation increase was 4.5% in 1996 and 4.25% in 1995 and the expected long-term rate of return on plan assets was 9.25% in 1996 and 8.0% in 1995. 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. Postretirement 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 reach 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. Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31, ------------------- 1996 1995 1994 ---- ----- ------ Service cost....................................... $297 $ 284 $ 444 Interest cost on accumulated postretirement benefit obligation........................................ 617 678 831 Actual return on plan assets....................... -0- -0- -0- Net amortization and deferral...................... (252) (559) (237) ---- ----- ------ Net periodic postretirement benefit cost........... $662 $ 403 $1,038 ==== ===== ======
The following table sets forth the plans' combined benefit obligation with the amount shown in Torchmark's balance sheet:
AT DECEMBER 31, --------------- 1996 1995 ------- ------- Accumulated postretirement benefit obligation: Retirees............................................... $ 3,622 $ 4,880 Fully eligible active plan participants................ 1,613 1,231 Other active plan participants......................... 2,395 3,145 ------- ------- Total accumulated postretirement benefit obligation... 7,630 9,256 Plan assets at fair value............................... -0- -0- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets......................................... 7,630 9,256 Unrecognized net gain from past experience different from that assumed and from changes in assumptions...... 1,717 1,423 Prior service cost not yet recognized in net periodic post retirement benefit cost........................... 993 262 ------- ------- Accrued postretirement benefit cost included in liabilities.......................................... $10,340 $10,941 ======= =======
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED) For measurement purposes, a 7.5% to 10.0% annual rate of increase in a per capita cost of covered healthcare benefits was assumed for 1996. These rates were assumed to decrease gradually to ranges of 4.5% to 6.5% by the year 2005. 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, 1996 by $1.3 million and would increase the net periodic postretirement cost for the year ended December 31, 1996 by approximately $425 thousand. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1996 and 7.0% to 8.0% in 1995. NOTE 12--NOTES PAYABLE An analysis of notes payable is as follows:
DECEMBER 31, ----------------------------------------- 1996 1995 -------------------- -------------------- SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM DEBT DEBT DEBT DEBT ---------- --------- ---------- --------- Sinking Fund Debentures........... $198,134 $198,033 Senior Notes, due 1998............ 199,607 199,343 Senior Debentures, due 2009....... 99,450 99,881 Notes, due 2023................... 195,921 195,877 Notes, due 2013................... 98,477 98,432 Commercial paper.................. $40,778 $189,248 Other notes and mortgages payable at various interest rates; collateralized by buildings ..... 132 291 124 422 ------- -------- -------- -------- $40,910 $791,880 $189,372 $791,988 ======= ======== ======== ========
The amount of debt that becomes due during each of the next five years is: 1997, $40.9 million; 1998, $200.1 million; 1999, $150 thousand; 2000, $-0-; and 2001, $-0-. 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 104.59% 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, provided the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. Pursuant to this option, $550 thousand debentures were repurchased in 1996. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness. 53 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 $600 million. One-third of the commitment matures October 23, 1997 and the balance matures October 24, 2001. Borrowings, pro rata under each facility, are at interest rates selected by Torchmark based on either the corporate base rate or the Eurodollar rate at the time of borrowings. At December 31, 1996 and December 31, 1995 there were no borrowings under the revolving credit agreements. The revolving credit agreements are designed to back up a commercial paper program which began in 1995. The short-term borrowings under the revolving credit agreements and in the commercial paper market averaged $103 million during 1996, and were made at an average yield of 5.42%. At December 31, 1996, commercial paper was outstanding in the face amount of $41.0 million. Torchmark is subject to certain covenants for the revolving credit agreements regarding capitalization and earnings, for which it was in compliance at December 31, 1996, and pays a facility fee based on size of the lines. Interest in the amount of $1.4 million, $1.6 million and $1.8 million was capitalized during 1996, 1995, 1994, 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. 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 6.95% at December 31, 1996 and 7.25% at December 31, 1995. Torchmark pays a yearly fee of $860 thousand for the cap agreement. The market value of the swap agreement was a benefit of $14.7 million at December 31, 1996 and a benefit of $26.5 million at December 31, 1995. The market value of the cap agreement, net of the present value of future annual payments, was an obligation of $1.3 million at December 31, 1996 and an obligation of $2.1 million at December 31, 1995. Except as otherwise described in "Note 3--Investments" on page 43 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, 1996 and 1995 was $193 million. 54 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 ---------- --------- ---------- ---------- 1994: Balance at January 1, 1994....... 1,000,000 (530,180) 73,784,228 (889,134) Issuance of common stock due to exercise of stock options...... 130,641 Other treasury stock acquired... (469,820) (1,491,700) Retirement of preferred treasury stock.......................... (1,000,000) 1,000,000 ---------- --------- ---------- ---------- Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193) 1995: Issuance of common stock due to exercise of stock options...... 133,102 ---------- --------- ---------- ---------- Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091) 1996: Issuance of common stock due to exercise of stock options...... 338,188 Other treasury stock acquired... (2,309,350) ---------- --------- ---------- ---------- Balance at December 31, 1996.... -0- -0- 73,784,228 (4,088,253) ========== ========= ========== ==========
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 --------------------- --------------------- 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
Preferred Stock: One million shares of adjustable rate preferred stock were issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark acquired 530 thousand shares which 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 shares are acquired from time to time for the following reasons: (1) open market purchases under the Torchmark stock repurchase program, in which share purchases in the amount of $107 million for 2.3 million shares, and $59 million for 1.5 million shares were made in 1996 and 1994, respectively, (2) for future employee stock option exercises, and (3) for payment of the option price and taxes upon exercise of stock options by employees. 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 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 1997, $275 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--EMPLOYEE STOCK OPTIONS Certain employees and directors have been granted options to buy shares of Torchmark stock generally at the market value of the stock on the date of grant under the provisions of the Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"). 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. Employee stock options granted under the 1987 Option Plan generally vest one-half in two years and one-half in three years. Director grants generally vest in six months. At December 31, 1996, approximately 11.4 million shares were authorized for grants of options under this plan. In October, 1993, Torchmark implemented a policy to issue shares for the exercise of stock options out of treasury stock. In October, 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for Torchmark beginning January 1, 1996. SFAS 123 defines a "fair value method" of accounting for employee stock options. It also allows accounting for such options under the "intrinsic value method" in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. If a company elects to use the intrinsic value method, then pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied. The effects of applying SFAS 123 in the pro forma disclosures are not necessarily indicative of future amounts because the pro forma disclosures do not take into account the amortization of the fair value of awards prior to 1995. Additionally, Torchmark is expected to grant additional awards in future years. Torchmark has elected to account for its stock options under the intrinsic value method as outlined in APB 25. The fair value method requires use of the Black-Scholes option valuation model to value employee stock options, upon which a compensation expense is based. The Black-Scholes option valuation model was not developed for use in valuing employee stock options. Instead, this model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Torchmark's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not provide a reliable measure of the fair value of its employee stock options. Under the intrinsic value method, compensation expense is only recognized if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant. In accordance with SFAS 123, the fair value for Torchmark's employee stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995.
1996 1995 -------- -------- Risk-free interest rate.................................... 6.4% 5.4% Dividend yield............................................. 3.7% 3.7% Volatility factor.......................................... 22.8 22.8 Weighted average expected life (in years).................. 4.17 4.17
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Torchmark's pro forma information follows (in thousands except for earnings per share information):
1996 1995 -------- -------- Pro forma net income...................................... $309,657 $143,148 Pro forma net income per share............................ 4.35 2.00
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED) A summary of Torchmark's stock option activity, and related information for the years ended December 31, 1996 and 1995 follows:
1996 1995 1994 --------------------------- --------------------------- --------- WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS --------- ---------------- --------- ---------------- --------- Outstanding-beginning of year................... 4,435,850 34.61 3,820,707 $32.50 3,660,391 Granted................. 724,100 49.09 761,100 43.14 316,600 Exercised............... (338,188) 30.00 (133,102) 22.18 (130,641) Expired................. (146,751) 39.26 (12,855) 40.24 (25,643) --------- --------- --------- Outstanding-end of year. 4,675,011 37.04 4,435,850 34.61 3,820,707 ========= ========= ========= Exercisable at end of year................... 3,094,311 32.93 3,243,647 32.66 2,936,867
The weighted average fair value of options granted during the years ended December 31, 1996 and 1995 were $49.61 and $43.14, respectively. The following table summarizes information about stock options outstanding at December 31, 1996:
CONTRACT EXERCISE NUMBER NUMBER TERMINATION PRICE GRANT DATE OUTSTANDING EXERCISABLE DATE -------- ----------------- ----------- ----------- ----------------- 11.300 October 1, 1993 13,906 13,906 October 3, 2003 13.110 October 1, 1993 13,828 13,828 October 3, 2003 16.000 December 16, 1987 7,500 7,500 December 18, 1997 19.875 February 25, 1988 5,217 5,217 February 27, 1998 20.375 January 3, 1989 30,003 30,003 January 5, 1999 22.600 October 1, 1993 31,041 31,041 October 3, 2003 24.410 October 1, 1993 2,766 2,766 October 3, 2003 25.625 October 11, 1990 692,155 692,155 October 13, 2000 28.480 October 1, 1993 42,670 42,670 October 3, 2003 31.125 January 15, 1991 445,930 445,930 January 17, 2001 32.500 January 2, 1991 63,000 63,000 January 4, 2001 33.125 January 25, 1990 63,000 63,000 January 27, 2000 34.000 December 16, 1994 265,600 146,300 December 18, 2004 34.000 December 7, 1992 123,863 96,863 December 9, 2002 34.000 December 14, 1993 258,522 258,522 December 16, 2003 34.000 October 1, 1993 47,497 47,497 October 3, 2003 34.350 October 1, 1993 26,539 26,539 October 3, 2003 34.375 December 12, 1991 606,757 606,757 December 14, 2001 34.875 January 3, 1995 21,000 21,000 January 5, 2005 36.610 October 1, 1993 27,997 27,997 October 3, 2003 37.220* December 18, 1996 30,000 0 December 20, 2006 38.375 January 2, 1992 63,000 63,000 January 4, 2002 43.375 December 20, 1995 731,300 0 December 22, 2005 43.500 December 14, 1993 189,824 189,824 December 16, 2003 45.000 January 3, 1994 24,000 24,000 January 5, 2004 45.000 January 2, 1996 21,000 21,000 January 4, 2006 46.560 October 1, 1993 12,745 12,745 October 3, 2003 49.750 December 16, 1996 673,100 0 December 18, 2006 52.000 December 7, 1992 117,251 117,251 December 9, 2002 57.750 January 3, 1993 24,000 24,000 January 5, 2003 --------- --------- 4,675,011 3,094,311 ========= =========
- -------- * Issued when the market price was $49.625. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--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 $2.5 million per life. Life insurance ceded represents less than 1.0% of total life insurance in force at December 31, 1996. Insurance ceded on life and accident and health products represents 1.0% of premium income for 1996. 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 3.1% of life insurance in force at December 31, 1996 and reinsurance assumed on life and accident and health products represents 1.8% of premium income for 1996. 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 $7.0 million, $6.3 million, and $7.9 million for 1996, 1995, and 1994, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1996 are as follows: 1997, $3.9 million; 1998, $2.4 million; 1999, $1.5 million; 2000, $726 thousand; 2001, $157 thousand; and in the aggregate, $8.7 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 $15.0 million at December 31, 1996 and $11.8 million at December 31, 1995. 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, 1996, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (22%); non government-guaranteed mortgage-backed securities (5%); short-term investments, which generally mature within one month (1%); securities of state and municipal governments (12%); securities of foreign governments (1%); and investment-grade corporate bonds (46%). The remainder of the portfolio was in oil and gas investments (1%) and real estate (3%), which are not considered financial instruments according to GAAP; policy loans (4%), which are secured by the underlying insurance policy values; and equity securities, mortgages, noninvestment grade corporate securities and other long-term investments (5%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Most of the 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, 1996, 1% or more of the portfolio was invested in the following industries: Financial services (18%); regulated utilities (5%); chemicals and allied products (5%); food and kindred products (4%); transportation (4%); technology (3%); media (2%); paper and allied products (2%); petroleum (2%); and retailing (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1996, 5% of the carrying value of fixed maturities was rated below investment grade (Ba or lower as rated by Moody's service or the equivalent NAIC designation). Par value of these investments was $237.7 million, amortized cost was $239.8 million, and market value was $243.4 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. Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits 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 state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria 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, 1996, Liberty was a party to approximately 282 active lawsuits (including 25 employment related cases and excluding interpleaders and stayed cases), more than 250 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment with the Supreme Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously affirmed the Robertson class action settlement and on February 16, 1996, issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. A petition for writ of certiorari to the Supreme Court of the United States was then filed by intervenors. The U.S. Supreme Court granted certiorari in Robertson on October 1, 1996. Oral arguments on the intervenors' petition, which alleged that class members had not received due process in the class certification procedure and should be allowed to opt out of the class action settlement to pursue separate litigation, were heard by the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme Court dismissed, as improvidently granted, the writ of certiorari previously granted in Robertson. The ruling effectively ends direct appeals from the Robertson class action settlement and Liberty will proceed with administration of benefits under the class settlement. As previously reported, Liberty is subject to 76 individual cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of the Robertson case. Liberty will file motions to dismiss these lawsuits based upon the U.S. Supreme Court opinion in Robertson. If these cases are dismissed, no collateral attacks on the cancer class action settlement will remain at this time. As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94- 1006-P-M), which was filed on December 30, 1994 and is presently pending in the U.S. District Court for the Northern District of Alabama, is the only remaining purported class action litigation brought by Torchmark shareholders alleging untimely and inadequate disclosure of material contingent liabilities arising out of insurance policy litigation involving Liberty. The U.S. District Court entered an order granting partial summary judgment on behalf of the defendants on April 16, 1996. Claims for damages based on Section 10b-5 of the Securities Exchange Act, on state securities laws and for common law fraud remain pending in the case. As previously reported, 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 was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. Prior filings have reported that 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 alleged actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. Liberty removed this 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) case to federal court, but the case was subsequently remanded to the state court. The Bryant case was settled on an individual basis by the parties on December 23, 1996. No class was ever certified. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage alleged to be in conflict with provisions of the Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). The Stewart case has been dismissed with prejudice and the other cases remain pending. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims during an approximately two month period in 1993 (Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible by the providers under federal law. In November, 1993 Liberty discontinued this practice and recalculated and repaid all claims in full as it had prior to September 1993 together with interest. Nearly two years after this refund, the Adkins case was filed. The claims made in Adkins are identical to the individual claims in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an individual case reversed and remanded by the Alabama Supreme Court on March 7, 1997 after an appeal regarding the remitted verdict of $2.7 million. A class certification order, which does not address the merits of the litigation, was entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for writ of mandamus or prohibition with the Alabama Supreme Court in August 1996 asserting abuse of discretion by the trial court in certifying the Adkins class. The Alabama Supreme Court has stayed further proceedings as to the class issues in Adkins pending its ruling on the propriety of class certification. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an amended complaint in Smith to allege violations of various provisions of the Employment Retirement Income Security Act of 1974. Discovery is presently proceeding in this case. It has been previously reported that Liberty is a party to individual lawsuits and a purported class action (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County, Alabama, in which allegations are made that an interest sensitive life insurance policy would become paid-up or self-sustaining after a specified number of years. Currently, Liberty is a party to more than 100 individual interest sensitive cases, 53 of which were filed by a single lawyer in Chambers County, Alabama. Additionally, Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company, filed in the Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119), where the plaintiffs were seeking class certification on behalf of such policyholders including those who were allegedly induced to exchange life insurance policies or the existing policy's cash value was allegedly depleted. On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an order conditionally certifying a plaintiffs claim in Lawson in order to preserve the Court's jurisdiction over the class action question, subject to a full evidentiary hearing on class certification at a future date yet to be determined. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. (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 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. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. 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. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996 on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed economic circumstances. Liberty is actively opposing this petition. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996, Torchmark's motion to change venue was granted and the case has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The Company's motion to dismiss remains pending while discovery is proceeding. It has been previously reported that the Company, its subsidiaries United American and Globe and certain individual corporate officers are parties to purported class action litigation filed April 5, 1996 in the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud, breach of contract, conspiracy, violations of the Oklahoma Consumer Protection Act and breach of the duty of good faith and fair dealing on behalf of all persons who purchased, at any time between 1987 and the present, certain hospitalization and surgical insurance policies issued by Globe and United American. The plaintiffs asserted that they purchased these policies and subsequently incurred improper claim denials, wrongful recision and "rate-ups" and post-claim underwriting. On December 4, 1996, the U.S. District Court dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract counts as to certain defendants and ordered plaintiffs to file an amended complaint. On December 23, 1996, the plaintiffs filed the amended complaint as ordered, alleging breach of contract, fraud, conspiracy and breach of the duty of good faith and fair dealing on behalf of a purported class of persons who purchased Globe, but not United American, policies from 1987 to the present. Defendants have filed motions to dismiss and for partial summary judgment. On April 19, 1996, a $5 million punitive judgment was entered against LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was in his sixties, cancelled several small life insurance policies and purchased a substantial amount of new coverage. The plaintiff contended that certain supplemental benefits which were present in the smaller policies were not included in the new coverage (i.e. accidental death and premium waiver). The trial judge held that Strickland was not entitled to recover compensatory damages. Nevertheless the jury awarded $100 in nominal damages in addition to the punitive award. Liberty has filed various motions for the post-trial relief with the Circuit Court, which held a post trial hearing on the propriety of the punitive damage award on February 12, 1997. On March 11, 1997, the Circuit Court judge reduced the Strickland judgment to $37,500. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) A jury in Chambers County, Alabama Circuit Court returned a verdict of $333,000 compensatory damages and $17.2 million in punitive damages against Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance Company (CV-94-234). The case arose out of a claim which had been denied due to an alleged misrepresentation in the application. There was a recorded telephone interview with the applicant in which a statement was given which Liberty alleges was a misrepresentation of the health of the proposed insured. After the litigation was filed, it was learned that one signature on the application was not that of the insured. Upon notice of this fact, Liberty paid the $20,000 claim proceeds into court. Liberty has filed motions for post-trial relief with the Court, subject to completion of post-trial discovery. A post-trial hearing on the propriety of the punitive damage award is scheduled for March 28, 1997. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be 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 in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. NOTE 17--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. Torchmark markets its products in all fifty states. Certain insurance company investments are managed by the asset management segment. 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. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 17--INDUSTRY SEGMENTS (CONTINUED) A summary of segment data is as follows:
ADJUSTMENTS ASSET AND CONSOLIDATED INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL ---------- ---------- --------- ------------ ------------ 1996: Revenues--unaffiliated.. $2,008,594 $192,414 $ 4,802 $ -0- $2,205,810 Intersegment revenues... 7,561 33,139 (2,310) (38,390) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $2,016,155 $225,553 $ 2,492 $(38,390) $2,205,810 ========== ======== ========= ======== ========== Pretax income........... $ 485,646 $118,082 $(101,521) $ (7,075) $ 495,132 Depreciation............ 5,468 3,451 137 9,056 Capital expenditures.... 15,236 9,671 62 24,969 Identifiable assets at year end............... 9,649,488 396,061 357,792 (602,541) 9,800,800 1995: Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482 Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482 ========== ======== ========= ======== ========== Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175 Depreciation............ 6,135 3,327 141 9,603 Capital expenditures.... 7,094 15,227 193 22,514 Identifiable assets at year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104 1994: Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337 Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337 ========== ======== ========= ======== ========== Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974 Depreciation............ 8,260 2,869 142 11,271 Capital expenditures.... 5,117 20,952 160 26,229 Identifiable assets at year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244
NOTE 18--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 $30.3 million and $26.2 million at December 31, 1996 and 1995, respectively. Investment income derived from these investments is included in net investment income. Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc. ("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was $508 thousand, $494 thousand, and $461 thousand, for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 19--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, ----------------- 1996 1995 1994 ------- ---- ---- Paid-in capital from tax benefit for stock option exercises.............................................. $ 1,947 $709 $349 Non-cash assets received from sale of energy operations. 79,289 -0- -0- Non-cash liabilities assumed from sale of energy operations............................................. 48,942 -0- -0-
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 -------- ------- -------- Interest paid..................................... $ 74,433 $82,642 $ 77,114 Income taxes paid................................. $108,496 $99,298 $182,052
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED) The following is a summary of quarterly results for the two years ended December 31, 1996. 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, --------- -------- ------------- ------------ 1996: - ----- Premium and policy charges....... $402,188 $403,534 $402,585 $401,612 Financial services revenue....... 44,337 47,157 45,529 47,272 Net investment income............ 99,417 100,700 101,576 102,915 Realized investment gains........ 4,713 379 498 239 Total revenues................... 550,823 551,983 550,597 552,407 Policy benefits.................. 264,302 265,971 263,612 264,199 Amortization of acquisition expenses........................ 55,457 54,277 54,788 54,304 Pretax income from continuing operations...................... 119,296 123,200 125,094 127,542 Loss from discontinued operations...................... -0- -0- (7,137) -0- Net income....................... 76,274 79,039 73,693 82,366 Net income per common share from continuing operations........... 1.06 1.10 1.13 1.17 Net income per common share from discontinued operations: Loss on disposal............... 0.00 0.00 (0.10) 0.00 Net income per common share...... 1.06 1.10 1.03 1.17 Net income per common share excluding realized gains, the related DPAC adjustment, and discontinued operations......... 1.03 1.10 1.13 1.17 1995: - ----- Premium and policy charges....... $390,834 $384,759 $383,962 $386,728 Financial services revenue....... 34,774 37,223 39,108 41,377 Net investment income............ 92,808 92,883 93,762 102,412 Realized investment gains (losses)........................ (920) 304 (15,700) 1,993 Total revenues................... 517,688 515,597 501,383 532,814 Policy benefits.................. 253,369 252,640 252,547 250,780 Amortization of acquisition expenses........................ 50,185 49,936 51,150 52,796 Pretax income from continuing operations...................... 107,362 108,530 94,457 117,826 Income (loss) from discontinued operations...................... 288 569 2,017 (131,584) Net income (loss)................ 68,621 70,023 60,974 (56,383) Net income per common share from continuing operations........... 0.96 0.97 0.82 1.05 Net income per common share from discontinued operations: Income (loss) from operations.. 0.00 0.01 0.03 (1.84) Net income (loss) per common share........................... 0.96 0.98 0.85 (0.79) Net income per common share excluding realized gains, the related DPAC adjustment, and discontinued operations......... 0.96 0.97 0.97 1.03
64 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 Section 16(a) "Beneficial Ownership Reporting Compliance" of the Securities Exchange Act in the Proxy Statement for the Annual Meeting of Stockholders to be held April 24, 1997 (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. 65 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.................................... 32 Consolidated Balance Sheet at December 31, 1996 and 1995........ 33 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1996.................. 34 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1996......... 35 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1996...................... 36 Notes to Consolidated Financial Statements...................... 37 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1996................ II.Condensed Financial Information of Registrant (Parent Compa- ny)............................................................. 71 III.Supplementary Insurance Information (Consolidated).......... 74 IV.Reinsurance (Consolidated)................................... 75
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. 66 EXHIBITS
Page of this Report ------- (3)(i) Restated Certificate of Incorporation of Torchmark Corpora- tion, as amended (incorporated by reference from Exhibit 3(i) to Form 10-K for the fiscal year ended December 31, 1995) (ii) 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 (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 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)
67
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 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) (l) 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) (m) 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) (n) 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) (o) 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) (p) 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) (q) 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) (r) 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) (s) 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) (t) Credit Agreements dated as of October 24, 1996 among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year) (u) Coinsurance and Servicing Agreement between Security Benefit Life Insurance Company and Liberty National Life Insurance Company, effective as of December 31, 1995 (incorporated by reference from Exhibit 10(u) to Form 10-K for the fiscal year ended December 31, 1995) (v) 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) (w) Torchmark Corporation 1996 Non-Employee Directors Stock Op- tion Plan (x) Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (11) Statement re computation of per share earnings 70 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 24, 1997 (21) Subsidiaries of the registrant 70 (23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Reg- istration No. 2-76378) (b) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, into Form S-8 of The United Investors Management Company Savings and Invest- ment Plan (Registration No. 2-76912)
68
Page of this Report ------- (c) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, into Form S-8 and the accompanying Form S-3 Prospectus of The 1984 Torchmark Corpo- ration Stock Option Plan (Registration No. 2-93760) (d) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, 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 reference of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, into Form S-8 and the accompanying Form S-3 Prospectus of The Capital Accumulation and Bonus Plan of Torchmark Corporation (Registration No. 33-1032) (f) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, 1997, except for Note 16, which is as of March 11, 1997, into Form S-8 of the Liberty National Life Insurance Company 401(k) Plan (Regis- tration No. 33-65507) (24) Powers of attorney (27) Financial Data Schedule
69 (b) Reports on Form 8-K. A Form 8-K dated October 2, 1996 was filed to report the United States Supreme Court's grant of intervenors' petition for writ of certiorari in Robertson v. Liberty National Life Insurance Company. No exhibits were required to be filed. (c) Exhibits Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1996 1995 1994 ------------ ------------- ------------ Net income from continuing opera- tions.............................. $318,508,976 $ 271,945,720 $263,814,601 Discontinued operations of energy segment: Income (loss) from operations...... -0- (128,710,390) 5,131,667 Loss on disposal................... (7,137,124) -0- -0- ------------ ------------- ------------ Net income.......................... 311,371,852 143,235,330 268,946,268 Preferred dividends................. -0- 0 (804,130) ------------ ------------- ------------ Adjusted net income................. $311,371,852 $ 143,235,330 $268,142,138 ============ ============= ============ Weighted average shares outstanding. 71,229,892 71,593,774 72,095,657 ============ ============= ============ Primary earnings per share: From continuing operations......... $ 4.47 $ 3.80 $ 3.65 From discontinued operations of en- ergy segment: Income (loss) from operations..... -0- (1.80) 0.07 Loss on disposal.................. (0.10) -0- -0- ------------ ------------- ------------ Net income........................ $ 4.37 $ 2.00 $ 3.72 ============ ============= ============
There were no common stock equivalents included in weighted average shares outstanding. Exhibit 21. 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 ----------------------- ------------- --------------------- American Income Life American Income Life Insurance Company Indiana Insurance Company 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 Waddell & Reed Investors Management Investors Management Company, Inc. Delaware Company, Inc. Waddell & Reed Waddell & Reed Services Company, Inc. Delaware Services Company, Inc.
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 67 through 69 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 70 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (AMOUNTS IN THOUSANDS)
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Assets: Investments: Long-term investments--available for sale........ $ 11,182 $ 9,655 Short-term investments........................... 5,940 994 ---------- ---------- Total investments................................. 17,122 10,649 Cash.............................................. 156 -0- Investment in affiliates.......................... 2,949,625 2,820,323 Due from affiliates............................... 104,146 105,887 Accrued investment income......................... 84 94 Other assets...................................... 5,154 3,636 Discontinued operations assets.................... -0- 61,109 ---------- ---------- Total assets..................................... $3,076,287 $3,001,698 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt.................................. $ 40,778 $ 189,248 Long-term debt................................... 791,589 791,566 Due to affiliates................................ 330,527 195,193 Other liabilities................................ 90,904 43,643 ---------- ---------- Total liabilities................................ 1,253,798 1,219,650 Monthly income preferred securities............... 193,146 193,096 Shareholders' equity: Preferred stock.................................. -0- -0- Common stock..................................... 73,784 73,784 Additional paid-in capital....................... 141,701 139,754 Unrealized investment gains ..................... 46,581 140,338 Retained earnings................................ 1,549,391 1,325,534 Treasury stock................................... (182,114) (90,458) ---------- ---------- Total shareholders' equity....................... 1,629,343 1,588,952 ---------- ---------- Total liabilities and shareholders' equity....... $3,076,287 $3,001,698 ========== ==========
See accompanying Independent Auditors' Report 71 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Net investment income............................ $ 931 $ 1,261 $ 5,183 Realized investment losses....................... (5,738) (23,516) (4,422) Other income..................................... 1 11 11 -------- -------- -------- Total revenue.................................. (4,806) (22,244) 772 General operating expenses....................... 13,958 7,823 14,442 Non-operating expenses--related to affiliates.... -0- -0- (71,417) Reimbursements from affiliates................... (13,332) (13,260) (15,218) Interest expense................................. 88,916 91,825 79,762 -------- -------- -------- Total expenses................................. 89,542 86,388 7,569 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates.......................... (94,348) (108,632) (6,797) Income taxes .................................... 23,102 37,363 2,022 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (71,246) (71,269) (4,775) Equity in earnings of affiliates................. 420,900 326,822 271,992 Monthly income preferred securities dividend..... (9,655) (10,317) (2,137) -------- -------- -------- Net income from continuing operations.......... 339,999 245,236 265,080 Discontinued operations of energy segment: Income (loss) from operations................... -0- (102,001) 3,866 Loss on disposal................................ (28,627) -0- -0- -------- -------- -------- Net income..................................... $311,372 $143,235 $268,946 ======== ======== ========
See accompanying Independent Auditors' Report. 72 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- --------- --------- Cash provided from operations before dividends from subsidiaries............................. $(77,291) $ (86,764) $ (48,378) Cash dividends from subsidiaries.............. 265,688 185,500 270,500 -------- --------- --------- Cash provided from operations.................. 188,397 98,736 222,122 Cash provided from (used for) investing activi- ties: Disposition of investments.................... -0- 116 225,573 Acquisition of investments.................... (1,667) (1,556) (202,579) Investment in subsidiaries.................... -0- (83,211) (70,000) Purchase of American Income................... -0- -0- (476,501) Loans to subsidiaries......................... (12,508) (49,043) (28,916) Net decrease (increase) in temporary invest- ments........................................ (4,946) (188) 1,529 Additions to properties....................... (49) (146) (113) -------- --------- --------- Cash used for investing activities............. (19,170) (134,028) (551,007) Cash provided from (used for) financing activi- ties: Issuance of debt.............................. -0- -0- 143,000 Issuance of monthly income preferred securi- ties......................................... -0- -0- 193,046 Repayments of debt............................ (149,020) (60,752) -0- Issuance of stock to subsidiaries............. -0- 77,766 -0- Issuance of stock............................. 10,145 2,808 4,408 Acquisitions of treasury stock................ (106,996) -0- (106,054) Borrowed from subsidiaries.................... 153,959 101,857 176,821* Repayment on borrowings from subsidiaries..... 8,500 (5,500) -0- Payment of dividends.......................... (85,659) (80,887) (82,336) -------- --------- --------- Cash provided from (used for) financing activi- ties.......................................... (169,071) 35,292 328,885 Net increase in cash........................... 156 -0- -0- Cash balance at beginning of period............ -0- -0- -0- -------- --------- --------- Cash balance at end of period.................. $ 156 $ -0- $ -0- ======== ========= =========
* Includes an $80.3 million note payable to subsidiary which was forgiven in 1994 in the form of a dividend from the subsidiary. 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:
1996 1995 1994 -------- -------- -------- Consolidated subsidiaries..................... $265,688 $185,500 $270,500 ======== ======== ========
See accompanying Independent Auditors' Report. 73 TORCHMARK CORPORATION SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED) (AMOUNTS IN THOUSANDS)
AMORTIZATION OF DEFERRED PREMIUM NET POLICY OTHER AND POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES ---------- ---------- -------- ---------- ------------ --------- FOR THE YEAR ENDED DE- CEMBER 31, 1996: - ---------------------- Insurance.............. $1,609,919 $403,300 $ 2,936 $1,058,084 $219,917 $252,508 Asset management....... 8,077 217,476 107,471 Corporate.............. (3,550) 6,042 104,013 Eliminations and ad- justments............. (3,219) (35,171) (1,091) (30,224) ---------- -------- -------- ---------- -------- -------- Total................. $1,609,919 $404,608 $191,283 $1,058,084 $218,826 $433,768 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ---------------------- Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167 Asset management....... 4,021 180,001 87,651 Corporate.............. (3,418) (14,309) 106,653 Eliminations and ad- justments............. (3,357) (29,469) (1,442) (25,567) ---------- -------- -------- ---------- -------- -------- Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ---------------------- Insurance.............. $1,388,874 $331,679 $ 3,821 $ 921,277 $172,493 $228,042 Asset management....... 2,443 165,259 82,727 Corporate.............. 8,103 (2,525) 95,160 Eliminations and ad- justments............. 5,412 (27,729) 5,614 (23,950) ---------- -------- -------- ---------- -------- -------- Total................. $1,388,874 $347,637 $138,826 $ 921,277 $178,107 $381,979 ========== ======== ======== ========== ======== ========
See accompanying Independent Auditors' Report. 74 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, 1996: - ---------------------- Life insurance in force. $84,360,821 $655,574 $2,587,330 $86,292,577 3.0% =========== ======== ========== =========== ==== Premiums:* Life insurance......... 759,321 3,472 26,511 782,360 3.4% Health insurance....... 742,319 9,835 135 732,619 0.0% ----------- -------- ---------- ----------- Total premiums........ $ 1,501,640 $ 13,307 $ 26,646 $ 1,514,979 1.8% =========== ======== ========== =========== ==== FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ---------------------- Life insurance in force. $80,377,021 $636,961 $ 14,355 $79,754,415 0.0% =========== ======== ========== =========== ==== Premiums:* Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6% Health insurance....... 761,573 10,985 -0- 750,588 0.0% ----------- -------- ---------- ----------- Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3% =========== ======== ========== =========== ==== 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% =========== ======== ========== =========== ====
- -------- * Excludes policy charges See accompanying Independent Auditors' Report. 75 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 By: ________________________________ R.K. RICHEY, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR By: ________________________________ KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) By: ________________________________ GARY L. COLEMAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: March 20, 1997 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. By: ________________________________ By: ________________________________ DAVID L. BOREN DIRECTOR HAROLD T. MCCORMICK DIRECTOR By: ________________________________ By: ________________________________ JOSEPH M. FARLEY DIRECTOR GEORGE J. RECORDS DIRECTOR By: ________________________________ By: ________________________________ LOUIS T. HAGOPIAN DIRECTOR YETTA G. SAMFORD, JR. DIRECTOR By: ________________________________ C.B. HUDSON DIRECTOR By: ________________________________ JOSEPH L. LANIER, JR. DIRECTOR Date: March 20, 1997 *By: _______________________________ GARY L. COLEMAN ATTORNEY-IN-FACT 76 EX-10.(F) 2 1987 STOCK INCENTIVE PLAN EXHIBIT 1 RESTATED TORCHMARK CORPORATION 1987 STOCK INCENTIVE PLAN (AMENDED AND RESTATED AS OF MARCH 4, 1997) SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. The name of this plan is the Torchmark Corporation 1987 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Torchmark Corporation (the "Company") and its Subsidiaries to attract and retain employees and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such employees and directors to participate in the long-term success and growth of the Company through an equity interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Affiliate" means any corporation (other than a Subsidiary), partnership, joint venture or any other entity in which the Company owns, directly or indirectly, at least a 10 percent beneficial ownership interest. b. "Board" means the Board of Directors of the Company. c. "Cause" means a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. d. "Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto. e. "Committee" means the Compensation Committee of the Board. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. f. "Commission" means the Securities and Exchange Commission. g. "Company" means Torchmark Corporation, a corporation organized under the laws of the State of Delaware (or any successor corporation). h. "Deferred Stock" means an award made pursuant to Section 9 below of the right to receive Stock at the end of a specified deferral period. i. "Director Stock Option" means any option to purchase shares of Stock granted pursuant to Section 6. j. "Disability" means total and permanent disability as determined under the Company's long term disability program. With respect to Director Stock Options, "Disability" shall be determined as if the Director was covered under the Company's long term disability program. k. "Early Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate pursuant to the early retirement provisions of the applicable company pension plan. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto. A-1 m. "Fair Market Value" means, as of any given date, the closing price of the Stock on such date on the New York Stock Exchange Composite Tape. n. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. o. "Immediate Family" means the children, grandchildren or spouse of any optionee. p. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. q. "Normal Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate on or after the normal retirement date specified in the applicable company pension plan. r. "Plan" means this 1987 Stock Incentive Plan. s. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 8. t. "Retirement" means Normal or Early Retirement. u. "Stock" means the Common Stock of the Company. v. "Stock Appreciation Right" means a right granted under Section 7 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. w. "Stock Option" means any option to purchase shares of Stock granted to employees pursuant to Section 5. x. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Committee which shall at all times comply with the requirements of Rule 16b-3 of the Exchange Act. Commencing on the date of the 1995 annual meeting of stockholders of the Company, all members of the Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code. The Committee shall have the power and authority to grant to eligible employees, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock or (iv) Deferred Stock. In particular, the Committee shall have the authority: (i) to select the officers and other key employees of the Company, its Subsidiaries, and its Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards or a combination of the foregoing from time to time will be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares of Stock to be covered by each such award granted hereunder; A-2 (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (other than Director Stock Options), including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto based on performance and/or such other factors as the Committee may determine, in its sole discretion, and any vesting acceleration features based on performance and/or such other factors as the Committee may determine, in its sole discretion; (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of a participant, including providing for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 12,300,000 comprised of: (i) 9,300,000 shares (plus such number of shares subject to options granted under the 1984 Torchmark Corporation Stock Option Plan which expire unexercised), which may consist, in whole or in part, of authorized and unissued shares or treasury shares, and (ii) 3,000,000 additional shares, which may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Stock that have been optioned cease to be subject to option, or if any shares subject to any Restricted Stock or Deferred Stock award granted hereunder are forfeited or such award otherwise terminates, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, (ii) the number and option price of shares subject to outstanding Stock Options and Director Stock Options granted under the Plan, (iii) the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan, (iv) the aggregate number of shares available for issuance to any employee pursuant to Section 4(a), and (v) the number of Director Stock Options to be granted each year pursuant to Section 6, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number, and further provided that no such adjustment shall increase the aggregate value of any outstanding award. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY. (a) Officers and other key employees of the Company, its Subsidiaries or its Affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, its Subsidiaries, or its Affiliates are eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards. Except as provided in Section 6, the optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award or grant; provided, however, that no employee shall be granted Stock Options on more than 200,000 shares in any calendar year. A-3 (b) Directors of the Company (other than directors who are also officers or employees of the Company, its Subsidiaries or its Affiliates) are eligible to receive Director Stock Options pursuant to Section 6 of the Plan. SECTION 5. STOCK OPTIONS FOR EMPLOYEES. Stock Options may be granted either alone or in addition to other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each optionee. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights) except that Incentive Stock Options shall not be granted to employees of an Affiliate. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Except as provided in Section 5(1), no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. Notwithstanding the foregoing, in the event an optionee voluntarily disqualifies an option as an Incentive Stock Option within the meaning of Section 422 of the Code, the Committee may, but shall not be obligated to, make such additional grants, awards or bonuses as the Committee shall deem appropriate, to reflect the tax savings to the Company which results from such disqualification. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date such Incentive Stock Option is granted. (c) Exercisability. Subject to paragraph (l) of this Section 5 with respect to Incentive Stock Options, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee, provided, however, that, except as provided in Section 5(f), 5(g), 5(h) or 13, no Stock Option shall be exercisable prior to six months from the date of the granting of the option. Notwithstanding the limitations set forth in the preceding sentence, the Committee may accelerate the exercisability of any Stock Option, at any time in whole or in part, based on performance and/or such other factors as the Committee may determine in its sole discretion. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, the shares received upon the exercise of such Stock Option shall be restricted or deferred, as the case may be, in accordance with the original term of the Restricted Stock award or Deferred Stock award in A-4 question, except that the Committee may direct that such restrictions or deferral provisions shall apply to only the number of such shares equal to the number of shares of Restricted Stock or Deferred Stock surrendered upon the exercise of such option. No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (e) Transferability of Options. A Stock Option agreement may permit an optionee to transfer the Stock Option to members of his or her Immediate Family, to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners if (i) the agreement setting forth such Stock Option expressly provides that the Stock Option may be transferred only with the express written consent of the Committee, and (ii) the optionee does not receive any consideration in any form whatsoever for said transfer. Any Stock Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Stock Option immediately prior to the transfer thereof. Stock Options granted prior to December 1, 1993 may be amended to provide for their transferability, subject to the foregoing conditions. Any Stock Option not (i) granted pursuant to any agreement expressly allowing the transfer of said Stock Option or (ii) amended expressly to permit its transfer shall not be transferable by the optionee otherwise than by will or by the laws of descent and distribution and such Stock Option thus shall be exercisable during the optionee's lifetime only by the optionee. (f) Termination by Death. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary, and any Affiliate terminates by reason of death (or if an optionee dies following termination of employment by reason of disability or Normal Retirement), any Stock Option shall become immediately exercisable and may thereafter be exercised by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, during the period ending on the expiration of the stated term of such Stock Option or the first anniversary of the optionee's death, whichever is later. (g) Termination by Reason of Disability. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Disability, any Stock Option held by such optionee shall be immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Stock Option. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Normal Retirement, any Stock Option held by such optionee shall become immediately exercisable. A Stock Option held by an optionee whose employment has terminated by reason of Normal Retirement shall expire at the end of the stated term of such Stock Option, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Early Retirement, any Stock Option shall terminate three years from the date of such Early Retirement or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. In the event of Early Retirement, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee at or after grant, and said Stock Option may only be exercised to the extent it is or has become exercisable prior to termination of the Stock Option. A-5 In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Termination for Cause. If the optionee's employment with the Company, any Subsidiary and any Affiliate is terminated for Cause, the Stock Option shall immediately be forfeited to the Company upon the giving of notice of termination of employment. (j) Other Termination. If the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause, the Stock Option shall terminate three months from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate is voluntarily terminated for any reason, the Stock Option shall terminate one month from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter. In the event of involuntary termination without Cause or voluntary termination for any reason, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee and said Stock Option may only be exercised to the extent it is or has become exercisable prior to termination of the Stock Option. (k) Termination upon Change of Control. Notwithstanding the provisions of Section 5(j) or the stated term of the Stock Option, if the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Stock Option shall terminate upon the later of six months and one day after such merger or business combination or ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred. (l) Limit on Value of Incentive Stock Option First Exercisable Annually. The aggregate Fair Market Value (determined at the time of grant) of the Stock for which "incentive stock options" within the meaning of Section 422 of the Code are exercisable for the first time by an optionee during any calendar year under the Plan (and/or any other stock option plans of the Company, any Subsidiary and any Affiliate) shall not exceed $100,000. Notwithstanding the preceding sentence, the exercisability of such Stock Options may be accelerated by the Committee and shall be accelerated as provided in Sections 5(f), 5(g), 5(h), and 13, in which case Stock Options which exceed such $100,000 limit shall be treated as Non-Qualified Stock Options. SECTION 6. DIRECTOR STOCK OPTIONS. Director Stock Options granted under the Plan shall be options which are not intended to be "incentive stock options" within the meaning of Section 422 of the Code. Such Director Stock Options may be granted pursuant to a pre- established formula contained in the Plan or may, in the sole discretion of the entire Board of Directors, be granted as to such number of shares and upon such terms and conditions as shall be determined by said Board of Directors. Director Stock Options granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) Formula-based Director Stock Options. For each calendar year after 1995, 3,000 Director Stock Options shall be granted automatically on the first day of each calendar year on which Stock is publicly traded on the New York Stock Exchange to each member of the Board on that date who is not an employee of the Company, its Subsidiaries or Affiliates ("Outside Director"). A-6 The option price per share of Stock purchasable under such Director Stock Option shall be 100% of the Fair Market Value of the Stock on the date of the grant of the Director Stock Option. Except as provided in Section 13, said Director Stock Options for calendar years after 1994 shall become exercisable in full six months from the date of the grant of the option and shall remain exercisable for a term of ten years and two days from the date such Director Stock Option is granted. (b) Non-Formula Based Director Stock Options. Within its sole discretion, the entire Board may, for calendar years commencing with 1996, award Director Stock Options on a non-formula basis to all or such individual Outside Directors as it shall select. Such Director Stock Options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such Director Stock Options may be fixed by the Board at a discount not to exceed 25% of the fair market value of the Stock on the date of grant or may be the fair market value of the Stock on the grant date. Such Director Stock Options shall become first exercisable and have an option term as determined by the Board in its discretion, provided however, that except as described in Section 13 and in paragraph (e) of this section, no such Director Stock Option shall be first exercisable until six months from the date of grant. All other terms and conditions of such Director Stock Options shall be as established by the Board in its sole discretion. (c) Method of Exercise. Any Director Stock Option granted pursuant to the Plan may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based on the Fair Market Value of the Stock on the date the option is exercised). No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (d) Transferability of Options. No Director Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Director Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable options. (e) Termination of Service. Upon an optionee's termination of status as an Outside Director with the Company for any reason, any Director Stock Options held by such optionee shall become immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Director Stock Options or the first anniversary of the optionee's death, whichever is later. Not withstanding the foregoing sentence, if the optionee's status as an Outside Director terminates by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Director Stock Option shall terminate upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, and (iii) the expiration of the stated term of such Director Stock Option. SECTION 7. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided by the Committee at the time of grant, a Stock Appreciation Right granted with respect A-7 to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 7, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 7. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 7 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of the Stock Appreciation Right, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (e) of Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. (vi) In its sole discretion, the Committee may provide, at the time of grant of a Stock Appreciation Right under this Section 7, that such Stock Appreciation Right can be exercised only in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below). (vii) The Committee, in its sole discretion, may also provide that in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below) the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the "Change of Control Price" (as defined in Section 13 below). SECTION 8. RESTRICTED STOCK. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and its Subsidiaries and Affiliates to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant and/or vesting of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement"), has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. Awards of Restricted Stock A-8 must be accepted within a period of 60 days (or such shorter period as the Committee may specify) after the award date by executing a Restricted Stock Award Agreement and paying the price specified in the Restricted Stock Award Agreement. Each participant who is awarded Restricted Stock shall be issued a stock certificate registered in the name of the participant in respect of such shares of Restricted Stock. The Committee shall specify that the certificate shall bear a legend, as provided in clause (i) below, and/or be held in custody by the Company, as provided in clause (ii) below. (i) The certificate shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Torchmark Corporation 1987 Stock Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Torchmark Corporation. Copies of such Plan and Agreement are on file in the offices of Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233." (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 8 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the Restricted Stock Award Agreements, during such period as may be set by the Committee commencing on the grant date (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, before or after the participant's termination of employment, based on performance and/or such other factors as the Committee may determine, in its sole discretion. (ii) Except as provided in paragraph (c)(i) of this Section 8, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to receive any dividends. Dividends paid in stock of the Company or stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates for shares of unrestricted Stock shall be delivered to the participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant, and the participant shall only receive the amount, if any, paid by the participant for such forfeited Restricted Stock. SECTION 9. DEFERRED STOCK AWARDS. (a) Administration. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company, its Subsidiaries and Affiliates to whom, and the time or times at which, Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those set forth in paragraph (b) of this Section 9. The Committee may also condition the grant and/or vesting of Deferred Stock upon the attainment of specified performance goals, or such other criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. A-9 (b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to this Section 9 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period, (as defined below) where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) At the time of the award, the Committee may, in its sole discretion, determine that amounts equal to any dividends declared during the Deferral Period (or Elective Deferral Period) with respect to the number of shares covered by a Deferred Stock award will be: (a) paid to the participant currently; (b) deferred and deemed to be reinvested; or (c) that such participant has no rights with respect thereto. (iii) Subject to the provisions of the award agreement and this Section 9, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the participant. (iv) Based on performance and/or such other criteria as the Committee may determine, the Committee may, at or after grant (including after the participant's termination of employment), accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to defer further receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least six months prior to completion of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock award agreement executed by the Company and the participant. SECTION 10. LOAN PROVISIONS. With the consent of the Committee, the Company may make, or arrange for, a loan or loans to an employee with respect to the exercise of any Stock Option granted under the Plan and/or with respect to the payment of the purchase price, if any, of any Restricted Stock awarded hereunder. The Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, term and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which the loan or loans may be forgiven. SECTION 11. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the right of an optionee or participant under a Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock or Deferred Stock award theretofore granted, without the optionee's or participant's consent. Amendments may be made without stockholder approval except as required to satisfy Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, or other regulatory requirements. The Committee may amend the terms of any award or option (other than Director Stock Options) theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted Stock Options including options granted under other plans applicable to the participant and previously granted Stock Options having higher option prices. A-10 SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing set forth herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 13. CHANGE OF CONTROL. The following acceleration and valuation provisions shall apply in the event of a "Change of Control" or "Potential Change of Control," as defined in this Section 13: (a) In the event of a "Change of Control" as defined in paragraph (b) of this Section 13, unless otherwise determined by the Committee in writing at or after grant, but prior to the occurrence of such Change of Control, or, if and to the extent so determined by the Committee in writing at or after grant (subject to any right of approval expressly reserved by the Committee at the time of such determination) in the event of a "Potential Change of Control," as defined in paragraph (c) of this Section 13: (i) any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions and deferral limitations applicable to any Restricted Stock and Deferred Stock awards under the Plan shall lapse and such shares and awards shall be deemed fully vested; and (iii) the value of all outstanding Stock Options, Director Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock Awards, shall, to the extent determined by the Committee at or after grant, be settled on the basis of the "Change of Control Price" (as defined in paragraph (d) of this Section 13) as of the date the Change of Control occurs or Potential Change of Control is determined to have occurred, or such other date as the Committee may determine prior to the Change of Control or Potential Change of Control. In the sole discretion of the Committee, such settlements may be made in cash or in stock, as shall be necessary to effect the desired accounting treatment for the transaction resulting in the Change of Control. In addition, any Stock Option, Director Stock Option, and Stock Appreciation Right which has been outstanding for less than six months shall be settled solely in stock. (b) For purposes of paragraph (a) of this Section 13, a "Change of Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or a Subsidiary or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company required to be described pursuant to the requirements of 6(e) of Schedule 14A of Regulation 14A of the Commission under the Exchange Act; (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board cease, for any reason other than death, to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or (iv) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise. A-11 (c) For purposes of paragraph (a) of this Section 13, a "Potential Change of Control" means the happening of any of the following: (i) the entering into an agreement by the Company, the consummation of which would result in a Change of Control of the Company as defined in paragraph (b) of this Section 13; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change of Control of the Company has occurred for purposes of this Plan. (d) For purposes of this Section 13, "Change of Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Tape, or paid or offered in any transaction related to a potential or actual Change of Control of the Company at any time during the preceding sixty day period as determined by the Committee, except that (i) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cashout such options, and (ii) in the case of Director Stock Options, the sixty day period shall be the period immediately prior to the Change of Control. SECTION 14. GENERAL PROVISIONS. (a) All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee or director of the Company, any Subsidiary or any Affiliate, any right to continued employment (or, in the case of a director, continued retention as a director) with the Company, a Subsidiary or an Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company, a Subsidiary or an Affiliate to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which the value of an award first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements. The Committee may permit or require, in its sole discretion, participants to elect to satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all awards other than Stock Options which have related Stock Appreciation Rights by the reduction, in an amount necessary to pay all said withholding tax obligations, of the number of shares of Stock or amount of cash otherwise issuable or payable to said participants in respect of an award. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a participant from any payment of any kind otherwise due to said participant. (d) At the time of grant or purchase, the Committee may provide in connection with any grant or purchase made under this Plan that the shares of Stock received as a result of such grant or purchase shall be subject to a right of first refusal, pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to the provisions of Section 13 hereof and to such other terms and conditions as the Committee may specify at the time of grant. A-12 (e) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. SECTION 15. EFFECTIVE DATE OF PLAN. The Plan shall be effective on the date it is approved by a majority vote of the Company's stockholders. The Plan, as amended and restated as of March 4, 1997, shall be effective on the date it is approved by the Company's stockholders at the 1997 annual meeting of stockholders. SECTION 16. TERM OF PLAN. No Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock award or Deferred Stock award shall be granted pursuant to the Plan on or after April 28, 2004, but awards theretofore granted may extend beyond that date. A-13 EX-10.(T) 3 CREDIT AGREEMENTS EXECUTION COPY [364 Day] $200,000,000 CREDIT AGREEMENT Dated as of October 24, 1996 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..................................................................... 12 2.1. The Facility..................................................................... 12 2.1.1. Description of Facility.................................................. 12 2.1.2. Facility Amount.......................................................... 12 2.1.3. Availability of Facility................................................. 12 2.2. Ratable Advances................................................................. 13 2.2.1. Ratable Advances......................................................... 13 2.2.2. Ratable Advance Rate Options............................................. 13 2.2.3. Method of Selecting Types and Interest Periods for Ratable Advances...... 13 2.2.4. Conversion and Continuation of Outstanding Ratable Advances.............. 13 2.3. Competitive Bid Advances......................................................... 14 2.3.1. Competitive Bid Option................................................... 14 2.3.2. Competitive Bid Quote Request............................................ 14 2.3.3. Invitation for Competitive Bid Quotes.................................... 15 2.3.4. Submission and Contents of Competitive Bid Quotes........................ 15 2.3.5. Notice to Borrower....................................................... 16 2.3.6. Acceptance and Notice by Borrower........................................ 17 2.3.7. Allocation by Agent...................................................... 17 2.4. Availability of Funds............................................................ 17 2.5. Facility Fee; Reductions in Aggregate Commitment................................. 17 2.6. Minimum Amount of Each Advance................................................... 18 2.7. Optional Principal Payments...................................................... 18 2.8. Changes in Interest Rate, etc.................................................... 18 2.9. Rates Applicable After Default................................................... 18 2.10. Method of Payment................................................................ 18 2.11. Notes; Telephonic Notices........................................................ 19 2.12. Interest Payment Dates; Interest and Fee Basis................................... 19 2.13. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.. 19 2.14. Lending Installations............................................................ 20 2.15. Non-Receipt of Funds by the Agent................................................ 20 2.16. Withholding Tax Exemption........................................................ 20 2.17. Extension of Termination Date.................................................... 20 ARTICLE III CHANGE IN CIRCUMSTANCES.......................................................... 21 3.1. Yield Protection................................................................. 21 3.2. Changes in Capital Adequacy Regulations.......................................... 22 3.3. Availability of Types of Advances................................................ 22 3.4. Funding Indemnification.......................................................... 22
(i) 3.5. Lender Statements; Survival of Indemnity........................................ 22 3.6. Right to Substitute Lender...................................................... 23 ARTICLE IV CONDITIONS PRECEDENT............................................................ 23 4.1. Initial Advance................................................................. 23 4.2. Each Advance.................................................................... 24 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................. 24 5.1. Corporate Existence and Standing................................................ 24 5.2. Authorization and Validity...................................................... 25 5.3. No Conflict; Government Consent................................................. 25 5.4. Financial Statements............................................................ 25 5.5. Material Adverse Change......................................................... 25 5.6. Taxes........................................................................... 25 5.7. Litigation and Contingent Obligations........................................... 26 5.8. Subsidiaries.................................................................... 26 5.9. ERISA........................................................................... 26 5.10. Accuracy of Information......................................................... 26 5.11. Regulation U.................................................................... 26 5.12. Material Agreements............................................................. 26 5.13. Compliance With Laws............................................................ 27 5.14. Ownership of Properties......................................................... 27 5.15. Investment Company Act.......................................................... 27 5.16. Public Utility Holding Company Act.............................................. 27 5.17. Insurance Licenses.............................................................. 27 ARTICLE VI COVENANTS....................................................................... 27 6.1. Financial Reporting............................................................. 28 6.2. Use of Proceeds................................................................. 29 6.3. Certain Notices................................................................. 29 6.4. Conduct of Business............................................................. 30 6.5. Taxes........................................................................... 30 6.6. Insurance....................................................................... 30 6.7. Compliance with Laws............................................................ 30 6.8. Maintenance of Properties....................................................... 30 6.9. Inspection...................................................................... 30 6.10. Merger.......................................................................... 31 6.11. Sale of Assets.................................................................. 31 6.12. Sale and Leaseback.............................................................. 31 6.13. Investments and Acquisitions.................................................... 31 6.14. Liens........................................................................... 31 6.15. Consolidated Net Worth.......................................................... 31 6.16. Ratio of Consolidated Indebtedness to Consolidated Capitalization............... 31 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest Expense...... 31 6.18. Affiliates...................................................................... 31
(ii) ARTICLE VII DEFAULTS........................................................................ 32 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES.................................. 34 8.1. Acceleration.................................................................... 34 8.2. Amendments...................................................................... 34 8.3. Preservation of Rights.......................................................... 35 ARTICLE IX GENERAL PROVISIONS.............................................................. 35 9.1. Survival of Representations..................................................... 35 9.2. Governmental Regulation......................................................... 35 9.3. Taxes........................................................................... 35 9.4. Headings........................................................................ 35 9.5. Entire Agreement................................................................ 35 9.6. Several Obligations; Benefits of this Agreement................................. 35 9.7. Expenses; Indemnification....................................................... 36 9.8. Numbers of Documents............................................................ 36 9.9. Accounting...................................................................... 36 9.10. Severability of Provisions...................................................... 36 9.11. Nonliability of Lenders......................................................... 36 9.12. CHOICE OF LAW................................................................... 37 9.13. CONSENT TO JURISDICTION......................................................... 37 9.14. Confidentiality................................................................. 37 9.15. Nonreliance..................................................................... 37 9.16. WAIVER OF JURY TRIAL............................................................ 37 9.17. Disclosure...................................................................... 38 ARTICLE X THE AGENT....................................................................... 38 10.1. Appointment..................................................................... 38 10.2. Powers.......................................................................... 38 10.3. General Immunity................................................................ 38 10.4. No Responsibility for Loans, Recitals, etc...................................... 38 10.5. Action on Instructions of Lenders............................................... 38 10.6. Employment of Agents and Counsel................................................ 39 10.7. Reliance on Documents; Counsel.................................................. 39 10.8. Agent's Reimbursement and Indemnification....................................... 39 10.9. Notice of Default............................................................... 39 10.10. Rights as a Lender.............................................................. 39 10.11. Lender Credit Decision.......................................................... 40 10.12. Successor Agent................................................................. 40 10.13. Agent's Fee..................................................................... 40 ARTICLE XI SETOFF; RATABLE PAYMENTS........................................................ 40 11.1. Setoff.......................................................................... 41 11.2. Ratable Payments................................................................ 41
(iii) ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS............................... 41 12.1. Successors and Assigns.......................................................... 41 12.2. Participations.................................................................. 41 12.2.1. Permitted Participants; Effect......................................... 41 12.2.2. Voting Rights.......................................................... 42 12.2.3. Benefit of Setoff...................................................... 42 12.3. Assignments..................................................................... 42 12.3.1. Permitted Assignments.................................................. 42 12.3.2. Effect; Effective Date................................................. 42 12.4. Dissemination of Information.................................................... 43 12.5. Tax Treatment................................................................... 43 ARTICLE XIII NOTICES......................................................................... 43 13.1. Giving Notice................................................................... 43 13.2. Change of Address............................................................... 43 ARTICLE XIV COUNTERPARTS.................................................................... 43
(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" - Insurance Licenses Schedule "3" - Pricing Grid (v) CREDIT AGREEMENT This Agreement, dated as of October 24, 1996, 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 those 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 recommended by the NAIC to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Eurodollar Margin" means, at any time, the percentage determined in accordance with the Pricing Grid at such time. The Applicable Eurodollar Margin shall change as and when the Borrower Debt Rating changes. The initial Applicable Eurodollar Margin shall be .165%. "Applicable Facility Fee Percentage" means, at any time, the percentage determined in accordance with the Pricing Grid at such time. The Applicable Facility Fee Percentage shall change as and when the Borrower Debt Rating changes. The initial Applicable Facility Fee Percentage shall be .06%. "Article" means an article of this Agreement unless another document is specifically referenced. Page 2 "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 a rating agency identified on the Pricing Grid. "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 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 October 24, 1996. "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. Page 3 "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. "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 4 "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. "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 Auction" means a solicitation of Competitive Bid Quotes setting forth Eurodollar Bid Rates pursuant to Section 2.3. "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 Ratable Loan (or in the case of a Eurodollar Bid Rate Page 5 Advance, in an amount comparable to the amount of such Advance) 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 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 364 Day Credit Agreement dated as of December 6, 1994 among the Borrower, First Chicago, as agent, and the lenders party thereto, as amended and (ii) that certain 5 Year Credit Agreement dated as of December 6, 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 Page 6 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. "Financial Statements" is defined in Section 5.4. "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, 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. Page 7 "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), security interest, 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). "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, certificates 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. Page 8 "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 dated October 11, 1994, issued by the Borrower for the benefit of the holders of the Series A Preferred Securities, without giving effect to any amendments thereto. "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. "Pricing Grid" means the pricing grid attached hereto as Schedule "3". "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. Page 9 "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. "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 has 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 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, 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," 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 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. Page 10 "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 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, limited liability company 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. "Termination Date" means (i) October 23, 1997, 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. "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. Page 11 "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, limited liability company 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 hereby establish in ----------------------- favor of 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) exclusive of Competitive Bid Advances being repaid substantially contemporaneously with the making of any such Ratable Loans; 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) at any time exceed the Aggregate Commitment. 2.1.3. Availability of Facility. Subject to the terms hereof, such ------------------------ 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 Advances 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. Page 12 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. The Borrower's obligation to pay the principal of, and interest on, the Ratable Advances shall be evidenced by the Ratable Notes. Although the Ratable Notes shall be dated the Closing Date, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding and, although the stated amount of each Ratable Note shall be equal to the applicable Lender's Commitment, each Ratable Note shall be enforceable, with respect to the Borrower's obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the Ratable Loans at the time evidenced thereby. 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 such 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 Page 13 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: (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. The Borrower's obligation to pay the principal of, and interest on, the Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. Although the Competitive Bid Notes shall be dated the Closing Date, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding. 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: Page 14 (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). 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 15 (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 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. Page 16 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 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) on each --------------------- Borrowing Date, each Lender (or in the case of a Competitive Bid Advance, each Lender making a portion of such Advance) 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 in arrears 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 $25,000,000, 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 Page 17 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 $5,000,000 (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 $5,000,000 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 or Absolute Rate 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 Alternate Base Rate 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 Eurodollar Rate or Absolute 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 Page 18 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 such 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 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 Page 19 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 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 Page 20 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 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 21 (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, 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, 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 a 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 a 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 Page 22 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 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, both certified by the appropriate governmental officer in its jurisdiction of incorporation, together with a good standing certificate issued by the Secretary of State of the jurisdiction of its incorporation and such other jurisdictions as shall be requested by the Agent. (ii) Copies, certified by the Secretary or an Assistant Secretary of the Borrower, of its by-laws and Board of Directors' resolutions 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. Page 23 (iv) A certificate, signed by the Chief Financial Officer or the Treasurer of the Borrower, stating that on the date hereof (a) no Default or Unmatured Default has occurred and is continuing and (b) each of the representations and warranties set forth in Article V of this Agreement is true and correct as of such date. (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. (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. Page 24 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. 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, 1995 audited consolidated -------------------- financial statements of the Borrower and its Subsidiaries and the June 30, 1996 unaudited consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders (the "Financial Statements") 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 December 31, 1995, 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, 1989. No tax liens have been filed and no claims against the Borrower or its Subsidiaries are being asserted with respect to any such taxes except claims being contested in good faith and as to which, in the good faith judgment of the Borrower, adequate reserves have been provided. 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. Page 25 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). As of the date hereof, the Borrower has no material Contingent Obligations not provided for or disclosed in the Financial Statements. 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. 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. Page 26 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 for Liens permitted by Section ----------------------- 6.14, on the date of this Agreement, the Borrower and its Subsidiaries 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 permitted by this Agreement, except for assets sold, transferred or otherwise disposed of in the ordinary course of business since the date of such Financial Statements. 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", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.17. Insurance Licenses. Schedule "2" attached hereto (as said Schedule ------------------ "2" 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 best knowledge no such suspension or revocation has been threatened by any Governmental Authority. Schedule "2" 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 "2". ARTICLE VI COVENANTS --------- During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: Page 27 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 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, Chief Accounting Officer or Treasurer. (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 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. Page 28 (vii) Within 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 accountants 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 Form A and any annual update of Form 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 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 Page 29 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. 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 Page 30 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. The Borrower will not make, and will ---------------------------- not permit any Subsidiary to make, any Acquisitions except Permitted Acquisitions. 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 its Property other than Liens securing in the aggregate not more than $100,000,000 of Indebtedness. 6.15. Consolidated Net Worth. The Borrower will maintain at all times ---------------------- Consolidated Net Worth equal to not less than the sum of (i) $1,500,000,000 plus (ii) 25% of the Borrower's Consolidated Net Income, if positive, for each fiscal quarter ending after June 30, 1996. 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. 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, Page 31 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 any principal of any Note when due, or nonpayment of any 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. 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due 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 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. 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, Page 32 (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, (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7 or not pay, or admit in writing its inability to pay, its debts generally as they become due. 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 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 Page 33 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. 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 or forgive 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. Page 34 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. 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 August 26, 1996 and that certain fee letter agreement dated August 26, 1996, 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 Page 35 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. 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. The Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to the Borrower by the Agent or the Lenders is for the protection of the Agent and the Lenders and neither the Borrower nor any other Person is entitled to rely thereon. The Borrower agrees that neither the Agent nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, Page 36 any punitive damages in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby or the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith. 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, (ii) to legal counsel, accountants, and other professional advisors to, and Affiliates of, 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. Page 37 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. 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 Page 38 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 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 not reimbursed by the Borrower under the Loan Documents and 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 stating that such notice is a "notice of default". 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 Page 39 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 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 August 26, 1996, or as otherwise agreed from time to time. Page 40 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 2.10, 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 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 Page 41 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 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 or, if less, the entire amount of its Commitment and Loans. 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 $3,500 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 Page 42 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). 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 43 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: /s/ Michael J. Klyce ---------------------- Print Name: Michael J. Klyce ------------------ Title: Vice President and Treasurer ----------------------------- 2001 Third Avenue South Birmingham, Alabama 35233 Attention: Mr. Michael J. Klyce Telephone No.: (205) 325-2051 Telecopier No.: (205) 325-4157 $20,000,000 THE FIRST NATIONAL BANK OF CHICAGO, - ----------- Individually and as Agent By: /s/ Paul T. Schultz ------------------------------- Print Name: Paul T. Schultz ---------------- Title: Managing Director ------------------ 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 44 $13,000,000 AMSOUTH BANK OF ALABAMA - ----------- By: /s/ John M. Kettig ------------------------------- Print Name: John M. Kettig Title: Senior Vice President 1900 5th Avenue North - 7th Floor Birmingham, AL 35203 Attention: John M. Kettig Telephone No.: (205) 326-5240 Telecopier No.: (205) 801-0157 $13,000,000 BANK OF AMERICA ILLINOIS - ----------- By: /s/ Dana L. Ragiel ------------------------------- Print Name: Dana L. Ragiel Title: Vice President 231 South LaSalle Street Chicago, IL 60697 Attention: Dana L. Ragiel Telephone No.: (312) 828-6723 Telecopier No.: (312) 987-0889 Page 45 $13,000,000 BANK OF MONTREAL - ----------- By: /s/ Dan Streiff ------------------------------- Print Name: Dan Streiff Title: 115 South LaSalle Street Chicago, IL 60697 Attention: Dan Streiff Telephone No.: (312) 750-3775 Telecopier No.: (312) 750-3783 $13,000,000 THE BANK OF NEW YORK - ----------- By: /s/ Michael Barry ------------------------------- Print Name: Michael Barry Title: Assistant Treasurer One Wall Street, 17th Floor New York, NY 10286 Attention: Michael Barry Telephone No.: (212) 635-6460 Telecopier No.: (212) 809-9520 Page 46 $13,000,000 THE CHASE MANHATTAN BANK - ----------- By: /s/ J. David Parker, Jr. ------------------------------- Print Name: J. David Parker, Jr. Title: Vice President One Chase Manhattan Plaza, 4th Floor New York, NY 10081 Attention: J. David Parker, Jr. Telephone No.: (212) 552-7631 Telecopier No.: (212) 552-3651 $13,000,000 FIRST ALABAMA BANK - ----------- By: /s/ Robert Kuhn ------------------------------- Print Name: Robert Kuhn Title: Vice President 417 North 20th Street, 2nd Floor Birmingham, AL 35203 Attention: Robert Kuhn Telephone No.: (205) 326-7104 Telecopier No.: (205) 326-7739 Page 47 $13,000,000 FLEET NATIONAL BANK - ----------- By: /s/ Jeffrey Simpson ------------------------------- Print Name: Jeffrey Simpson Title: Vice President 777 Main Street, MSN 250 Hartford, CT 06115 Attention: Jeffrey Simpson Telephone No.: (860) 986-5600 Telecopier No.: (860) 986-1264 $13,000,000 SOUTHTRUST BANK OF ALABAMA - ----------- By: /s/ Curtis J. Perry ------------------------------- Print Name: Curtis J. Perry Title: Vice President 420 North 20th Street Birmingham, AL 35203 Attention: Curtis J. Perry Telephone No.: (205) 254-5799 Telecopier No.: (205) 254-5022 Page 48 $10,000,000 COMPASS BANK - ----------- By: /s/ Con Holland ------------------------------- Print Name: Con Holland Title: Vice President 15 South 20th Street, 2nd Floor Birmingham, AL 35233 Attention: Con Holland Telephone No.: (205) 933-3238 Telecopier No.: (205) 933-3926 $10,000,000 UNION BANK OF SWITZERLAND, NEW YORK - ----------- BRANCH By: /s/ Robert Mendeles ------------------------------- Print Name: Robert Mendeles Title: Assistant Vice President By: ------------------------------- Print Name: Title: 299 Park Avenue New York, NY 10171 Attention: Robert Mendeles Telephone No.: (212) 821-3020 Telecopier No.: (212) 821-4540 Page 49 $8,000,000 BANQUE NATIONALE DE PARIS - ---------- By: /s/ Phil Trusdale ------------------------------- Print Name: Phil Trusdale Title: Vice President By: ------------------------------- Print Name: Title: 499 Park Avenue New York, NY 10022 Attention: Phil Trusdale Telephone No.: (212) 415-9719 Telecopier No.: (212) 415-9695 $8,000,000 BOATMEN'S NATIONAL BANK - ---------- By: /s/ Mike Helak ------------------------------- Print Name: Mike Helak Title: Senior Vice President 10th and Baltimore Kansas City, MO 64183 Attention: Mike Helak Telephone No.: (816) 691-7032 Telecopier No.: (816) 691-7426 Page 50 $8,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR - ---------- CAYMAN ISLANDS BRANCH By: ------------------------------- Print Name: Title: By: ------------------------------- Print Name: Title: 31 West 52nd Street New York, NY 10019 Attention: Telephone No.: (212) 474-8104 Telecopier No.: (212) 474-8108 $8,000,000 DRESDNER BANK AG, NEW YORK BRANCH AND - ---------- GRAND CAYMAN BRANCH By: ------------------------------- Print Name: Title: By: ------------------------------- Print Name: Title: 75 Wall Street New York, NY 10005-2889 Attention: Lloyd C. Stevens Telephone No.: (212) 429-2229 Telecopier No.: (212) 429-2524 Page 51 $8,000,000 MELLON BANK, N.A. - ---------- By: ------------------------------- Print Name: Robert E. Brandenstein Title: Vice President One Mellon Bank Center Pittsburgh, PA 15258 Attention: Robert E. Brandenstein Telephone No.: (412) 234-7922 Telecopier No.: (412) 234-8087 $8,000,000 THE SAKURA BANK, LIMITED - ---------- By: /s/ Hiroyasu Imanishi ------------------------------- Print Name: Hiroyasu Imanishi Title: Vice President and Senior Manager 245 Peachtree Center Ave. N.E. Atlanta, GA 30303 Attention: Charles Zimmerman Telephone No.: (404) 521-3111 Telecopier No.: (404) 521-1133 Page 52 $8,000,000 UMB BANK, N.A. - ---------- By: /s/ Jim Sangster ------------------------------- Print Name: Jim Sangster Title: Divisional Executive Vice President 1010 Grand Avenue Kansas City, MO 64103 Attention: Jim Sangster Telephone No.: (816) 860-7919 Telecopier No.: (816) 860-7143 Page 53 EXECUTION COPY [5 Year] $400,000,000 CREDIT AGREEMENT Dated as of October 24, 1996 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...................................................... 13 2.1. The Facility...................................................... 13 2.1.1. Description of Facility.................................. 13 2.1.2. Facility Amount.......................................... 13 2.1.3. Availability of Facility................................. 13 2.2. Ratable Advances.................................................. 14 2.2.1. Ratable Advances......................................... 14 2.2.2. Ratable Advance Rate Options............................. 14 2.2.3. Method of Selecting Types and Interest Periods for Ratable Advances......................................... 14 2.2.4. Conversion and Continuation of Outstanding Ratable Advances................................................. 15 2.3. Competitive Bid Advances.......................................... 15 2.3.1. Competitive Bid Option................................... 15 2.3.2. Competitive Bid Quote Request............................ 16 2.3.3. Invitation for Competitive Bid Quotes.................... 16 2.3.4. Submission and Contents of Competitive Bid Quotes........ 16 2.3.5. Notice to Borrower....................................... 18 2.3.6. Acceptance and Notice by Borrower........................ 18 2.3.7. Allocation by Agent...................................... 18 2.4. Availability of Funds............................................. 19 2.5. Facility Fee; Reductions in Aggregate Commitment.................. 19 2.6. Minimum Amount of Each Advance.................................... 19 2.7. Optional Principal Payments....................................... 19 2.8. Changes in Interest Rate, etc..................................... 19 2.9. Rates Applicable After Default.................................... 20 2.10. Method of Payment................................................. 20 2.11. Notes; Telephonic Notices......................................... 20 2.12. Interest Payment Dates; Interest and Fee Basis.................... 21 2.13. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions............................................. 21 2.14. Lending Installations............................................. 21 2.15. Non-Receipt of Funds by the Agent................................. 21 2.16. Withholding Tax Exemption......................................... 22 ARTICLE III CHANGE IN CIRCUMSTANCES........................................... 22 3.1. Yield Protection.................................................. 22 3.2. Changes in Capital Adequacy Regulations........................... 23 (i)
3.3. Availability of Types of Advances................................. 23 3.4. Funding Indemnification........................................... 23 3.5. Lender Statements; Survival of Indemnity.......................... 24 3.6. Right to Substitute Lender........................................ 24 ARTICLE IV CONDITIONS PRECEDENT.............................................. 25 4.1. Initial Advance................................................... 25 4.2. Each Advance...................................................... 26 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................... 26 5.1. Corporate Existence and Standing.................................. 26 5.2. Authorization and Validity........................................ 26 5.3. No Conflict; Government Consent................................... 26 5.4. Financial Statements.............................................. 27 5.5. Material Adverse Change........................................... 27 5.6. Taxes............................................................. 27 5.7. Litigation and Contingent Obligations............................. 27 5.8. Subsidiaries...................................................... 28 5.9. ERISA............................................................. 28 5.10. Accuracy of Information........................................... 28 5.11. Regulation U...................................................... 28 5.12. Material Agreements............................................... 28 5.13. Compliance With Laws.............................................. 28 5.14. Ownership of Properties........................................... 29 5.15. Investment Company Act............................................ 29 5.16. Public Utility Holding Company Act................................ 29 5.17. Insurance Licenses................................................ 29 ARTICLE VI COVENANTS......................................................... 29 6.1. Financial Reporting............................................... 29 6.2. Use of Proceeds................................................... 31 6.3. Certain Notices................................................... 31 6.4. Conduct of Business............................................... 32 6.5. Taxes............................................................. 32 6.6. Insurance......................................................... 32 6.7. Compliance with Laws.............................................. 32 6.8. Maintenance of Properties......................................... 32 6.9. Inspection........................................................ 33 6.10. Merger............................................................ 33 6.11. Sale of Assets.................................................... 33 6.12. Sale and Leaseback................................................ 33 6.13. Investments and Acquisitions...................................... 33 6.14. Liens............................................................. 33 6.15. Consolidated Net Worth............................................ 33 (ii)
6.16. Ratio of Consolidated Indebtedness to............................ 33 Consolidated Capitalization 6.17. Ratio of Consolidated Adjusted Net Income to Consolidated Interest Expense.................................... 33 6.18. Affiliates....................................................... 34 ARTICLE VII DEFAULTS......................................................... 34 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES................... 36 8.1. Acceleration..................................................... 36 8.2. Amendments....................................................... 37 8.3. Preservation of Rights........................................... 37 ARTICLE IX GENERAL PROVISIONS............................................... 37 9.1. Survival of Representations...................................... 37 9.2. Governmental Regulation.......................................... 38 9.3. Taxes............................................................ 38 9.4. Headings......................................................... 38 9.5. Entire Agreement................................................. 38 9.6. Several Obligations; Benefits of this Agreement.................. 38 9.7. Expenses; Indemnification........................................ 38 9.8. Numbers of Documents............................................. 39 9.9. Accounting....................................................... 39 9.10. Severability of Provisions....................................... 39 9.11. Nonliability of Lenders.......................................... 39 9.12. CHOICE OF LAW.................................................... 39 9.13. CONSENT TO JURISDICTION.......................................... 39 9.14. Confidentiality.................................................. 40 9.15. Nonreliance...................................................... 40 9.16. WAIVER OF JURY TRIAL............................................. 40 9.17. Disclosure....................................................... 40 ARTICLE X THE AGENT........................................................ 41 10.1. Appointment...................................................... 41 10.2. Powers........................................................... 41 10.3. General Immunity................................................. 41 10.4. No Responsibility for Loans, Recitals, etc....................... 41 10.5. Action on Instructions of Lenders................................ 41 10.6. Employment of Agents and Counsel................................. 42 10.7. Reliance on Documents; Counsel................................... 42 10.8. Agent's Reimbursement and Indemnification........................ 42 10.9. Notice of Default................................................ 42 10.10. Rights as a Lender............................................... 42 10.11. Lender Credit Decision........................................... 43 10.12. Successor Agent.................................................. 43 (iii)
10.13. Agent's Fee...................................................... 43 ARTICLE XI SETOFF; RATABLE PAYMENTS......................................... 44 11.1. Setoff........................................................... 44 11.2. Ratable Payments................................................. 44 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS................ 44 12.1. Successors and Assigns........................................... 44 12.2. Participations................................................... 44 12.2.1. Permitted Participants; Effect......................... 45 12.2.2. Voting Rights.......................................... 45 12.2.3. Benefit of Setoff...................................... 45 12.3. Assignments...................................................... 45 12.3.1. Permitted Assignments.................................. 45 12.3.2. Effect; Effective Date................................. 46 12.4. Dissemination of Information..................................... 46 12.5. Tax Treatment.................................................... 46 ARTICLE XIII NOTICES.......................................................... 46 13.1. Giving Notice.................................................... 46 13.2. Change of Address................................................ 47 ARTICLE XIV COUNTERPARTS..................................................... 47
(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" - Insurance Licenses Schedule "3" - Pricing Grid (v) CREDIT AGREEMENT This Agreement, dated as of October 24, 1996, 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 those 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 recommended by the NAIC to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Eurodollar Margin" means, at any time, the percentage determined in accordance with the Pricing Grid at such time. The Applicable Eurodollar Margin shall change as and when the Borrower Debt Rating changes. The initial Applicable Eurodollar Margin shall be .145%. Page 2 "Applicable Facility Fee Percentage" means, at any time, the percentage determined in accordance with the Pricing Grid at such time. 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 a rating agency identified on the Pricing Grid. "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 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. Page 3 "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 October 24, 1996. "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. "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. Page 4 "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' 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/Continua tion 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 Page 5 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. "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 Auction" means a solicitation of Competitive Bid Quotes setting forth Eurodollar Bid Rates pursuant to Section 2.3. "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 Ratable Loan (or in the case of a Eurodollar Bid Rate Advance, in an amount comparable to the amount of such Advance) 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. Page 6 "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 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 364 Day Credit Agreement dated as of December 6, 1994 among the Borrower, First Chicago, as agent, and the lenders party thereto, as amended and (ii) that certain 5 Year Credit Agreement dated as of December 6, 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. "Financial Statements" is defined in Section 5.4. "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. Page 7 "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, 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), security interest, 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 Page 8 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, certificates 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. Page 9 "Payment and Guarantee Agreement" means the Payment and Guarantee Agreement dated October 11, 1994, issued by the Borrower for the benefit of the holders of the Series A Preferred Securities, without giving effect to any amendments thereto. "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. "Pricing Grid" means the pricing grid attached hereto as Schedule "3". "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. "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. Page 10 "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 has 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 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, 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," 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 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. Page 11 "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 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, limited liability company 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. "Termination Date" means (i) October 24, 2001, 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. "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. Page 12 "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, limited liability company 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 hereby establish in ----------------------- favor of 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) exclusive of Competitive Bid Advances being repaid substantially contemporaneously with the making of any such Ratable Loans; 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) at any time exceed the Aggregate Commitment. 2.1.3. Availability of Facility. Subject to the terms hereof, such ------------------------ facility is available from the date hereof to the Termination Date. Subject to the terms of this Agreement, the Borrower Page 13 may borrow, repay and reborrow Advances 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. The Borrower's obligation to pay the principal of, and interest on, the Ratable Advances shall be evidenced by the Ratable Notes. Although the Ratable Notes shall be dated the Closing Date, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding and, although the stated amount of each Ratable Note shall be equal to the applicable Lender's Commitment, each Ratable Note shall be enforceable, with respect to the Borrower's obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the Ratable Loans at the time evidenced thereby. 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 such 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; Page 14 (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: (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. The Borrower's obligation to pay the principal of, and interest on, the Competitive Bid Advances shall be evidenced Page 15 by the Competitive Bid Notes. Although the Competitive Bid Notes shall be dated the Closing Date, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding. 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). 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 Page 16 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: (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; Page 17 (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 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 Page 18 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) on --------------------- each Borrowing Date, each Lender (or in the case of a Competitive Bid Advance, each Lender making a portion of such Advance) 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 in arrears 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 $25,000,000, 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 $5,000,000 (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 $5,000,000 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 or Absolute Rate 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 Alternate Base Rate 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 Page 19 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 Eurodollar Rate or Absolute 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 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 Page 20 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 such 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 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 Page 21 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 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 Page 22 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 (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, 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, 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 a 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 a Eurodollar Advance is not made on the date specified Page 23 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 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. Page 24 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,both certified by the appropriate governmental officer in its jurisdiction of incorporation, together with a good standing certificate issued by the Secretary of State of the jurisdiction of its incorporation and such other jurisdictions as shall be requested by the Agent. (ii) Copies, certified by the Secretary or an Assistant Secretary of the Borrower, of its by-laws and Board of Directors' resolutions 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 date hereof (a) no Default or Unmatured Default has occurred and is continuing and (b) each of the representations and warranties set forth in Article V of this Agreement is true and correct as of such date. (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. (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. Page 25 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. 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 Page 26 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, 1995 audited -------------------- consolidated financial statements of the Borrower and its Subsidiaries and the June 30, 1996 unaudited consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders (the "Financial Statements") 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 December 31, 1995, 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, 1989. No tax liens have been filed and no claims against the Borrower or its Subsidiaries are being asserted with respect to any such taxes except claims being contested in good faith and as to which, in the good faith judgment of the Borrower, adequate reserves have been provided. 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). As of the date hereof, the Borrower has no material Contingent Obligations not provided for or disclosed in the Financial Statements. 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 Page 27 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. 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 Page 28 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 for Liens permitted by Section ----------------------- 6.14, on the date of this Agreement, the Borrower and its Subsidiaries 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 permitted by this Agreement, except for assets sold, transferred or otherwise disposed of in the ordinary course of business since the date of such Financial Statements. 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", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.17. Insurance Licenses. Schedule "2" attached hereto (as said ------------------ Schedule "2" 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 best knowledge no such suspension or revocation has been threatened by any Governmental Authority. Schedule "2" 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 "2". 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 Page 29 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 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, Chief Accounting Officer or Treasurer. (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 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) Within 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 Page 30 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 accountants 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 Form A and any annual update of Form 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 Page 31 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. 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 Page 32 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. The Borrower will not make, and ---------------------------- will not permit any Subsidiary to make, any Acquisitions except Permitted Acquisitions. 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 its Property other than Liens securing in the aggregate not more than $100,000,000 of Indebtedness. 6.15. Consolidated Net Worth. The Borrower will maintain at all ---------------------- times Consolidated Net Worth equal to not less than the sum of (i) $1,500,000,000 plus (ii) 25% of the Borrower's Consolidated Net Income, if positive, for each fiscal quarter ending after June 30, 1996. 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 Page 33 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 any principal of any Note when due, or nonpayment of any 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. 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due any Indebtedness in excess of, singly or in the aggregate for all such Subsidiaries, $10,000,000; or the Page 34 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 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. 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, (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7 or not pay, or admit in writing its inability to pay, its debts generally as they become due. 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 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. Page 35 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. 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. Page 36 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 or forgive 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. 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. Page 37 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 August 26, 1996 and that certain fee letter agreement dated August 26, 1996, 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 Page 38 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. 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. The Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to the Borrower by the Agent or the Lenders is for the protection of the Agent and the Lenders and neither the Borrower nor any other Person is entitled to rely thereon. The Borrower agrees that neither the Agent nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any punitive damages in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby or the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith. 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 Page 39 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, (ii) to legal counsel, accountants, and other professional advisors to, and Affiliates of, 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. Page 40 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. 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 Page 41 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 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 not reimbursed by the Borrower under the Loan Documents and 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 stating that such notice is a "notice of default". 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 Page 42 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 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 August 26, 1996, or as otherwise agreed from time to time. Page 43 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 2.10, 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 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. -------------- Page 44 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 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 or, if less, the entire amount of its Commitment and Loans. 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. Page 45 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 $3,500 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. 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 46 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 47 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: /s/ Michael J. Klyce -------------------------------- Print Name: Michael J. Klyce Title: Vice President and Treasurer 2001 Third Avenue South Birmingham, Alabama 35233 Attention: Mr. Michael J. Klyce Telephone No.: (205) 325-2051 Telecopier No.: (205) 325-4157 $40,000,000 THE FIRST NATIONAL BANK OF CHICAGO, - ----------- Individually and as Agent By: /s/ Paul T. Schultz ---------------------------------- Print Name: Paul T. Schultz Title: Managing Director 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 48 $26,000,000 AMSOUTH BANK OF ALABAMA - ----------- By: /s/ John M. Kettig ------------------------------ Print Name: John M. Kettig Title: Senior Vice President 1900 5th Avenue North - 7th Floor Birmingham, AL 35203 Attention: John M. Kettig Telephone No.: (205) 326-5240 Telecopier No.: (205) 801-0157 $26,000,000 BANK OF AMERICA ILLINOIS - ----------- By: /s/ Dana L. Ragiel ------------------------------ Print Name: Dana L. Ragiel Title: Vice President 231 South LaSalle Street Chicago, IL 60697 Attention: Dana L. Ragiel Telephone No.: (312) 828-6723 Telecopier No.: (312) 987-0889 Page 49 $26,000,000 BANK OF MONTREAL - ----------- By: /s/ Dan Streiff -------------------------- Print Name: Dan Streiff Title: 115 South LaSalle Street Chicago, IL 60697 Attention: Dan Streiff Telephone No.: (312) 750-3775 Telecopier No.: (312) 750-3783 $26,000,000 THE BANK OF NEW YORK - ----------- By: /s/ Michael Barry -------------------------- Print Name: Michael Barry Title: Assistant Treasurer One Wall Street, 17th Floor New York, NY 10286 Attention: Michael Barry Telephone No.: (212) 635-6460 Telecopier No.: (212) 809-9520 Page 50 $26,000,000 THE CHASE MANHATTAN BANK - ----------- By: /s/ J. David Parker, Jr. -------------------------- Print Name: J. David Parker, Jr. Title: Vice President One Chase Manhattan Plaza, 4th Floor New York, NY 10081 Attention: J. David Parker, Jr. Telephone No.: (212) 552-7631 Telecopier No.: (212) 552-3651 $26,000,000 FIRST ALABAMA BANK - ----------- By: /s/ Robert Kuhn -------------------------- Print Name: Robert Kuhn Title: Vice President 417 North 20th Street, 2nd Floor Birmingham, AL 35203 Attention: Robert Kuhn Telephone No.: (205) 326-7104 Telecopier No.: (205) 326-7739 Page 51 $26,000,000 FLEET NATIONAL BANK - ----------- By: /s/ Jeffrey Simpson -------------------------- Print Name: Jeffrey Simpson Title: Vice President 777 Main Street, MSN 250 Hartford, CT 06115 Attention: Jeffrey Simpson Telephone No.: (860) 986-5600 Telecopier No.: (860) 986-1264 $26,000,000 SOUTHTRUST BANK OF ALABAMA - ----------- By: /s/ Curtis J. Perry -------------------------- Print Name: Curtis J. Perry Title: Vice President 420 North 20th Street Birmingham, AL 35203 Attention: Curtis J. Perry Telephone No.: (205) 254-5799 Telecopier No.: (205) 254-5022 Page 52 $20,000,000 COMPASS BANK - ----------- By: /s/ Con Holland -------------------------- Print Name: Con Holland Title: Vice President 15 South 20th Street, 2nd Floor Birmingham, AL 35233 Attention: Con Holland Telephone No.: (205) 933-3238 Telecopier No.: (205) 933-3926 $20,000,000 UNION BANK OF SWITZERLAND, NEW YORK - ----------- BRANCH By: /s/ Robert Mendeles -------------------------- Print Name: Robert Mendeles Title: Assistant Vice President By: -------------------------- Print Name: Title: 299 Park Avenue New York, NY 10171 Attention: Robert Mendeles Telephone No.: (212) 821-3020 Telecopier No.: (212) 821-4540 Page 53 $16,000,000 BANQUE NATIONALE DE PARIS - ----------- By: /s/ Phil Trusdale -------------------------- Print Name: Phil Trusdale Title: Vice President By: -------------------------- Print Name: Title: 499 Park Avenue New York, NY 10022 Attention: Phil Trusdale Telephone No.: (212) 415-9719 Telecopier No.: (212) 415-9695 $16,000,000 BOATMEN'S NATIONAL BANK - ----------- By: /s/ Mike Helak -------------------------- Print Name: Mike Helak Title: Senior Vice President 10th and Baltimore Kansas City, MO 64183 Attention: Mike Helak Telephone No.: (816) 691-7032 Telecopier No.: (816) 691-7426 Page 54 $16,000,000 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR - ----------- CAYMAN ISLANDS BRANCH By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: 31 West 52nd Street New York, NY 10019 Attention: Telephone No.: (212) 474-8104 Telecopier No.: (212) 474-8108 $16,000,000 DRESDNER BANK AG, NEW YORK BRANCH AND - ----------- GRAND CAYMAN BRANCH By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: 75 Wall Street New York, NY 10005-2889 Attention: Lloyd C. Stevens Telephone No.: (212) 429-2229 Telecopier No.: (212) 429-2524 Page 55 $16,000,000 MELLON BANK, N.A. - ----------- By: /s/ Robert E. Brandenstein -------------------------- Print Name: Robert E. Brandenstein ----------------------- Title: Vice President --------------- One Mellon Bank Center Pittsburgh, PA 15258 Attention: Robert E. Brandenstein Telephone No.: (412) 234-7922 Telecopier No.: (412) 234-8087 $16,000,000 THE SAKURA BANK, LIMITED - ----------- By: /s/ Hiroyasu Imanishi -------------------------- Print Name: Hiroyasu Imanishi Title: Vice President and Senior Manager 245 Peachtree Center Ave. N.E. Atlanta, GA 30303 Attention: Charles Zimmerman Telephone No.: (404) 521-3111 Telecopier No.: (404) 521-1133 Page 56 $16,000,000 UMB BANK, N.A. - ----------- By: /s/ Jim Sangster -------------------------- Print Name: Jim Sangster Title: Divisional Executive Vice President 1010 Grand Avenue Kansas City, MO 64103 Attention: Jim Sangster Telephone No.: (816) 860-7919 Telecopier No.: (816) 860-7143 Page 57 EX-10.(W) 4 1996 NON-EMPLOYEE DIRECTORS STOCK PLAN EXHIBIT 2 TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN ARTICLE 1 PURPOSE OF THE PLAN Section 1.1. Purpose. The purpose of the Torchmark Corporation 1996 Non- Employee Director Stock Option Plan is to attract and retain highly qualified and capable Non-Employee Directors and to promote the long-term growth of Torchmark Corporation by providing a vehicle for Non-Employee Directors to increase their proprietary interest in Torchmark Corporation. The Plan will be effective for Annual Compensation payable in 1997 or thereafter. ARTICLE 2 DEFINITIONS Section 2.1. Unless the context clearly indicates otherwise, the following terms shall have the following meanings: "Acquisition" has the meaning assigned such term in Section 9.3 hereof. "Acquisition Consideration" has the meaning assigned such term in Section 9.3 hereof. "Annual Compensation" means the annual cash retainer and meeting fees payable by the Company to a Non-Employee Director for services as a director (and, if applicable, as the member or chairman of a committee of the Board) of the Company, as such amount may be changed from time to time. For purposes of an election to receive Options under the Plan in lieu of Annual Compensation, meeting fees will be deemed to be earned at the beginning of the year for all scheduled meetings during the year, whether or not the Optionee later attends such meetings. "Beneficiary" means any person or persons designated by a Participant, in accordance with procedures established by the Committee or Plan Administrator, to receive benefits hereunder in the event of the Participant's death. If any Participant shall fail to designate a Beneficiary or shall designate a Beneficiary who shall fail to survive the Participant, the Beneficiary shall be the Participant's surviving spouse, or, if none, the Participant's surviving descendants (who shall take per stirpes) and if there are no surviving descendants, the Beneficiary shall be the Participant's estate. "Board" means the Board of Directors of the Company. "Business Day" means a day on which the New York Stock Exchange or any national securities exchange or over-the-counter market on which the Shares are traded is open for business. "Change in Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a subsidiary thereof or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company that is required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Exchange Act; B-1 (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board, cease for any reason other than death to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or (iv) the occurrence of a transaction requiring stockholder approval for the acquistion of the Company by an entity other than the Company or a subsidiary thereof through the purchase of assets, by merger, or otherwise. "Committee" means the Compensation Committee of the Board. "Company" means Torchmark Corporation, a Delaware corporation. "Disability" means total and permanent disability as determined under the Company's long term disability program, whether or not the Optionee is covered under such program. If no such program is in effect, the Disability of a Participant shall be determined in good faith by the Board (excluding the Participant). "Election Date" means the date established by the Plan as the date by which a Participant must submit a valid Primary Election Form to the Plan Administrator in order to participate in the Plan for a calendar year. For each calendar year, the Election Date is December 31 of the preceding calendar year; provided, however, that the Election Date for a newly eligible Participant shall be the 30th day following the date on which such individual becomes a Non-Employee Director. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means, as of any given date, the closing price of the Stock on such date on the New York Stock Exchange Composite Tape. "Interest Account" means the account established by the Company for each Participant for Annual Compensation deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by the Plan Administrator). The maintenance of individual Interest Accounts is for bookkeeping purposes only. "Non-Employee Director" means a director of the Company who is not an employee of the Company or of any subsidiary (as determined by the Committee). "Option" means an option to purchase Shares awarded under Article 6. "Option Grant Date" means the date upon which an Option is granted to a Non- Employee Director pursuant to Article 6. "Optionee" means a Non-Employee Director of the Company to whom an Option has been granted or, in the event of such Non-Employee Director's death prior to the expiration of an Option, such Non-Employee Director's Beneficiary. "Participant" means any Non-Employee Director who is participating in the Plan. "Plan" means the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan. "Plan Administrator" means the Committee or its delegee of administrative duties under the Plan pursuant to Section 3.2. B-2 "Primary Election Form" means a form, substantially in the form attached hereto as Exhibit A, pursuant to which a Non-Employee Director elects to defer Annual Compensation under the Plan. "Secondary Election Form" means a form, substantially in the form attached hereto as Exhibit B, pursuant to which a Non-Employee Director elects to convert previously deferred compensation to Options pursuant to Section 6.1 of the Plan. "Shares" means shares of the common stock of the Company. "Stock Option Award Notice" means a written award notice to a Non-Employee Director from the Company evidencing an Option. ARTICLE 3 ADMINISTRATION OF THE PLAN Section 3.1. Administrator of the Plan. The Plan shall be administered by the Committee. Section 3.2. Authority of Committee. The Committee shall have full power and authority to: (i) interpret and construe the Plan and adopt such rules and regulations as it shall deem necessary and advisable to implement and administer the Plan, and (ii) designate persons other than members of the Committee or the Board to carry out its responsibilities, subject to such limitations, restrictions and conditions as it may prescribe, such determinations to be made in accordance with the Committee's best business judgment as to the best interests of the Company and its stockholders and in accordance with the purposes of the Plan. The Committee may delegate administrative duties under the Plan to one or more agents as it shall deem necessary or advisable. Section 3.3. Effect of Committee Determinations. No member of the Committee or the Board or the Plan Administrator shall be personally liable for any action or determination made in good faith with respect to the Plan or any Option or to any settlement of any dispute between a Non-Employee Director and the Company. Any decision or action taken by the Committee or the Board with respect to an Option or the administration or interpretation of the Plan shall be conclusive and binding upon all persons. ARTICLE 4 PARTICIPATION Section 4.1. Election to Participate. Each Non-Employee Director is automatically eligible to participate in the Plan. A Non-Employee Director may participate in the Plan for a calendar year by delivering a properly completed and signed Primary Election Form to the Plan Administrator on or before the Election Date. The Non-Employee Director's participation in the Plan will be effective as of the first day of the calendar year beginning after the Plan Administrator receives the Non-Employee Director's Primary Election Form, or, in the case of a newly eligible Participant, on the first day of the calendar month beginning after the Plan Administrator receives such Non-Employee Director's Primary Election Form. A Participant shall not be entitled to any benefit hereunder unless such Participant has properly completed a Primary Election Form and deferred the receipt of his or her Annual Compensation pursuant to the Plan. Section 4.2. Irrevocable Election. A Participant may not revoke or change his or her Primary Election Form for a calendar year; provided, however, that a Participant may, by filing a Secondary Election Form with the Plan Administrator within the period provided in the Plan, subsequently elect to convert the balance in his or her Interest Account to Options in accordance with Article 6. Section 4.3. No Right to Continue as a Director. Nothing contained in the Plan shall be deemed to give any Non-Employee Director the right to be retained as a director of the Company. ARTICLE 5 PLAN BENEFITS Section 5.1. Deferred Annual Compensation. A Non-Employee Director may elect to defer up to 100% of his or her Annual Compensation (in 10% increments but not less than 50%) to his or her Interest Account B-3 and/or by conversion to Options in accordance with the terms of the Plan. For bookkeeping purposes, the amount of the Annual Compensation which a Non- Employee Director elects to defer pursuant to the Plan shall be transferred to and held in individual Interest Accounts (in annual designations) pending distribution in cash or the conversion to Options, if applicable, pursuant to Article 6. Section 5.2. Time of Election of Deferral. A Non-Employee Director who wishes to defer Annual Compensation for a calendar year must irrevocably elect to do so on or prior to the Election Date for such calendar year, by delivering a valid Primary Election Form to the Plan Administrator. The Primary Election Form shall indicate: (1) the percentage of Annual Compensation to be deferred, and (2) the form and timing of payout of deferred amounts. Section 5.3. Interest Accounts. Amounts in a Participant's Interest Account will be credited with interest as of the last day of each calendar quarter (or such other day as determined by the Plan Administrator, which, in the case of amounts converted to Options under the Plan, shall be the date of such conversion) at the rate set from time to time by the Committee to be applicable to the Interest Accounts of all Participants under the Plan. To the extent required for bookkeeping purposes, a Participant's Interest Accounts will be segregated to reflect deferred Annual Compensation on a year-by-year basis. For example, a 1997 Interest Account, a 1998 Interest Account, and so on. Within a reasonable time after the end of each calendar year, the Plan Administrator shall report in writing to each Participant the amount held in his or her Interest Accounts at the end of the year. Section 5.4. Responsibility for Investment Choices. Each Participant is solely responsible for any decision to defer Annual Compensation into his or her Interest Account or convert Annual Compensation to Options under the Plan and accepts all investment risks entailed by such decision, including the risk of loss and a decrease in the value of the amounts he or she elects to defer. Section 5.5. Form of Payment. (a) Payment Commencement Date. Payment of the balances in a Participant's Interest Accounts shall commence on the earliest to occur of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after the Participant's death, or (c) the Participant's termination as a Non-Employee Director other than by reason of death. (b) Optional Forms of Payment. Distributions from a Participant's Interest Accounts may be paid to the Participant either in a lump sum or in a number of approximately equal monthly installments designated by the Participant on his or her Primary Election Form. Such monthly installments may be for any number of months up to 120 months; provided, however, that in the event of the Participant's death during the payout period, the remaining balance shall be payable to the Participant's Beneficiary in a lump sum on the first Business Day of the fourth month after the Participant's death. If a Participant elects to receive a distribution of his or her Interest Accounts in installments, the Plan Administrator may purchase an annuity from an insurance company which annuity will pay the Participant the desired annual installments. If the Plan Administrator purchases an annuity contract, the Eligible Executive will have no further rights to receive payments from the Company or the Plan with respect to the amounts subject to the annuity. If the Plan Administrator does not purchase an annuity contract, the value of the Interest Accounts remaining unpaid shall continue to receive allocations of return as provided in Section 5.3. If the Participant fails to designate a payment method in the Participant's Primary Election Form, the Participant's Account shall be distributed in a lump sum. (c) Irrevocable Elections. A Participant may elect a different payment form for each year's Annual Compensation deferred under the Plan. The payment form elected or deemed elected on the Participant's Primary Election Form shall be irrevocable. (d) Acceleration of Payment. If a Participant elects an installment distribution and the value of such installment payment elected by the Participant would result in a distribution of less than $3,000 per year, the Plan Administrator may accelerate payment of the Participant's benefits over a lesser number of whole B-4 years so that the annual amount distributed is at least $3,000. If payment of the Participant's benefits over a five year period will not provide annual distributions of at least $3,000, the Participant's Account shall be paid in a lump sum. (e) Effect of Competition. Notwithstanding the Primary Election Form or any provision set forth herein, the entire balance of a Participant's Interest Accounts shall be paid immediately to the Participant a lump sum in the event the Participant ceases to be a Non-Employee Director and becomes a proprietor, officer, partner, employee or otherwise becomes affiliated with any business that is in competition with the Company or an affiliated company, or becomes employed by any governmental agency having jurisdiction over the activities of the Company or an affiliated company. (f) Effect of Adverse Determination. Notwithstanding the Primary Election Form or any provision set forth herein, if the Internal Revenue Service determines, for any reason, that all or any portion of the amounts credited under this Plan is currently includable in the taxable income of any Participant, then the amounts so determined to be includable in income shall be distributed in a lump sum to such Participant as soon as practicable. (g) Payment to Beneficiary. Upon the Participant's death, all unpaid amounts held in the Participant's Account shall be paid to the Participant's Beneficiary in a lump sum on the first Business Day of the fourth month following the Participant's death. Section 5.6. Financial Hardship. The Plan Administrator may, in its sole discretion, accelerate the making of payment to a Participant of an amount reasonably necessary to handle a severe financial hardship of a sudden and unexpected nature due to causes not within the control of the Participant. All financial hardship distributions shall be made in cash in a lump sum. Such payments will be made on a first-in, first-out basis so that the oldest Annual Compensation deferred under the Plan shall be deemed distributed first in a financial hardship. Section 5.7. Payment to Minors and Incapacitated Persons. In the event that any amount is payable to a minor or to any person who, in the judgment of the Plan Administrator, is incapable of making proper disposition thereof, such payment shall be made for the benefit of such minor or such person in any of the following ways as the Plan Administrator, in its sole discretion, shall determine: (a) By payment to the legal representative of such minor or such person; (b) By payment directly to such minor or such person; (c) By payment in discharge of bills incurred by or for the benefit of such minor or such person. The Plan Administrator shall make such payments without the necessary intervention of any guardian or like fiduciary, and without any obligation to require bond or to see to the further application of such payment. Any payment so made shall be in complete discharge of the Plan's obligation to the Participant and his or her Beneficiaries. Section 5.8. Application for Benefits. The Plan Administrator may require a Participant or Beneficiary to complete and file certain forms as a condition precedent to receiving the payment of benefits. The Plan Administrator may rely upon all such information given to it, including the Participant's current mailing address. It is the responsibility of all persons interested in receiving a distribution pursuant to the Plan to keep the Plan Administrator informed of their current mailing addresses. Section 5.9. Designation of Beneficiary. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his or her Beneficiary or Beneficiaries to whom the Participant's Account is to be paid if the Participant dies before receipt of all such benefits. Each Beneficiary designation shall be on the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. The revocation of a Beneficiary designation, no matter how effected, shall not require the consent of any designated Beneficiary. B-5 ARTICLE 6 ELECTIVE OPTIONS Each Non-Employee Director shall be granted Options subject to the following terms and conditions: Section 6.1. Election to Receive Options. At any time, but only one time, during the calendar year immediately following the filing of a Primary Election Form under Article 5, a Participant shall have the right to convert into Options pursuant to this Article 6 the then-current balance (as of the date of such election to receive Options) in his or her Interest Account for the calendar year to which the Primary Election Form relates. For example, if a Primary Election Form is filed in December 1996 to defer Annual Compensation to be earned in 1997, the director may elect at any time in 1997 to convert such deferred amount to Options. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form to receive Options as of the date of the election (the "Option Grant Date"). The exercise price per Share under each Option granted pursuant to this Article 6 shall, at the election of the Optionee as indicated on the Secondary Election Form, be either 100% of the Fair Market Value per Share on the Option Grant Date or a lesser percentage (but not less than 75%) of the Fair Market Value per Share on the Option Grant Date, such lesser percentage to be determined by the Committee from time to time. Such Secondary Election Form shall indicate the percentage of such Options to be granted at each Exercise Price, which choice may affect the number of Options to be received pursuant to Section 6.2. Section 6.2. Number and Terms of Options. The number of Shares subject to an Option granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where: A = the dollar amount which the Non-Employee Director has elected pursuant to Section 6.1 to convert to Options; and B = the per share value of an Option on the Option Grant Date, as determined by the Committee using an option valuation model selected by the Committee in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Option Grant Date). In determining the number of Shares subject to an Option, (i) the Committee may designate the assumptions to be used in the selected option valuation model, and (ii) any fraction of a Share will be rounded up to the next whole number of Shares. Section 6.3. Exercise of Options. Each Option shall be first exercisable, cumulatively, as to 10% commencing on the each of the first through tenth anniversaries of the Option Grant Date. An Optionee's death, Disability, retirement or other termination of directorship or failure to be reelected as a director shall not shorten the term of any outstanding Option. In no event shall the period of time over which the Option may be exercised exceed eleven years from the Option Grant Date. An Option, or portion thereof, may be exercised in whole or in part only with respect to whole Shares. Shares shall be issued to the Optionee pursuant to the exercise of an Option only upon receipt by the Company from the Optionee of payment in full in cash of the aggregate purchase price for the Shares subject to the Option or portion thereof being exercised. Section 6.4. Accelerated Vesting. Notwithstanding the normal vesting schedule set forth in Section 6.3 hereof, any and all outstanding Options shall become immediately exercisable upon the first to occur of (i) the death of the Optionee, (ii) the Disability of the Optionee, (iii) the occurrence of a Change in Control, or (iv) the unanimous determination by the Committee that a particular Option or Options shall become fully exercisable. Upon acceleration, an Option will remain exercisable for the remainder of its original term. Section 6.5. Stock Option Award Notice. Each Option granted under the Plan shall be evidenced by a Stock Option Award Notice which shall be executed by an authorized officer of the Company. Such Award Notice shall contain provisions regarding (a) the number of Shares that may be issued upon exercise of the Option, B-6 (b) the exercise price per Share of the Option and the means of payment therefor, (c) the term of the Option, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. Section 6.6. Transferability of Options. No Option shall be assignable or transferable by the Optionee other than by will or the laws of descent and distribution; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Options. ARTICLE 7 SHARES SUBJECT TO THE PLAN Section 7.1. Shares Subject to the Plan. Subject to adjustment as provided in Article 9, the aggregate number of Shares which may be acquired upon the exercise of Options shall not exceed 400,000 Shares. Shares acquired upon exercise of Options may be newly issued Shares or previously issued and reacquired Shares, and there are hereby reserved for issuance under the Plan 400,000 Shares. To the extent that Shares subject to an outstanding Option are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such Option or by reason of the delivery of Shares to pay all or a portion of the exercise price of such Option, then such Shares shall again be available under the Plan. ARTICLE 8 AMENDMENT AND TERMINATION Section 8.1. Amendment, Suspension or Early Termination. The Board may amend, suspend or terminate the Plan or any Stock Option Award Notice at any time; provided, however, that the Board may condition any amendment or modification on the approval of stockholders of the Company if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations, and no such amendment, modification or termination shall adversely affect any outstanding Options or Interest Accounts without the consent of the Participant. ARTICLE 9 ADJUSTMENT PROVISIONS Section 9.1. Change in Corporate Structure Affecting Shares. If the Company shall at any time change the number of issued Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Shares, the total number of Shares reserved for issuance under the Plan shall be appropriately adjusted and the number of Shares covered by each outstanding Option and the exercise price per Share under each outstanding Option and the number of shares underlying Options shall be adjusted so that the aggregate consideration payable to the Company and the value of each such Option shall not be changed. Section 9.2. Certain Reorganizations. Notwithstanding any other provision of the Plan, and without affecting the number of Shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding Options or provide for other equitable adjustments after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve Optionees' rights under the Plan. B-7 Section 9.3. Acquisitions. In the case of any sale of assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), any Optionee who holds an outstanding Option shall have the right (subject to the provisions of the Plan and any limitation applicable to the Option) thereafter and during the term of the Option, to receive upon exercise thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Shares which would have been obtained upon exercise of the Option or portion thereof, as the case may be, immediately prior to the Acquisition. The term "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or any combination thereof receivable in respect of one Share of the Company upon consummation of an Acquisition. ARTICLE 10 MISCELLANEOUS Section 10.1. Withholding. If any Option granted under the Plan is or becomes subject to any withholding requirement, the Committee may require the Optionee to remit such withholding as a condition to exercising the Option or any portion thereof. Section 10.2. Compliance with SEC Regulations. All grants and exercises of Options under the Plan shall be executed in accordance with the requirements of Section 16 of the Exchange Act, as amended and any regulations promulgated thereunder, to the extent applicable. To the extent that any of the provisions contained herein do not conform with Rule 16b-3 of the Exchange Act or any amendments thereto or any successor regulation, then the Committee may make such modifications so as to conform the Plan and any Options granted thereunder to the Rule's requirements. Section 10.3. Validity. In the event that any provision of the Plan or any related Stock Option Award Notice is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan or any related Stock Option Award Notice. Section 10.4. Inurement of Rights and Obligations. The rights and obligations under the Plan and any related agreements shall inure to the benefit of, and shall be binding upon the Company, its successors and assigns, and the Non-Employee Directors and their beneficiaries. Section 10.5. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Section 10.6. Governing Law. The Plan shall be construed, governed and enforced in accordance with the law of Delaware, except as such laws are preempted by applicable federal law. B-8 EXHIBIT A PRIMARY ELECTION FORM [FOR CALENDAR YEAR 1997] ELECTION TO DEFER DIRECTOR COMPENSATION PURSUANT TO THE TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (the "Plan") with respect to the undersigned's annual cash retainer and meeting fees payable to the undersigned by Torchmark Corporation (the "Company") for services as a director (and, if applicable, as a member or chairman of a committee of the Board of Directors) of the Company during the calendar year identified above ("Next Year's Annual Compensation"). Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to defer into my Interest Account under the Plan % [INDICATE ANY PERCENTAGE FROM 50% TO 100%, IN 10% INCREMENTS] of my Next Year's Annual Compensation until the earliest of (a) December 31 of the fifth year after the year identified above, (b) the first Business Day of the fourth month after my death, or (c) my termination as a director of the Company for any reason other than my death (the "Payment Date"); subject to, however, my ability under the Plan to make a one-time election at any time during the calendar year identified above, to be effective on the date such subsequent election is received by the Plan administrator, to convert the balance on such date in my Interest Account for such year to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. Any amount remaining in my Interest Account on the Payment Date will be paid to me or my Beneficiary [PLEASE CHECK ONE BOX] [_] in cash in a lump sum on the Payment Date, or [_] in approximately equal installments over months [UP TO 120 MONTHS] beginning on the Payment Date; provided, however, that in the event of my death during such payout period, the remaining balance shall be payable to my Beneficiary in a lump sum on the first Business Day of the fourth month after my death. Executed this day of December, 1996. --------------------------------------- (Name) B-9 EXHIBIT B SECONDARY ELECTION FORM [FOR CALENDAR YEAR 1997] ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (the "Plan") with respect to the conversion to Options of the balance in the undersigned's Interest Account under the Plan for the year identified above. Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to convert, as of the date hereof, the balance in my Interest Account under the Plan for the year identified above to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]: % of such Options will be granted at an exercise price of % of the Fair Market Value of the Company's common stock on the date of grant, and % of such Options will be granted at an exercise price of 100% of the Fair Market Value of the Company's common stock on the date of grant. Executed this day of , 1997. --------------------------------------- (Name) B-10 EX-10.(X) 5 1996 EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 3 TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN ARTICLE 1. PURPOSE OF THE PLAN. Section 1.1. Purpose. The purpose of the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan is to promote the long-term growth of Torchmark Corporation by providing a vehicle for Eligible Executives to increase their proprietary interest in Torchmark Corporation and to attract and retain highly qualified and capable Eligible Executives. ARTICLE 2. DEFINITIONS. Section 2.1. Unless the context clearly indicates otherwise, the following terms shall have the following meanings: "Acquisition" has the meaning assigned such term in Section 9.3 hereof. "Acquisition Consideration" has the meaning assigned such term in Section 9.3 hereof. "Annual Bonus" means the annual cash bonus payable by the Company to an Eligible Executive for services to the Company or any of its affiliates, as such amount may be determined from year to year. "Beneficiary" means any person or persons designated by a Participant, in accordance with procedures established by the Committee or Plan Administrator, to receive benefits hereunder in the event of the Participant's death. If any Participant shall fail to designate a Beneficiary or shall designate a Beneficiary who shall fail to survive the Participant, the Beneficiary shall be the Participant's surviving spouse, or, if none, the Participant's surviving descendants (who shall take per stirpes) and if there are no surviving descendants, the Beneficiary shall be the Participant's estate. "Board" means the Board of Directors of the Company. "Bonus Deferral Election Date" means the date established by the Plan as the date by which a Participant must submit a valid Primary Election Form for Bonus to the Plan Administrator in order to defer Annual Bonus under the Plan for a calendar year. For each calendar year, the Bonus Deferral Election Date is December 31 of the calendar year for which the Bonus is to be earned. "Business Day" shall mean a day on which the New York Stock Exchange or any national securities exchange or over-the-counter market on which the Shares are traded is open for business. "Change in Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a subsidiary thereof or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company that is required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Exchange Act; (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board, cease for any reason other than death to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or C-1 (iv) the occurrence of a transaction requiring stockholder approval for the acquistion of the Company by an entity other than the Company or a subsidiary thereof through the purchase of assets, by merger, or otherwise. "Committee" means the Compensation Committee of the Board. "Company" means Torchmark Corporation, a Delaware corporation. "Covered Employee" means an individual defined in Section 162(m)(3) of the Internal Revenue Code of 1986, as amended, with respect to the Company. "Disability" means total and permanent disability as determined under the Company's long term disability program, whether or not the Optionee is covered under such program. If no such program is in effect, the Disability of a Participant shall be determined in good faith by the Board (excluding the Participant). "Eligible Executive" means an executive officer of the Company or any of its affiliates, as such officers may be selected by the Chairman of the Board of Directors or the Committee or its designee from year to year. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means, as of any given date, the closing price of the Stock on such date on the New York Stock Exchange Composite Tape. "Interest Account" means the Interest Account for Bonus and/or the Interest Account for Salary, as the context requires. The maintenance of individual Interest Accounts is for bookkeeping purposes only. "Interest Account for Bonus" means the account established by the Company for each Participant for Annual Bonus deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by the Plan Administrator). "Interest Account for Salary" means the account established by the Company for each Participant for Salary deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by the Plan Administrator). "Option" means an option to purchase Shares awarded under Article 6. Options granted under the Plan are not incentive stock options within the meaning of Section 422 of the Internal Revenue Code. "Option Grant Date" means the date upon which an Option is granted to an Eligible Executive pursuant to Article 6. "Optionee" means an Eligible Executive of the Company to whom an Option has been granted or, in the event of such Eligible Executive's death prior to the expiration of an Option, such Eligible Executive's Beneficiary. "Participant" means any Eligible Executive who is participating in the Plan. "Plan" means the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan. "Plan Administrator" means the Committee or its delegee of administrative duties under the Plan pursuant to Section 3.2. "Primary Election Form" means a Primary Election Form for Salary and/or a Primary Election Form for Bonus, as the context requires. "Primary Election Form for Bonus" means a form, substantially in the form attached hereto as Exhibit B, pursuant to which an Eligible Executive elects to defer Bonus under the Plan. C-2 "Primary Election Form for Salary" means a form, substantially in the form attached hereto as Exhibit A, pursuant to which an Eligible Executive elects to defer Salary under the Plan. "Salary" means the salary payable by the Company to an Eligible Executive for services to the Company or any of its affiliates, as such amount may be changed from time to time. "Salary Deferral Election Date" means the date established by the Plan as the date by which a Participant must submit a valid Primary Election Form for Salary to the Plan Administrator in order to defer Salary under the Plan for a calendar quarter. For each calendar quarter, the Salary Deferral Election Date is the last day of the preceding calendar quarter. "Secondary Election Form" means a Secondary Election Form for Salary and/or a Secondary Election Form for Bonus, as the context requires. "Secondary Election Form for Bonus" means a form, substantially in the form attached hereto as Exhibit D, pursuant to which an Eligible Executive elects to convert previously deferred Annual Bonus to Options pursuant to Section 6.1 of the Plan. "Secondary Election Form for Salary" means a form, substantially in the form attached hereto as Exhibit C, pursuant to which an Eligible Executive elects to convert previously deferred Salary to Options pursuant to Section 6.1 of the Plan. "Shares" means shares of the common stock of the Company. "Stock Option Award Notice" means a written award notice to an Eligible Executive from the Company evidencing an Option. ARTICLE 3. ADMINISTRATION OF THE PLAN. Section 3.1. Administrator of the Plan. The Plan shall be administered by the Committee. Section 3.2. Authority of Committee. The Committee shall have full power and authority to: (i) interpret and construe the Plan and adopt such rules and regulations as it shall deem necessary and advisable to implement and administer the Plan, and (ii) designate persons other than members of the Committee or the Board to carry out its responsibilities, subject to such limitations, restrictions and conditions as it may prescribe, such determinations to be made in accordance with the Committee's best business judgment as to the best interests of the Company and its stockholders and in accordance with the purposes of the Plan. The Committee may delegate administrative duties under the Plan to one or more agents as it shall deem necessary or advisable. Section 3.3. Effect of Committee Determinations. No member of the Committee or the Board or the Plan Administrator shall be personally liable for any action or determination made in good faith with respect to the Plan or any Option or to any settlement of any dispute between an Eligible Executive and the Company. Any decision or action taken by the Committee or the Board with respect to an Option or the administration or interpretation of the Plan shall be conclusive and binding upon all persons. ARTICLE 4. PARTICIPATION. Section 4.1. Election to Participate. The Chairman of the Board or the Committee or its designee shall designate each year those executives who shall be Eligible Executives for the coming year. An Eligible Executive may participate in the Plan by delivering to the Plan Administrator a properly completed and signed (i) Primary Election Form for Salary on or before the Salary Deferral Election Date, and/or (ii) Primary Election Form for Bonus on or before the Bonus Deferral Election Date. An Eligible Executive's participation in the Plan will be effective (i) as of the first day of the calendar quarter beginning after the Plan Administrator receives the Eligible Executive's Primary Election Form for Salary, or (ii) as of the first day of the year for which an Annual Bonus C-3 is earned, in the case of an Eligible Executive's Primary Election Form for Bonus. A Participant shall not be entitled to any benefit hereunder unless such Participant has properly completed a Primary Election Form and deferred the receipt of his or her Annual Bonus and/or Salary pursuant to the Plan. Section 4.2. Irrevocable Election. A Participant may not revoke or change his or her Primary Election Form; provided, however, that a Participant may, by filing a Secondary Election Form with the Plan Administrator within the period provided in the Plan, subsequently elect to convert the balance in his or her Interest Account to Options in accordance with Article 6. Section 4.3. No Right to Continue as an Employee. Nothing contained in the Plan shall be deemed to give any Eligible Executive the right to be retained as an employee of the Company or any of its affiliates. ARTICLE 5. PLAN BENEFITS. Section 5.1. Deferred Annual Bonus or Salary. An Eligible Executive may elect to defer up to 100% (in increments of 10% or $10,000) of his or her Annual Bonus and/or Salary to his or her Interest Account, and/or by conversion to Options in accordance with the terms of the Plan. For bookkeeping purposes, the amount of the Annual Bonus and/or Salary which an Eligible Executive elects to defer pursuant to the Plan shall be transferred to and held in individual Interest Accounts (in annual designations) pending distribution in cash or the conversion to Options, if applicable, pursuant to Article 6. Section 5.2. Time of Election of Deferral. An Eligible Executive who wishes to defer Salary for a calendar quarter must irrevocably elect to do so on or prior to the Salary Deferral Election Date for such calendar quarter, by delivering a valid Primary Election Form for Salary to the Plan Administrator. The Primary Election Form for Salary shall indicate: (1) the percentage of Salary to be deferred, and (2) the form and timing of payout of deferred amounts; provided, however, that if a Participant elects to defer Salary for more than one quarter during a particular calendar year, the form and timing of payout for each quarter's deferral shall be identical. An Eligible Executive who wishes to defer Annual Bonus for a calendar year must irrevocably elect to do so on or prior to the Bonus Deferral Election Date for such calendar year, by delivering a valid Primary Election Form for Bonus to the Plan Administrator. The Primary Election Form for Bonus shall indicate: (1) the percentage of Annual Bonus to be deferred, and (2) the form and timing of payout of deferred amounts; provided, however, that if a Participant elects to defer both Salary and Annual Bonus for a particular calendar year, the form and timing of payout for each shall be identical. Section 5.3. Interest Accounts. Amounts in a Participant's Interest Account will be credited with interest as of the last day of each calendar quarter (or such other day as determined by the Plan Administrator, which, in the case of amounts converted to Options under the Plan, shall be the date of such conversion) at the rate set from time to time by the Committee to be applicable to the Interest Accounts of all Participants under the Plan. To the extent required for bookkeeping purposes, a Participant's Interest Accounts will be segregated to reflect deferred compensation on a year-by-year basis and on the basis of the type of compensation deferred. For example, a 1997 Interest Account for Bonus, a 1997 Interest Account for Salary, a 1998 Interest Account for Bonus, a 1998 Interest Account for Salary, and so on. Within a reasonable time after the end of each calendar year, the Plan Administrator shall report in writing to each Participant the amount held in his or her Interest Accounts at the end of the year. Section 5.4. Responsibility for Investment Choices. Each Participant is solely responsible for any decision to defer Annual Bonus and/or Salary into his or her Interest Account or convert Annual Bonus and/or Salary to Options under the Plan and accepts all investment risks entailed by such decision, including the risk of loss and a decrease in the value of the amounts he or she elects to defer. Section 5.5. Form of Payment. (a) Payment Commencement Date. Payment of the balances in a Participant's Interest Accounts shall commence on the earliest to occur of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after the Participant's death, or (c) the Participant's termination as an employee of the Company or any of its subsidiaries or affiliates, other than by reason of death. C-4 (b) Optional Forms of Payment. Distributions from a Participant's Interest Accounts may be paid to the Participant either in a lump sum or in a number of approximately equal monthly installments designated by the Participant on his or her Primary Election Form. Such monthly installments may be for any number of months up to 120 months; provided, however, that in the event of the Participant's death during the payout period, the remaining balance shall be payable to the Participant's Beneficiary in a lump sum on the first Business Day of the fourth month after the Participant's death. If a Participant elects to receive a distribution of his or her Interest Accounts in installments, the Plan Administrator may purchase an annuity from an insurance company which annuity will pay the Participant the desired annual installments. If the Plan Administrator purchases an annuity contract, the Eligible Executive will have no further rights to receive payments from the Company or the Plan with respect to the amounts subject to the annuity. If the Plan Administrator does not purchase an annuity contract, the value of the Interest Accounts remaining unpaid shall continue to receive allocations of return as provided in Section 5.3. If the Participant fails to designate a payment method in the Participant's Primary Election Form, the Participant's Account shall be distributed in a lump sum. (c) Irrevocable Elections. A Participant may elect a different payment form for each year's compensation deferred under the Plan; provided, however, that if a Participant elects to defer Salary for more than one quarter during a particular calendar year, or if a Participant elects to defer Salary and Annual Bonus for a particular calendar year, the form and timing of payout for each such deferral shall be identical. The payment form elected or deemed elected on the Participant's Primary Election Form shall be irrevocable. (d) Acceleration of Payment. If a Participant elects an installment distribution and the value of such installment payment elected by the Participant would result in a distribution of less than $3,000 per year, the Plan Administrator may accelerate payment of the Participant's benefits over a lesser number of whole years so that the annual amount distributed is at least $3,000. If payment of the Participant's benefits over a five year period will not provide annual distributions of at least $3,000, the Participant's Account shall be paid in a lump sum. (e) Effect of Competition. Notwithstanding the Primary Election Form or any provision set forth herein, the entire balance of a Participant's Interest Accounts shall be paid immediately to the Participant a lump sum in the event the Participant ceases to be an employee of the Company or any of its subsidiaries or affiliates and becomes a proprietor, officer, partner, employee or otherwise becomes affiliated with any business that is in competition with the Company or an affiliated company, or becomes employed by any governmental agency having jurisdiction over the activities of the Company or an affiliated company. (f) Effect of Adverse Determination. Notwithstanding the Primary Election Form or any provision set forth herein, if the Internal Revenue Service determines, for any reason, that all or any portion of the amounts credited under this Plan is currently includable in the taxable income of any Participant, then the amounts so determined to be includable in income shall be distributed in a lump sum to such Participant as soon as practicable. (g) Payment to Beneficiary. Upon the Participant's death, all unpaid amounts held in the Participant's Account shall be paid to the Participant's Beneficiary in a lump sum on the first Business Day of the fourth month following the Participant's death. Section 5.6. Financial Hardship. The Plan Administrator may, in its sole discretion, accelerate the making of payment to a Participant of an amount reasonably necessary to handle a severe financial hardship of a sudden and unexpected nature due to causes not within the control of the Participant. All financial hardship distributions shall be made in cash in a lump sum. Such payments will be made on a first-in, first-out basis so that the oldest compensation deferred under the Plan shall be deemed distributed first in a financial hardship. Section 5.7. Payment to Minors and Incapacitated Persons. In the event that any amount is payable to a minor or to any person who, in the judgment of the Plan Administrator, is incapable of making proper disposition C-5 thereof, such payment shall be made for the benefit of such minor or such person in any of the following ways as the Plan Administrator, in its sole discretion, shall determine: (a) By payment to the legal representative of such minor or such person; (b) By payment directly to such minor or such person; (c) By payment in discharge of bills incurred by or for the benefit of such minor or such person. The Plan Administrator shall make such payments without the necessary intervention of any guardian or like fiduciary, and without any obligation to require bond or to see to the further application of such payment. Any payment so made shall be in complete discharge of the Plan's obligation to the Participant and his or her Beneficiaries. Section 5.8. Application for Benefits. The Plan Administrator may require a Participant or Beneficiary to complete and file certain forms as a condition precedent to receiving the payment of benefits. The Plan Administrator may rely upon all such information given to it, including the Participant's current mailing address. It is the responsibility of all persons interested in receiving a distribution pursuant to the Plan to keep the Plan Administrator informed of their current mailing addresses. Section 5.9. Designation of Beneficiary. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his or her Beneficiary or Beneficiaries to whom the Participant's Account is to be paid if the Participant dies before receipt of all such benefits. Each Beneficiary designation shall be on the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. The revocation of a Beneficiary designation, no matter how effected, shall not require the consent of any designated Beneficiary. ARTICLE 6. ELECTIVE OPTIONS. Each Eligible Executive shall be granted Options subject to the following terms and conditions: Section 6.1. Election to Receive Options. (a) Options Converted from Deferred Salary. At any time, but only one time, during the twelve-month period following the end of a calendar year with respect to which a Participant deferred Salary into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Salary for such previous year into Options pursuant to this Article 6. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Salary to receive Options as of the date of the filing of such Secondary Election Form (the "Option Grant Date"). (b) Options Converted from Deferred Bonus. At any time, but only one time, during the twelve-month period following the end of a calendar year with respect to which a Participant deferred Annual Bonus into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Bonus for such previous year into Options pursuant to this Article 6. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Bonus to receive Options as of the date of the filing of such Secondary Election Form (the "Option Grant Date"). (c) Exercise Price of Options. The exercise price per Share under each Option granted pursuant to this Article 6 shall, at the election of the Optionee as indicated on the Secondary Election Form, be either 100% of the Fair Market Value per Share on the Option Grant Date, or a lesser percentage (but not less than 75%) of the Fair Market Value per Share on the Option Grant Date, such lesser percentage to be determined by the Committee from time to time. Such Secondary Election Form shall indicate the percentage of such Options to be granted at each Exercise Price, which choice may affect the number of Options to be received pursuant to Section 6.2. C-6 Section 6.2. Number and Terms of Options. The number of Shares subject to an Option granted pursuant to this Article 6 shall be the number of whole Shares equal to A divided by B, where: A = the dollar amount which the Eligible Executive has elected pursuant to Section 6.1 to convert to Options; and B = the per share value of an Option on the Option Grant Date, as determined by the Committee using the Black Scholes option valuation model or another recognized option valuation model selected by the Committee in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Option Grant Date). In determining the number of Shares subject to an Option, (i) the Committee may designate the assumptions to be used in the selected option valuation model, and (ii) any fraction of a Share will be rounded up to the next whole number of Shares. Section 6.3. Exercise of Options. Each Option shall be first exercisable, cumulatively, as to 10% commencing on the each of the first through tenth anniversaries of the Option Grant Date; provided, however, that any Option held by a Covered Employee shall not be exercisable before the first day of the calendar year immediately following the year in which the Optionee ceased to be a Covered Employee. An Optionee's death, Disability, retirement or other termination of employment shall not shorten the term of any outstanding Option. In no event shall the period of time over which the Option may be exercised exceed the longer of (i) eleven years from the Option Grant Date, or (ii) the thirtieth (30th) day of the calendar year immediately following the year in which an Optionee ceased to be a Covered Employee. An Option, or portion thereof, may be exercised in whole or in part only with respect to whole Shares. Shares shall be issued to the Optionee pursuant to the exercise of an Option only upon receipt by the Company from the Optionee of payment in full in cash of the aggregate purchase price for the Shares subject to the Option or portion thereof being exercised. Section 6.4. Accelerated Vesting. Notwithstanding the normal vesting schedule set forth in Section 6.3 hereof, any and all outstanding Options shall become immediately exercisable upon the first to occur of (i) the death of the Optionee, (ii) the Disability of the Optionee, (iii) the occurrence of a Change in Control, or (iv) the unanimous determination by the Committee that a particular Option or Options shall become fully exercisable. Upon acceleration, an Option will remain exercisable for the remainder of its original term. Section 6.5. Stock Option Award Notice. Each Option granted under the Plan shall be evidenced by a Stock Option Award Notice which shall be executed by an authorized officer of the Company. Such Award Notice shall contain provisions regarding (a) the number of Shares that may be issued upon exercise of the Option, (b) the exercise price per Share of the Option and the means of payment therefor, (c) the term of the Option, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. Section 6.6. Transferability of Options. No Option shall be assignable or transferable by the Optionee other than by will or the laws of descent and distribution; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Options. ARTICLE 7. SHARES SUBJECT TO THE PLAN. Section 7.1. Shares Subject to the Plan. Subject to adjustment as provided in Article 9, the aggregate number of Shares which may be acquired upon the exercise of Options shall not exceed 1,000,000 Shares. Shares acquired upon exercise of Options may be newly issued Shares or previously issued and reacquired Shares, and there are hereby reserved for issuance under the Plan 1,000,000 Shares. To the extent that Shares subject to an outstanding Option are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such Option or by reason of the delivery of Shares to pay all or a portion of the exercise price of such Option, then such Shares shall again be available under the Plan. C-7 ARTICLE 8. AMENDMENT AND TERMINATION. Section 8.1. Amendment, Suspension or Early Termination. The Board may amend, suspend or terminate the Plan or any Stock Option Award Notice at any time; provided, however, that the Board may condition any amendment or modification on the approval of stockholders of the Company if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations, and no such amendment, modification or termination shall adversely affect any outstanding Options or Interest Accounts without the consent of the Participant. ARTICLE 9. ADJUSTMENT PROVISIONS. Section 9.1. Change in Corporate Structure Affecting Shares. If the Company shall at any time change the number of issued Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Shares, the total number of Shares reserved for issuance under the Plan shall be appropriately adjusted and the number of Shares covered by each outstanding Option and the exercise price per Share under each outstanding Option and the number of shares underlying Options shall be adjusted so that the aggregate consideration payable to the Company and the value of each such Option shall not be changed. Section 9.2. Certain Reorganizations. Notwithstanding any other provision of the Plan, and without affecting the number of Shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding Options or provide for other equitable adjustments after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve Optionees' rights under the Plan. Section 9.3. Acquisitions. In the case of any sale of assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding Shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), any Optionee who holds an outstanding Option shall have the right (subject to the provisions of the Plan and any limitation applicable to the Option) thereafter and during the term of the Option, to receive upon exercise thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Shares which would have been obtained upon exercise of the Option or portion thereof, as the case may be, immediately prior to the Acquisition. The term "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or any combination thereof receivable in respect of one Share of the Company upon consummation of an Acquisition. ARTICLE 10. MISCELLANEOUS. Section 10.1. Withholding. If any Option granted under the Plan is or becomes subject to any withholding requirement, the Committee may require the Optionee to remit such withholding as a condition to exercising the Option or any portion thereof. Section 10.2. Compliance with SEC Regulations. All grants and exercises of Options under the Plan shall be executed in accordance with the requirements of Section 16 of the Exchange Act, as amended and any regulations promulgated thereunder, to the extent applicable. To the extent that any of the provisions contained herein do not conform with Rule 16b-3 of the Exchange Act or any amendments thereto or any successor regulation, then the Committee may make such modifications so as to conform the Plan and any Options granted thereunder to the Rule's requirements. C-8 Section 10.3. Validity. In the event that any provision of the Plan or any related Stock Option Award Notice is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan or any related Stock Option Award Notice. Section 10.4. Inurement of Rights and Obligations. The rights and obligations under the Plan and any related agreements shall inure to the benefit of, and shall be binding upon the Company, its successors and assigns, and the Eligible Executives and their beneficiaries. Section 10.5. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Section 10.6. Governing Law. The Plan shall be construed, governed and enforced in accordance with the law of Delaware, except as such laws are preempted by applicable federal law. C-9 EXHIBIT A PRIMARY ELECTION FORM FOR SALARY FOR THE [SECOND QUARTER OF 1997] ELECTION TO DEFER SALARY PURSUANT TO THE TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (the "Plan") with respect to the undersigned's salary as an executive officer of Torchmark Corporation (the "Company") or its subsidiaries and affiliates to be earned by the undersigned during the calendar quarter identified above ("Next Quarter's Salary"). Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to defer into my Interest Account for Salary under the Plan for the year identified above, % [INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] or $ [INDICATE ANY DOLLAR AMOUNT IN INCREMENTS OF $10,000] of my Next Quarter's Salary until the earliest of (a) December 31 of the fifth year after the year identified above, (b) the first Business Day of the fourth month after my death, or (b) my termination as an employee of the Company or any of its subsidiaries or affiliates for any reason other than my death (the "Payment Date"); subject to, however, my ability under the Plan to make a one-time election at any time during the twelve-month period following the end of the year identified above, to be effective on the date such subsequent election is received by the Plan Administrator, to convert some or all of the balance in my Interest Account for Salary for such year to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. Any amount remaining in my Interest Account for Salary on the Payment Date will be paid to me or my Beneficiary as follows: . if I have previously filed a Primary Election Form for Bonus or a Primary Election Form for Salary for the year identified above, then in the same manner as indicated on such form, or . if I have not previously filed a Primary Election Form for Bonus or a Primary Election Form for Salary for such year, then [PLEASE CHECK ONE BOX] [_] in cash in a lump sum on the Payment Date, or [_] in approximately equal installments over months [UP TO 120 MONTHS] beginning on the Payment Date; provided, however, that in the event of my death during such payout period, the remaining balance shall be payable to my Beneficiary in a lump sum on the first Business Day of the fourth month after my death. Executed this day of , 1997. --------------------------------------- (Name) EXHIBIT B PRIMARY ELECTION FORM FOR BONUS FOR [CALENDAR YEAR 1997] ELECTION TO DEFER BONUS PURSUANT TO THE TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (the "Plan") with respect to the undersigned's bonus as an executive officer of Torchmark Corporation (the "Company") or its subsidiaries and affiliates to be earned by the undersigned during the calendar year identified above ("Current Year Bonus"). Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to defer into my Interest Account for Bonus under the Plan for the year identified above, % [INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] or $ [INDICATE ANY DOLLAR AMOUNT IN INCREMENTS OF $10,000] of my Current Year Bonus, if any, until the earliest of (a) December 31 of the fifth year after the year identified above, (b) the first Business Day of the fourth month after my death, or (c) my termination as an employee of the Company or any of its subsidiaries or affiliates for any reason other than my death (the "Payment Date"); subject to, however, my ability under the Plan to make a one-time election at any time during the twelve-month period following the end of the year identified above, to be effective on the date such subsequent election is received by the Plan Administrator, to convert some or all of the balance in my Interest Account for Bonus for such year to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. Any amount remaining in my Interest Account for Bonus on the Payment Date will be paid to me or my Beneficiary as follows: . if I have filed a Primary Election Form for Salary for the year identified above, then in the same manner as indicated on such form, or . if I have not filed a Primary Election Form for Salary for such year, then [PLEASE CHECK ONE BOX] [_] in cash in a lump sum on the Payment Date, or [_] in approximately equal installments over months [UP TO 120 MONTHS] beginning on the Payment Date; provided, however, that in the event of my death during such payout period, the remaining balance shall be payable to my Beneficiary in a lump sum on the first Business Day of the fourth month after my death. Executed this day of , 1997. --------------------------------------- (Name) EXHIBIT C SECONDARY ELECTION FORM FOR SALARY [FOR CALENDAR YEAR 1997] ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (the "Plan") with respect to the conversion to Options of the balance in the undersigned's Interest Account for Salary under the Plan for the year identified above. Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to convert, as of the date hereof, % [INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] of the balance in my Interest Account for Salary under the Plan for the year identified above to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]: % of such Options will be granted at an exercise price of % of the Fair Market Value of the Company's common stock on the date of grant, and % of such Options will be granted at an exercise price of 100% of the Fair Market Value of the Company's common stock on the date of grant. Executed this day of , 1998. --------------------------------------- (Name) EXHIBIT D SECONDARY ELECTION FORM FOR BONUS [FOR CALENDAR YEAR 1997] ELECTION TO RECEIVE STOCK OPTIONS PURSUANT TO THE TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN The following constitutes the irrevocable election of the undersigned under the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (the "Plan") with respect to the conversion to Options of the balance in the undersigned's Interest Account for Bonus under the Plan for the year identified above. Capitalized terms used herein and not otherwise defined have the meanings assigned such terms in the Plan. I hereby irrevocably elect to convert, as of the date hereof, % [INDICATE ANY PERCENTAGE UP TO 100%, IN 10% INCREMENTS] of the balance in my Interest Account for Bonus under the Plan for the year identified above to Options to purchase common stock of the Company in accordance with the terms and provisions of the Plan. I further elect that [PLEASE FILL IN THE FOLLOWING BLANKS]: % of such Options will be granted at an exercise price of % of the Fair Market Value of the Company's common stock on the date of grant, and % of such Options will be granted at an exercise price of 100% of the Fair Market Value of the Company's common stock on the date of grant. Executed this day of , 1998. --------------------------------------- (Name) EX-11 6 COMPUTATION OF PER SHARE EARNINGS Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1996 1995 1994 ------------ ------------- ------------ Net income from continuing operations ... $318,508,976 $ 271,945,720 $263,814,601 Discontinued operations of energy segment: Income (loss) from operations ......... -0- (128,710,390) 5,131,667 Loss on disposal ...................... (7,137,124) -0- -0- ------------ ------------- ------------ Net income .............................. 311,371,852 143,235,330 268,946,268 Preferred dividends ..................... -0- 0 (804,130) ------------ ------------- ------------ Adjusted net income ..................... $311,371,852 $ 143,235,330 $268,142,138 ============ ============= ============ Weighted average shares outstanding ..... 71,229,892 71,593,774 72,095,657 ============ ============= ============ Primary earnings per share: From continuing operations ............ $ 4.47 $ 3.80 $ 3.65 From discontinued operations of energy segment: Income (loss) from operations ....... -0- (1.80) 0.07 Loss on disposal .................... (0.10) -0- -0- ------------ ------------- ------------ Net income .......................... $ 4.37 $ 2.00 $ 3.72 ============ ============= ============
There were no common stock equivalents included in weighted average shares outstanding. EX-20 7 1997 PROXY STATEMENT [LOGO OF TORCHMARK CORPORATION APPEARS HERE] March 25, 1997 To the Stockholders of Torchmark Corporation: Torchmark's 1997 annual meeting of stockholders will be held in the auditorium at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama at 10:00 a.m., Central Daylight Time, on Thursday, April 24, 1997. The accompanying formal notice and proxy statement discuss matters which will be presented for a stockholder vote. If you have any questions or comments about the matters discussed in the proxy statement or about the operations of your Company, we will be pleased to hear from you. It is important that your shares be voted at this meeting. Please mark, sign, and return your proxy. If you attend the meeting in person, you may withdraw your proxy and vote your stock if you desire to do so. We hope that you will take this opportunity to meet with us to discuss the results and operations of the Company during 1996. Sincerely, /s/ R. K. Richey ----------------------------------- R. K. Richey Chairman & Chief Executive Officer /s/ Keith A. Tucker ----------------------------------- Keith A. Tucker Vice Chairman --------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997 --------------------------------- To the Holders of Common Stock of Torchmark Corporation The annual meeting of stockholders of Torchmark Corporation will be held at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama 35233 on Thursday, April 24, 1997 at 10:00 a.m., Central Daylight Time, for the following purposes: (1) To elect the nominees shown in the proxy statement as directors to serve for three year terms or until their successors have been duly elected and qualified. (2) To approve amendments to and the restatement of the Torchmark Corporation 1987 Stock Incentive Plan. (3) To approve the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan and the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan. (4) To ratify the Torchmark political contributions program. (5) To consider the appointment of independent auditors. (6) To transact such other business as may properly come before the meeting. These matters are more fully discussed in the accompanying proxy statement. The close of business on Wednesday, March 5, 1997 has been fixed as the date for determining the stockholders who are entitled to notice of and to vote at the annual meeting. All stockholders, whether or not they expect to attend the annual meeting in person, are requested to mark, date, sign, and return the enclosed form of proxy in the accompanying envelope. Your proxy may be revoked at any time before it is voted. The annual meeting for which this notice is given may be adjourned from time to time without further notice other than announcement at the meeting or any adjournment thereof. Any business for which notice is hereby given may be transacted at any such adjourned meeting. By Order of the Board of Directors /s/ Carol A. McCoy ----------------------------------- Carol A. McCoy Associate Counsel & Secretary Birmingham, Alabama March 25, 1997 PROXY STATEMENT SOLICITATION OF PROXIES The Board of Directors of Torchmark Corporation (the "Company" or "Torchmark") solicits your proxy in the form enclosed with this statement for use at the annual meeting of stockholders to be held at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama 35233 at 10:00 a.m., Central Daylight Time, on Thursday, April 24, 1997, and at any adjournment of such meeting. R. K. Richey and Keith A. Tucker are named as proxies in the form and have been designated as directors' proxies by the Board of Directors. When the enclosed proxy/direction card is returned, properly executed, and in time for the meeting, the shares represented thereby will be voted at the meeting. All proxies will be voted in accordance with the instructions set forth on the proxy/direction card, but if proxies which are executed and returned do not specify a vote on the proposals considered, the proxies will be voted FOR such proposals. Any stockholder giving a proxy has the right to revoke it by giving written notice of revocation to the Secretary of the Company (at the address set forth above) at any time before the proxy is voted. The card is considered to be voting instructions furnished to the respective trustees of the Torchmark Corporation Savings and Investment Plan, the United Investors Management Company Savings and Investment Plan, the Liberty National Life Insurance Company 401(k) Plan and the Profit-Sharing and Retirement Plan of Liberty National Life Insurance Company with respect to shares allocated to individual accounts under such plans. To the extent that account information is the same, participants in one or more of the plans who are also shareholders of record will receive a single card representing all shares. If a plan participant does not return a proxy/direction card to the Company, the trustees of a plan in which shares are allocated to his or her individual account will vote such shares in the same proportion as the total shares in such plan for which directions have been received. A simple majority vote of the holders of the issued and outstanding common stock of the Company represented in person or by proxy at the stockholders meeting is required to elect directors and approve all other matters put to a vote of stockholders. Abstentions are considered as shares present and entitled to vote and therefore have the same legal effect as a vote against a matter presented at the meeting. Any shares regarding which a broker or nominee does not have discretionary voting authority under applicable New York Stock Exchange rules will be considered as shares not entitled to vote and will therefore not be considered in the tabulation of the votes. RECORD DATE AND VOTING STOCK Each stockholder of record at the close of business on March 5, 1997 is entitled to one vote for each share of common stock held on that date upon each matter to be voted on by the stockholders at the meeting. At the close of business on March 5, 1997, there were 69,832,952 shares of common capital stock of the Company outstanding (not including 71,181,588 shares held by the Company and its subsidiaries which are non-voting while so held). There is no cumulative voting of the common stock. 1 PRINCIPAL STOCKHOLDERS The following table lists all persons known to be the beneficial owner of more than five percent of the Company's outstanding common stock as of December 31, 1996.
PERCENT OF NAME AND ADDRESS NUMBER OF SHARES(1) CLASS ---------------- ------------------- ---------- INVESCO PLC 4,225,127 6.0% 11 Devonshire Square London EC2M 4YR England
- -------- (1) All stock reported is held by holding companies (INVESCO North American Group, Ltd, INVESCO Group Services, Inc., INVESCO, Inc. and INVESCO North American Holdings, Inc.) and an investment advisor (INVESCO Capital Management, Inc.), which are subsidiaries of INVESCO PLC. These entities share the voting and the dispositive power over the shares and have disclaimed beneficial ownership of such stock. PROPOSAL NUMBER 1 ELECTION OF DIRECTORS The Company's By-laws provide that the number of directors shall be not less than seven nor more than fifteen with the exact number to be fixed by the Board of Directors. In March, 1997, the Board of Directors fixed the number of directors at nine persons, effective upon the retirement of Yetta G. Samford, Jr. at the April 24, 1997 annual meeting of stockholders. The Board of Directors proposes the election of David L. Boren, Louis T. Hagopian, and Harold T. McCormick as directors, to hold office for a term of three years, expiring at the close of the annual meeting of stockholders to be held in 2000 or until their successors are elected and qualified. The current terms of office of Messrs. Boren, Hagopian and McCormick expire in 1997. The term of office of each of the other six directors continues until the close of the annual meeting of stockholders in the year shown in the biographical information below. Non-officer directors retire from the Board of Directors at the annual meeting of stockholders which immediately follows their 73rd birthday. Directors who are officers of the Company retire from active service as directors at the annual stockholders meeting immediately following their 65th birthday, except that the director holding the position of Chairman of the Board retires at the annual meeting of stockholders following his 73rd birthday. If any of the nominees becomes unavailable for election, which is not anticipated, the directors' proxies will vote for the election of such other person as the Board of Directors may recommend unless the Board reduces the number of directors. The Board recommends that the stockholders vote FOR the nominees. PROFILES OF DIRECTORS AND NOMINEES(/1/) David L. Boren (age 56) has been a director of the Company since April, 1996. He is a director of Phillips Petroleum Corporation, AMR Corporation and Texas Instruments, Inc. Principal occupation: President of The University of Oklahoma, Norman, Oklahoma since November, 1994. (United States Senator from Oklahoma, 1979-1994; Member, Senate Finance Committee). Joseph M. Farley (age 69) has been a director of the Company since 1980. His term expires in 1998. He is an advisory director of The Southern Company. Principal occupation: Of Counsel at Balch & Bingham, Attorneys and Counselors, Birmingham, Alabama since November, 1992. (President and Chief Executive Officer of Southern Nuclear Operating Company, Birmingham, Alabama, a nuclear utility operating company, 2 December, 1990-May, 1992; Chairman of the Board of Southern Nuclear Operating Company, May-October, 1992; Executive Vice President and Corporate Counsel of The Southern Company, Birmingham, Alabama, July, 1991-October, 1992). Louis T. Hagopian (age 71) has been a director of the Company since 1988. Principal occupation: Owner of Meadowbrook Enterprises, Darien, Connecticut, an advertising and marketing consultancy, since January, 1990. Vice Chairman, Partnership for a Drug-Free America, New York, New York. C. B. Hudson (age 51) has been a director since 1986. His term expires in 1998. Principal occupation: Chairman of Insurance Operations of the Company since January, 1993; Chairman of Liberty, United American and Globe since October, 1991 and Chief Executive Officer of Liberty since December, 1989, of United American since November, 1982 and of Globe since February, 1986. (President of Liberty, January, 1993-December, 1994). Joseph L. Lanier, Jr. (age 65) has been a director of the Company since 1980. His term expires in 1998. He is a director of Flowers Industries, Inc., Dimon Inc. and SunTrust Banks, Inc. Principal occupation: Chairman of the Board and Chief Executive Officer of Dan River Incorporated, Danville, Virginia, a textile manufacturer, since November, 1989. Harold T. McCormick (age 68) has been a director since April, 1992. Principal occupation: Chairman and Chief Executive Officer of Bay Point Yacht & Country Club, Panama City, Florida, since March, 1988; Chairman, First Ireland Spirits Co., Ltd., Dublin, Ireland, since February, 1996. George J. Records (age 62) has been a director of the Company since April, 1993. His term expires in 1999. Principal occupation: Chairman of Midland Financial Co., Oklahoma City, Oklahoma, a bank and financial holding company for retail banking and mortgage operations, since 1982. R. K. Richey (age 70) has been a director of the Company since 1980. His term expires in 1999. He is a director of Full House Resorts, Inc., Vesta Insurance Group, Inc., the United Group of Mutual Funds (17 funds), Waddell & Reed Funds, Inc. (6 funds) and TMK/United Funds, Inc. (10 funds). Principal occupation: Chairman of Company since August, 1986 and Chief Executive Officer of the Company since December, 1984. Keith A. Tucker (age 52) has been a director since October, 1989. His term expires in 1999. He is a director of Vesta Insurance Group, Inc., the United Group of Mutual Funds (17 funds), Waddell & Reed Funds, Inc. (6 funds) and TMK/United Funds, Inc. (10 funds). Principal occupation: Vice Chairman of Company since May, 1991. - -------- (1) "Liberty", "Globe" and "United American" as used in this proxy statement refer to Liberty National Life Insurance Company, Globe Life And Accident Insurance Company and United American Insurance Company, respectively, subsidiaries of the Company. 3 PROPOSAL NUMBER 2 AMENDMENT TO AND RESTATEMENT OF 1987 TORCHMARK STOCK INCENTIVE PLAN On October 22, 1996 and March 4, 1997, the Board of Directors of the Company adopted amendments to the provisions of and determined to restate the Torchmark Corporation 1987 TMK Stock Incentive Plan (the "TMK Incentive Plan"), subject to approval by the stockholders of the Company. The amendments are discussed in more detail below. The full text of the TMK Incentive Plan, as amended and restated, is attached hereto as Exhibit 1 and the following description is qualified in its entirety by reference to said Exhibit 1. Capitalized terms used herein shall have the same meaning as set forth in the TMK Incentive Plan. SUMMARY OF AMENDMENTS The TMK Incentive Plan presently provides that 11,300,000 shares are available for issuance thereunder. The Board has amended the plan, subject to shareholder approval, to increase the number of shares available for awards from 11,300,000 to 12,300,000. The additional 1,000,000 shares which would be available for awards may come from authorized but unissued shares or from the treasury stock of the Company. If a stock option expires unexercised or an award is forfeited, the shares subject to such award will generally be available for future awards. The TMK Incentive Plan currently provides that non-employee ("outside") directors are automatically awarded a Director Stock Option for 3,000 shares on the first day of each calendar year on which the Company's common stock is traded on the New York Stock Exchange. In 1996, changes were made in federal securities laws and regulations which would allow non-formula based stock options to be awarded to outside directors pursuant to option plans which comply with Rule 16b-3 of the Securities Exchange Act of 1934. After review and deliberation, the Board determined that it was desirable to amend the TMK Incentive Plan to permit the Board, in its discretion, to grant non-formula based stock options to outside directors from time to time. Thus, the Board amended the plan, subject to shareholder approval at the 1997 Annual Meeting, to provide that the entire Board, in its sole discretion, may for calendar years commencing with 1996, award Director Stock Options on a non-formula basis to all or such individual Outside Directors as it may select upon such terms and conditions as it may determine. The price of such Director Stock Options may be fixed by the Board at a discount not to exceed 25% of the fair market value of the Company's common stock on the grant date or may be the fair market value of the stock on the grant date. Contingent upon shareholder approval, on December 18, 1996, each of Messrs. Boren, McCormick and Records were granted options on 10,000 shares at $37.22 per share (25% discount to fair market value on December 18, 1996). The Board in its discretion determined to award these non-formula options to all non- employee directors elected after January 1, 1992 (the newer directors) to provide them a greater economic interest in the Company through ownership of common stock. DESCRIPTION OF THE TMK INCENTIVE PLAN The following is a description of the amended and restated TMK Incentive Plan as submitted for stockholder approval. The TMK Incentive Plan authorizes the Compensation Committee to grant Stock Options, Stock Appreciation Rights, Restricted Stock and/or Deferred Stock awards to officers and other key employees of the Company and its Subsidiaries and Affiliates, during the period ending April 28, 2004. Each Outside Director of the Company is automatically granted a Director Stock Option for 3,000 shares on the first day of each calendar year on which the Company's common stock is traded on the New York Stock Exchange. Outside Directors may from time to the be awarded, in the sole discretion of the Board, non-formula based Director Stock Options in such amounts and upon such terms as are determined by the Board. A maximum of 12,300,000 shares (plus such shares subject to options under the 1984 Torchmark Corporation Stock Option Plan which expire unexercised) of common stock of the Company are available for awards under the terms of the TMK Incentive Plan, subject to adjustment for future stock splits, stock dividends and similar events. Options, awards and other grants under the TMK Incentive Plan which expire unexercised or are forfeited are generally not counted in applying the maximum shares authorization. Presently, 671,288 shares remain available for awards pursuant to the TMK Incentive Plan. The closing price of Company common stock on the New York Stock Exchange on March 7, 1997 was $59.625 per share. 4 The TMK Incentive Plan permits the granting of incentive stock options and non-qualified stock options. The Stock Option term is set by the Compensation Committee but cannot exceed ten years in the case of incentive stock options. Automatic-formula-based Director Stock Options are non-qualified stock options with a ten year and two day term. Non-formula based Director Stock Options are non-qualified options with the term specified by the Board at the time of grant. The exercise price for any Stock Option and formula-based Director Stock Option will be determined by the Compensation Committee but will never be less than 100% of the market price of the stock on the date of grant. A non-formula based Director Stock Option may be awarded by the Board, in its discretion, with an exercise price equal to the fair market value of the stock on the grant date or at a discount not to exceed 25% of the market value on the grant date. Options become exercisable, in full or in installments, at the time determined by the Compensation Committee, which can also accelerate the exercisability of options. Generally, Stock Options and Director Stock Options (both formula-based and discretionary) may not be first exercised prior to six months from the option grant date except in certain circumstances more fully described below. The Compensation Committee may also substitute new Stock Options for previously granted Stock Options including options granted under other plans applicable to the participant and previously granted Stock Options having higher prices. All shares purchased upon the exercise of a Stock Option or either type of Director Stock Option must be paid for in full at the time of purchase in cash or, if permitted by the Compensation Committee, by delivery of unrestricted stock, restricted stock or deferred stock valued at Fair Market Value on the exercise date. The Compensation Committee may allow "pyramiding" in the exercise of Stock Options and permits the exercise and simultaneous sale ("cashless exercise") of Stock Options and Director Stock Options through a program operated in conjunction with local brokerages. Stock Options, in the case of termination of employment by death, Disability, or Normal Retirement, and Director Stock Options, in all situations where Outside Director status terminates, become immediately exercisable upon the termination date and may thereafter be exercised during the period which ends upon the expiration of the stated term of the option or in the case of death, the expiration of the stated term of the option or the first anniversary of the optionee's death, whichever is later. If the officer or key employee's employment terminates as a result of Early Retirement, the Stock Options terminate three years from the termination date or upon the expiration of the stated term of the option, whichever is shorter, and may be exercised to the extent they become exercisable during such period. When an optionee's employment is involuntarily terminated without Cause, the Stock Options expire three months from the termination date or upon the expiration of the stated term of the option, whichever is shorter, and may be exercised to the extent they become exercisable during such period. When an optionee's employment is terminated for Cause, the options are immediately forfeited to the Company. In the case of voluntary termination of employment for any reason, Stock Options terminate one month from the termination date or upon the expiration of the stated term of the option, whichever is shorter, and may be exercised to the extent they become exercisable during such period. The Compensation Committee is authorized to grant Stock Options which may be transferred during the optionee's lifetime in limited circumstances with the express written consent of the Compensation Committee. Such transfers may only be made to members of the Immediate Family of the optionee, a partnership where such Immediate Family members are the only partners, or one or more trusts for the benefit of such Immediate Family members, and without consideration for the transfer. Any Stock Option not (i) granted pursuant to any agreement expressly allowing the transfer of said Stock Option or (ii) amended expressly to permit its transfer will not be transferable otherwise than by will or by the laws of descent and distribution. Optionees recognize income for purposes of Federal income tax immediately upon the exercise of non-qualified options, generally in an amount equal to the option spread on the date of exercise, and the employer corporation generally receives a deduction in the same amount, subject to limitations on deductibility imposed by Sections 162(m) and 280G of the Internal Revenue Code. Upon the exercise of incentive stock options if the optionee holds the shares received for the longer of one year from the date of the option exercise or two years from the date of the option grant, the optionee generally does not recognize income until the shares are actually sold (at which time the difference between the sale proceeds and the exercise price is taxed as capital gain) and the employer corporation does not receive any deduction. The TMK Incentive Plan provides that optionees may elect, subject to the approval of the Compensation Committee, to have their tax withholding obligations met by the reduction of the number of shares of stock or amount of cash otherwise issuable or payable to such person. 5 Stock appreciation rights ("SARs") may be granted in conjunction with options, entitling the holder upon exercise to receive an amount in any combination of cash or unrestricted common stock of the Company (as determined by the Compensation Committee), not greater in value than the increase in the value of the shares covered by such right since the date of grant. Each SAR will terminate upon the termination of the related option. The Compensation Committee may also award non-transferable restricted shares of common stock subject to such conditions and restrictions as it may determine, which may include continued employment or the attainment of performance goals. The Compensation Committee may permit the restrictions to lapse in installments within the restricted period and may accelerate or waive any restrictions at any time (including after termination of employment). A recipient of restricted stock may be required to pay a purchase price per share for such stock or may receive such restricted stock without any payment in cash or property as determined by the Compensation Committee. If a participant who holds shares of restricted stock terminates employment for any reason (including death) prior to the lapse or waiver of the restrictions, the participant will forfeit the shares in exchange for the amount, if any, which the participant paid for them. Deferred stock awards may be made by the Compensation Committee under the TMK Incentive Plan. These non-transferable awards entitle the recipient to receive shares without any payment in cash or property in one or more installments at a future date or dates, as determined by the Compensation Committee. Receipt of deferred stock may be conditioned on such matters as the Compensation Committee shall determine, including continued employment or attainment of performance goals. All such rights will generally terminate upon the participant's termination of employment. Any deferral restrictions under a deferred stock award may be accelerated or waived by the Compensation Committee at any time (including following termination of employment). The TMK Incentive Plan authorizes the Company, with the consent of the Compensation Committee, to make or arrange for loans to employees in connection with the exercise of options or the payment of any purchase price for restricted stock granted under the TMK Incentive Plan. The Compensation Committee has full authority to decide whether to make such loans and to determine the terms and provisions of any such loans including the interest charged and repayment terms. The TMK Incentive Plan provides that (1) in the event of a "Change of Control" (as defined in the TMK Incentive Plan), unless otherwise determined by the Compensation Committee prior to such Change of Control, or (2) to the extent expressly provided by the Compensation Committee at or after the time of grant, in the event of a "Potential Change of Control" (as defined in the TMK Incentive Plan), (i) all stock options and related SARs will become immediately exercisable, (ii) the restrictions and deferral limitations applicable to outstanding restricted stock awards and deferred stock awards will lapse and the shares in question will fully vest, and (iii) the value of such options and awards, to the extent determined by the Compensation Committee, will be settled on the basis of the highest price paid (or offered) during the preceding 60-day period, as determined by the Compensation Committee. In the sole discretion of the Committee, such settlements may be made in cash or in stock, as shall be necessary to effect the desired accounting treatment for the transaction resulting in the Change of Control. In addition, at any time prior to or after a Change of Control or a Potential Change of Control, the Compensation Committee may accelerate awards and waive conditions and restrictions on any awards to the extent it may determine appropriate. Generally, if an optionee's employment or consultant status with the Company or a director's status as an Outside Director terminates by reason of or within three months following a merger or other business combination resulting in a Change of Control, the Plan provides that such optionee's stock options will terminate upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, and (iii) the expiration of the stated term of such Stock Option or Director Stock Option. The following table sets forth the stock options awarded in 1996 pursuant to the TMK Incentive Plan. It is within the sole discretion of the Compensation Committee whether stock options will be granted to officers and employees. Thus, the 1996 stock options shown below as awarded to officers and employees may not be indicative of any future stock options which might be granted to such persons. Outside Directors annually receive formula-based Director Stock Options for a fixed number of shares pursuant to the provisions of the TMK 6 Incentive Plan. Such formula-based Director Stock Options are reflective of the number of shares to be awarded in the future years. Non-formula based Director Stock Options are granted within the sole discretion of the entire Board and such options granted in 1996, subject to shareholder approval of the amendments to the TMK Incentive Plan, may not be indicative of any future non- formula based Director Stock Options awarded. TORCHMARK CORPORATION 1987 STOCK INCENTIVE PLAN
NUMBER NAME OF SHARES ---- --------- R. K. Richey................................................. 100,000 Chairman and CEO Keith A. Tucker.............................................. 65,000 Vice Chairman C. B. Hudson................................................. 65,000 Chairman & CEO of Liberty, Globe and United American Henry J. Herrmann............................................ 18,000 Vice President and Chief Investment Officer of W&R Financial Bernard Rapoport............................................. 40,000 Chairman and CEO of American Income Executive Group.............................................. 288,000 Non-Executive Director Group................................. 51,000 Non-Executive Officer Employee Group......................... 382,100
The Board recommends that stockholders vote FOR the amendments to and restatement of the TMK Incentive Plan. 7 PROPOSAL NUMBER 3 APPROVAL OF TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN On December 18, 1996, the Board adopted the Torchmark Corporation 1996 Non- Employee Director Stock Option Plan (the "Non-Employee Director Plan") and the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (the "Executive Deferral Plan"), subject to shareholder approval at the 1997 Annual Meeting of the Company. The stated purpose of the Non-Employee Director Plan is to attract and retain highly qualified and capable non-employee directors and to promote the long term growth of the Company by providing a vehicle for such directors to increase their proprietary interest in the Company. The purpose of the Executive Deferral Plan is to promote long-term growth of the Company by providing a vehicle for eligible executives to increase their proprietary interest in the Company and to attract and retain highly qualified and capable eligible executives. A copy of the Non-Employee Director Plan is attached as Exhibit II and a copy of the Executive Deferral Plan is attached as Exhibit II and this description is qualified in its entirety by reference to such exhibits. Capitalized terms used herein have the same meaning as in the Non-Employee Director Plan or the Executive Deferral Plan, as applicable. NON-EMPLOYEE DIRECTOR PLAN If approved, the Non-Employee Director Plan would permit directors who are not employees of the Company, its subsidiaries or affiliates to elect to defer on an annual basis all or a designated portion of their director compensation payable in 1997 or thereafter into the interest-bearing account of the Non- Employee Director Plan. Such deferrals would be made subject to a one-time opportunity by the Non-Employee Director to convert that year's deferred director compensation into options, granted either at market value or at a designated discount not to exceed 25%, to acquire Company common stock. The Company's seven current Non-Employee Directors as well as any subsequently elected Non-Employee Directors constitute the class of persons eligible to participate in this plan. Up to 400,000 shares of Company common stock are proposed to be reserved for issuance pursuant to the Non-Employee Director Plan. The closing price of common stock of the Company on the New York Stock Exchange on March 7, 1997 was $59.625 per share. Contingent upon shareholder approval of the Non-Employee Director Stock Plan, in December 1996, Messrs. Hagopian, Lanier, McCormick, Records and Samford deferred 100% of their 1997 director compensation into the Interest Account of the Non-Employee Director Plan. Mr. Lanier elected to convert his interest-bearing account balance on January 2, 1997 to fair market value stock options on 9,084 Company common shares with an exercise price of $50.25 per share. On January 31, 1997, Messrs. Hagopian, McCormick, Records and Samford converted their respective interest-bearing account balances to fair market value stock options on 9,041, 9,137, 9,137 and 3,142 shares, respectively, with a $51.75 exercise price per share. Messrs. Boren and Farley, who are eligible to participate in the Non-Employee Director Plan, chose not to make deferrals of any 1997 director compensation and will be paid all such compensation in cash. DESCRIPTION OF PLAN On or before December 31 of each year, each Non-Employee Director will determine whether to receive all or a portion of his or her annual retainer and Board and committee meeting fees for the following calendar year in cash or to defer all or a portion (in 10% increments, but not less than 50%) of such Annual Compensation (assuming maximum attendance at scheduled Board and Committee meetings) into an interest-bearing account in the Non-Employee Director Plan. In the case of a newly elected Non-Employee Director, such determination to defer compensation must be made within the 30 day period immediately following election to the Board. The determination to defer, if made, shall be indicated upon a Primary Election Form, which shall specify the percentage of compensation deferred and the basis for payment of the interest- bearing account balance (a lump sum or designated number of monthly payments not to exceed 120) to the Non-Employee Director upon the earliest of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after such Non-Employee Director's death or (c) termination as a Non-Employee Director, for any reason other than by death. 8 At any time, but only once, during the calendar year immediately following the filing of a Primary Election Form, a participating Non-Employee Director may elect to convert the then current balance in his or her Interest Account for the calendar year to which such Primary Election Form relates into options to acquire Company common stock. For example, if a Primary Election Form was filed in December 1996 deferring Annual Compensation to be earned in 1997, the Non-Employee Director may elect at any time during 1997 to convert such deferred amount plus accrued interest to the conversion election date into stock options. The irrevocable election to receive options as of this election date, which is made on a Secondary Election Form, will specify the percentage of such stock options to be granted at an exercise price of 100% of the Fair Market Value per Share on the Option Grant Date and the percentage of Options to be granted at an exercise price of not less than 75% of the Fair Market Value per Share (with the discount of up to 25% to be determined by the Committee in its discretion). Non-Employee Directors may elect to receive discounted stock options, market value stock options or a combination of both. To the extent that a Non-Employee Director chooses to receive discounted stock options, he or she will receive options on a smaller number of shares with a lower exercise price per share while a decision to receive market value options will result a larger number of shares subject to option with a higher exercise price per share. Options granted pursuant to the Non-Employee Director Plan will be non- qualified stock options. Based upon the Non-Employee Director's decision as to the exercise price (discounted or market value) of the options to be received, the number of Shares subject to such option will be the whole number of Shares equal to (a) the dollar amount which the Non-Employee Director has elected to convert to Options divided by (b) the per share value of an Option on the Option Grant Date, as determined using an option valuation model selected by the Compensation Committee of the Board of the Company. Options are first exercisable, cumulatively, as to 10% of the Shares on each of the first through tenth anniversaries of the Option Grant Date. The term of the option will be as specified by the Committee but in no event may the period of time over which an Option may be exercised exceed eleven years from the Option Grant Date. In no event will death, Disability, retirement, other termination of directorship or failure to be reelected as a director shorten the term of any outstanding Option. Options may be subject to accelerated vesting and shall be immediately exercisable upon the Non-Employee Director's death or Disability, a Change in Control of the Company as defined in the plan or the unanimous decision of the Committee to accelerate. Upon acceleration, an Option remains exercisable for the remainder of its original term. Options may be exercised in whole or in part. Shares will be issued pursuant to the exercise of an Option only upon receipt by the Company of payment in full in cash of the aggregate purchase price for the Shares subject to the Option or portion thereof being exercised. The Committee may determine the specific method of payment, including permitting "cashless exercises" (exercise and simultaneous sale), and other terms and provisions of Options in its sole discretion. Options will not be assignable or transferrable other than by will or by the laws of descent and distribution; provided, however, the Committee may permit transfers which it, in its sole discretion, concludes do not result in accelerated taxation and which are otherwise appropriate and desirable taking into account any applicable securities laws. Based upon current Federal tax laws, a Non-Employee Director will not recognize income upon the making of a proper and timely deferral to the Interest Account nor will income be recognized upon the conversion of such account balance to Options. The Non-Employee Director will recognize income for purposes of Federal income tax when the amount in his or her Interest Account is paid out or immediately upon the exercise of the Options, generally in an amount equal to the option spread on the date of exercise. The Company generally receives a corresponding tax deduction when the Non-Employee Director recognizes income subject to any applicable deductibility limitations of the Internal Revenue Code. The Non-Employee Director Plan will be administered by the Compensation Committee of the Board of the Company, which shall have the authority to interpret and construe the plan, make necessary rules and regulations to administer the plan and designate persons as its agents who are neither members of the Committee or the Board to carry out administrative responsibilities under the plan. 9 Adjustments will be made to the total number of Shares reserved for issuance under the Non-Employee Director Plan, the number of Shares covered by and the Exercise Price of each outstanding Option if the Company at any time changes the number of issued Shares through a stock dividend, stock split, recapitalization, reorganization, or other change in corporate structure affecting the Shares. The Committee will authorize the issuance, continuation or assumption of outstanding Options or provide for other equitable adjustments after changes in Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock or similar occurrence in which the Company is the surviving or continuing corporation upon such terms and conditions as it deems necessary. In the case of an acquisition where the Company is not the surviving or continuing corporation and outstanding Shares are not converted into or exchanged for different securities, cash or other property, a Non-Employee Director who holds an outstanding Option will have the right then and during the remaining term of the Option to receive the same acquisition consideration received by other Company shareholders. The Board may amend, suspend or terminate the Non-Employee Director Plan or any Stock Option Award Notice thereunder at any time; provided, however, that it may condition amendments or modifications on shareholder approval if necessary or advisable because of tax, securities or other applicable laws, policies or regulations. No amendment, modification or termination shall adversely affect any outstanding Options or Interest Accounts without the consent of the Participant. The following table shows the Options granted under the Non-Employee Director Plan as of March 25, 1997 to the named individuals and groups. TORCHMARK CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
NUMBER NAME OF SHARES ---- --------- R. K. Richey................................................. 0 Chairman and Chief Executive Officer Keith A. Tucker.............................................. 0 Vice Chairman C. B. Hudson................................................. 0 Chairman and Chief Executive Officer of Liberty, Globe and United American Henry J. Herrmann............................................ 0 Vice President and Chief Investment Officer of Waddell & Reed Financial Bernard Rapoport............................................. 0 Chairman and Chief Executive Officer of American Income Executive Group.............................................. 0 Non-Executive Director Group................................. 39,541 Non-Executive Officer Employee Group......................... 0
10 EXECUTIVE DEFERRAL PLAN The Executive Deferral Plan, if approved, would permit Eligible Executives to defer salary and/or bonus into interest-bearing accounts in the plan, subject to a one-time opportunity to elect to convert within a designated time period any deferred salary for that year as well as a one-time opportunity to elect within a designated time period to convert any deferred bonus for that calendar year into options to acquire the Company's common stock. Such options may be granted with an exercise price of the fair market value of the stock or at a discount not to exceed 25% of the stock's market value. The executives eligible to participate in the Executive Deferral Plan will be determined from time to time by the Compensation Committee of the Board or its designee or by the Chairman of the Board. Currently, three persons have been designated as eligible to participate in this plan and it is contemplated that the number of Eligible Executives will not in any case exceed ten persons. Up to 1,000,000 shares of Company common stock have been reserved for issuance pursuant to the Executive Deferral Plan. The closing price of common stock of the Company on the New York Stock Exchange on March 7, 1997 was $59.625. Contingent upon shareholder approval, Messrs. Richey and Tucker deferred all of their respective 1996 bonuses and Mr. Hudson deferred a portion of his 1996 bonus into interest-bearing accounts in the plan prior to December 31, 1996. On January 31, 1997, each of Messrs. Richey, Tucker and Hudson elected to convert 100% of his Interest Account for Bonus into stock options with an exercise price of 100% of the fair market value of the common stock on that date. They received the number of shares set forth opposite their respective names in the table on page 13. DESCRIPTION OF PLAN On or before the last day of each calendar quarter, an Eligible Executive may elect to receive all or a portion of his or her salary for the next calendar quarter in cash or may irrevocably elect to defer all or a portion in 10% or $10,000 increments of next quarter's salary into an Interest Account for Salary under the Executive Deferral Plan by delivering a Primary Election Form for Salary to the plan administrator. Such Primary Election Form for Salary will specify the amount of Salary to be deferred into the interest- bearing account and the form and timing of the payout of deferred amounts; provided, however, if an executive elects to defer Salary for more than one quarter in a calendar year, the form and timing of payout for each quarter's deferral must be identical. At any time prior to December 31 of each year, an Eligible Executive may also elect to receive all or a portion of his or her bonus for the current calendar year in cash or may irrevocably elect to defer all or a portion (in 10% or $10,000 increments) of such current calendar year bonus into an Interest Account for Bonus under the Executive Deferral Plan by delivering a Primary Election Form for Bonus to the plan administrator. Such Primary Election Form for Bonus will specify the amount of Annual Bonus to be deferred and the form and timing of payout of the deferred amount; provided, however, that if an executive elects to defer both Salary and Annual Bonus for a particular calendar year, the form and timing must be identical. The Interest Accounts of a participating executive shall be segregated to reflect deferred compensation on a year-by-year basis and as to the type of compensation deferred (salary or bonus). Interest will be credited to such Interest Accounts at the rate determined from time to time by the Compensation Committee. Payment of the balances in an executive's Interest Accounts will be made as designated by the executive in a lump sum or in the number of approximately equal monthly installments not to exceed 120 which have been selected by the executive. Such payments shall begin on the earliest of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after the executive's death or (c) termination as an employee of the Company or any of its subsidiaries or affiliates, for any reason other than by death. At any time, but only once, during the twelve month period following the end of the calendar year with respect to which an executive deferred Salary into this plan, such executive will have the right to convert his or her Interest Account for Salary for the previous year into options in Company common stock by filing an irrevocable Secondary Election Form for Salary. Also, at any time, but only one time, during the twelve month 11 period following the end of a calendar year with respect to which an executive has deferred Annual Bonus into the plan, such executive shall have the right to convert his or her Interest Account for Bonus for such previous year into options in Company common stock by filing an irrevocable Secondary Election Form for Bonus. The filing of such Secondary Election Form for Salary or Secondary Election Form for Bonus will result in receipt by the executive of Options as of the date of such filing. The Secondary Election Form will specify the percentage of Options to be granted at an Exercise Price of 100% of the Fair Market Value per Share on the Option Grant Date and the percentage of Options to be granted at an exercise price of not less than 75% of the Fair Market Value per Share on the Option Grant Date (with the discount of up to 25% to be determined by Compensation Committee in its discretion). An Eligible Executive may elect to receive market value stock options, discounted stock options or a combination of both. To the extent that an executive selects market value options, he or she will receive options on a larger number of shares with a higher exercise price than if discounted options on fewer shares with a lower exercise price were selected. Options issued pursuant to the Executive Deferral Plan will be non-qualified stock options. Based upon the Eligible Executive's decision as to the exercise price (discounted or market value) of the options to be received, the number of Shares subject to such option will be the whole number of Shares equal to the dollar amount which the executive has elected to convert to Options divided by the per share value of an Option on the Option Grant Date, as determined using an option valuation model selected by the Compensation Committee of the Board. Options are first exercisable, cumulatively, as to 10% of the Shares on each of the first through tenth anniversaries of the Option Grant Date; provided, however, that any Option held by a Covered Employee as defined in Section 162(m) of the Internal Revenue Code shall not be exercisable before the first day of the calendar year immediately following the year in which the executive ceased to be a Covered Employee. The term of the option will be as specified by the Committee but in no event may the period of time over which an Option may be exercised exceed the longer of eleven years from the Option Grant Date or the thirtieth day of the calendar year immediately following the year in which the executive ceased to be a Covered Employee. In no event will death, Disability, retirement or other termination of employment shorten the term of any outstanding Option. Options will be subject to accelerated vesting and shall be immediately exercisable upon the executive's death or Disability, a Change in Control of the Company as defined in the plan or the unanimous decision of the Committee to accelerate. Upon acceleration, an Option remains exercisable for the remainder of its original term. Options may be exercised in whole or in part. Shares will be issued pursuant to the exercise of an Option only upon receipt by the Company of payment in full in cash of the aggregate purchase price for the Shares subject to the Option or portion thereof being exercised. The Committee may determine the specific method of payment, including permitting "cashless exercises" (exercise and simultaneous sale), and other terms and provisions of Options in their sole discretion. Options will not be assignable or transferrable other than by will or by the laws of descent and distribution; provided, however, the Committee may permit transfers which it, in its sole discretion, concludes do not result in accelerated taxation and which are otherwise appropriate and desirable taking into account any applicable securities laws. Based on current Federal tax laws, a participating executive will not recognize income upon the making of a proper and timely deferral to Interest Accounts nor will income be recognized when the amounts in his or her Interest Accounts are paid out or upon the conversion of such account balances to Options. The executive will recognize income for purposes of Federal income tax immediately upon the exercise of the non-qualified Options, generally in an amount equal to the option spread on the date of exercise. The Company generally receives a corresponding tax deduction when the executive recognizes income, subject to any applicable deductibility limitations of the Internal Revenue Code. The Executive Deferral Plan will be administered by the Compensation Committee of the Board of the Company, which shall have the authority to interpret and construe the plan, make necessary rules and regulations to administer the plan and designate persons as its agents who are neither members of the Committee or the Board to carry out administrative responsibilities under the plan. 12 Adjustments will be made to the total number of Shares reserved for issuance under the Executive Deferral Plan, the number of Shares covered by and the Exercise Price of each outstanding Option if the Company at any time changes the number of issued Shares through a stock dividend, stock split, recapitalization, reorganization, or other change in corporate structure affecting the Shares. The Committee will authorize the issuance continuation or assumption of outstanding Options or provide for other equitable adjustments after changes in Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock or similar occurrence in which the Company is the surviving or continuing corporation upon such terms and conditions as it deems necessary. In the case of an acquisition where the Company is not the surviving or continuing corporation and outstanding Shares are not converted into or exchanged for different securities, cash or other property, a participating executive who holds an outstanding Option will have the right then and during the remaining term of the Option to receive the same acquisition consideration received by other Company shareholders. The Board may amend, suspend or terminate the Executive Deferral Plan or any Stock Option Award Notice thereunder at any time; provided, however, that it may condition amendments or modifications on shareholder approval if necessary or advisable because of tax, securities or other applicable laws, policies or regulations. No amendment, modification or termination shall adversely affect any outstanding Options or Interest Accounts without the consent of the participating executive. The following table shows the Options granted under the Executive Deferral Plan to the named executives and groups as of March 25, 1997. TORCHMARK CORPORATION 1996 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN
NUMBER NAME OF SHARES ---- --------- R. K. Richey................................................. 157,081 Chairman and Chief Executive Officer Keith A. Tucker.............................................. 81,746 Vice Chairman C. B. Hudson................................................. 38,468 Chairman and Chief Executive Officer of Liberty, Globe and United American Henry J. Herrmann............................................ 0 Vice President and Chief Investment Officer of Waddell & Reed Financial Bernard Rapoport............................................. 0 Chairman and Chief Executive Officer of American Income Executive Group.............................................. 277,295 Non-Executive Director Group................................. 0 Non-Executive Officer Employee Group......................... 0
The Board recommends that the shareholders vote FOR the Non-Employee Director Plan and the Executive Deferral Plan. 13 PROPOSAL NUMBER 4 RATIFICATION OF TORCHMARK POLITICAL CONTRIBUTIONS PROGRAM Torchmark's financial and competitive well-being are subject to many different factors, some within its control and some outside its control. Governmental action is a key factor that can effect the Company's results. Torchmark's traditional lines of business have always been affected by governmental action. While the insurance industry is regulated by various state insurance departments, it is affected by laws passed by the U. S. Congress as well as by regulations and actions of other federal agencies. Likewise, the mutual fund industry in the United States is regulated at both the state and federal levels and is subject to laws passed at all levels. In an effort to protect the financial position of Torchmark and the best interests of its shareholders, the Company participates in the political process through the making of corporate political contributions which qualify under Federal election law. Increasingly, however, there is criticism of such corporate expenditures even though qualified under Federal law. To respond to these criticisms, the Board of the Company determined at its March 1997 meeting to submit a program for shareholder ratification whereby .05% of the Company's pre-tax earnings per year could be set aside for disbursement over a two-year election cycle in full accordance with all Federal election laws. Management of the Company, acting in what it determined to be the best interests of Company shareholders, would then utilize these funds to make contributions, in accordance with all Federal election laws, supporting candidates and political parties which they believe will work for preservation of the insurance industry and the mutual fund industry. If the shareholders do not ratify this political contributions program, the Board will re-examine its political contributions process and will in all respects continue to comply with Federal election laws. The Board recommends that the Shareholders vote FOR the proposal. PROPOSAL NUMBER 5 APPROVAL OF AUDITORS A proposal to approve the appointment of the firm of KPMG Peat Marwick LLP as the principal independent accountants of the Company to audit the financial statements of the Company and its subsidiaries for the year ending December 31, 1997 will be presented to the stockholders at the annual meeting. The audit committee of the Board recommends the appointment of the firm, which has served as the principal independent accountants for the Company since 1981. A representative of KPMG Peat Marwick LLP is expected to be present at the meeting and available to respond to appropriate questions and, although the firm has indicated that no statement will be made, an opportunity for a statement will be provided. If the stockholders do not approve the appointment of KPMG Peat Marwick LLP, the selection of independent auditors will be reconsidered by the Board of Directors. The Board recommends that stockholders vote FOR the proposal. OTHER BUSINESS The directors know of no other matters which may properly be and are likely to be brought before the meeting. If any other proper matters are brought before the meeting, however, the persons named in the enclosed proxy, or in the event no person is named, R. K. Richey and Keith A. Tucker will vote in accordance with their judgment on such matters. 14 INFORMATION REGARDING DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS EXECUTIVE OFFICERS The following table shows certain information concerning each person deemed to be an executive officer of the Company, except those persons also serving as directors. Each executive officer is elected by the Board of Directors of the Company or its subsidiaries annually and serves at the pleasure of that board. There are no arrangements or understandings between any executive officer and any other person pursuant to which the officer was selected.
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE NAME AGE FOR THE PAST FIVE YEARS(1) ---- --- -------------------------- Henry J. Herrmann........... 54 Vice President and Chief Investment Officer of W&R Financial since April, 1993; Senior Vice President and Chief Investment Officer of United Management since March, 1987; President and Chief Investment Officer of WRAMCO since September, 1987. Bernard Rapoport............ 79 Chairman of the Board and Chief Executive Officer of American Income since 1975. (Chairman of the Board and Chief Executive Officer of American Income Holding, Inc. 1988-1995).
- -------- (1) Waddell & Reed Financial Services, Inc. ("W&R Financial"), United Investors Management Company ("United Management"), Waddell & Reed Asset Management Company ("WRAMCO") and American Income Life Insurance Company ("American Income") are wholly-owned subsidiaries of the Company. 15 STOCK OWNERSHIP The following table shows certain information about stock ownership of the directors, director nominees and executive officers in the Company.
COMPANY COMMON STOCK OR OPTIONS BENEFICIALLY OWNED AS OF DECEMBER 31, 1996(1) ------------------------- NAME DIRECTLY(2) INDIRECTLY(3) ---- ----------- ------------- David L. Boren....................................... 150 0 Norman, OK Joseph M. Farley..................................... 61,805 3,000 Birmingham, AL Louis T. Hagopian.................................... 61,718 0 Darien, CT C. B. Hudson......................................... 749,484 11,390 Plano, TX Joseph L. Lanier, Jr. ............................... 59,501 9,456 Lanett, AL Harold T. McCormick ................................. 12,000 0 Panama City, FL George J. Records.................................... 11,000 0 Oklahoma City, OK R. K. Richey......................................... 416,002 791,007 Birmingham, AL Keith A. Tucker...................................... 214,612 27,859 Kansas City, MO Henry J. Herrmann.................................... 101,750 2,494 Overland Park, KS Bernard Rapoport..................................... 10,000 0 Waco, TX All Directors, Nominees and Executive Officers as a group:(4)............................................ 1,698,022 845,206
- -------- (1) No directors, director nominees or executive officers other than R. K. Richey (1.66%) and C.B. Hudson (1.05%) beneficially own 1% or more of the common stock of the Company. (2) Includes: for Joseph Farley, 39,000 shares; for Joseph Lanier, 49,001 shares; for Louis Hagopian, 54,218 shares; for Harold McCormick, 12,000 shares; for George Records, 9,000 shares; for R. K. Richey, 286,221 shares; for C. B. Hudson, 414,744 shares; for Keith Tucker, 178,612 shares; for Henry Herrmann, 99,100 shares; for Bernard Rapoport, 10,000 shares and for all directors, executive officers and nominees as a group, 1,151,896 shares, that are subject to presently exercisable Company stock options. David L. Boren holds options on 13,000 Torchmark shares. None of such options are presently exercisable prior to July 2, 1997. (3) Indirect beneficial ownership includes shares (a) owned by the director, executive officer or spouse as trustee of a trust or executor of an estate, (b) held in a trust in which the director, executive officer or a family member living in his home has a beneficial interest, (c) owned by the spouse or a family member living in the director's, executive officer's or nominee's home or (d) owned by the director or executive officer in a personal corporation. Indirect beneficial ownership also includes 5,390 Company shares, 11,452 Company shares, 1,984 Company shares and 2,494 Company shares held in the accounts of Messrs. Hudson, Richey, Tucker and Herrmann, respectively, in the Company or United Management Savings and Investment Plans. Mr. Lanier disclaims beneficial ownership of 8,256 shares owned by his spouse and 1,200 shares owned by his children. Mr. Farley disclaims 2,400 shares held as trustee of a church endowment fund. (4) All directors, nominees and executive officers as a group, beneficially own 3.49% of the common stock of the Company. 16 During 1996, the Board of Directors met five times. In 1996, all of the directors attended more than 75% of the meetings of the Board and the committees on which they served. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has the following committees: audit, comprised in 1996 of Messrs. Farley, Hagopian and Samford; compensation, comprised in 1996 of Messrs. Lanier, McCormick and Records; finance, comprised in 1996 of Messrs. Farley, Lanier, McCormick and Records; and nominating, comprised in 1996 of Messrs. Boren, Farley, Hagopian, Lanier, McCormick, Records and Samford. The audit committee recommends the independent auditors to be selected by the Board; discusses the scope of the proposed audit with the independent auditors and considers the audit reports; discusses the implementation of the auditors' recommendations with management; reviews the fees of the independent auditors for audit and non-audit services; reviews the adequacy of the Company's system of internal accounting controls; reviews, before publication or issuance, the annual financial statement and any annual reports to be filed with the Securities and Exchange Commission and periodically reviews pending litigation. Additionally, the audit committee meets with the Company's independent accountants and internal auditors both with and without management being present. The audit committee met twice in 1996. The compensation committee determines the compensation of senior management of the Company and its subsidiaries and affiliates. Additionally, the compensation committee administers the Stock Incentive Plan of the Company. The compensation committee met three times in 1996. The finance committee serves as the pricing committee in connection with capital financing by the Company. The finance committee did not meet in 1996. The nominating committee reviews the qualifications of potential candidates for the Board of Directors from whatever source received, reports its findings to the Board and proposes nominations for Board membership for approval by the Board of Directors and for submission to the stockholders for approval. Recommendations of potential Board candidates may be directed to the nominating committee in care of the Corporate Secretary of the Company at the address stated herein. The nominating committee met twice in 1996. 17 COMPENSATION AND OTHER TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE ------------------------------------------------------------------------ ANNUAL COMPENSATION LONG TERM COMPENSATION ----------------------------------- -------------------------------- AWARDS --------------- (G) (E) SECURITIES (I) (A) (C) (D) OTHER ANNUAL UNDERLYING ALL OTHER NAME AND (B) SALARY BONUS COMPENSATION OPTIONS/SARS(5) COMPENSATION PRINCIPAL POSITION YEAR ($) ($)(3) ($) (4) (#) ($)(6) ------------------ ---- --------- ------- ------------ --------------- ------------ R.K. Richey 1996 1,166,688 0 315,592 257,081 25,058 Chairman and CEO 1995 1,166,688 500,000 181,716 150,000 24,401 1994 1,166,676 580,000 189,420 70,000 23,538 Keith A. Tucker 1996 700,008 0 146,746 6,114 Vice Chairman(1) 1995 700,008 350,000 100,000 6,062 1994 700,008 400,000 65,000 5,995 C.B. Hudson 1996 650,000 185,000 103,468 5,442 Chairman and Chief 1995 650,000 250,000 100,000 5,412 Executive Officer of 1994 650,000 350,000 35,000 5,373 Liberty, Globe and United American Henry J. Herrmann 1996 420,000 392,000 18,000 4,500 Vice President and 1995 320,000 357,000 22,000 4,500 Chief Investment 1994 320,000 327,000 19,500 4,500 Officer of W&R Financial Bernard Rapoport 1996 480,000 115,000 9,405 40,000 0 Chairman and CEO of 1995 480,000 175,269 7,695 20,000 9,000 American Income(2) 1994 460,000 0 148,500 20,000 9,000
- -------- (1) At year end 1996, Mr. Tucker held 30,000 restricted shares valued at $1,515,000 (based on a year end closing price of $50.50 per share). Restrictions on the 60,000 share award made pursuant to the Capital Accumulation and Bonus Plan expire over a ten year period and 6,000 shares vest annually commencing May 1, 1992. Dividends on all these restricted shares are paid directly to Mr. Tucker at the same rate as on unrestricted shares. (2) Mr. Rapoport serves as Chairman and CEO of American Income, a company acquired by Torchmark in November 1994. Prior to that time, American Income was a subsidiary of an unaffiliated publicly-held company, American Income Holding, Inc. (3) Messrs. Richey, Tucker and Hudson elected to defer $816,673, $425,000 and $200,000, respectively, of their 1996 bonuses to the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan ("TMK Executive Deferral Plan"), which is subject to shareholder approval at the 1997 Annual Meeting. (4) Includes perquisites for Mr. Richey--$121,102 in 1996 as premium equivalent for group term life insurance; $89,265, $87,747 as additional premiums paid for group term life insurance in 1995 and 1994, respectively; and $57,728 in 1996 for 1996, $57,728 in 1996 for 1997 and $57,728 in each of 1995 and 1994 as premiums for personal life insurance. Includes for Mr. Rapoport--$9,405, $7,695 and $148,500 paid to him from the American Income Life Insurance Company Exempt Employees 401K Profit Sharing Plan ("American Income Profit Sharing Plan") in 1996, 1995 and 1994, respectively. (5) Messrs. Richey, Tucker, Hudson, Herrmann and Rapoport received stock option grants in Company common stock pursuant to the Torchmark Corporation 1987 Stock Incentive Plan ("TMK Incentive Plan") in 1995 and 1994. In 1996, Messrs. Richey, Tucker and Hudson received stock option grants of 100,000, 65,000 and 65,000 shares, respectively, pursuant to the TMK Incentive Plan. On January 31, 1997, Messrs. Richey, Tucker and Hudson elected to convert all 1996 bonus amounts plus accrued interest of $4,703 $2,447 and $1,151, respectively, held in the TMK Executive Deferral Plan, subject to shareholder approval, to stock options of 157,081, 81,746 and 38,468 shares, respectively. 18 (6) Includes Company contributions to Torchmark Corporation Savings and Investment Plan, a funded, qualified defined contribution plan, for each of Messrs. Richey, Tucker and Hudson of $4,500.00 in 1996 and 1995 and of $7,075.20 in 1994. Includes in 1996, 1995 and 1994, interest only on prior contributions to the Torchmark Corporation Supplemental Savings and Investment Plan, an unfunded, non-qualified defined contribution plan, for Mr. Richey of $20,557.75, $19,901.08 and $19,038.70, for Mr. Tucker of $1,613.82, $1,562.26 and $1,494.57 and for Mr. Hudson of $942.11, $912.03 and $872.51, respectively. Includes for Mr. Herrmann, employer company contributions to the United Investors Management Company Savings and Investment Plan, a funded, qualified defined contribution plan, of $4,500 in 1996, 1995 and 1994. Includes for Mr. Rapoport, employer company contributions to the American Income Profit Sharing Plan, a funded, qualified defined contribution plan, of $0 in 1996 and $9,000 in 1995 and 1994, respectively.
OPTION GRANTS IN LAST FISCAL YEAR - ---------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ---------------------------------------------------------------------- ----------------------------------- NUMBER OF SECURITIES % OF EXERCISE UNDERLYING TOTAL OPTIONS OR OPTIONS GRANTED TO BASE GRANTED(1) EMPLOYEES IN PRICE EXPIRATION NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) (A) (B) (C) (D) (E) 0% ($) (F) (G) - ----------------------- ---------- ------------- --------- ---------- ------ ------------- ------------- All Company Common Shareholders(2) N/A N/A N/A N/A 0 2,213,488,235 5,609,408,831 R.K. Richey 100,000 14.9% 49.75 12/18/06 0 3,128,753 7,928,866 CEO gain on 1996 grants as % of All Company Common Shareholders gain N/A N/A N/A N/A N/A .14% .14% Keith A. Tucker 65,000 9.7% 49.75 12/18/06 0 2,033,689 5,153,763 C.B. Hudson 65,000 9.7% 49.75 12/18/06 0 2,033,689 5,153,763 Henry J. Herrmann 18,000 2.7% 49.75 12/18/06 0 563,175 1,427,196 Bernard Rapoport 40,000 5.9% 49.75 12/18/06 0 1,251,501 3,171,547
- -------- (1) All options are non-qualified stock options granted in Company common stock pursuant to the TMK Incentive Plan with a ten year and two day term at an exercise price equal to the closing price of the Company's common stock on the grant date. Options granted at $49.75 per share in 1996 are not exercisable during the first two years after the grant date and become first exercisable on 50% of the shares two years after the grant date and on the remaining 50% of the shares three years after the grant date. (2) Calculated based upon 69,695,975 publicly-held Torchmark common shares outstanding as of December 31, 1996 (excluding treasury shares and stock held by subsidiaries which is treated as treasury stock).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES - ------------------------------------------------------------------------------------------------ (C) (D) (E) (B) VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED (A) SHARES ACQUIRED REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS NAME ON EXERCISE (#) ($) OPTIONS AT FY-END (#) AT FY-END ($) ----- --------------- -------- ------------------------- ------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Richey, R.K. 0 0 286,221 285,000 4,316,575 1,721,250 Tucker, Keith A. 0 0 178,612 197,500 2,141,681 1,297,500 Hudson, C.B. 0 0 414,744 182,500 8,586,600 1,050,000 Herrmann, Henry J. 2,625 95,484 99,100 49,750 1,454,487 331,125 Rapoport, Bernard 0 0 10,000 70,000 165,000 337,500
19 PENSION PLANS Torchmark Corporation Pension Plan; United Investors Management Company Retirement Income Plan. These plans are non-contributory pension plans which cover all eligible employees who are 21 years of age or older and have one or more years of credited service. The benefits at age 65 under the Torchmark Pension Plan are determined by multiplying the average of the participant's earnings in the five consecutive years in which they were highest during the ten years before the participant's retirement by a percentage equal to 1% for each of the participant's first 40 years of credited service plus 2% for each year of credited service up to 20 years after the participant's 45th birthday and then reducing that result by a Social Security offset and by other benefits from certain other plans of affiliates. Benefits under the United Management Retirement Income Plan are determined by multiplying the average of the participant's earnings in the five consecutive years in which they were highest during the last ten years before the participant's retirement by a percentage equal to 2% for each year of credited service up to 30 years and by 1% for each year of credited service for the next 10 years and then reducing that result by a Social Security offset and by other benefits from certain other plans of affiliates. Earnings for purposes of the Torchmark Pension Plan include compensation paid by subsidiaries and affiliates, and do not include commissions, directors' fees, expense reimbursements, employer contributions to retirement plans, deferred compensation, or any amounts in excess of $150,000 (as adjusted). Earnings for purposes of the United Management Retirement Income Plan do not include bonuses or commissions (other than for Regional Vice Presidents, Division Managers and District Managers), directors' fees, expense reimbursements, employer contributions to retirement plans, deferred compensation or any amounts in excess of $150,000 per year (as adjusted). Benefits under the Torchmark Pension Plan and the United Management Retirement Income Plan vest 100% at five years. Upon the participant's retirement, benefits under both plans are payable as an annuity or in a lump sum. In 1996, covered compensation was $150,000 for Messrs. Richey, Tucker, and Hudson under the Torchmark Pension Plan and for Mr. Herrmann under the United Management Retirement Income Plan. Vested benefits under the non-qualified Torchmark Supplemental Retirement Plan, in which Messrs. Richey, Tucker and Hudson have participated, were frozen as of December 31, 1994 and no additional benefits accrue after that date pursuant to the supplementary retirement plan. Mr. Herrmann does not participate in any supplementary pension plan. Messrs. Richey, Hudson and Tucker have 33 years, 22 years and five years of credited service under the Torchmark Pension Plan, respectively. Mr. Herrmann is covered under the United Management Retirement Income Plan and has 23 years of credited service thereunder. Mr. Rapoport is not covered by any pension plan. The following tables show the estimated annual benefits payable under the Torchmark Pension Plan along with its supplementary retirement plan (which was frozen in 1994) and under the United Management Retirement Income Plan upon retirement of participants with varying final average earnings and years of service. Primarily because of the termination of the Torchmark Supplemental Retirement Plan, the benefits shown below as payable pursuant to the Torchmark Pension and Supplemental Retirement Plans may in most cases exceed the actual amounts paid. The benefits shown are offset as described above and the amounts are calculated on the basis of payments for the life of a participant who is 65 years of age. TORCHMARK PENSION AND SUPPLEMENTAL RETIREMENT PLANS*
FINAL YEARS OF CREDITED SERVICE AVERAGE ----------------------------------------------------------------- EARNINGS 15 20 25 30 35 -------- ------- ------- --------- ---------- ---------- $1,000,000 450,000 600,000 650,000 700,000 750,000 1,200,000 540,000 720,000 780,000 840,000 900,000 1,400,000 630,000 840,000 910,000 980,000 1,050,000 1,600,000 720,000 960,000 1,040,000 1,120,000 1,200,000
- -------- * Benefits paid under a qualified defined benefit plan are limited by law in 1996 to $120,000 per year. The balance of the benefit payments shown above thus comes from the Supplemental Retirement Plan. Because benefit accruals under the Supplemental Retirement Plan ceased as of December 31, 1994, each of Messrs. Richey, Tucker and Hudson have two years less of credited service under the Supplemental Retirement Plan than under the Torchmark Pension Plan. 20 UNITED MANAGEMENT RETIREMENT INCOME PLAN*
YEARS OF CREDITED SERVICE ------------------------------------------------------------ REMUNERATION 15 20 25 30 35 ------------ -------- -------- -------- -------- -------- $200,000 $ 60,000 $ 80,000 $100,000 $120,000 $120,000 250,000 75,000 100,000 120,000 120,000 120,000 300,000 90,000 120,000 120,000 120,000 120,000 350,000 105,000 120,000 120,000 120,000 120,000 400,000 120,000 120,000 120,000 120,000 120,000 500,000 120,000 120,000 120,000 120,000 120,000
- -------- *Benefits paid under a qualified defined benefit plan which does not operate in conjunction with a defined benefit supplementary or excess pension award plan are limited by law in 1996 to $120,000 per year. The United Management Retirement Plan has no supplementary or excess pension award plan. Waddell & Reed, Inc. Career Field Retirement Plan. Until January 1, 1973, W&R employees participated in the Waddell & Reed, Inc. Career Field Retirement Plan (the "Career Field Retirement Plan"). Under this plan, W&R contributed annually up to 10% of its profits less forfeitures, which were allocated to the participants on the basis of their compensation. Voluntary employee contributions were permitted under the plan but not required. Since January 1, 1973, no new participants have been admitted to the plan, and participants and the employer make no further contributions. All participants are fully vested. Upon the participant's retirement, termination of employment, disability, death or reaching age 65, his account is used to purchase an annuity or is paid in a lump sum. Mr. Herrmann is covered under the Career Field Retirement Plan for his service while employed by W&R prior to 1973. Benefits paid under this plan do not offset benefits paid under any other pension plan. PAYMENTS TO DIRECTORS Directors of the Company are currently compensated on the following basis: (1) Directors who are not officers or employees of the Company or a subsidiary of the Company ("Outside Directors") receive a fee of $1,000 for each attended Board meeting, a fee of $500 for each attended Board committee meeting, and an annual retainer of $40,000, payable each January for the entire year. They do not receive fees for the execution of written consents in lieu of Board meetings and Board committee meetings. They receive an allowance for their travel and lodging expenses if they do not live in the area where the meeting is held. Each Outside Director also is automatically awarded annually non- qualified stock options on 3,000 shares of Company common stock on the first day of each calendar year in which stock is traded on the New York Stock Exchange. (2) Beginning in January, 1993, directors who are officers or employees of the Company or a subsidiary of the Company waived receipt of all fees for attending Board meetings. They do not receive fees for the execution of written consents in lieu of Board meetings. They also do not receive a fee for attending Board committee meetings or an annual retainer. They are reimbursed their travel and lodging expenses, if any. Subject to shareholder approval of amendments to the TMK Incentive Plan at the 1997 Annual Meeting, the entire Board may, for calendar years commencing with 1996, award non-qualified stock options on a non-formula basis to all or such individual Outside Directors as it shall select. Such options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such options may be fixed by the Board at a discount not to exceed 25% of the fair market value on the grant date or at the fair market value of the stock on the grant date. In 1996, subject to shareholder approval as described above, three Outside Directors (Messrs. Boren, McCormick and Records) each received 10,000 shares at a 25% discount to the grant date price as non-formula based options. 21 Also, subject to shareholder approval of the Non-Employee Director Plan, commencing with 1997 annual retainer and meeting and committee fees (assuming attendance at all scheduled meetings), Outside Directors may elect to make deferrals of compensation into the interest-bearing account of the Non- Employee Director Plan and subsequently elect to convert such balances to stock options with either fair market value or discounted exercise prices. In 1996, subject to shareholder approval as described above, Messrs. Hagopian, Lanier, McCormick, Records and Samford chose to make such deferrals of 1997 compensation. Additional information regarding the Non-Employee Director Plan and deferrals thereunder is contained in Proposal Number 3. A director who is an officer of the Company and who retires as a director after his 65th birthday may be elected by the Board as an advisory director for one year terms until his 70th birthday. An advisory director receives an annual retainer of $25,000 payable in quarterly installments. Each person who has retired as a director and who is not currently serving as an advisory director may receive a retirement benefit payable annually, in an amount equal to $200 a year for each year of service as a director or advisory director up to 25 years, but not less than $1,200 a year. In determining this benefit, the number of years of service may include years as a director of a subsidiary of the Company if the payment for such years by the Company is in place of a payment which would otherwise be made by the subsidiary. OTHER TRANSACTIONS Robert Richey, Vice President of a Company subsidiary and son of R. K. Richey, received compensation and fringe benefits in 1996 of $117,310. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under the securities laws of the United States, the Company's directors, its executive officers, and any persons holding more than ten percent of the Company's common stock are required to report their initial ownership of the Company's common stock and other equity securities and any subsequent changes in that ownership to the Securities and Exchange Commission and the New York Stock Exchange and to submit copies of these reports to the Company. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1996, all required Section 16(a) filings applicable to its executive officers, directors, and greater than ten percent beneficial owners were timely and correctly made except that Mr. Herrmann filed an amended Form 5 after its due date to report 25 owned shares inadvertently omitted from his total direct holdings. 22 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Compensation of senior executives of Torchmark and its subsidiaries and affiliates is determined by the Compensation Committee of the Board of Directors (the "Committee"). The Committee, comprised entirely of outside directors, meets to fix annual salaries in advance and bonuses for the current year of executives earning more than $150,000, to review annual goals and reward outstanding annual performance of executives and to grant stock options pursuant to the 1987 TMK Incentive Plan. In 1993, the Committee employed an unaffiliated executive compensation consulting firm, Towers Perrin, to assist it in reviewing executive compensation policies and the payment of bonuses to executives. In 1996, the Committee met on several occasions with the Chairman to discuss the salaries and bonuses of the five most highly compensated executives, including the Chairman. Also, the Committee received written reports from certain of the other four most highly compensated executives of the Company discussing compensation of persons reporting to that executive. COMPENSATION PRINCIPLES The business philosophy of the Company focuses on maintenance and improvement of insurance operating margins and other operating margins through the efficient management of assets and control of costs. The Company's executive compensation program is based on principles which align compensation with this business philosophy, company values and management initiative. The program seeks to attract and retain key executives necessary to the long-term success of the Company, to mesh compensation with both annual and long-term strategic plans and goals and to reward executives for their efforts in the continued growth and success of the Company. Annual goals for executive compensation focus on insurance operating income for the insurance subsidiaries and operating income in other Company subsidiaries. To the extent readily determinable and as one of the factors in its consideration of compensation matters, the Committee considers the anticipated tax treatment to the Company and to the executives of various payments and benefits. Some types of compensation payments and their deductibility depend upon the timing of an executive's vesting or exercise of previously granted rights. Further, interpretations of and changes in the tax laws and other factors beyond the Committee's control also affect the deductibility of compensation. For these and other reasons, the Committee will not necessarily and in all circumstances limit executive compensation to that deductible under Section 162(m). The Committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives. SALARY AND BONUS SYSTEM For some time the Company has used a system of salaries and bonuses to reward executives of the Company and its subsidiaries for performance relative to annual goals. These goals focus on insurance operating income for the insurance subsidiaries and operating income for the other subsidiaries and vary by operating company based upon that particular company's current position. Annually, the Committee, in consultation with the Company's Chairman and Chief Executive Officer and with the Chief Executive Officer of certain operating subsidiaries, reviews each subsidiary's performance relative to the goals and fixes salaries and bonuses for that operating subsidiary's executives. The degree to which these executives have met their particular subsidiary's goals in turn determines the amount of the bonus, if any, and whether senior executive officers of the Company receive salary increases. Such executives do not receive any cost of living salary adjustments. STOCK OPTION PROGRAM The Company began awarding stock options to executives and key employees in 1984. The option plan under which options in Company common stock are currently awarded was adopted in 1987 and has as its stated purpose attracting and retaining employees who contribute to the Company's, its subsidiaries' and affiliates' success and enabling those persons to participate in that long- term success and growth through an equity interest in the Company. To this end, the Committee, as administrator of the TMK Incentive Plan, grants non- qualified stock options to officers and key employees at the market value of the Company's common stock on the date of the grant, the size of the grant being based generally on the current compensation of such officers or key 23 employees. The five most highly compensated executive officers are paid salaries and bonuses commensurate with the level of their responsibilities and therefore they typically are awarded a larger number of option shares than other employees with lesser levels of compensation and responsibility. In 1996, for the five most highly compensated executive officers, the options granted were in proportion to current compensation adjusted by a subjective factor ranging from 2.2 to 13.0. Decisions regarding stock option grants are made annually and the number of options previously awarded to an individual executive officer is not a substantial consideration in determining the amount of options granted to that officer in the future. Once an officer has been awarded options and becomes a part of the stock option program, he or she will typically continue to receive from year to year stock options related to salary. Stock options may be exercised using cash or previously-owned stock for payment or through a simultaneous exercise and sale program. Such stock options become first exercisable to the extent of 50% of the shares on the second anniversary of the option grant date and on the remaining 50% of the shares on the third anniversary of the option grant date. COMPENSATION OF CHIEF EXECUTIVE OFFICER R. K. Richey, was deeply involved in the formation of the Company in 1980 and has served as one of its principal executives and a director since that time. He assumed the responsibilities of Chief Executive Officer of the Company on January 1, 1985. Since 1980, the market value of Torchmark has increased over nine times, at over $3.5 billion, and the number of outstanding shares has been reduced by more than 38%. Cash dividends during the same period increased at a 12.4% compound growth rate and the price of Company stock has compounded at 19.7%. The Committee, in determining Mr. Richey's bonus for 1996, focused primarily on earnings per share and return on equity, while giving consideration to Mr. Richey's ability and determination as well as his vision and leadership in continuing to enhance the long term value of the Company. During 1993, the Committee developed, in conjunction with its consultant Towers Perrin, and adopted a precise bonus formula for Mr. Richey as Chairman and Chief Executive Officer of the Company based upon the combination of growth in earnings per share and in return on equity adjusted for certain items, including, but not limited to, changes in income tax rates, guaranty fund assessments and punitive damage awards. In 1996, there was 12.7% growth in earnings per share resulting in an earnings per share bonus component of 30% and return on equity exceeded 20% resulting in a return on equity bonus component of 50%, making Mr. Richey eligible pursuant to the formula for the maximum bonus on his base salary of $1,166,688. The Committee, however, has capped Mr. Richey's total compensation at $2 million and thus determined has to award him a bonus of $816,673 in 1996. Mr. Richey's base salary and stock option award are not directly related to specific measures of corporate performance. His base salary is determined by his tenure of service with the Company and its subsidiaries and affiliates, his current job responsibilities and the progression of responsibilities and positions he has assumed in the Company over the course of his career. Mr. Richey's total cash compensation has been capped by the Committee at $2,000,000, including a specific cap on his base salary and an effective cap on any bonus he may be awarded. Mr. Richey's stock option award is also not directly tied to specific measures of corporate performance. Such award is generally based on his current compensation. To the extent that his current compensation is related to base salary, there is no tie to specific measures of corporate performance. To the extent that his current compensation has a bonus component, his stock option award maybe indirectly impacted by measures of corporate performance. COMPENSATION OF OTHER EXECUTIVES The other executive officers listed in the Summary Compensation Table in the Proxy Statement are compensated by salary and a bonus based upon growth in insurance operating income and/or operating income of the various Company subsidiaries, affiliates or areas of operation for which each is responsible. 24 Mr. Tucker's bonus compensation is based upon the combined insurance operating income of United Investors Life Insurance Company and the operating income of the Waddell & Reed, Inc. group of companies, entities for which he is responsible. Mr. Hudson is in charge of all insurance operations of the Company except United Investors Life. Messrs. Tucker and Hudson were eligible for 1996 bonuses based upon a formula providing for 5% of their Committee approved salary for each 1% growth in insurance operating income and/or operating income, subject to a cap of 50% of salary. Additionally, the Committee, in its sole discretion could award Messrs. Hudson and Tucker a bonus of up to 15% of 1996 salary. The total of the discretionary bonus and the formula bonus generally may not exceed 60% of the current year base salary. Combined insurance operating income and operating income of the companies for which Mr. Tucker is responsible increased 14% in 1996 entitling him to a maximum formula bonus of 50% of base salary or $350,000. A discretionary bonus of 10.7% of base salary was granted to Mr. Tucker by the Committee, resulting in a total bonus of $425,000. Insurance operating income before administrative expense for 1996 in Mr. Hudson's areas of supervision grew 8% resulting in a bonus of 40% of base salary or $280,000. A discretionary bonus of 15 % of base salary was granted to Mr. Hudson by the Committee, resulting in a total bonus of $385,000 for 1996. Mr. Herrmann is the Chief Investment Officer of the Waddell & Reed group of companies. Mr. Herrmann's bonus comes from a bonus pool for Waddell & Reed senior officers, the amount of which is determined based upon increases in operating earnings. The exact size of the pool varies depending on a comparison of actual growth with targeted growth objectives. Mr. Herrmann's bonus is determined by the Committee, in its discretion. In 1996, Mr. Herrmann's bonus was $392,000 or 49.8% of the pool. Mr. Rapoport has served for a number of years as the Chairman of the Board and Chief Executive Officer of American Income. Mr. Rapoport's bonus is subjectively determined based upon a number of factors, including growth in earnings and growth in insurance operating income of American Income. COMPENSATION AND COMPANY PERFORMANCE As indicated above, the annual aspect of executive compensation at Torchmark centers on increases in insurance operating income or operating income. Over the last three years insurance operating income has increased 35% from $283 million in 1993 to $381 million in 1996. Operating income at the non-insurance subsidiaries rose from $101 million in 1993 to $110 million in 1996, an increase of 9%. Insurance operating income comprised 79%, 83% and 77% of the Company's pre-tax earnings for 1994, 1995 and 1996, respectively, while operating income at the non-insurance subsidiaries was 20.9%, 21.6% and 22.2%, respectively, of the Company's pre-tax earnings for the same periods. Mr. Richey's salary and bonus compensation has been capped by the Committee at $2 million. The above performance resulted in compensation increases to certain of the Company's other executives shown in the Summary Compensation Table and decreases to other listed executives. Excluding Mr. Richey, whose compensation is capped, cash compensation paid to the other persons listed in the Summary Compensation Table on page 18 as a group decreased 10.4% from 1995 to 1996, because of substantial bonus deferrals by Messrs. Tucker and Hudson into the new proposed deferred compensation plan for executives. The long-term portion of the executive compensation program centers on stock value through the granting of stock options. Over the last three fiscal years earnings per share from continuing operations excluding realized investment gains and the related acquisition cost adjustment have increased 26.6% and rose from $3.50 in 1993 to $4.43 in 1996. Harold T. McCormick, Chairman Joseph L. Lanier, Jr. George J. Records The foregoing Compensation Committee Report on Executive Compensation shall not be deemed "filed" with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. 25 LOGO The line graph shown above compares the yearly percentage change in Torchmark's cumulative total return on its common stock with the cumulative total returns of the Standard and Poor's 500 Stock Index ("S&P 500") and the Standard and Poor's Insurance (Life/Health) Index ("S&P Insurance (Life/Health)"). Torchmark is one of the companies whose stock is included within both the S&P 500 and the S&P Insurance (Life/Health). The graph reflects $100 invested on December 31, 1991 in each of Torchmark stock and the two indices with all dividends being reinvested. Information for graph produced by Research 26 MISCELLANEOUS INFORMATION PROPOSALS OF STOCKHOLDERS In order for a proposal by a stockholder of the Company to be eligible to be included in the proxy statement and proxy form for the annual meeting of stockholders in 1998, the proposal must be received by the Company at its home office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before November 26, 1997. GENERAL The cost of this solicitation of proxies will be borne by the Company. The Company will request certain banking institutions, brokerage firms, custodians, trustees, nominees, and fiduciaries to forward solicitation material to the beneficial owners of shares of the Company held of record by such persons, and the Company will reimburse reasonable forwarding expenses. THE ANNUAL REPORT OF THE COMPANY FOR 1996, WHICH ACCOMPANIES THIS PROXY STATEMENT, INCLUDES A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND THE FINANCIAL STATEMENTS AND SCHEDULES THERETO. UPON REQUEST AND PAYMENT OF THE COST OF REPRODUCTION, THE EXHIBITS TO THE FORM 10-K WILL BE FURNISHED. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO INVESTOR RELATIONS DEPARTMENT, TORCHMARK CORPORATION AT ITS ADDRESS STATED HEREIN. By Order of the Board of Directors LOGO Carol A. McCoy Associate Counsel & Secretary March 25, 1997 27 TORCHMARK CORPORATION PROXY/DIRECTION CARD FOR ANNUAL MEETING ON APRIL 24, 1997 THIS PROXY/DIRECTION IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY. The undersigned hereby appoints R. K. Richey and Keith A. Tucker, jointly and severally with full power of substitution, to vote all shares of common stock which the undersigned holds of record and is entitled to vote at the Annual Meeting of Shareholders to be held at the offices of the Company, 2001 Third Avenue South, Birmingham, Alabama on the 24th day of April 1997 at 10:00 a.m. (CDT), or any adjournment thereof. All shares votable by the undersigned in- cluding shares held of record by agents or trustees for the undersigned as a participant in the Dividend Reinvestment Plan (DRP), Torchmark Corporation Sav- ings and Investment Plan (TTP), United Investors Management Company Savings and Investment Plan (UITP), Liberty National Life Insurance Company 401K Plan (LNL 401K) and the Profit Sharing and Retirement Plan of Liberty National Life In- surance Company (LNL PS&R) will be voted in the manner specified and in the discretion of the persons named above or such agents or trustees on such other matters as may properly come before the meeting. ELECTION OF DIRECTORS: David L. Boren, Louis T. Hagopian and Harold T. McCormick P R O X Y (change of address/comments) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXY COMMITTEE CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD. SEE REVERSE SIDE FOLD AND DETACH HERE TORCHMARK MAINTAINS A DIVIDEND REINVESTMENT PLAN FOR ALL HOLDERS OF ITS COMMON STOCK. UNDER THE PLAN, SHAREHOLDERS MAY REINVEST ALL OR PART OF THEIR DIVIDENDS IN ADDITIONAL SHARES OF COMMON STOCK AND MAY ALSO MAKE PERIODIC ADDITIONAL CASH PAYMENTS OF UP TO $3,000 TOWARD THE PURCHASE OF TORCHMARK STOCK. PARTICIPATION IS ENTIRELY VOLUNTARY. MORE INFORMATION ON THE PLAN CAN BE OBTAINED BY CALLING 1-800-446-2617. 4937 ---- X Please mark your votes as in this example. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ELECTION OF DIRECTORS AND FOR PROPOSALS 2, 3, 4 AND 5. 1. Election of Directors FOR WITHHELD [_] [_] 2. Amendment and Restatement of Incentive Plan FOR AGAINST ABSTAIN [_] [_] [_] 3. Approval of Non-Employee Director and Executive Deferral Plans FOR AGAINST ABSTAIN [_] [_] [_] For, except vote withheld from the following nominee(s): - -------------------------------------------------------------------------------- 4. Approval of Political Contributions Program 5. Approval of Auditors Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE(S) DATE FOLD AND DETACH HERE TORCHMARK CORPORATION STOCKHOLDER INQUIRIES FOR GENERAL INFORMATION CONCERNING YOUR TORCHMARK STOCK, CALL (205) 325-4270. EX-21 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21. 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 - --------------------- ------------- ----------------------- American Income Life American Income Life Insurance Company Indiana Insurance Company 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 Waddell & Reed Investors Management Investors Management Company, Inc. Delaware Company, Inc. Waddell & Reed Waddell & Reed Services Company, Inc. Delaware Services Company, Inc.
EX-23 9 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23(a)-(f) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation We consent to incorporation by reference in the Registration Statements (Nos. 2-76378, 2-76912, 2-93760, 33-23580, 33-1032, and 33-65507) on Forms S-8 of our report dated January 31, 1997, except for Note 16 which is as of March 11, 1997, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996, 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 No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of. /s/ KPMG Peat Marwick LLP Birmingham, Alabama March 24, 1997 EX-24 10 POWER OF ATTORNEY 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, Larry M. Hutchison, 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, 1996. 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/ David L. Boren -------------------------- David L. Boren, Director Date: March 3, 1997 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, Larry M. Hutchison, 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, 1996. 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: March 3, 1997 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, Larry M. Hutchison, 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, 1996. 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: March 3, 1997 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, Larry M. Hutchison, 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, 1996. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, 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: March 3, 1997 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, Larry M. Hutchison, 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, 1996. 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 L. Lanier, Jr., Director Date: March 3, 1997 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, Larry M. Hutchison 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, 1996. 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 3, 1997 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, Larry M. Hutchison, 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, 1996. 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 --------------------------- Harold T. McCormick, Director Date: March 3, 1997 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, Larry M. Hutchison, 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 capacities 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, 1996. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form-10, 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: March 3, 1997 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, Larry M. Hutchison, 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, 1996. 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: March 3, 1997 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, Larry M. Hutchison, 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 capacities 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, 1996. 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: March 3, 1997 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, Larry M. Hutchison, 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, 1996. 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: March 3, 1997 EX-27 11 ARTICLE 5 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 5,328,276 0 0 8,858 64,353 150,490 5,939,520 18,272 0 1,498,095 9,800,800 4,797,738 83,670 220,121 80,812 832,790 193,145 0 73,784 1,555,559 9,800,800 1,609,919 404,608 5,829 185,454 1,058,084 218,826 433,768 495,132 180,622 318,509 (7,137) 0 0 311,372 4.37 0 0 0 0 0 0 0 0
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