-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jD2GESoTdV5uF6QDOiLvxevYyupVAYHvLaAuYyLhYK1L83eY1fN7LMQESmAx2dp9 Aux8UgYrchNGgb7n6iDKqQ== 0000005320-94-000027.txt : 19941122 0000005320-94-000027.hdr.sgml : 19941122 ACCESSION NUMBER: 0000005320-94-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMVESTORS FINANCIAL CORP CENTRAL INDEX KEY: 0000005320 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 481021516 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15330 FILM NUMBER: 94559841 BUSINESS ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 BUSINESS PHONE: 9132333600 MAIL ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INVESTORS LIFE INSURANCE CO INC DATE OF NAME CHANGE: 19860921 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Nine Months Ended September 30, 1994 Commission File Number 0-15330 AMVESTORS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Kansas 48-1021516 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 415 Southwest 8th Avenue, Topeka, Kansas 66603 _____________________________________________ ___________ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (913) 232-6945 _______________ 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 reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding September 30, 1994 _______ ______________________________ Common Stock, no par value 10,132,842 shares AMVESTORS FINANCIAL CORPORATION INDEX PART I. Financial Information: Page Number Consolidated Balance Sheets September 30, 1994 and December 31, 1993 2-3 Consolidated Statements of Earnings Nine months ended September 30, 1994 and 1993 4 Consolidated Statements of Earnings Three months ended September 30, 1994 and 1993 5 Consolidated Statements of Stockholders' Equity Twelve months ended December 31, 1993 and Nine months ended September 30, 1994 6 Consolidated Statements of Cash Flows - Nine months ended September 30, 1994 and 1993 7 Notes to Consolidated Financial Statements 8-22 Management's Discussion and Analysis of Financial Condition and Results of Operations 23-30 PART II. Other Information 31-32 1 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1994 and December 31, 1993 (000's Omitted) (Unaudited)

2 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1994 and December 31, 1993 (000's Omitted, except per share data) (Unaudited)

3 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Nine months ended September 30, 1994 and 1993 (000's Omitted, except per share data) (Unaudited)

4 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Three months ended September 30, 1994 and 1993 (000's Omitted, except per share data) (Unaudited) [CAPTION] 1994 1993 Revenue: Insurance premiums and policy charges $ 1,886 1,557 Net investment income 36,198 34,193 Net investment gains (losses) (727) 2,517 Other revenue 162 69 Total revenue 37,519 38,336 Benefits and expenses: Benefits, claims and interest credited to policyholders 28,519 28,192 Amortization of deferred policy acquisition costs 2,530 608 General insurance expenses 1,361 2,104 Premium and other taxes, licenses and fees 216 81 Other expenses 60 60 Total benefits and expenses 32,686 31,045 Operating earnings 4,833 7,291 Interest expense - 301 Earnings before income tax expense 4,833 6,990 Income tax expense 1,628 2,497 Net earnings $ 3,205 4,493 Earnings per share of common stock: Primary: Net earnings $ .31 .69 Fully diluted: Net earnings $ .31 .65 Average shares outstanding: Primary 10,347 6,390 Fully diluted 10,354 6,913 See notes to consolidated financial statements.

5 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's Omitted, except share and per share data) (Unaudited)
Unrealized investment Preferred Common Paid-in gains Retained Treasury stock stock capital (losses) earnings stock LESOP Total Balance-January 1, 1993 $ 172 8,186 45,016 (809) 7,441 (6,855) (3,688) 49,463 Net earnings - - - - 17,978 - - 17,978 Decrease in unrealized investment losses - - - 1,873 - - - 1,873 Cash dividends to stock- holders ($1.50 per share on preferred stock) - - - - (236) - - (236) Cash paid on reverse stock split - - (25) - - - - (25) Issuance of common stock: upon completion of stock offering upon - 4,392 25,014 - - - - 29,406 exercise of options - 290 1,704 - - - - 1,994 upon conversion of preferred stock (172) 729 (557) - - - - - Cancellation of treasury stock - (690) (6,165) - - 6,855 - - Repurchase of warrants upon payment of debt - - (375) - - - - (375) Allocation of LESOP shares- - - - - - 267 267 Balance-December 31, 1993 - 12,907 64,612 1,064 25,183 - (3,421) 100,345 Net earnings - - - - 9,266 - - 9,266 Expenses related to 1993 stock offering - - (134) - - - - (134) Cumulative effect of adoption of SFAS 115 on January 1, 1994 - - - 19,613 - - - 19,613 Decrease in unrealized investment gains - - - (21,289) - - - (21,289) Issuance of common stock upon exercise of options - 12 58 - - - - 70 Purchase of treasury stock - - - - - (177) - (177) Redemption of stockholders rights plan - - (102) - - - - (102) Balance-September 30, 1994 $ - 12,919 64,434 (612) 34,449 (177) (3,421) 107,592 Net of deferred income taxes of $548. Net of income tax benefit of $441. Net of deferred income tax expense (benefit) of $(329). Net of amortization of deferred policy acquisition cost of $387. See notes to consolidated financial statements.
6 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Increase (Decrease) in Cash and Cash Equivalents Nine months ended September 30, 1994 and 1993 (000's Omitted) (Unaudited) [CAPTION] 1994 1993 Operating Activities: Net earnings $ 9,266 13,597 Adjustments to reconcile net earnings to net cash provided by operating activities: Interest credited to policyholders 84,935 87,503 Depreciation 337 402 Amortization of (discounts) premiums on debt securities, net (2,062) (1,514) Amortization of deferred policy acquisition costs 7,524 10,162 Net investment (gains) losses (328) (15,263) Accrued investment income (533) (1,186) Deferred income taxes (486) 1,452 Accrued expenses and other liabilities (832) 945 Other, net (654) 2,161 Net cash provided by operating activities 97,167 98,259 Investing Activities: Purchases of debt securities (511,406) (455,408) Proceeds from sale of debt securities 284,710 319,367 Proceeds from maturation of debt securities 105,579 105,164 Purchases of long-term investments (12,275) (16,266) Principal collected on long-term investments 8,255 2,768 Policy loans originated (1,031) (1,167) Principal collected on policy loans 852 1,096 Short-term investments, net 1,287 1,026 Capitalization of deferred policy acquisition costs (19,517) (12,618) Other, net (306) (650) Net cash provided by (used in) investing activities (143,852) (56,688) Financing Activities: Premiums received 206,889 157,329 Surrender and death benefits paid (181,223) (272,708) Surrender and risk charges collected 4,199 3,816 Amount due on securities settlements in process 2,811 (6,951) Payments on notes payable - (6,002) Cash dividends to stockholders - (236) Purchase of treasury stock (177) - Redemption of stockholders rights plan (102) - Issuance of common stock (64) 1,807 Other, net 1,705 (2,216) Net cash provided by (used in) financing activities 34,038 (125,161) Increase (Decrease) in Cash and Cash Equivalents (12,647) (83,590) Cash and Cash Equivalents: Beginning of year 21,782 93,050 End of period $ 9,135 9,460 Supplemental schedule of cash flow information: Income tax payments $ 5,305 204 Interest payments $ - 772 Net unrealized investment gains (losses) on available-for-sale securities $ (554) - Less: Associated amortization of deferred policy acquisition costs 387 - Deferred income tax expense (benefit) (329) - Net unrealized investment gains available for sale $ (612) - See notes to consolidated financial statements.

7 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: _______________________________________________ a. Principles of consolidation: The consolidated financial statements include the accounts of AmVestors and its wholly-owned subsidiaries American Investors Life Insurance Company, Inc. (American), American Investors Sales Group, Inc. (American Sales), AmVestors Investment Group, Inc. (AIG) and Omni-Tech Medical, Inc. (Omni-Tech), (collectively the company). All significant intercompany accounts and transactions have been eliminated. b. Accounting Principles and Practices: The accompanying unaudited consolidated financial statements have been prepared on the basis of generally accepted accounting principles as promulgated by the American Institute of Certified Public Accountants. In the opinion of the company, the consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 1994 and December 31, 1993 and the statements of earnings and the statements of cash flows for the nine month periods ended September 30, 1994 and 1993. c. Investments: Debt securities held-to-maturity are carried at amortized cost, except that those securities with an other than temporary impairment in value are carried at estimated net realizable value. Debt securities available-for-sale are carried at the estimated market value, with any unrealized gains or losses recorded in stockholder's equity. Investments are reviewed on each balance sheet date to determine if they are impaired. In determining whether an investment is impaired, the company considers whether the decline in market value at the balance sheet date is an other than temporary decline; if so, then the investment's carrying value is reduced to a new cost basis which represents estimated net realizable value. The decline in value is reported as a realized loss, and a recovery from the new cost basis is recognized as a realized gain only at sale. The estimates of net realizable value are based on information obtained from published financial information provided by issuers, independent source such as broker dealers or the company's independent investment advisor. Such amounts represent an estimate of the consideration to be received in the future when the defaulted company's debt is settled through the sale of their assets or the restructuring of their debt. These estimates do not represent the discounted present value of these future considerations. An allowance for credit losses has been recorded to reduce total investments by charging investment losses. The recorded allowance reflects management's estimate of losses existing in the company's invested assets, which may occur in the future due to conditions unknown to management at this time. Management periodically reviews the adequacy of the allowance for credit losses. As credit losses are realized, they are charged against the allowance. Investments in common stock and non-redeemable preferred stock are carried at market, with any unrealized gains or losses recorded in stockholders' equity. The cost of securities sold is determined on the identified certificate basis. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ Other long-term investments include policy loans and mortgage loans on real estate which are carried at cost less principal payments since date of acquisition, and certain partnership investments which are carried at an amount equal to the company's share of the partnerships' estimated market value with any unrealized gains or losses recorded in net investment income. d. Fair value of financial instruments: Estimated fair value amounts have been determined by the company using available market information and appropriate valuation methodologies. Due to the fact that considerable judgment is required to interpret market data to develop the estimates of fair value, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The carrying values and estimated fair values of the company's financial instruments as of September 30, 1994 were as follows:
(000's Omitted) Carrying Fair Value Value Assets Debt securities $ 1,853,902 1,785,984 Equity securities 2,577 2,577 Other long-term investments 42,677 42,746 Short-term investments 624 624 Cash and cash equivalents 9,135 9,135 Amounts receivable on securities settlements in process 600 600 Accounts receivable and accrued investment income 27,970 27,970 Liabilities: Future policy benefits - investment contracts 1,891,256 1,774,110 Other policy liabilities 3,798 3,798 Amounts due on securities settlement in process 2,208 2,208 Accrued expenses and other liabilities 3,232 3,232
Debt securities - Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Equity securities - Fair value equals the carrying value as these securities are carried at quoted market value. Other long-term investments - For certain homogeneous categories of mortgage loans, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Fair value of policy loans and other long-term investments is estimated to approximate the assets' carrying value. Short-term investments and cash and cash equivalents - The carrying amounts reported in the balance sheet approximate the assets' fair value. Amounts receivable on securities settlements in process - The carrying amount reported in the balance sheet approximates the fair value of this asset. Accounts receivable and accrued investment income - The carrying amounts reported in the balance sheet for these assets approximates fair value. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ Future policy benefits for investment contracts - The fair values for deferred annuities were estimated to be the amount payable on demand at the reporting date as those investment contracts have no defined maturity and are similar to a deposit liability. The amount payable at the reporting date was calculated as the account balance less any applicable surrender charges. Other policy liabilities - The carrying amount reported in the balance sheet approximates the fair value of these liabilities. Amounts due on securities settlements in process - The carrying amount reported in the balance sheet approximates the fair value of this liability. Accrued expenses and other liabilities - The carrying amount reported in the balance sheet approximates the fair value of these liabilities. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. e. Deferred policy acquisition costs: The costs of acquiring new business (primarily commissions and policy expenses), which vary with and are directly related to the production of new business, have been deferred. The deferred costs related to investment-type deferred annuity contracts are amortized in relation to the incidence of expected gross profits over the expected life of the policies, but not more than 15 years. For single premium life insurance, deferred acquisition costs are amortized over the life of the policies, but not more than 20 years for policies issued before January l, 1987 and not more than 30 years for policies issued after December 31, 1986, based on the expected gross profits for the amortization periods. The deferred costs related to traditional life contracts are amortized over the premium paying period for the related policies using the same actuarial assumptions as to interest, mortality and withdrawals as are used to calculate the reserves for future benefits. Determination of expected gross profits includes managements' best estimate of certain elements over the life of the contracts, including anticipated excess investment income, surrender charge revenues and mortality charge revenues (single premium life insurance). Estimates of expected gross profits used as a basis for amortization are evaluated regularly by management, and the total amortization recorded to date is adjusted by a charge or credit to the statement of operations if actual experience indicates that the estimates should be revised. Net investment gains realized in the first nine months of 1994 and 1993 resulted in the company experiencing investment margins greater than those estimated. As a result, $78,480 and $4,192,438 of the unamortized balance of deferred policy acquisition costs were expensed in the nine months ended September 30, 1994 and 1993, respectively. The amount charged off is based on actual gross profits earned to date in relation to total gross profits expected to be earned over the related contracts. Estimates of the expected gross profits to be realized in future years include the anticipated yield on investments. Deferred policy acquisition costs will be adjusted in the future based on actual investment income earned. f. Future policy benefits: Liabilities for future policy benefits under life insurance policies, other than single premium life insurance, have been computed by the net level premium method based upon estimated future policy benefits (excluding participating dividends), investment yield, mortality and withdrawals giving recognition to risk of adverse deviation. Interest rates range from 4% to 9% depending on the year of issue, with mortality and withdrawal assumptions based on company and industry experience prevailing at the time of issue. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ For single premium life insurance and single premium annuities, the future policy benefits are equal to the accumulation of the single premiums at the credited rate of interest and for single premium whole life, less any mortality charges. g. Participating policies: The company issued participating policies in past years on which dividends are paid to policyholders as determined annually by the Board of Directors. The amount of dividends declared but undistributed is included in other liabilities. Policy benefit reserves do not include a provision for estimated future participating dividends. h. Depreciation: The home office buildings are depreciated on the straight-line basis over estimated lives of 40 years. Other depreciation is provided on the straight- line basis over useful lives ranging from 5 to 8 years. i. Income taxes: The company and its subsidiaries prepare and file their income tax returns on a consolidated basis. The company provides for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been reported in the financial statements on the liability method. j. Earnings per share: Primary earnings per share of common stock are computed by dividing net earnings reduced by preferred dividend requirements by the sum of the weighted average number of shares outstanding during the period plus dilutive common stock equivalents applicable to stock options and warrants, calculated using the treasury stock method. Fully diluted earnings per share assumes the conversion of the convertible preferred stock outstanding during 1993. k. Consolidated statements of cash flows: For purposes of reporting cash flows, cash and cash equivalents includes cash and money market accounts. l. New accounting standards: Effective January 1, 1994, the company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement addresses the accounting and reporting for certain investments in debt and equity securities by requiring such investments to be classified in held-to-maturity, available-for-sale, or trading categories. The cumulative effect of the adoption of this Statement was an increase in stockholder's equity of $19,612,653, representing the aggregate excess fair value over cost for those securities included in the available-for-sale category, net of associated amortization of deferred policy acquisition costs and deferred income tax expense. Net earnings for the period ended September 30, 1994 were not affected by the adoption of this Statement. m. Reclassifications: Certain reclassifications have been made to conform the September 30, 1993 and December 31, 1993 consolidated financial statements to the September 30, 1994 presentation. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments: __________________ A summary of investment income is as follows:
(000's Omitted) For the Period Ended September 30, 1994 1993 Debt securities $ 105,999 102,232 Equity securities 38 65 Other long-term investments (261) 1,232 Short-term investments 642 826 Other 330 171 106,748 104,526 Less investment expenses 1,387 1,508 Net investment income $ 105,361 103,018 Net investment gains (losses): Debt securities $ (252) 15,467 Equity securities 580 (204) Net investment gains (losses) $ 328 15,263
The maturity of the company's debt and equity securities portfolio as of September 30, 1994 was as follows:
(000's Omitted) As of September 30, 1994 Held-to-maturity Available-for-sale Estimated Estimated Book Market Book Market Value Value Value Value Debt securities: Bonds: One year or less............. $ 1,324 1,336 25,118 23,031 Two years through five years. 159,732 157,383 211,485 213,838 Six years through ten years.. 921,016 870,299 230,085 230,548 Eleven years and after....... 171,466 156,602 134,352 132,804 1,253,538 1,185,620 601,040 600,221 Preferred stock with mandatory redemption requirements..... - - 151 143 Equity securities............. - - 2,304 2,577 $ 1,253,538 1,185,620 603,495 602,941
These tables include mortgage-backed securities based on the estimated future cash flows of the underlying mortgages. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): _____________________________ The book value, estimated market value and unrealized market gains and losses of debt and equity securities as of September 30, 1994, and December 31, 1993 were as follows:
(000's Omitted) Estimated Book Unrealized Unrealized Market Value Gains Losses Value September 30, 1994 __________________ Bonds held-to-maturity: Corporate debt obligations Investment grade $ 808,044 3,776 52,478 759,342 High-yield 136,052 416 6,644 129,824 944,096 4,192 59,122 889,166 U.S. Treasury obligations 3,627 1 268 3,360 Mortgage-backed securities 305,815 114 12,835 293,094 Bonds held-to-maturity 1,253,538 4,307 72,225 1,185,620 Bonds available-for-sale: Corporate debt obligation Investment grade 219,673 3,236 1,170 221,739 High-yield 3,212 - 162 3,050 222,885 3,236 1,332 224,789 U.S. Treasury obligations - - - - Mortgage-backed securities 378,155 3,019 5,742 375,432 Bonds available-for-sale 601,040 6,255 7,074 600,221 Total bonds 1,854,578 10,562 79,29 1,785,841 Preferred stock with mandatory redemption requirements available-for-sale 151 - 8 143 Equity securities available-for-sale 2,304 502 229 2,577 $ 1,857,033 11,064 79,536 1,788,561 December 31, 1993 __________________ Bonds held-to-maturity: Corporate debt obligations Investment grade $ 776,905 32,703 3,480 806,128 High-yield 84,063 2,799 559 86,303 860,968 35,502 4,039 892,431 U.S. Treasury obligations 3,631 14 5 3,640 Mortgage-backed securities 201,984 6,905 46 208,843 Bonds held-to-maturity 1,066,583 42,421 4,090 1,104,914 Bonds available-for-sale: Corporate debt obligations Investment grade 198,636 19,943 - 218,579 High-yield - - - - 198,636 19,943 - 218,579 U.S. Treasury obligations 9,954 12 - 9,966 Mortgage-backed securities 454,106 23,087 - 477,193 Bonds available-for-sale 662,696 43,042 - 705,738 Total bonds 1,729,279 85,463 4,090 1,810,652 Preferred stock with mandatory redemption requirements 184 - 7 177 Equity securities 3,630 795 513 3,912 $ 1,733,093 86,258 4,610 1,814,741
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ____________________________ The preceding table includes the book value and estimated market value of debt securities which the company has determined to be impaired (other than temporary decline in value) as follows:
Accumulated Estimated Original Write Book Market Cost downs Value Value ~~September 30, 1994........................ $ 7,545 7,545 - - December 31, 1993........................ $ 7,611 7,582 29 76~~
The company defines high-yield securities as those corporate debt obligations rated below investment grade by Standard & Poor's and Moody's or, if unrated, those that meet the objective criteria developed by the company's independent investment advisory firm. Management believes that the return on high-yield securities adequately compensates the company for additional credit and liquidity risks that characterize such investments. In some cases, the ultimate collection of principal and timely receipt of interest is dependent upon the issuer attaining improved operating results, selling assets or obtaining financing. The book value, estimated market value and unrealized market gains and losses by type of mortgage-backed security as of September 30, 1994, and December 31, 1993 were as follows:
(000's Omitted) Estimated Book Unrealized Unrealized Market September 30, 1994 Value Gains Losses Value __________________ Government agency mortgage-backed securities: Planned amortization classes $ 75,540 314 3,739 72,115 Targeted amortization classes and accretion directed classes 7,708 - 139 7,569 Sequential classes 10 - - 10 Pass-throughs 45 3 - 48 Total government agency mortgage-backed securities 83,303 317 3,878 79,742 Government sponsored enterprise mortgage-backed securities: Planned amortization classes 418,372 1,506 8,538 411,340 Sequential classes 19,783 9 408 19,384 Pass-throughs 308 2 - 310 Total government sponsored enterprise mortgage-backed securities 438,463 1,517 8,946 431,034 Other mortgage-backed securities: Planned amortization classes 23,467 50 210 23,307 Sequential classes 128,162 1,248 3,436 125,974 Pass-throughs 13 1 - 14 Subordinated classes 10,562 - 2,107 8,455 Total other mortgage-backed securities 162,204 1,299 5,753 157,750 Total mortgage-backed securities $ 683,970 3,133 18,577 668,526
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________
(000's Omitted) Estimated Book Unrealized Unrealized Market December 31, 1993 Value Gains Losses Value _________________ Government agency mortgage-backed securities: Planned amortization classes $ 104,528 5,064 - 109,592 Targeted amortization classes and accretion directed classes 7,646 436 - 8,082 Sequential classes 37,220 1,171 - 38,391 Pass-throughs 60 6 - 66 Total government agency mortgage-backed securities 149,454 6,677 - 156,131 Government sponsored enterprise mortgage-backed securities: Planned amortization classes 340,328 17,588 - 357,916 Sequential classes 5,612 58 - 5,670 Pass-throughs 428 30 - 458 Total government sponsored enterprise mortgage-backed securities 346,368 17,676 - 364,044 Other mortgage-backed securities: Planned amortization classes 47,887 983 31 48,839 Sequential classes 101,852 4,306 15 106,143 Pass-throughs 19 1 - 20 Subordinated classes 10,510 349 - 10,859 Total other mortgage-backed securities 160,268 5,639 46 165,861 Total mortgage-backed securities $ 656,090 29,992 46 686,036
Certain mortgage-backed securities are subject to significant prepayment risk. This is due to the fact that in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled, as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments which they are unable to reinvest at an interest rate comparable to the rate on the prepaying mortgages. Mortgage-backed pass-through securities and sequential classes, which comprised 21.7% and 22.1% of the book value of the company's mortgage-backed securities as of September 30, 1994 and December 31, 1993, respectively, are sensitive to this prepayment risk. A portion of the company's mortgage-backed securities portfolio consists of planned amortization class ("PAC"), targeted amortization class ("TAC") and accretion directed class ("AD") instruments. These securities are designed to amortize in a more predictable manner by shifting the primary risk of prepayment to investors in other tranches (support classes) of the mortgage-backed security. PAC, TAC and AD securities comprised 76.8% and 76.3% of the book value of the company's mortgage-backed securities as of September 30, 1994 and December 31, 1993. The company does not invest in support class securities or principal-only ("PO") and interest-only ("IO") strips. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________ As of September 30, 1994, 76.3% of the company's mortgage-backed securities were issued by either government agencies or government sponsored enterprises, compared to 75.6% as of December 31, 1993. The credit risk associated with these securities is generally less than other mortgage-backed securities. With the exception of one issue, with a book value of $13,114 as of September 30, 1994, all of the company's investments in other mortgage- backed securities are rated A or better by Standard & Poor's or Moody's. The amounts shown as "market" are primarily based on quotations obtained from independent sources such as broker dealers who make markets in similar securities. Unless representative trades of securities actually occur at the balance sheet date, these quotes are generally estimates of market value based on an evaluation of appropriate factors such as institution-size trading in similar securities, yield, credit quality, coupon rate, maturity, type of issue and other market data. The estimated market value of high-yield securities and the secondary market for high-yield securities have been and are likely to continue to be volatile because these securities are affected by various economic factors in addition to interest rate levels. Losses are recognized in the period they occur based upon specific review of the securities portfolio and other factors. The consideration received on sales of debt and equity securities, book value and realized gains and losses on those sales were as follows:
(000's Omitted) For the Period Ended September 30, 1994 1993 Consideration received $ 400,561 344,543 Book value 400,233 329,045 Net investment gains (losses) $ 328 15,498 Investment gains $ 3,388 15,751 Investment losses (3,060) (253) Net investment gains (losses) $ 328 15,498
The above table includes bonds of one issuer which the company had classified as held-to-maturity. These bonds had a book value of $8,507,732 and the sale resulted in a realized loss of $205,526. The decision to sell these bonds was based upon a significant deterioration in the issuer's credit worthiness. Net unrealized gains (losses) on debt securities held-to-maturity, debt securities available-for-sale, equity securities available-for-sale and other long-term investments changed as follows:
(000's) Omitted Net Unrealized Gains (Losses) Debt Debt Equity Securities Securities Securities Other Held-to- Available- Available- Long Term Maturity for-Sale for-Sale Investments Balance as of January 1, 1992 37,420 4,115 (809) - 1993 Net Change 911 38,920 1,091 1,330 Balance as of December 31, 1993 38,331 43,035 282 1,330 1994 Net Change (106,249) (43,862) (9) (1,330) Balance as of September 30, 1994 $(67,918) (827) 273 -
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________ At September 30, 1994 and December 31, 1993, investments with statutory carrying values of $1,866,857,134 and $1,736,404,701, respectively, were on deposit with insurance departments to meet regulatory requirements. 3. Related Party Transactions: ______________________________ On January 22, 1991, the company made a $504,000, 30 year, first mortgage loan on the personal residence of a Director. At the time the loan was made, it represented a loan to value of 80%. This loan originally provided for interest at the rate equal to the cost of funds of the Eleventh District of the Federal Reserve, plus two percent and had a final payment due February 1, 2021. On December 10, 1992 the terms of the loan were renegotiated to provide for interest to be at a rate of 7.5% and a final payment due January 10, 2008. The outstanding principal balance on this loan was $17,448 and $205,059 as of September 30, 1994 and December 31, 1993, respectively. 4. Other Assets: ________________ Other assets consist of the following:
(000's Omitted) September 30, December 31, 1994 1993 Property and equipment at cost: Home office building (including land of $352) $ 2,121 2,113 Furniture and equipment 3,424 3,328 Automobiles 114 100 5,659 5,541 Less accumulated depreciation 3,217 3,174 2,442 2,367 Other 1,291 630 $ 3,733 2,997
5. Reinsurance: _______________ The company reinsures portions of the insurance risk it writes. The maximum amount of risk retained by the company on any one life is $150,000. A summary of reinsurance data follows (000's Omitted):
For the Ceded to Assumed Period Gross other from other Net Descriptions Ended Descriptions amount companies companies amount ___________ _________________________ __________ _____________ ______________ ____________ September Life insurance in force..$ 336,808 264,858 - 71,950 30, 1994 Insurance premiums and policy charges ... $ 5,558 727 - 4,831 September Life insurance in force. $ 360,429 285,601 - 74,828 30, 1993 Insurance premiums and policy charges ... $ 5,941 859 - 5,082 September Future policy benefits.. $2,121,645 149,293 - 1,972,352 30, 1994 December Future policy benefits.. $2,005,339 150,500 - 1,854,839 31, 1993
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Reinsurance (continued): ___________________________ The company had amounts receivable under reinsurance agreements of $150,042,191 and $151,392,088 as of September 30, 1994, and December 31, 1993, respectively. Of the amounts, $148,286,573 and $149,468,739 were associated with a single reinsurer. In 1989, the company entered into a coinsurance agreement which ceded 90% of the risk on the company's block of single premium whole life policies written prior to 1989 to Employers Reassurance Corporation (ERC). The agreement provides that ERC assumes 90% of all risks associated with each policy in the block. The following table identifies the components of the amounts receivable from ERC:
(000's Omitted) September 30, December 31, 1994 1993 Reserve for future policy benefits $ 147,625 148,712 Reimbursement for benefit payments and administrative allowance 662 757 $ 148,287 149,469
6. Retirement Plans: ____________________ The company sponsors an Employee Stock Ownership Plan (ESOP) for all full-time employees with one year of service. Qualifying participants may contribute an amount not to exceed ten percent of covered compensation. The company made no contributions to this plan during either the nine months ended September 30, 1994 or 1993. The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP) for all full-time employees with one year of service. The LESOP has acquired shares of the company aggregating 370,244 through the proceeds of a note payable to American. The note bears interest at 7.0% and is payable in annual installments through December 30, 2002. The note had unpaid principal balance of $3,639,922 as of September 30, 1994. Each year, the company will make contributions to the LESOP which are to be used to make loan interest and principal payments. On December 31 of each year, a portion of the common stock will be allocated to participating employees. Of the 368,178 shares of the company's common stock now owned by the LESOP, 75,357 shares have been allocated to the participating employees with the remaining 292,821 shares being held by American as collateral for the loan. The unallocated portion of the company's common stock owned by the LESOP has been recorded as a separate reduction of stockholders' equity. Accrued contributions to the LESOP were $419,010, and $454,424, for the nine months ended September 30, 1994, and 1993, respectively. During 1992, the company's Board of Directors approved retirement plans for its members and members of the Board of Directors of certain of its subsidiaries. The plans provide that retired Directors shall serve as Advisory Members to the Board at a fee of $750 per meeting attended and a monthly lifetime benefit in the amount of $750 be paid to each qualified Director upon retirement. In addition, the company has agreed to continue any life insurance policies being provided as of the date of retirement. To qualify for this benefit, a Director must have reached the age of 60 and meet years of service requirements thereafter. The plans also call for a mandatory retirement on the date the Director's term expires following age 70. As of September 30, 1994, five of the company's directors qualified for benefits under the plan. A liability in the amount of $550,762, representing the present value of future benefits, has been established. Earnings for the nine months ended September 30, 1994 reflect a benefit of $10,662 relating to the plans, while 1993 nine months reflect an expense of $15,313. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Retirement Plans (continued): ________________________________ Effective January 1, 1993, the company adopted an Age-Weighted Money Purchase Plan for all full-time employees with one year of service. The full cost of this plan will be paid by the company with qualifying participants receiving contributions based upon their age at plan implementation and current salary. Contributions to the Age-Weighted Money Purchase Plan for the nine months ended September 30, 1994 and 1993 were $146,277 and -0- respectively. 7. Stockholders' Equity: ________________________ Dividends by American to AmVestors are limited by laws applicable to insurance companies. Under Kansas law, American may pay a dividend, without prior consent of the Kansas Commissioner of Insurance, in an amount equal to the greater of 10% of statutory capital and surplus at the end of the preceding year or all of the statutory net gain from operations of the preceding year, provided that such dividend does not exceed its unassigned surplus (surplus profits) at the end of the preceding year. As of December 31, 1993, surplus profits of American were $12,621,521 and 10% of statutory capital and surplus was $8,714,605. Statutory net income (loss) for the year 1993 was ($1,469,786). American is also required to maintain, on a statutory basis, paid-in capital stock and surplus (capital in excess of par value and unassigned surplus) of $100,000 each. As of September 30, 1994 and December 31, 1993 American's statutory capital and surplus was $90,999,944 and $87,146,052 respectively. On March 17, 1989, the Board of Directors of the company adopted the 1989 Nonqualified Stock Option Plan (the "1989 Nonqualified Plan") and simultaneously approved the termination of the 1986 Incentive Stock Option Plan and the 1986 Nonqualified Stock Option Plan. All of the options outstanding under those Plans were cancelled and replaced with options under the 1989 Nonqualified Plan. The options granted under the 1989 Nonqualified Plan will cover the same number of shares and have the same exercise price as the cancelled options, and none of such options may be exercised beyond ten years from the original date of grant of the cancelled option. A total of 827,037 options to acquire common stock are outstanding under the 1989 Nonqualified Plan. The 1989 Nonqualified Plan is administered by the Board of Directors and officers of the company and its subsidiaries. The terms of the options, including the number of shares, and the exercise price are subject to the sole discretion of the Board of Directors. Changes during the periods were as follows:
For the Period Ended September 30, December 31, 1994 1993 Options outstanding, beginning of period 816,107 757,340 Options granted 50,000 413,000 Options exercised (10,000) (227,561) Options expired (19,070) (126,659) Options cancelled (10,000) (13) Options outstanding, end of period 827,037 816,107 Outstanding options exercisable at end of period 460,037 403,107 Shares reserved for future grants at end of period 177,247 145,677 Option prices per share: Exercised, during the period $ 7.03 $4.84-$9.60 Outstanding, end of period $4.84-$12.66 $4.84-$13.75
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Stockholders' Equity (continued): _____________________________________ On March 17, 1989, the Board of Directors also adopted the 1989 Stock Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan (the Restricted Stock Plan). The SAR Plan authorized the Board of Directors to grant stock appreciation rights to employees, officers and directors in such amounts and with such exercise prices as it shall determine. No stock appreciation rights granted under the SAR Plan may be exercised more than five years from its date of grant. The SAR Plan authorized a maximum of 125,000 shares to be issued pursuant to stock appreciation rights granted thereunder. During 1991, stock appreciation rights under the SAR Plan were granted as follows: 30,000 rights with a base price of $6.875, the closing stock price on December 31, 1991, exercisable on December 31, 1992; 30,000 rights with a base of $10.9375, the closing stock price on December 31, 1992, exercisable on December 31, 1993; and 30,000 rights with a base price of $11.00, the closing stock price on December 31, 1993, exercisable on December 31, 1994.
For the Period Ended September December 1994 1993 Rights outstanding, beginning of period 30,000 60,000 Rights granted - - Rights exercised - (30,000) Rights expired - - Rights cancelled - - Rights outstanding, end of period 30,000 30,000 Reserved for future grants 5,000 5,000
The company recorded no compensation expense relating to stock appreciation rights for the nine months ended September 30, 1994 and 1993. The Restricted Stock Plan authorizes the Board of Directors to make restricted stock awards to employees, officers and directors in such amounts as it shall determine. The stock issued pursuant to such awards is subject to restrictions on transferability for a period of five years. Such stock is subject to a five-year vesting schedule, and the company is required to repurchase all vested stock from a grantee if such grantee's employment with the company is terminated prior to the lapse of the transfer restrictions. The Restricted Stock Plan authorizes a maximum 125,000 shares to be issued thereunder. No restricted stock awards have been granted pursuant to the Restricted Stock Plan. In conjunction with its bank borrowing, the company issued ten-year warrants to purchase a total of 170,002 shares of its common stock as summarized in the following table:
Warrant Issue Number Exercise Expiration Holder Date of Shares Price Date Morgan Guaranty Trust 12/8/88 75,000 $ 3.9688 12/9/98 Company of New York 4/30/92 95,002 6.3855 5/1/02 170,002
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 9. Stockholders' Rights Plan: ______________________________ At a meeting of the company's Board of Directors held August 4, 1988, a resolution was passed adopting a Stockholders' Rights Plan. The Rights Plan provides that one junior preferred stock purchase right will be distributed as a dividend on each outstanding share of common stock of the company held on and after August 5, 1988. Each right entitles holders of the company's common stock to purchase one one- hundredth share of a new series of junior participating preferred stock of the company at an exercise price of $9.216. Each such fractional share of preferred stock is equivalent in voting power to one share of the company's common stock and would be paid dividends equal to the dividend paid on each share of common stock. The rights will be exercisable only if a person or group acquires beneficial ownership of 20% or more of the company's common shares, or announces a tender or exchange offer upon consummation of which, such person or group would beneficially own 20% or more of the common shares, or if a person or group acquired beneficial ownership of 10% or more of the common shares and such person or group is judged to be an "Adverse Person" by the company. If any person or group becomes the beneficial owner of 20% or more of the company's common shares, effects certain business combinations, or engages in certain "self-dealing" transactions, each right, not owned by the person or group, entitles its holder to purchase the previously described fractional shares of the company's junior participating preferred stock, at the right's then-current exercise price (or in certain circumstances as determined by the company, a combination of cash, property, common shares or other securities), having a value of twice the right's exercise price of $9.216. For purposes of determining the value of the junior preferred stock, each one one-hundredth of a share shall be considered to be equivalent in value to one share of the company's common stock. In addition, if the company is involved in a merger or business combination transaction with another person in which the company is not the surviving company, each right that has not previously been exercised will entitle its holder to purchase, at the right's then-current exercise price, common shares of such other person having a value of twice the right's exercise price. The company generally will be entitled to redeem the rights at 1 cent per right at any time until the 20th business day following the announcement that a 20% ownership position has been acquired. On June 30, 1994, the company's Board of Directors voted to repeal the Stockholders' Rights Plan and set the close of business on July 22, 1994 as the record date for the payment of the one cent per share redemption price. Stockholders of record were paid on August 8, 1994, in full redemption of the rights under the plan. The total amount to redeem the Rights was $101,432. 10. Other Revenue: __________________ Effective December 1, 1989, the company entered into a coinsurance agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of the risk on the company's block of SPWL policies written prior to 1989. The agreement provides that ERC assumes 90% of all risks associated with each policy in the block. These policies continue to be administered by American. In return, American receives an administrative allowance of $31.50 per policy per year. The total allowance received during the nine months ended September 30, 1994 and 1993 was $98,148 and $103,317, respectively. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 11. Income Taxes: _________________ The provision for income taxes charged to operations was as follows:
(000's Omitted) For the Period Ended September 30, 1994 1993 Current income tax expense $ 5,236 5,168 Deferred income tax expense (benefit) (486) 1,231 Total income tax expense $ 4,750 6,399
12. Contingencies: _____________________ The company's insurance subsidiary is subject to state guaranty association assessments in all states in which it is admitted. Generally these associations guarantee specified amounts payable to residents of the state under policies issued by insolvent insurers. Most state laws permit assessments or some portion thereof to be credited against future premium taxes. Guaranty fund assessments reduced 1993 and 1992 income before taxes by approximately $1,594,000, and $1,834,000, respectively. The company expects that further charges to income may be required in the future and will record such amounts when they become known. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ________________________________________________________________________________ General The company specializes in the sale of SPDA products as a retirement savings vehicle for individuals. During each of the past three years, sales of SPDAs have accounted for at least 92% of the company's premiums received, while sales of SPIAs and FPDAs have accounted for virtually all remaining premiums received. The company's operating earnings are derived primarily from its investment results, including realized gains (losses), less interest credited to annuity contracts and expenses. Under GAAP, premiums received on SPDAs, SPIAs without life contingencies and FPDAs are not recognized as revenue at the time of sale. Similarly, policy acquisition costs (principally commissions) related to such sales are not recognized as expenses but are capitalized as deferred acquisition costs, or "DAC". As a result of this deferral of costs and the lack of revenue recognition for premiums received, no profit or loss is realized on these contracts at the time of sale. Premiums received on SPDAs, SPIAs without life contingencies and FPDAs are reflected on the company's balance sheet by an increase in assets equal to the premiums received and by a corresponding increase in future policy liabilities. The company's earnings depend, in significant part, upon the persistency of its annuities. Over the life of the annuity, net investment income, net investment gains (losses) and policy charges are realized as revenue, and DAC is amortized as an expense. The timing of DAC amortization is based on the projected realization of profits including realized gains (losses) for each type of annuity contract and is periodically adjusted for actual experience. If a policy is terminated prior to its expected maturity, any remaining related DAC is expensed in the current period. Most of American's annuity policies in force have surrender charges which are designed to discourage and mitigate the effect of premature withdrawals. As a result, the impact on earnings from surrenders will depend upon the extent to which available surrender charges offset the associated amortization of DAC. For the years ended 1993, 1992 and 1991, the company's weighted average expected surrender levels were 13.0%, 9.9% and 5.7%, compared to the weighted average actual surrenders of 14.7%, 9.6% and 10.2%. The negative impact on earnings of any difference between the actual surrender levels and expected surrender levels has been more than offset by the realization of gains on the sale of securities and the change in future expected gross profits as the result of the company's reduction in credited rates. Recent periods of low interest rates have reduced the company's investment yields. As a result of the lower investment yields, the company elected to reduce credited interest rates on certain of its annuity products. Certain annuities issued by the company include a "bailout" feature. This feature generally allows policyowners to withdraw their entire account balance without surrender charge for a period of 45 to 60 days following the initial determination of a renewal crediting rate below a predetermined level. If a policyowner elects not to withdraw funds during this period, surrender charges are reinstated. On policies including a "bailout" feature, the company announces its renewal crediting rates on January 14 of each year. In January 1994, 1993 and 1992, the company deemed it advisable, due to the general decline in interest rates and the yield on its investment portfolio, to reduce credited interest rates on certain annuity contracts below the "bailout" level. The aggregate account values of annuity contracts on which the crediting rate was reduced below the "bailout" level totalled $109.8 million, $326.2 million, and $160.4 million during 1994, 1993 and 1992, respectively. As a result, $18.3 million, or 17%, $139.6 million, or 43%, and $34.6 million, or 22%, of such policies were surrendered during 1994, 1993, and 1992, respectively. The company was able to offset the negative impact of "bailout" surrenders on its earnings through the realization of gains on the sale of its securities. Excluding surrenders from "bailout" products, American's annuity withdrawal rates were 7% in both 1993 and 1992. Although, as of September 30, 1994, approximately $176.5 million, or 10% of annuity account values contained a "bailout" provision, the current credited rates on these policies are above the "bailout" rate. The "bailout" rate on $92.1 million of this amount is 5% or less. If the company reduces credited rate below the "bailout" rates on policies 23 containing "bailout" provisions in the future, it intends to pay any resulting surrenders from cash provided by operations and premiums received. In the event such sources are not sufficient to pay surrenders, the company would have to sell securities at the then current market prices. American expects that withdrawals on its annuity contracts will increase as such contracts approach maturity. There is no certainty as to the company's ability to realize investment gains in the future to offset the adverse impact on earnings, should future "bailout" surrenders occur. Premiums received by the company on the sale of its annuity products have declined and surrenders have increased in recent years. In the years ended December 31, 1993, 1992 and 1991, premiums received amounted to $222.2 million, $168.7 million and $219.2 million, respectively. Management believes the decline in premiums received during 1992 was due primarily to the rating downgrade of American by A.M. Best in July 1991, from "A" (Excellent) to "A-" (Excellent) and, to a lesser extent, to reductions in credited rates, agent and policyholder concerns about the company's non- investment grade bond holdings and the highly publicized insolvencies of other life insurance companies. Management also believes that a general decline in interest rates and a corresponding reduction in credited rates offered on annuity products may have reduced the relative attractiveness of annuities as compared with alternative investment vehicles. Management believes that A.M. Best ratings may have affected the credited rates and commissions the company has had to credit or pay to retain or attract business relative to the credited rates and commissions credited or paid by carriers enjoying A+ (Superior) and A++ (Superior) ratings. The company has not materially altered the levels of commissions paid or interest rates credited in response to its A.M. Best ratings downgrade from A (Excellent) to A- (Excellent). In response to these events, the company continued to reduce its holdings of non-investment grade securities to less than 8% as of September 30, 1994. In addition the company has expanded its internal investment management capabilities through the addition of new personnel. The company reduced its outstanding indebtedness from $31.2 million at the end of 1988 to $0 million as of December 31, 1993. Recently, the company has augmented its capabilities for agent recruitment through American Sales and the establishment of relationships with additional National Marketing Organizations. As a result of these actions, management believes that the company is now better positioned to take advantage of any opportunities for the sale of its products in the savings and retirement market. 24 Margin Analysis The company's earnings are impacted by realized investment gains and losses and by the associated amortization of DAC. The actual timing and pattern of such amortization is determined by the actual profitability to date (which includes realized investment gains and losses) and the expected future profitability on a particular annuity contract. To the extent investment income is accelerated through realization of investment gains, the corresponding amortization of DAC is also accelerated as the stream of profitability on the underlying annuities is effectively accelerated. When investment losses are realized, the reverse is true. The following margin analysis depicts the effects of realized gains (losses) on the company's operating earnings:
For the Nine Months Ended September 30, 1994 1993 (dollars in millions) (percent of average invested assets annualized) Average invested assets $ 1,850.6 100.0% $ 1,738.5 100.0% Insurance premiums and policy charges $ 4.8 .3% $ 5.1 .4% Net investment income 105.4 7.6 103.0 7.9 Policyholder benefits (83.2) (6.0) (85.4) (6.5) Gross interest margin 27.0 1.9 22.7 1.8 Associated amortization of deferred acquisition costs (7.4) (.5) (6.0) (.5) Net interest margin 19.6 1.4 16.7 1.3 Net investment gains .3 - 15.3 1.2 Associated amortization of deferred acquisition costs (.1) - (4.2) (.3) Net margin from investment gains .2 - 11.1 .9 Total net margin 19.8 1.4 27.8 2.2 Expenses, net (5.8) (.4) (6.9) (.5) Operating earnings 14.0 1.0 20.9 1.7 Interest expense - - .8 .1 Earnings before income taxes 14.0 1.0 20.0 1.6 Income tax expense 4.7 .3 6.4 .5 Net earnings $ 9.3 .7% $ 13.6 1.1% Operating earnings $ 14.0 1.0% $ 20.9 1.7% Less: Net margin from investment gains .2 - 11.1 .9 Operating earnings excluding net investment gains and associated amortization of deferred policy acquisition costs $ 13.8 1.0% $ 9.8 .8% Average of cash, invested assets (excluding unrealized gains (losses) on debt securities available-for-sale) and net amounts due to or from brokers on unsettled security trades at the beginning and end of period. Net investment income is presented net of investment expense. Note: Numbers may not add due to rounding.
25
For the Quarter Ended September 30, 1994 1993 (dollars in millions) (percent of average invested assets annualized) Average invested assets $ 1,886.5 100.0% $ 1,703.3 100.0% Insurance premiums and policy charges $ 1.9 .4% $ 1.6 .4% Net investment income 36.2 7.7 34.2 8.0 Policyholder benefits (28.5) (6.0) (28.2) (6.6) Gross interest margin 9.6 2.1 7.6 1.8 Associated amortization of deferred acquisition costs (2.7) (.6) .2 - Net interest margin 6.9 1.5 7.8 1.8 Net investment gains (losses) (.7) (.1) 2.5 .6 Associated amortization of deferred acquisition costs (.2) - (.8) (.2) Net margin from investment gains (losses) (.5) (.1) 1.7 .4 Total net margin 6.4 1.4 9.5 2.2 Expenses, net (1.5) (.3) (2.2) (.5) Operating earnings 4.8 1.0 7.3 1.7 Interest expense - - .3 .1 Earnings before income taxes 4.8 1.0 7.0 1.6 Income tax expense 1.6 .3 2.5 .5 Net earnings $ 3.2 .7% $ 4.5 1.1% Operating earnings $ 4.8 1.0% $ 7.3 1.7% Less: Net margin from investment gains (losses) (.5) (.1) 1.7 .4 Operating earnings excluding net investment gains (losses) and associated amortization of deferred policy acquisition costs $ 5.3 1.1% $ 5.6 1.3% Average of cash, invested assets (excluding unrealized gains (losses) on debt securities available-for-sale) and net amounts due to or from brokers on unsettled security trades at the beginning and end of period. Net investment income is presented net of investment expense. Note: Numbers may not add due to rounding.
26 Results of Operations Nine Months Ended September 30, 1994 and 1993 Net investment income increased $2.4 million, or 2%, to $105.4 million from $103.0 million in 1993. This increase resulted from an increase in average invested assets from $1,738.5 million in 1993 to $1,850.6 million in 1994, offset in part by a reduction in the yield on average invested assets from 7.9% for the nine months ended September 30, 1993, to 7.6% for the nine months ended September 30, 1994. The decline in yield experienced during the first nine months of 1994 resulted in part from an investment in investment partnerships. These partnerships form a fund of funds totalling $23.5 million on September 30, 1994 which is structured in an attempt to consistently provide returns in excess of the Standard and Poors 500 over time without regard to the general direction of financial markets. This fund lost a total of $1.5 million during the first nine months of 1994. The fund's annualized loss since inception in July 1993 was .9%, compared to a cash flow equivalent loss of 11.8% had the same amounts been invested at the same time in 10 year treasury bonds, or a 1.2% gain had the funds been invested in the Standard and Poors 500. In addition to the losses experienced in the company's partnership investments, average yields have been impacted by declining interest rates throughout 1993 and the reinvestment at lower yields of proceeds from securities disposed of to realize investment gains. Net investment gains decreased $15.0 million, to $.3 million in 1994, from $15.3 million in 1993. Gains and losses may be realized upon securities which are disposed of for various reasons. The gains realized during 1993 were primarily taken to reduce the effects of the statutory losses resulting from surrenders in the first quarter of 1993 following the reduction of crediting rates on certain annuity policies below the "bailout" rate. Unrealized gains (losses) in the company's bond portfolio were ($68.7) million, $81.4 million and $113.6 million as of September 30, 1994, December 31, 1993 and September 30, 1993, respectively. Benefits, claims and interest credited to policyholders decreased $2.2 million, or 3%, to $83.2 million in 1994 from $85.4 million in 1993. This decrease results primarily from a reduction in the average interest rate credited on the company's annuity liabilities, from 6.3% as of September 30, 1993 to 5.8% as of September 30, 1994. This decrease was partially offset by an increase in annuity liabilities to $1,944.1 million on September 30, 1994 from $1,777.3 million on September 30, 1993. Amortization of deferred policy acquisition costs decreased $2.7 million, or 26%, to $7.5 million in 1994 from $10.2 million in 1993. Amortization of deferred policy acquisition costs (DAC) associated with investment gains decreased $4.1 million to $.1 million in 1994 on $.3 million of gains, from $4.2 million in 1993 on $15.3 million of gains. Amortization of DAC associated with gross interest margins increased $1.4 million to $7.4 million in 1994 on $.3 million of gains, from $6.0 million in 1993. Acquisition costs incurred during 1994 and deferred into future policy periods were $19.5 million, compared with $12.6 million in 1993. General insurance expenses decreased $1.2 million, or 18%, to $5.3 million in 1994 from $6.5 million in 1993. This decrease is attributable to an increase of $1.4 million increase in the amount of policy acquisition related expenses deferred, from $1.3 million in 1993 to $2.7 million in 1994, related to the company's increased recruiting and marketing efforts during 1994. Management believes these efforts are responsible for the more than 35% increase in premiums written during the first nine months of 1994 when compared with the same period of 1993. Interest expense decreased $.8 million, to $-0- million in 1994 from $.8 million in 1993. The company's bank debt was paid on November 19, 1993, with proceeds from a common stock offering. Income tax expense decreased $1.6 million to $4.8 million in 1994 from $6.4 million in 1993. Taxes were provided at an effective rate of 34% on 1994 income and 32% on 1993 income. 27 Results of Operations Three Months Ended September 30, 1994 and 1993 Insurance premiums and policy charges increased $.3 million, or 19%, to $1.9 million in 1994 from $1.6 million in 1993, due primarily to a $.4 million increase in surrender charges received on SPDA's. Net investment income increased $2.0 million, or 6%, to $36.2 million from $34.2 million in 1993. This increase resulted from an increase in average invested assets from $1,703.3 million in 1993 to $1,886.5 million in 1994, offset in part by a reduction in the yield on average invested assets from 8.0% for the quarter ended September 30, 1993, to 7.7% for the quarter ended September 30, 1994. Average yields have been impacted by declining interest rates throughout 1993 and the reinvestment at lower yields of proceeds from securities disposed of to realized investment gains. In addition, third quarter yields were down as a result of an investment in investment partnerships. These partnerships form a fund of funds totalling $23.5 million on September 30, 1994 which is structured in an attempt to consistently provide returns in excess of the Standard and Poors 500 over time without regard to the general direction of financial markets. This fund had income of $.3 million for the quarter ended September 30, 1994. On an annualized basis this represents a return of 5.3%, compared to a cash flow equivalent loss of 4.5% had the same amounts been invested at the same time in 10 year treasury bonds, or a 15.5% gain had the funds been invested in the Standard and Poors 500. Net investment gains (losses) decreased $3.2 million, to a loss of $.7 million in 1994, from gains of $2.5 million in 1993. Gains and losses may be realized upon securities which are disposed of for various reasons. The gains realized during 1993 were to reduce the effects of the statutory losses resulting from surrenders following the reduction of crediting rates on certain annuity policies below the "bailout" rate in the first quarter of 1993. Unrealized gains (losses) in the company's bond portfolio were ($68.7) million, $81.4 million and $113.6 million as of September 30, 1994, December 31, 1993 and September 30, 1993, respectively. Benefits, claims and interest credited to policyholders increased $.3 million to $28.5 million in 1994 from $28.2 million in 1993. This increase results primarily from an increase in annuity liabilities to $1,944.1 million on September 30, 1994 from $1,777.3 million on September 30, 1993. This increase was partially offset by a reduction in the average interest rate credited on the company's annuity liabilities, from 6.3% as of September 30, 1993 to 5.8% as of September 30, 1994. Amortization of deferred policy acquisition costs increased $1.9 million, to $2.5 million in 1994 from $.6 million in 1993. Amortization of deferred policy acquisition costs (DAC) associated with investment gains (losses) decreased $1.0 million to a benefit of $.2 million in 1994 on losses of $.7 million, from $.8 million in 1993 on $2.5 million of gains. Amortization of DAC associated with gross interest margins increased $2.9 million to $2.7 million in 1994, from a benefit of $.2 million in 1993. The period to period increase was primarily due to an increase during the quarter ended September 30, 1993, in the estimates of future expected gross profits resulting from the lowering of interest crediting rates during that quarter. Acquisition costs incurred during 1994 and deferred into future policy periods were $6.4 million, compared with $5.4 million in 1993. General insurance expenses decreased $.7 million, or 33%, to $1.4 million in 1994 from $2.1 million in 1993. This decrease is attributable to an $.7 million increase in the amount of policy acquisition related expenses deferred, from $.5 million in 1993 to $1.2 million in 1994, related to the company's increased recruiting and marketing efforts during 1994. Management believes these efforts are responsible for the more than 35% increase in premiums written during the first nine months of 1994 when compared with the same period of 1993. 28 Interest expense decreased $.3 million, to $-0- million in 1994 from $.3 million in 1993. The company's bank debt was paid on November 19, 1993, with proceeds from a common stock offering. Income tax expense decreased $.9 million to $1.6 million in 1994 from $2.5 million in 1993. Taxes were provided at an effective rate of 34% on 1994 income and 36% on 1993 income. Liquidity and Capital Resources The company is an insurance holding company whose principal asset is the common stock of American. The company's primary cash requirements are to pay operating expenses. As a holding company, the company relies on funds received from American to meet its cash requirements at the holding company level. The company receives funds from American in the form of commissions paid to American Sales, investment fees paid to AIG, rent, administrative, printing and data processing charges and dividends. The insurance laws of Kansas generally limit the ability of American to pay cash dividends in excess of certain amounts without prior regulatory approval and also require that certain agreements relating to the payment of fees and charges to the company by American be approved by the Kansas Insurance Commissioner. The liquidity requirements of American are met by premiums received from annuity sales, net investment income received, and proceeds from investments upon maturity, sale or redemption. The primary uses of funds by American are the payment of surrenders, policy benefits, operating expenses and commissions, as well as the purchase of assets for investment. For purposes of the company's consolidated statements of cash flows, financing activities include premiums received from sales of SPDAs, surrenders and death benefits paid, and surrender and policy charges collected on these contracts. The net cash provided by (used in) these particular financing activities for the nine months ended September 30, 1994 and 1993, was $29.9 million and ($111.6) million, respectively. The increase in net cash provided by annuity contracts without life contingencies in the first nine months of 1993 resulted primarily from a $91.5 million decrease in surrender and death benefits paid from $272.7 million to $181.2 million and by a $49.6 million increase in premiums received from $157.3 million to $206.9 million. Net cash provided by the company's operating activities was $97.2 million and $98.3 million in 1994 and 1993, respectively. Cash provided by financing and operating activities and by the sale and maturity of portfolio investments is used primarily to purchase portfolio investments and for the payment of acquisition costs (commissions and expenses associated with the sale and issue of policies). To meet its anticipated liquidity requirements, the company purchases investments taking into account the anticipated future cash flow requirements of its underlying liabilities. In addition, the company invests a portion of its assets in short-term investments and maturities of less than one year (2% and 3% as of September 30, 1994 and December 31, 1993, respectively). The weighted average duration of the company's investment portfolio was 4.8 years as of September 30, 1994. The company continually assesses its capital requirements in light of business developments and various capital and surplus adequacy ratios which affect insurance companies. During the past five years, the company has met its capital needs and those of American through several different sources including bank borrowing and the sale of both preferred and common stock. On December 31, 1991, the company issued 172,000 shares of its $2.00 Series B Convertible 29 preferred Stock with a total stated value of $4.3 million. The Preferred Stock was convertible at $7.50 per share into 573,332 shares of the company's Common Stock. On December 30, 1992, the company issued and sold 235,294 shares of Common Stock at $10.625 per share to the company's Leveraged Employee Stock Ownership Plan ("LESOP"). This purchase was financed with the proceeds of a $2.5 million loan from American. For additional information regarding the LESOP, see Note 6 of Notes to Consolidated Financial Statements. In 1993, the company raised $29.4 million through the sale of 3,451,668 shares of Common Stock. Recent regulatory actions against certain large life insurers encountering financial difficulty have prompted the various state guaranty associations to begin assessing life insurance companies for the resulting losses. For further information regarding the effects of guaranty fund assessments, see Note 12 of Notes to Consolidated Financial Statements. Reinsurance. The company had amounts receivable under reinsurance agreements of $150.0 million and $151.4 million as of September 30, 1994 and December 31, 1993, respectively. Of the amounts, $148.3 million and $149.5 million, respectively, were associated with a single insurer, ERC. In 1989, the company entered into a coinsurance agreement which ceded 90% of the risk on the company's block of SPWL written prior to 1989 to ERC. The agreement provides that ERC assumes 90% of all risks associated with each policy in the block. Under the terms of the contract the company continues to administer the policies and is reimbursed for ERC's share of all payments made under the terms of those policies. Additionally, the company receives a fee from the reinsurer for administering such policies. Cash settlements under the contract are made with ERC on a monthly basis. If ERC were to become insolvent, American would remain responsible for the payment of all policy liabilities. In addition, the company is a party to two assumption reinsurance agreements with other reinsurers. Effect of Inflation and Changes in Interest Rates. The company does not believe that inflation has had a material effect on its consolidated results of operations during the past three years. The company seeks to manage its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the company's fixed income securities increases or decreases directly with interest rate changes. For example, if interest rates decline (as was the case in 1992 and 1993), the company's fixed income investments generally will increase in market value, while net investment income will decrease. In a rising interest rate environment, the company's average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. During such a rise in interest rates, new funds would be invested in bonds with higher yields than the liabilities assumed. In a declining interest rate environment, the company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities. 30 PART II. OTHER INFORMATION AMVESTORS FINANCIAL CORPORATION Item 1. Legal Proceedings ____________________________ The company has no material legal proceedings pending against it. Item 2. Changes in Securities ________________________________ For a description of the Stockholders Rights Plan, see Note 8 of Notes to Consolidated Financial Statements which is incorporated herein by reference. Item 3. Defaults upon Senior Securities __________________________________________ None Item 4. Submission of Matters to a Vote of Security Holders _______________________________________________________________ None Item 5. Other Information ____________________________ None Item 6. Exhibits and Reports on Form 8-K ___________________________________________ (a) Exhibits (numbered in accordance with Item 601 of Regulations S-K).
Exhibit Page Number or Incorporation Number Description by Reference (2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration July 10, 1986, between AmVestors Form S-2, File #2-82811 Financial Corporation and American dated November 26, 1986. Investors Life Insurance Company, Inc. (2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q Directors dated January 7, 1988, dated May 11, 1988. providing for succession to the position of Chairman of the Board of Directors (4)(a) Rights Agreement dated as of Exhibit (1) to Form 8-K August 4, 1988, between AmVestors dated August 10, 1988. Financial Corporation and The Merchants Bank, which includes the form of Certificate of Designation setting forth the terms of the series A Junior Participating Preferred Stock, $1.00 par value per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C
31
Exhibit Page Number or Incorporation Number Description by Reference (4)(b) Specimen Common Stock Certificate Exhibit (4)(d) to Form 10-Q dated August 13, 1993. (10)(a) Employment Agreement dated PP 34-46 October 3,1994, between the company and Ralph W. Laster, Jr. (10)(b) Bonus Compensation Agreement dated PP 47-56 September 30, 1994, between the company and Ralph W. Laster, Jr. (10)(c) Bonus Compensation Agreement dated PP 57-66 September 30, 1994, between the company and Mark V. Heitz (11) Calculation of Earnings (Loss) per Share P 67 (20)(a) Reports on Form 8-K There were no reports on Form 8-K for the three months ended September 30, 1994 (22) Wholly-owned subsidiaries of the registrant: American Investors Life Insurance Company, Inc. 415 Southwest Eighth Avenue Topeka, Kansas 66603 American Investors Sales Group, Inc. (formerly Gateway Corporation) 415 Southwest Eighth Avenue Topeka, Kansas 66603 AmVestors Investment Group, Inc. (formerly American Investors Sales Group, Inc.) 415 Southwest Eighth Avenue Topeka, Kansas 66603 Omni-Tech Medical, Inc. 6206 Southwest Ninth Terrace Topeka, Kansas 66615 (27) Financial Data Schedule
32 Signatures __________ Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMVESTORS FINANCIAL CORPORATION By: /c/ Ralph W. Laster, Jr. __________________________ Ralph W. Laster, Jr. Chairman of the Board Chief Executive Officer (Principal Executive Officer and Chief Financial Officer) (Principal Accounting Officer) Date: November 10, 1994 ___________________ 33 EX-11 2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS (LOSS) PER SHARE (000's Omitted, except per share data) For the Nine Months Ended For the Quarter Ended September 30, September 30, 1994 1993 1994 1993 CALCULATION OF PRIMARY EARNINGS PER SHARE Net earnings $ 9,266 13,597 3,205 4,493 Less dividends on preferred stock - (236) - (77) Earnings for primary earnings per share $ 9,266 13,361 3,205 4,416 Average number of common shares outstanding 10,143 6,089 10,137 6,095 Dilutive effect of stock options and warrants after application of treasury stock method 209 335 210 295 Average number of common shares and common equivalents outstanding 10,352 6,424 10,347 6,390 Primary earnings per share $ .90 2.08 .31 .69 CALCULATION OF FULLY DILUTED EARNINGS PER SHARE Earnings for fully diluted earnings per share $ 9,266 13,597 3,205 4,493 Shares used in calculating primary earnings per share 10,352 6,424 10,347 6,390 Shares resulting from assumed conversion of preferred stock - 514 - 514 Additional dilutive effect of stock options and warrants after application of treasury stock method 6 - 7 9 Average number of common shares outstanding on a fully diluted basis 10,358 6,938 10,354 6,913 Fully diluted earnings per share $ .89 1.96 .31 .65
67 EX-10.A 3 EMPLOYMENT AGREEMENT THIS AGREEMENT ["Agreement"] is made and entered into this 3rd day of October, 1994, by and between AMVESTORS FINANCIAL CORPORATION [hereinafter referred to as "AmVestors"], AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. [hereinafter referred to as "American"], AMVESTORS INVESTMENT GROUP, INC. and AMERICAN INVESTORS SALES GROUP, INC., all Kansas corporations [the latter three hereinafter collective referred to as "Affiliates"], parties of the first part [hereinafter referred to as "Companies"], and RALPH W. LASTER JR. [hereinafter referred to as "Mr. Laster"], an individual, party of the second part. WITNESSETH: WHEREAS, Mr. Laster has been employed for many years by AmVestors and its affiliates and has been employed since 1988 as Chief Executive Officer and Chairman of the Board of AmVestors; and WHEREAS, Mr. Laster has also been employed by, associated with or has acted as a consultant to, and may in the future, at the request of AmVestors, be employed by, associated with or act as a consultant to, the affiliates of AmVestors; and WHEREAS, AmVestors desires to continue to have the benefit of Mr. Laster's knowledge and experience and considers such a vital element in protecting and enhancing the best interests of AmVestors and its shareholders and in providing management for AmVestors. 2 NOW, THEREFORE, in consideration of the mutual agreements and conditions contained herein, the parties hereto agree as follows: 1. Full-time Employment of Executive. a. Duties and Status. (1) AmVestors hereby employs Mr. Laster as its Chairman of the Board of Directors and Chief Executive Officer and American hereby employs Mr. Laster as its President and Chief Executive Officer to provide certain services set forth herein and to provide certain other employment services to affiliates for the employment period as defined in paragraph 3(a), and Mr. Laster accepts such employment, on the terms and conditions set forth in this Agreement. During the employment period, Mr. Laster shall perform such managerial duties and responsibilities for AmVestors and affiliates as may be assigned to him in accordance with the bylaws, which duties and responsibilities shall be substantially the same character as or equivalent character to those required by his assigned offices and functions during 1994. (2) During the employment period, Mr. Laster shall devote his full time and efforts to the business of AmVestors and its affiliates and shall not engage in consulting work or any trade or business for his own account or for or on behalf of any other person, firm or corporation which competes, conflicts or interferes with the performance of his duties hereunder in any way. Mr. Laster shall be entitled to reasonable vacations and to such personal and sick leave as may be established by AmVestors' and affiliates corporate policies. Mr. 3 Laster shall perform his duties while employed in good faith and shall observe faithfully the covenants and agreements made by him herein. b. Compensation and General Benefits. (1) During the employment period, AmVestors shall pay Mr. Laster an annual base salary of not less than Three Hundred Seventy Thousand Dollars ($370,000.00), payable in twice monthly installments (or on such other basis as may be mutually agreed upon). The salary shall be reviewed annually by the respective Board of Directors and may be increased, but not diminished, during the employment period. (2) In addition to the salary provided by subparagraph (1) of this paragraph 1(b), AmVestors and affiliates shall provide benefits and other perquisites reasonably comparable to, and no less favorable than, those provided by AmVestors and its affiliates to Mr. Laster during 1993, including, but not limited to, an automobile suitable for the business and personal use of Mr. Laster. 2. Competition; Confidential Information. The parties recognize that, due to the nature of Mr. Laster's prior association with the Companies and of his engagement hereunder, and as a consequence of his relationship to Companies, both in the past and in the future hereunder, Mr. Laster has had access to and has acquired, and has assisted in and may assist in developing, confidential and proprietary information relating to the business and operations of the Companies. Mr. Laster recognizes that such information has been and will continue 4 to be of central importance to the business of the Companies and that disclosure of such information to others or its use by others could cause substantial irreparable loss to the Companies. Mr. Laster and Companies also recognize that an important part of Mr. Laster's duties will be to develop good will for the Companies through his personal contact with others having business relationships with Companies and within the insurance industry, and that there is a danger that this good will, a proprietary asset of the Companies, may follow him if and when his relationship with the Companies is terminated. Mr. Laster accordingly agrees as follows: a. Non-Competition. During the employment period he will not directly or indirectly, either individually or as owner, partner, agent, employee, consultant or otherwise, except for the account of and on behalf of Companies, engage in any activity competitive with the business of Companies, nor will he be in competition with Companies, solicit or otherwise attempt to establish any business relationships with any person, firm or corporation which was, at any time during the employment period, a customer or supplier of Companies. However, nothing in this Section 2 shall be construed to prevent him from owning, as an investment, up to one percent (1%) of a class of equity securities issued by any competitor of Companies. b. Confidential Information. Mr. Laster will not disclose any confidential information of Companies which is now known to him or which hereafter may become known to him as a result of his employment or association with Companies and shall 5 not at any time directly or indirectly disclose any such information to any person, firm or corporation, or use the same in any way other than in connection with the business of Companies and at all times after the expiration of the employment period. c. Companies' Remedies for Breach. It is recognized that damages in the event of breach of this Section 2 by Mr. Laster would be difficult, if not impossible, to ascertain and it is, therefore, agreed that Companies, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach, and Mr. Laster hereby waives any and all defenses he may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right shall not preclude Companies from pursuing any other rights and remedies at law or in equity which Companies may have. 3. Employment Period. a. Duration. The employment period shall commence on June 1, 1994 and shall continue until the close of business on May 31, 1997, unless otherwise terminated as provided in this Agreement. b. Performance and Termination. Subject to the performance of the covenants and agreements made by Companies herein, Mr. Laster shall perform his duties during the employment period in good faith and will observe faithfully the covenants and agreements made by him herein. Mr. Laster shall not be discharged during the employment period except for cause involving 6 dishonesty, moral turpitude, or material breach of any express or implied condition under this Agreement. The discharge of Mr. Laster for reasons other than those specified in the preceding sentence shall be deemed to be a discharge without cause. c. Mr. Laster's Remedies for Breach. If the Companies shall fail to observe or perform any covenant in this Agreement to be observed or performed by it or if the Companies shall take any action with respect to Mr. Laster's employment as set forth in paragraph 3(d) thereby entitling him to terminate his employment for good reason, then Mr. Laster shall be entitled to be paid a sum equal to the remaining balance of his salary at the current salary level for the remaining term of this Agreement without discount or adjustment within thirty (30) days of written notice of termination. The parties agree that, because there can be no exact measure of the damage which would occur to Mr. Laster as a result of a breach by any of the Companies, the payments provided hereunder shall be deemed to constitute liquidated damages and not a penalty for breach by Companies and Companies agree that Mr. Laster shall not be required to mitigate his damages. This paragraph shall constitute Mr. Laster's sole remedy for breach of this Agreement. In addition to the foregoing, if the Companies shall fail to observe or perform any covenant or if any of the Companies shall have taken any action with respect to Mr. Laster's employment as set forth in paragraph 3(d) thereby entitling him to terminate his employment for good reason or if there is a change in control as set forth in paragraph 3(e) thereby entitling Mr. 7 Laster to terminate his employment, and Mr. Laster exercises such right to terminate his employment pursuant to paragraph 3(d) or 3(e), then any and all non-competition agreements by Mr. Laster pursuant to paragraph 2(a) above shall terminate on the date that Mr. Laster terminates his employment pursuant to paragraph 3(d) or 3(e). d. Termination for Good Reason. Mr. Laster shall be entitled to terminate his employment for good reason. Any termination of employment under the following circumstances shall be for good reason and shall be deemed to be a breach of this Agreement by the Companies: (1) Without the express written consent of Mr. Laster, he is assigned any duties inconsistent with his positions, duties, responsibilities and status with the Companies since May 1993, or his reporting responsibilities, titles or offices as in effect during the period of this Agreement are changed or he is removed from or not reelected to any of such positions, except in connection with the termination of his employment for cause, or as a result of his substantial disability or death; (2) The annual base salary of Mr. Laster as in effect on May 31, 1994 ($370,000), as the same hereafter may be increased from time to time, is reduced; (3) Companies' principal executive offices are moved to a location outside Topeka, Kansas or any of the Companies require Mr. Laster without his agreement to be based anywhere other than the principle executive offices except for 8 required travel on Companies' business to an extent substantially consistent with his business travel obligations in effect immediately prior to the date of this Agreement; or (4) Mr. Laster voluntarily resigns after his reasonable determination that, as a result of a "change in control" [as hereinafter defined in paragraph 3(e)] of Amvestors, he may be unable to exercise the authorities, powers, functions or duties attached to his position to the extent contemplated by Section 1 of this Agreement, in which event any and all non- competition agreements by Mr. Laster pursuant to paragraph 2(a) above shall terminate on the date of such resignation by Mr. Laster. e. Change in Control. Notwithstanding Mr. Laster's right to terminate for good reason in paragraph 3(d), Mr. Laster shall also be entitled to terminate his employment following any "change in control" (as hereafter defined below) of Amvestors for any reason by providing notice in writing to Amvestors of his intent to terminate his employment effective as of a date not earlier than ninety (90) days after receipt of such written notification by AmVestors. The term "change in control" as used herein shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") as in effect on the date of this Agreement or, if Item 5(f) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Exchange Act 9 which serve similar purposes; provided that, without limitation, such a "change in control" shall be deemed to have occurred if and when (A) any "person" (as such term is used in Sections 3(a)(9), 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a beneficial owner, directly or indirectly, of securities of AmVestors representing 25 percent (25%) or more of the combined voting power of the then outstanding securities of AmVestors or American, (B) a tender offer or exchange offer is made whereby the effect of such offer is to take over and control AmVestors or American and such offer is consummated for the ownership of securities of AmVestors or American representing 25 percent (25%) or more of the combined voting power of the then outstanding voting securities of AmVestors or American, (C) AmVestors or American is merged or consolidated with another corporation or as a result of such merger or consolidation less than 75 percent (75%) of the then outstanding voting securities of the surviving or resulting corporation shall then be owned in the aggregate by the former stockholders of AmVestors or American, other than affiliates within the meaning of the Exchange Act or any party to such merger or consolidation, (D) individuals who were members of the Board of Directors of AmVestors or American immediately prior to a meeting of the shareholders of AmVestors or American involving a contest for the election of directors shall not constitute a majority of such Board of Directors following such election, or (E) AmVestors transfers substantially all of its assets to another corporation which is not a wholly owned subsidiary of AmVestors or American. 10 4. Death or Disability. a. In the event Mr. Laster shall become so disabled during the term of this Agreement that he is unable to reasonably perform his duties for a period of one (1) year, either Mr. Laster or AmVestors and its Affiliates shall have the right to terminate this Agreement upon written notice given at the end of such one (1) year period; provided that, at the time of delivery of such notice, such disability shall be continuing. In the event of a disagreement between Companies and/or Mr. Laster regarding the question of whether Mr. Laster is disabled as defined herein, the question shall be referred to the Companies physician whose decision will be conclusive and binding. In any such event, Mr. Laster shall be entitled to receive as a settlement of this contract, an annual sum equal to the annual base salary specified in Section 1b.(1) hereof as such may be increased from time to time which shall be payable semimonthly, for a period of two (2) years or until the later of the two dates stated in paragraph 3(a) (including any extension of such later date as is mutually agreed to by the parties hereto in writing), whichever is shorter. If Mr. Laster dies during the term of this Agreement, while receiving payments pursuant to this paragraph 4(a), such payments shall in no event continue for more than one (1) year after Mr. Laster's death and there shall be no further obligations on the part of the Companies. b. In the event Mr. Laster dies during the term of this Agreement, but prior to receiving payments pursuant to paragraph 4(a), the Companies shall pay to the person(s) 11 designated by Mr. Laster in writing to the Companies or, if no such designation is made, to Mr. Laster's estate, an amount equal to the annual base salary specified in Section 1b.(1) hereof as such may be increased from time to time which shall be payable semimonthly for a period of one (1) year following which there shall be no further obligation on the part of the Companies. 5. Governing Law. This Agreement shall be governed by the laws of the State of Kansas. 6. Binding Effect. This Agreement shall be binding upon the parties hereto, their successors, assigns, heirs, legatees and personal representatives. 7. Assignability. This Agreement shall not be assignable by the Companies, nor may his duties hereunder be delegated by Mr. Laster. 8. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements, proposals and other communications, oral or written, between the parties hereto relating to such subject matter. 9. Severability. If any term or provision of this Agreement or the application thereof to any circumstances shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term of provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable any remaining terms or provisions of this Agreement or the application of such term or provision to circumstances other than 12 those as to which it is invalid or unenforceable. To the extent permitted by applicable law, the parties hereto hereby waive any provision of law that renders any term or provision of this Agreement invalid or unenforceable in any respect. 10. Intent of Agreement. The Companies intend by this Agreement to provide for the employment of Mr. Laster. While this Agreement provides for Mr. Laster's employment, this Agreement shall in no manner ever be deemed or construed as limiting the power of stockholders to elect Mr. Laster as a director of Companies or limiting the power of the Companies to elect its Chairman or officer(s). In like manner, if stockholders or some future Board of Directors of the Companies shall not reelect Mr. Laster, such failure to so elect Mr. Laster shall not be deemed or considered as a condition precedent to the continued obligation of the Companies to pay Mr. Laster the compensation as provided for in this Agreement. 11. Recovery of Legal Fees, Costs and Expenses. In the event that Mr. Laster is terminated by the Companies and Mr. Laster retains legal counsel or commences legal action, the costs and expenses, including legal fees shall be paid by the Companies or their affiliates in the event Mr. Laster prevails in such action either by verdict or judgment. In the event Mr. Laster prevails as defined above, the Companies or their affiliate shall pay the reasonable attorney fees, costs and expenses within thirty (30) days after the conclusion of the litigation. IN WITNESS WHEREOF, the parties hereto have signed this Employment Agreement the day and year first above written. 13 PARTY OF THE FIRST PART: AMVESTORS FINANCIAL CORPORATION /s/Mark V. Heitz By: Mark V. Heitz, its President and General Counsel ATTEST: /s/Lynn F. Hammes CORPORATE SECRETARY AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. /s/Mark V. Heitz By: Mark V. Heitz, its Chairman of the Board and General Counsel ATTEST: /s/Lynn F. Hammes CORPORATE SECRETARY AMVESTORS INVESTMENT GROUP, INC. AMERICAN INVESTORS SALES GROUP INC. By: /s/Mark V. Heitz Mark V. Heitz COMPENSATION COMMITTEE -- AMVESTORS FINANCIAL CORPORATION and AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. By: /s/R. Rex Lee R. Rex Lee, Chairman PARTY OF THE SECOND PART: /s/Ralph W. Laster, Jr. RALPH W. LASTER JR. EX-10.B 4 BONUS COMPENSATION AGREEMENT THIS BONUS COMPENSATION AGREEMENT ["Bonus Agreement"] is made and entered into this 30th day of September, 1994, by and between AMVESTORS FINANCIAL CORPORATION ["AmVestors"] and AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. ["AILICO"], all Kansas corporations, as parties of the first part, and RALPH W. LASTER, JR. ["Mr. Laster"], an individual, party of the second part. WITNESSETH: WHEREAS, AmVestors has employed Mr. Laster as its Chairman of the Board of Directors and Chief Executive Officer, and AILICO has employed Mr. Laster as its President and Chief Executive Officer in accordance with the terms and conditions of an Employment Agreement dated August 25, 1994; WHEREAS, the Employment Agreement dated August 25, 1994, establishes Mr. Laster's annual base salary, benefits and perquisites, but does not provide him with any additional compensation based upon the financial performance or profitability of AmVestors and its affiliates ["the Companies"]; WHEREAS, AmVestors and AILICO believe that Mr. Laster may be in a position to influence the financial performance and profitability of the Companies by virtue of his employment, knowledge and experience; WHEREAS, AmVestors and AILICO believe that the best interests of the Companies, their shareholders, policyholders and/or creditors will be promoted by providing Mr. Laster with a personal financial incentive to maximize the profitability of the Companies, and that this objective can be attained by affording - - -1- him the opportunity to earn additional or bonus compensation based upon objective indicia of performance; WHEREAS, AmVestors and AILICO desire to provide Mr. Laster with the opportunity to earn additional or bonus compensation based upon the financial performance of the Companies in accordance with the terms and conditions described below; WHEREAS, Mr. Laster desires the opportunity to earn additional or bonus compensation, in addition to his annual base salary, benefits and perquisites, based upon the financial performance of the Companies in accordance with the terms and conditions described below. NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties expressly understand and agree as follows: 1. Performance of Executive Employee. Mr. Laster shall fully discharge his duties and responsibilities in accordance with the Employment Agreement dated August 25, 1994, and shall utilize his best efforts to maximize the financial performance and profitability of the Companies to the fullest extent permitted under law. 2. Additional or Bonus Compensation. During each year of his employment, Mr. Laster shall be entitled to earn additional or bonus compensation based upon the annual financial performance of AmVestors and its affiliates, and shall be entitled to receive such compensation if one or more specified performance objectives have been fulfilled and the conditions of this section are otherwise satisfied. - - -2- (a) Peformance Objectives During each calendar year of his employment, Mr. Laster shall be entitled to additional or bonus compensation if one or more of the following goals is met for the calendar year as a whole: (i) AmVestors achieves a return on equity equal to or greater than 13%; (ii) AmVestors achieves asset growth equal to or greater than 15%; (iii) AmVestors realizes a total return on its own common stock equal to or greater than the total return reported in the Standard & Poor Life Index for the life insurance industry that year; (iv) AmVestors' core operating earnings are equal to or greater than the reported expectations of market analysts as of April 1st of the calendar year; (v) AILICO receives premiums and annuity consideration before reinsurance equal to or greater than $300 million; (vi) AmVestors realizes and/or maintains a gross margin equal to or greater than 200 basis points ["BP"]; and (vi) AmVestors incurs total expenses equal to or less than 100 basis points ["BP"]. (b) Definitions For purposes of this section: (i) "return on equity" shall be stated as a percentage derived from net income divided by average shareholder's equity for the calendar year; (ii) "asset growth" shall be stated as a percentage derived from total assets as of December 31st of the calendar year minus total assets as of December 31st of the preceding calendar year divided by total assets as of December 31st of the preceding calendar year; (iii) "total return on its own common stock" shall be calculated using the same factors and metholodology as the Standard & Poor Life Index, including stock appreciation and dividends per share, if any, during the calendar year; (iv) "core - - -3- operating earnings" shall be derived from the corresponding entry on Form 10K of AmVestors' annual report to the shareholders; (v) "the reported expectations of market analysts" means any published forecast(s) of future financial performance deemed to be reliable by AmVestors' Board of Directors in its sole discretion; (vi) "premiums and annuity consideration before reinsurance" shall be derived from AILICO's annual statement filed with the Kansas Insurance Department; (vii) "gross margin" shall be derived from the corresponding entry in the margin analysis on Form 10K of AmVestors' annual report to the shareholders; and (viii) "total expenses" means general insurance expenses and amortization of deferred acquisition cost ["DAC"] associated with core operating earnings stated as a percentage of average invested assets for the calendar year. (c) Additional or Bonus Compensation Formula. Additional or bonus compensation shall be calculated by multiplying Mr. Laster's annual base salary for the calendar year ["base"] times the ratio of performance objective points earned divided by total performance objective points possible. For purposes of this formula, performance objectives are assigned the following point values: Objective Points AmVestors Return on Equity > 13% . AmVestors Asset Growth > 15% . . . . . . . . 1 Total Return on AmVestors Stock > Total Return on S&P Life Index . . . . . 1 AmVestors Core Operating Earnings > Analyst Expectations . . . . . . . . . . 1 - - -4- AILICO Premiums & Annuity Consideration > $300 Million . . . . . . . 1 AmVestors Gross Margin > 200 BP . . . . . . . 0.5 AmVestors Total Expenses < 100 BP . . . . . . . . . . . . . . . . . 0.5 for a total of 6.0 performance objective points possible each year in which such criteria are utilized. In determining the multiplication ratio as a fractional amount, the total objective points earned serves as the numerator and the total objective points possible serves as the denominator. If no performance objectives are achieved for the calendar year as a whole, however, no points are earned and no additional or bonus compensation shall be due. (d) Modification of Performance Measures and Point Values. During the first ninety (90) days of calendar year 1995 and each calendar year thereafter as deemed appropriate, the Board of Directors of AmVestors and AILICO, in consultation with the Compensation Committee, is authorized in its sole discretion to amend, modify and/or supplement the performance goals or objectives set forth in subsections (a), (b) and (c) above, and to assign relative point values to all such performance goals or objectives, for the purpose of determining Mr. Laster's eligibility for additional or bonus compensation and calculating its amount, and any such amendments or modifications shall be effective as of January 1st of any calendar year in which the action is taken. (e) Allocation and Payment of Additional or Bonus Compensation. The total amount of any additional or bonus - - -5- compensation which may be otherwise due in accordance with this section for any year of Mr. Laster's employment shall be allocated in equal amounts to a cash bonus and a salary bonus to be paid during the next succeeding calendar year as follows: (i) Mr. Laster shall be paid the total amount of the cash bonus [i.e., 50% of all additional or bonus compensation] in a lump sum as soon as practicable following receipt of the certified audit report for the year in which objective points were earned, but no later than April 15th; and (ii) Mr. Laster shall be paid the total amount of the salary bonus in equal bi-monthly installments from April 15th through December 31st except as otherwise provided herein. (f) Entitlement to and Forfeiture of Additional or Bonus Compensation Under Prescribed Circumstances. The terms of this subsection shall have the same meaning as terms utilized in a comparable context of the Employment Agreement dated August 25, 1994. (i) Expiration of Term of Employment In the event that Mr. Laster's employment is terminated for any reason upon expiration of the period covered by his Employment Agreement dated August 25, 1994, Mr. Laster shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him, which shall be paid within ten (10) days following receipt of the certified audit report for the last calendar year of his employment. (ii) Death or Disability In the event that Mr. Laster's employment is terminated due to death or disability - - -6- at any time prior to December 31st of any calendar year, his personal representative(s): shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him for the remainder of such calendar year, which shall be paid within thirty(30) days of death or disability; and, if Mr. Laster was employed at least nine (9) months during the calendar year of death or diability, a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the calendar year of his death or disability. (iii) Termination For Good Reason In the event that Mr. Laster terminates his employment for good reason, including a change in control, at any time prior to December 31st of any calendar year, he shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him for the remainder of such calendar year, which shall be paid within thirty (30) days of termination; and an additional lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the year of termination. (iv) Termination Without Good Reason In the event that Mr. Laster terminates his employment without good reason prior to December 31st of any calendar year, Mr. Laster - - -7- shall forfeit his right to any unpaid salary bonus through the remainder of the calendar year of termination, and Mr. Laster shall not be entitled to receive any cash bonus or salary bonus that would have otherwise been due or owing to him hereunder at any time during the calendar year following such termination. (v) Termination Without Cause In the event that Mr. Laster's employment is terminated by AmVestors and/or AILICO without cause prior to December 31st of any calendar year, Mr. Laster shall be entitled to receive the full amount of any cash bonus and salary bonus otherwise due in that calendar year, which shall be paid within ten (10) days of such termination; and, if Mr. Laster was employed for at least nine (9) months during the year of termination, he shall be entitled to receive an additional lump sum payment equal to the full amount of the cash bonus and salary bonus that would have otherwise been due or owing to him hereunder during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the year of termination. (vi) Termination for Cause In the event that AmVestors and/or AILICO terminate Mr. Laster's employment for cause prior to December 31st of any calendar year, Mr. Laster shall forfeit his right to any unpaid salary bonus through the remainder of the calendar year of termination, and Mr. Laster shall not be entitled to receive any cash bonus or salary bonus that would have otherwise been due or owing to him hereunder at any time during the next succeeding calendar year. - - -8- 3. Governing Law and Binding Effect This Bonus Agreement shall be governed by the laws of the State of Kansas, and shall be binding upon the parties hereto, their successors, heirs, legatees and personal representatives. IN WITNESS WHEREOF, parties hereto have signed this Bonus Compensation Agreement the day and year first written above. PARTY OF THE FIRST PART: AMVESTORS FINANCIAL CORPORATION By: /s/Mark V. Heitz _________________________ Mark V. Heitz, its President and General Counsel ATTEST: /s/Lynn F. Hammes _____________________________ CORPORATE SECRETARY AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. By: /s/Mark V. Heitz _____________________________ Mark V. Heitz, its Chairman of the Board and General Counsel ATTEST: /s/Lynn F. Hammes __________________________ CORPORATE SECRETARY - - -9- COMPENSATION COMMITTEE - AMVESTORS FINANCIAL CORPORATION and AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. By: /s/ R. Rex Lee ______________________________ R. Rex Lee, it Chairman PARTY OF THE SECOND PART: /s/Ralph W. Laster, Jr. _________________________________ RALPH W. LASTER, JR. - - -10- EX-10.C 5 BONUS COMPENSATION AGREEMENT THIS BONUS COMPENSATION AGREEMENT ["Bonus Agreement"] is made and entered into this 30th day of September, 1994, by and between AMVESTORS FINANCIAL CORPORATION ["AmVestors"] and AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. ["AILICO"], all Kansas corporations, as parties of the first part, and MARK V. HEITZ ["Mr. Heitz"], an individual, party of the second part. WITNESSETH: WHEREAS, AmVestors has employed Mr. Heitz as its President and General Counsel, and AILICO has employed Mr. Heitz as its Chairman of the Board of Directors and General Counsel in accordance with the terms and conditions of an Employment Agreement dated December 17, 1992; WHEREAS, in accordance with the Employment Agreement dated December 17, 1992, the Board of Directors of AmVestors and AILICO have established the amount of Mr. Heitz's annual base salary, benefits and perquisites, but have not provided him with any additional compensation based upon the financial performance or profitability of AmVestors and its affiliates ["the Companies"]; WHEREAS, AmVestors and AILICO believe that Mr. Heitz may be in a position to influence the financial performance and profitability of the Companies by virtue of his employment, knowledge and experience; WHEREAS, AmVestors and AILICO believe that the best interests of the Companies, their shareholders, policyholders and/ or creditors will be promoted by providing Mr. Heitz with a -1- personal financial incentive to maximize the profitability of the Companies, and that this objective can be attained by affording him the opportunity to earn additional or bonus compensation based upon objective indicia of performance; WHEREAS, AmVestors and AILICO desire to provide Mr. Heitz with the opportunity to earn additional or bonus compensation based upon the financial performance of the Companies in accordance with the terms and conditions described below; WHEREAS, Mr. Heitz desires the opportunity to earn additional or bonus compensation, in addition to his annual base salary, benefits and perquisites, based upon the financial performance of the Companies in accordance with the terms and conditions described below. NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties expressly understand and agree as follows: 1. Performance of Executive Employee. Mr. Heitz shall fully discharge his duties and responsibilities in accordance with the Employment Agreement dated December 17, 1992, and shall utilize his best efforts to maximize the financial performance and profitability of the Companies to the fullest extent permitted under law. 2. Additional or Bonus Compensation. During each year of his employment, Mr. Heitz shall be entitled to earn additional or bonus compensation based upon the annual financial performance of AmVestors and its affiliates, and shall be entitled to receive such compensation if one or more specified performance objectives -2- have been fulfilled and the conditions of this section are otherwise satisfied. (a) Peformance Objectives During each calendar year of his employment, Mr. Heitz shall be entitled to additional or bonus compensation if one or more of the following goals is met for the calendar year as a whole: (i) AmVestors achieves a return on equity equal to or greater than 13%; (ii) AmVestors achieves asset growth equal to or greater than 15%; (iii) AmVestors realizes a total return on its own common stock equal to or greater than the total return reported in the Standard & Poor Life Index for the life insurance industry that year; (iv) AmVestors' core operating earnings are equal to or greater than the reported expectations of market analysts as of April 1st of the calendar year; (v) AILICO receives premiums and annuity consideration before reinsurance equal to or greater than $300 million; (vi) AmVestors realizes and/or maintains a gross margin equal to or greater than 200 basis points ["BP"]; and (vi) AmVestors incurs total expenses equal to or less than 100 basis points ["BP"]. (b) Definitions For purposes of this section: (i) "return on equity" shall be stated as a percentage derived from net income divided by average shareholder's equity for the calendar year; (ii) "asset growth" shall be stated as a percentage derived from total assets as of December 31st of the calendar year minus total assets as of December 31st of the preceding calendar year divided by total assets as of December 31st of the preceding calendar year; (iii) "total return on its own common stock" shall be calculated using the same factors and metholodology as the -3- Standard & Poor Life Index, including stock appreciation and dividends per share, if any, during the calendar year; (iv) "core operating earnings" shall be derived from the corresponding entry on Form 10K of AmVestors' annual report to the shareholders; (v) "the reported expectations of market analysts" means any published forecast(s) of future financial performance deemed to be reliable by AmVestors' Board of Directors in its sole discretion; (vi) "premiums and annuity consideration before reinsurance" shall be derived from AILICO's annual statement filed with the Kansas Insurance Department; (vii) "gross margin" shall be derived from the corresponding entry in the margin analysis on Form 10K of AmVestors' annual report to the shareholders; and (viii) "total expenses" means general insurance expenses and amortization of deferred acquisition cost ["DAC"] associated with core operating earnings stated as a percentage of average invested assets for the calendar year. (c) Additional or Bonus Compensation Formula Additional or bonus compensation shall be calculated by multiplying Mr. Heitz's annual base salary for the calendar year ["base"] times the ratio of performance objective points earned divided by total performance objective points possible. For purposes of this formula, performance objectives are assigned the following point values: Objective Points AmVestors Return on Equity > 13% . . . . . . 1 AmVestors Asset Growth > 15% . . . . . . . . 1 Total Return on AmVestors Stock > Total Return on S&P Life Index . . . . . 1 - - -4- AmVestors Core Operating Earnings > Analyst Expectations . . . . . . . . . . 1 AILICO Premiums & Annuity Consideration > $300 Million . . . . . . . 1 AmVestors Gross Margin > 200 BP . . . . . . . 0.5 AmVestors Total Expenses < 100 BP . . . . . . . . . . . . . . . . . 0.5 for a total of 6.0 performance objective points possible each year in which such criteria are utilized. In determining the multiplication ratio as a fractional amount, the total objective points earned serves as the numerator and the total objective points possible serves as the denominator. If no performance objectives are achieved for the calendar year as a whole, however, no points are earned and no additional or bonus compensation shall be due. (d) Modification of Performance Measures and Point Values During the first ninety (90) days of calendar year 1995 and each calendar year thereafter as deemed appropriate, the Board of Directors of AmVestors and AILICO, in consultation with the Compensation Committee, is authorized in its sole discretion to amend, modify and/or supplement the performance goals or objectives set forth in subsections (a), (b) and (c) above, and to assign relative point values to all such performance goals or objectives, for the purpose of determining Mr. Heitz's eligibility for additional or bonus compensation and calculating its amount, and any such amendments or modifications shall be effective as of January 1st of any calendar year in which the action is taken. -5- (e) Allocation and Payment of Additional or Bonus Compensation The total amount of any additional or bonus compensation which may be otherwise due in accordance with this section for any year of Mr. Heitz's employment shall be allocated in equal amounts to a cash bonus and a salary bonus to be paid during the next succeeding calendar year as follows: (i) Mr. Heitz shall be paid the total amount of the cash bonus [i.e., 50% of all additional or bonus compensation] in a lump sum as soon as practicable following receipt of the certified audit report for the year in which objective points were earned, but no later than April 15th; and (ii) Mr. Heitz shall be paid the total amount of the salary bonus in equal bi-monthly installments from April 15th through December 31st except as otherwise provided herein. (f) Entitlement to and Forfeiture of Additional or Bonus Compensation Under Prescribed Circumstances The terms of this subsection shall have the same meaning as terms utilized in a comparable context of the Employment Agreement dated December 17, 1992. (i) Expiration of Term of Employment In the event that Mr. Heitz's employment is terminated for any reason upon expiration of the period covered by his Employment Agreement dated December 17, 1992, Mr. Heitz shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him, which shall be paid within ten (10) days following receipt of the certified audit report for the last calendar year of his employment. -6- (ii) Death or Disability In the event that Mr. Heitz's employment is terminated due to death or disability at any time prior to December 31st of any calendar year, his personal representative(s): shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him for the remainder of such calendar year, which shall be paid within thirty (30) days of death or disability; and, if Mr. Heitz was employed at least nine (9) months during the calendar year of death or diability, a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the calendar year of his death or disability. (iii) Termination For Good Reason In the event that Mr. Heitz terminates his employment for good reason, including a change in control, at any time prior to December 31st of any calendar year, he shall be entitled to receive a lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him for the remainder of such calendar year, which shall be paid within thirty (30) days of termination; and an additional lump sum payment equal to the full amount of any cash bonus and salary bonus that would otherwise have been due or owing to him during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the year of termination. -7- (iv) Termination Without Good Reason In the event that Mr. Heitz terminates his employment without good reason prior to December 31st of any calendar year, Mr. Heitz shall forfeit his right to any unpaid salary bonus through the remainder of the calendar year of termination, and Mr. Heitz shall not be entitled to receive any cash bonus or salary bonus that would have otherwise been due or owing to him hereunder at any time during the calendar year following such termination. (v) Termination Without Cause In the event that Mr. Heitz's employment is terminated by AmVestors and/or AILICO without cause prior to December 31st of any calendar year, Mr. Heitz shall be entitled to receive the full amount of any cash bonus and salary bonus otherwise due in that calendar year, which shall be paid within ten (10) days of such termination; and, if Mr. Heitz was employed for at least nine (9) months during the year of termination, he shall be entitled to receive an additional lump sum payment equal to the full amount of the cash bonus and salary bonus that would have otherwise been due or owing to him hereunder during the next succeeding calendar year, which shall be paid within ten (10) days following receipt of the certified audit report for the year of termination. (vi) Termination for Cause In the event that AmVestors and/or AILICO terminate Mr. Heitz's employment for cause prior to December 31st of any calendar year, Mr. Heitz shall forfeit his right to any unpaid salary bonus through the remainder of the calendar year of termination, and Mr. Heitz shall not be entitled to receive any cash bonus or salary bonus that would have -8- otherwise been due or owing to him hereunder at any time during the next succeeding calendar year. 3. Governing Law and Binding Effect This Bonus Agreement shall be governed by the laws of the State of Kansas, and shall be binding upon the parties hereto, their successors, heirs, legatees and personal representatives. IN WITNESS WHEREOF, parties hereto have signed this Bonus Compensation Agreement the day and year first written above. PARTY OF THE FIRST PART: AMVESTORS FINANCIAL CORPORATION By:/s/Ralph W. Laster, Jr. Ralph W. Laster, Jr., its Chairman of the Board and Chief Executive Officer ATTEST: /s/Lynn F. Hammes CORPORATE SECRETARY AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. By:/s/Ralph W. Laster, Jr. Ralph W. Laster, Jr., its President and Chief Executive Officer ATTEST: /s/Lynn F. Hammes CORPORATE SECRETARY -9- COMPENSATION COMMITTEE - AMVESTORS FINANCIAL CORPORATION and AMERICAN INVESTORS LIFE INSURANCE COMPANY, INC. By:/s/R. Rex Lee R. Rex Lee, it Chairman PARTY OF THE SECOND PART: /s/MarK V. Heitz MARK V. HEITZ -10- EX-27 6 ARTICLE 7 FDS FOR 10-Q
7 1,000 9-MOS DEC-31-1994 SEP-30-1994 600,364 1,253,538 1,185,620 2,577 0 0 1,897,280 9,135 0 140,277 2,238,475 2,121,645 0 0 3,798 0 12,919 0 0 94,673 2,238,475 4,831 105,361 328 443 83,198 7,524 6,225 14,016 4,750 9,266 0 0 0 9,266 .90 .89 0 0 0 0 0 0 0

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