<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the
Securities Exchange Act of 1934)
THE MANHATTAN LIFE INSURANCE COMPANY
(Name of the Issuer)
THE MANHATTAN LIFE INSURANCE COMPANY
THE UNION CENTRAL LIFE INSURANCE COMPANY
(Name of Person(s) Filing Statement)
Guarantee Capital Stock, $2 Par Value
(Title of Class of Securities)
563080100
(CUSIP Number of Class of Securities)
James J. Breen
Of Counsel
The Manhattan Life Insurance Company
111 West 57th Street
New York, New York 10019
Telephone: (212) 484-9300
(Name, Address and Telephone Number of
Person Authorized to Receive
Notices and Communications on Behalf of
Person(s) Filing Statement)
Copy to:
Michael Groll, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
(212) 424-8000
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement to
Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. [_] The filing of a registration statement under the Securities Act of
1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [X]
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CALCULATION OF FILING FEE
================================================================================
Transaction valuation* Amount of
Filing Fee
================================================================================
$6,835,140 $1,367
================================================================================
* Calculation based upon 911,352 shares of the Company's guarantee
capital stock, $2.00 par value per share, to be redeemed for cash
consideration of $7.50 per share.
[_] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
Amount Previously Paid:
Form or Registration No.:
Filing Party:
Date Filed:
<PAGE>
INTRODUCTION
This Amendment No. 1 to Rule 13e-3 Transaction Statement on Schedule
13E-3 is being filed by The Manhattan Life Insurance Company (the "Company") and
The Union Central Life Insurance Company ("UCLIC") with respect to the class of
equity securities of the Company that is subject to a Rule 13e-3 transaction.
The Company is submitting to its shareholders a proposal to approve (i) an
amendment of its Amended Charter providing for a reduction in the authorized
guarantee capital of the Company from 5,000,000 guarantee capital shares, $2.00
par value per share (the "Capital Stock"), to 11 guarantee capital shares,
$835,406 par value per share (the "New Capital Stock"), (ii) a 303,784 to one
reverse stock split of the Capital Stock, whereby each shareholder that
surrenders 303,784 shares of Capital Stock and contributes cash in the amount of
$227,838 (all of which cash amount will be contributed to the guarantee capital
of the Company), will receive in exchange one share of New Capital Stock, and
(iii) a cash payment in the amount of $7.50 per share of the currently
outstanding Capital Stock in lieu of the issuance of any resulting fractional
shares of New Capital Stock to shareholders who, after the reverse stock split,
own fractional shares of the New Capital Stock (items (i), (ii) and (iii) will
be considered one proposal and will be collectively referred to herein as the
"Reverse Stock Split"). The Reverse Stock Split will be effected on the terms
and subject to the conditions set forth in the Company's Proxy Statement for a
Special Meeting of Shareholders of the Company scheduled to be held on January
__, 1997 (including all annexes thereto, the "Proxy Statement"), a copy of which
is attached as Exhibit (d)(1) hereto and which Proxy Statement is hereby
expressly incorporated herein by reference in its entirety. If the proposed
Reverse Stock Split is consummated, it is anticipated that UCLIC, which owns
approximately 72.8% of the outstanding shares of Capital Stock, will be the sole
holder of the New Capital Stock and the holdings of all other shareholders will
be reduced to a fraction of a share of New Capital Stock for which such other
shareholders will be paid in cash in lieu of the issuance of certificates for
such fractional shares.
The following cross-reference sheet is provided pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement
filed by the Company with the Securities and Exchange Commission on the date
hereof of the information required to be included in response to the items of
this Statement.
<PAGE>
CROSS-REFERENCE SHEET SHOWING LOCATION
IN PRELIMINARY PROXY STATEMENT
OF INFORMATION REQUIRED BY
ITEMS IN SCHEDULE 13E-3
(PURSUANT TO GENERAL INSTRUCTION F TO SCHEDULE 13E-3)
SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
1. Issuer and Class of Security
Subject to the Transaction
Item 1(a).......................... Cover Page and "General -- Record
Date; Voting; Vote Required"
Item 1(b).......................... Cover Page, "Summary -- Record Date;
Voting; Vote Required" and "General
-- Record Date; Voting; Vote Required"
Item 1(c).......................... "Market Prices for the Capital Stock"
Item 1(d).......................... "Dividends"
Item 1(e).......................... Not applicable
Item 1(f).......................... Not applicable
2. Identity and Background This Statement is being filed by the
Company and UCLIC.
Items 2(a)-(d)..................... "Management of the Company" and
"Management of UCLIC"
Items 2(e) and (f)................. During the last five years, neither
the Company, UCLIC nor any of the
persons with respect to whom
information is provided in response
to this item (i) has been convicted
in a criminal proceeding (excluding
traffic violations or similar
misdemeanors) or (ii) was a party to
a civil proceeding of a judicial or
administrative body of competent
jurisdiction and as a result of such
proceeding was or is subject to a
judgment, decree or final order
enjoining further violations of, or
prohibiting activities subject to,
Federal
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SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
or State securities laws or finding
any violation of such laws.
Item 2(g).......................... All executive officers and directors
of the Company and of UCLIC are
citizens of the United States.
3. Past Contracts,
Transactions or Negotiations
Item 3(a)(1)....................... Not applicable
Items 3(a)(2) and (b).............. Not applicable
4. Terms of the Transaction
Items 4(a) and (b)................. "Summary -- Purpose of the Special
Meeting," "Summary -- Record Date;
Voting; Vote Required," "Summary --
Exchange of Certificates and Payment
for Fractional Shares of New Capital
Stock," "Summary -- Financing and
Expenses of the Reverse Stock Split,"
"General -- Purpose of the Special
Meeting," "General -- Record Date;
Voting; Vote Required," "General --
Amendment of Charter to Effect a
Reverse Stock Split," "Special
Factors -- Certain Effects of and
Conduct of the Company's Business
After the Reverse Stock Split,"
"Special Factors -- Exchange of
Certificates and Payment for
Fractional Shares of New Capital
Stock," "Special Factors -- Financing
and Expenses of the Reverse Stock
Split," "Security Ownership of
Certain Beneficial Owners" and
"Security Ownership of Management"
5. Plans or Proposals of the Issuer
or Affiliate
Items 5(a)-(g)................... "Summary -- Reasons for the Reverse
Stock Split," "Summary
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<PAGE>
SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
-- Certain Effects of and Conduct of
the Company's Business After the
Reverse Stock Split," "Special
Factors -- Reasons for the Reverse
Stock Split" and "Special Factors --
Certain Effects of and Conduct of the
Company's Business After the Reverse
Stock Split"
6. Source and Amount of Funds or
Other Consideration
Items 6(a) and (b)................. "Summary -- Financing and Expenses of
the Reverse Stock Split," "General --
Record Date; Voting; Vote Required"
and "Special Factors -- Financing and
Expenses of the Reverse Stock Split"
Item 6(c).......................... Not applicable
Item 6(d).......................... Not applicable
7. Purpose(s), Alternatives, Reasons
and Effects
"Summary -- Reasons for the Reverse
Item 7(a).......................... Stock Split," "Special Factors --
Background of the Reverse Stock
Split" and "Special Factors --
Reasons for the Reverse Stock Split"
Item 7(b)........................ "Special Factors -- Background of the
Reverse Stock Split" and "Special
Factors -- Reasons for the Reverse
Stock Split"
Item 7(c)........................ "Summary -- Reasons for the Reverse
Stock Split," "Special Factors --
Background of the Reverse Stock
Split" and "Special Factors --
Reasons for the Reverse Stock Split"
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<PAGE>
SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
Item 7(d).......................... "Summary -- Certain Effects of and
Conduct of the Company's Business
After the Reverse Stock Split,"
"Summary -- Certain Federal Income
Tax Consequences," "General --
Amendment of Charter to Effect a
Reverse Stock Split," "Special
Factors -- Certain Effects of and
Conduct of the Company's Business
After the Reverse Stock Split" and
"Special Factors -- Certain Federal
Income Tax Consequences"
8. Fairness of the Transaction
Items 8(a) and (b)................. "Summary -- Recommendation of the
Special Committee and the Board;
Fairness of the Reverse Stock Split,"
"Summary -- Opinion of the Financial
Advisor," "Special Factors --
Background of the Reverse Stock
Split," "Special Factors --
Recommendation of the Special
Committee and the Board; Fairness of
the Reverse Stock Split" and "Special
Factors -- Opinion of Financial
Advisor"
Item 8(c).......................... "Summary -- Record Date; Voting; Vote
Required," "General -- Record Date;
Voting; Vote Required" and "Special
Factors -- Recommendation of the
Special Committee and the Board;
Fairness of the Reverse Stock Split"
Item 8(d).......................... "Summary -- Opinion of the Financial
Advisor," "Special Factors --
Background of the Reverse Stock
Split," "Special Factors --
Recommendation of the Special
Committee and the Board; Fairness of
the Reverse Stock Split" and "Special
Factors -- Opinion of the Financial
Advisor"
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<PAGE>
SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
Item 8(e).......................... "Special Factors -- Recommendation of
the Special Committee and the Board;
Fairness of the Reverse Stock Split"
Item 8(f).......................... "Special Factors -- Background of the
Reverse Stock Split"
9. Reports, Opinions, Appraisals and
Certain Negotiations
Items 9(a) and (b)................. "Summary -- Opinion of the Financial
Advisor," "Special Factors --
Background of the Reverse Stock
Split," "Special Factors --
Recommendation of the Special
Committee and the Board; Fairness of
the Reverse Stock Split," "Special
Factors -- Opinion of the Financial
Advisor" and Annex B to the Proxy
Statement
Item 9(c).......................... "Special Factors -- Opinion of the
Financial Advisor"
10. Interests in Securities of the
Issuer
Item 10(a)......................... "Summary -- Voting; Voting Required,"
"General -- Voting; Voting Required,"
"Security Ownership of Certain
Beneficial Owners" and "Security
Ownership of Management"
Item 10(b)......................... Not applicable
11. Contracts, Agreements or
Understandings with Respect to the
Issuer's Securities............... Not applicable
12. Present Intention and
Recommendation of Certain Persons
with Regard to the Transaction
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<PAGE>
SHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------ --------------------------
Items 12(a) and (b).............. "Summary -- Record Date; Voting; Vote
Required," "Summary -- Reasons for
the Reverse Stock Split," "Summary --
Recommendation of the Special
Committee and the Board; Fairness of
the Reverse Stock Split," "General --
Record Date; Voting; Vote Required,"
"Special Factors -- Background of the
Reverse Stock Split," "Special
Factors -- Reasons for the Reverse
Stock Split" and "Special Factors --
Recommendation of the Special
Committee and the Board; Fairness of
the Reverse Stock Split"
13. Other Provisions of the
Transaction
Item 13(a)....................... "Summary -- Rights of Dissenting
Shareholders" and "Special Factors --
Rights of Dissenting Shareholders"
Items 13(b) and (c).............. Not applicable
14. Financial Information
Item 14(a)....................... "Summary - Selected Historical
Financial Data of the Company,"
"Selected Historical Financial Data
of the Company" and "Financial
Information"
Item 14(b)....................... Not applicable
15. Persons and Assets Employed,
Retained or Utilized
Items 15(a) and (b).............. "General -- Record Date; Voting; Vote
Required"
16. Additional Information........... Proxy Statement in its Entirety
17. Material to be Filed as Exhibits. Separately included herewith
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<PAGE>
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The name of the issuer is The Manhattan Life Insurance Company, a New
York guarantee capital life insurance company, and the address of its principal
executive offices is 1876 Waycross Road, Cincinnati, Ohio 45240.
(b) The exact title of the class of equity securities to which this
statement relates is Guarantee Capital Shares, par value $2.00 per share (the
"Capital Stock"). The information set forth on the Cover Page and under the
captions "Summary -- Record Date; Voting; Vote Required" and "General -- Record
Date; Voting; Vote Required" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth under the caption "Market Prices for the
Capital Stock" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth under the caption "Dividends" of the Proxy
Statement is incorporated herein by reference.
(e) Not applicable.
(f) Not applicable.
Item 2. Identity and Background.
(a)-(d) This Statement is filed by the Company, the issuer of the class of
securities which is the subject of this Rule 13e-3 transaction, and by UCLIC, an
Ohio domiciled mutual life insurance company which holds approximately 72.8% of
the Capital Stock. The information set forth under the captions "Certain
Information Concerning the Company and UCLIC," "Management of the Company" and
"Management of UCLIC" of the Proxy Statement is incorporated herein by
reference.
(e) and (f) During the last five years, neither the Company, UCLIC nor any
of the persons with respect to whom information is provided in response to this
item (i) has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or (ii) was a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities subject to, Federal or State
securities laws or finding any violation of such laws.
(g) All executive officers and directors of the Company and of UCLIC are
citizens of the United States.
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<PAGE>
Item 3. Past Contracts, Transactions or Negotiations.
(a)(1) Not applicable.
(a)(2) and (b) Not applicable.
Item 4. Terms of the Transaction.
(a)-(b) The information set forth under the captions "Summary -- Purpose
of the Special Meeting," "Summary -- Record Date; Voting; Vote Required,"
"Summary -- Exchange of Certificates and Payment for Fractional Shares of New
Capital Stock," "Summary -- Financing and Expenses of the Reverse Stock Split,"
"General -- Purpose of the Special Meeting," "General -- Record Date; Voting;
Vote Required," "General -- Amendment of Charter to Effect a Reverse Stock
Split," "Special Factors -- Certain Effects of and Conduct of the Company's
Business After the Reverse Stock Split," "Special Factors -- Exchange of
Certificates and Payment for Fractional Shares of New Capital Stock," "Special
Factors -- Financing and Expenses of the Reverse Stock Split," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
of the Proxy Statement is incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(g) The information set forth under the captions "Summary -- Reasons
for the Reverse Stock Split," "Summary -- Certain Effects of and Conduct of the
Company's Business After the Reverse Stock Split," "Special Factors -- Reasons
for the Reverse Stock Split" and "Special Factors -- Certain Effects of and
Conduct of the Company's Business After the Reverse Stock Split" of the Proxy
Statement is incorporated herein by reference.
Item 6. Source and Amounts of Funds or Other Consideration.
(a)-(b) The information set forth under the captions "Summary -- Financing
and Expenses of the Reverse Stock Split," "General -- Record Date; Voting; Vote
Required" and "Special Factors -- Financing and Expenses of the Reverse Stock
Split" of the Proxy Statement is incorporated herein by reference.
(c) Not applicable.
(d) Not applicable.
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<PAGE>
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth under the captions "Summary -- Reasons for
the Reverse Stock Split," "Special Factors -- Background of the Reverse Stock
Split" and "Special Factors -- Reasons for the Reverse Stock Split" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth under the captions "Special Factors --
Background of the Reverse Stock Split" and "Special Factors -- Reasons for the
Reverse Stock Split" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the captions "Summary -- Reasons for
the Reverse Stock Split," "Special Factors -- Background of the Reverse Stock
Split" and "Special Factors -- Reasons for the Reverse Stock Split" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth under the captions "Summary -- Certain
Effects of and Conduct of the Company's Business After the Reverse Stock Split,"
"Summary -- Certain Federal Income Tax Consequences," "General -- Amendment of
Charter to Effect a Reverse Stock Split," "Special Factors -- Certain Effects of
and Conduct of the Company's Business After the Reverse Stock Split" and
"Special Factors -- Certain Federal Income Tax Consequences" of the Proxy
Statement is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a)-(b) The information set forth under the captions "Summary --
Recommendation of the Special Committee and the Board; Fairness of the Reverse
Stock Split," "Summary -- Opinion of the Financial Advisor," "Special Factors --
Background of the Reverse Stock Split," "Special Factors -- Recommendation of
the Special Committee and the Board; Fairness of the Reverse Stock Split" and
"Special Factors -- Opinion of Financial Advisor" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth under the captions "Summary -- Record Date;
Voting; Vote Required," "General -- Record Date; Voting; Vote Required" and
"Special Factors -- Recommendation of the Special Committee and the Board;
Fairness of the Reverse Stock Split" of the Proxy Statement is incorporated
herein by reference.
(d) The information set forth under the captions "Summary -- Opinion of the
Financial Advisor," "Special Factors -- Background of the Reverse Stock Split,"
"Special Factors -- Recommendation of the Special Committee and the Board;
Fairness of the Reverse Stock Split" and "Special Factors -- Opinion of the
Financial Advisor" of the Proxy Statement is incorporated herein by reference.
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<PAGE>
(e) The information set forth under the caption "Special Factors --
Recommendation of the Special Committee and the Board; Fairness of the Reverse
Stock Split" of the Proxy Statement is incorporated herein by reference.
(f) The information set forth under the caption "Special Factors --
Background of the Reverse Stock Split" of the Proxy Statement is incorporated
herein by reference.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(b) The information set forth under the captions "Summary -- Opinion
of the Financial Advisor," "Special Factors -- Background of the Reverse Stock
Split," "Special Factors -- Recommendation of the Special Committee and the
Board; Fairness of the Reverse Stock Split" and "Special Factors -- Opinion of
the Financial Advisor" of the Proxy Statement and Annex B to the Proxy Statement
is incorporated herein by reference.
(c) The information set forth under the caption "Special Factors -- Opinion
of the Financial Advisor" of the Proxy Statement is incorporated herein by
reference.
Item 10. Interest in Securities of the Issuer.
(a) The information with respect to the ownership of and transactions in
Common Stock set forth under the captions "Summary -- Voting; Voting Required,"
"General -- Voting; Voting Required," "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
Item 11. Contracts, Arrangements, or Understandings with Respect to the
Issuer's Securities.
Not applicable.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
(a)-(b) The information set forth under the captions "Summary -- Record
Date; Voting; Vote Required," "Summary -- Reasons for the Reverse Stock Split,"
"Summary -- Recommendation of the Special Committee and the Board; Fairness of
the Reverse Stock Split," "General -- Record Date; Voting; Vote Required,"
"Special Factors -- Background of the Reverse Stock Split," "Special Factors --
Reasons for the Reverse Stock Split" and "Special Factors -- Recommendation of
the Special Committee and
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<PAGE>
the Board; Fairness of the Reverse Stock Split" of the Proxy Statement is
incorporated herein by reference.
Item 13. Other provisions of the Transaction.
(a) The information set forth under the captions "Summary -- Rights of
Dissenting Shareholders" and "Special Factors -- Rights of Dissenting
Shareholders" of the Proxy Statement is incorporated herein by reference.
(b)-(c) Not applicable.
Item 14. Financial Information.
(a) The information set forth under the captions "Summary - Selected
Historical Financial Data of the Company," "Selected Historical Financial
Data of the Company" and "Financial Information" of the Proxy Statement is
incorporated herein by reference. The following financial data required by
Instruction 2(a) through 2(c) to Rule 13e-3(e) is not included under the
captions "Summary - Selected Historical Financial Data of the Company" and
"Selected Historical Financial Data of the Company" of the Proxy Statement
for the reasons set forth below:
(1) "Income before extraordinary items" (total and per share) was not
included because there were no extraordinary items in the periods
presented.
(2) "Working capital" was not included because the Company does not
prepare classified balance sheets.
(3) "Total assets less deferred research and development charges and
excess of cost of assets acquired over book value" was not included because
there were no deferred research and development charges or excess of cost
of assets acquired over book value in the periods presented.
(4) "Extraordinary items" (per share) was not included because there
were no extraordinary items in the periods presented.
(5) "Net income per share on a fully diluted basis" was not included
because there are no Capital Stock equivalents or potentially dilutive
securities.
(6) "Ratio of earnings to fixed charges" was not included because the
Company had no fixed charges in the periods presented.
(b) Not applicable.
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<PAGE>
Item 15. Persons and Assets Employed, Retained or Utilized.
(a)-(b) The information set forth under the caption "General -- Record
Date; Voting; Vote Required" of the Proxy Statement is incorporated herein by
reference.
Item 16. Additional Information.
All of the information set forth in the Proxy Statement is incorporated
herein by reference.
Item 17. Material to be Filed as Exhibits.
(a), (c), and (f) Not applicable.
(b)(1) Fairness Opinion of BT Securities Corporation is incorporated by
reference from Annex B to the Proxy Statement filed as Exhibit (d) hereto.
(b)(2) Written Presentation delivered by BT Securities Corporation to the
Special Committee of the Board of Directors.*
(d) Letter to Shareholders of the Company, Notice of Special Meeting of
Shareholders of the Company, Proxy Statement of the Company for the Special
Meeting of Shareholders and Proxy Card.
(e) Statement of appraisal rights is incorporated by reference from Annex C
to the Proxy Statement filed as Exhibit (d) hereto.
__________________________
* Previously filed.
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<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
THE MANHATTAN LIFE INSURANCE COMPANY
Dated: December 10, 1996 By: /s/ Daniel J. Fischer
----------------------------
Name: Daniel J. Fischer
Title: President, Chief
Executive Officer and
General Counsel
THE UNION CENTRAL LIFE INSURANCE
COMPANY
Dated: December 10, 1996 By: /s/ Larry R. Pike
---------------------------
Name: Larry R. Pike
Title: Chairman, President
and Chief Executive
Officer
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- -------------- -----------
(a), (c) and Not applicable.
(f)
(b)(1) Fairness Opinion of BT Securities
Corporation is incorporated by
reference from Annex B to the Proxy
Statement filed as Exhibit (d) hereto.
(b)(2) Written Presentation delivered by BT
Securities Corporation to the Special
Committee of the Board of Directors.*
(d) Letter to Shareholders of the Company,
Notice of Special Meeting of
Shareholders of the Company, Proxy
Statement of the Company for the
Special Meeting of Shareholders and
Proxy Card.
(e) Statement of appraisal rights is
incorporated by reference from Annex C
to the Proxy Statement filed as
Exhibit (d) hereto.
__________________________
* Previously filed.
<PAGE>
EXHIBIT (D)
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
1876 WAYCROSS ROAD
CINCINNATI, OHIO 45240
December __, 1996
Dear Shareholder:
On behalf of the Board of Directors, I cordially invite you to
attend a Special Meeting of Shareholders (the "Special Meeting") of The
Manhattan Life Insurance Company (the "Company"), to take place on January
__, 1997, at 10:00 a.m., local time, at the Home Office of the Company, 111
West 57th Street, New York, New York 10019.
At the Special Meeting, you will be asked to consider and vote
upon a proposal to approve (i) an amendment (the "Amendment") of Section 3
of the Company's Amended Charter providing for a reduction in the
authorized guarantee capital of the Company from 5,000,000 guarantee
capital shares, $2.00 par value per share (the "Capital Stock"), to 11
guarantee capital shares, $835,406 par value per share (the "New Capital
Stock"), (ii) a 303,784 to one reverse stock split of the Capital Stock,
whereby each shareholder that surrenders 303,784 shares of Capital Stock
and contributes cash in the amount of $227,838 (all of which cash amount
will be contributed to the guarantee capital of the Company), will receive
in exchange one share of New Capital Stock, and (iii) a cash payment in the
amount of $7.50 per share (the "Cash Consideration") of the currently
outstanding Capital Stock in lieu of the issuance of any resulting
fractional shares of New Capital Stock to shareholders who, after the
reverse stock split, own fractional shares of New Capital Stock (items (i),
(ii) and (iii) will be considered one proposal and will be collectively
referred to herein as the "Reverse Stock Split").
The text of the proposed Amendment is set forth in Annex A to the
accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, it is anticipated that (i) The Union Central Life Insurance
Company ("UCLIC"), an Ohio domiciled mutual life insurance company and the
holder of approximately 72.8% of the Capital Stock, will become the sole
holder of the New Capital Stock, (ii) all shareholders other than UCLIC
will cease to be shareholders of the Company or to have any equity interest
in the Company and such shareholders will receive the Cash Consideration
for each share of Capital Stock of which they are the owner, (iii) all
shareholders other than UCLIC will be unable to participate in any future
appreciation of the Capital Stock, and (iv) all shareholders other than
UCLIC will be unable to share in any future earnings or growth of the
Company. In addition, if the proposed Reverse Stock Split is approved, the
Company will no longer file any reports with the Securities and
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<PAGE>
Exchange Commission and the Capital Stock will be delisted from the Nasdaq
National Market System.
A Special Committee of the Company's independent directors (the
"Special Committee") was authorized by the Board of Directors of the
Company to evaluate the Reverse Stock Split and to negotiate the terms and
conditions of the Reverse Stock Split. BT Securities Corporation, the
Special Committee's financial advisor, has rendered its opinion to the
effect that, as of the date of such opinion, the Cash Consideration to be
received by the shareholders of the Company other than UCLIC in the Reverse
Stock Split is fair to such shareholders from a financial point of view.
SHAREHOLDERS ARE URGED TO READ IN ITS ENTIRETY THE OPINION OF BT SECURITIES
CORPORATION, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND
MATTERS CONSIDERED IN CONNECTION WITH SUCH OPINION AND IS ATTACHED TO THE
ACCOMPANYING PROXY STATEMENT AS ANNEX B.
THE BOARD OF DIRECTORS OF THE COMPANY HAS FULLY REVIEWED AND
CONSIDERED THE TERMS AND CONDITIONS OF THE PROPOSED REVERSE STOCK SPLIT AND
HAS UNANIMOUSLY DETERMINED, BASED UPON THE RECOMMENDATION OF THE SPECIAL
COMMITTEE AND OTHER FACTORS, THAT THE REVERSE STOCK SPLIT IS FAIR TO THE
SHAREHOLDERS. THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE PROPOSED REVERSE STOCK SPLIT.
Pursuant to the New York Insurance Law (the "NYIL"), the
affirmative vote of at least two-thirds of the outstanding shares of
Capital Stock will be required to approve the Reverse Stock Split. UCLIC,
which owns approximately 72.8% of the outstanding shares of Capital Stock,
has advised the Company that it intends to vote its shares of Capital Stock
in favor of the Reverse Stock Split. Since UCLIC holds in the aggregate
more than two-thirds of the Capital Stock outstanding on the record date
for the shareholder vote on the Reverse Stock Split, it will have
sufficient voting power to approve the Reverse Stock Split without the
approval of any other shareholders of the Company.
If the proposed Reverse Stock Split is approved, shareholders of
the Company who dissent from the Reverse Stock Split may comply with the
requirements of Section 1206(a)(4) of the NYIL or Section 806(b)(6) of the
New York Business Corporation Law (the "NYBCL"), if applicable, and Section
623 of the NYBCL to obtain payment of the "fair value" of their shares.
See "Special Factors -- Rights of Dissenting Shareholders" in the
accompanying Proxy Statement for a description of the rights of dissenting
shareholders and a discussion of the procedures that must be followed by
shareholders to become dissenting shareholders. A copy of Section
1206(a)(4) of the NYIL and Sections 806(b)(6) and 623 of the NYBCL is
attached as Annex C to the accompanying Proxy Statement.
You should read carefully the Notice of Special Meeting of
Shareholders, Proxy Statement and Proxy Card that are enclosed
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<PAGE>
with this letter for important information concerning the Reverse Stock
Split. It is important that your shares be represented at this Special
Meeting. Whether or not you are able to attend, please sign and date the
accompanying Proxy Card and return it in the enclosed prepaid envelope as
soon as possible. If you attend the Special Meeting, you may vote your
shares in person, even if you have previously submitted a Proxy Card. Upon
consummation of the Reverse Stock Split, if approved, a Letter of
Transmittal will be mailed to all holders of Capital Stock for use in
surrendering their stock certificates. Please do not send in your stock
certificates until you receive your Letter of Transmittal.
Your continued support of and interest in the Company is greatly
appreciated.
Sincerely,
Daniel J. Fischer
President, Chief Executive
Officer and General Counsel
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<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
1876 WAYCROSS ROAD
CINCINNATI, OHIO 45240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY __, 1997
TO THE SHAREHOLDERS:
A Special Meeting of Shareholders (the "Special Meeting") of The
Manhattan Life Insurance Company (the "Company") will take place at the
Home Office of the Company, 111 West 57th Street, New York, New York on
January __, 1997 at 10:00 a.m., local time, for the purpose of considering
and voting upon the following:
1. A proposal to approve (i) an amendment (the "Amendment") of
Section 3 of the Company's Amended Charter providing for a reduction
in the authorized guarantee capital of the Company from 5,000,000
guarantee capital shares, $2.00 par value per share (the "Capital
Stock"), to 11 guarantee capital shares, $835,406 par value per share
(the "New Capital Stock"), (ii) a 303,784 to one reverse stock split
of the Capital Stock, whereby each shareholder that surrenders 303,784
shares of Capital Stock and contributes cash in the amount of $227,838
(all of which cash amount will be contributed to the guarantee capital
of the Company), will receive in exchange one share of New Capital
Stock, and (iii) a cash payment of $7.50 per share (the "Cash
Consideration") of the currently outstanding Capital Stock held in
lieu of the issuance of any resulting fractional shares of New Capital
Stock to shareholders who, after the reverse stock split, own
fractional shares of New Capital Stock (items (i), (ii) and (iii) will
be considered one proposal and will be collectively referred to herein
as the "Reverse Stock Split"), all as described more fully in the
accompanying Proxy Statement; and
2. Such other business as may properly be brought before the
Special Meeting or any adjournments or postponements thereof.
Pursuant to the New York Insurance Law (the "NYIL"), the affirmative
vote of at least two-thirds of the outstanding shares of Capital Stock will
be required to approve the Reverse Stock Split. Only holders of shares of
Capital Stock of record at the close of business on January __, 1997, are
entitled to vote in person or by proxy at the Special Meeting or any
adjournment or postponement of the meeting. The Union Central Life
Insurance Company ("UCLIC"), an Ohio domiciled mutual life insurance
company which owns approximately 72.8% of the outstanding shares of Capital
Stock, has advised the Company that it intends to vote its shares of
Capital Stock in favor of the Reverse Stock Split. Since UCLIC holds in
the aggregate more than two-thirds of the
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<PAGE>
Capital Stock outstanding on the record date for the shareholder vote on
the Reverse Stock Split, it will have sufficient voting power to approve
the Reverse Stock Split without the approval of any other shareholders of
the Company.
The text of the proposed Amendment is set forth in Annex A to the
accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, it is anticipated that (i) UCLIC will become the sole holder of
the New Capital Stock, (ii) all shareholders other than UCLIC will cease to
be shareholders of the Company or to have any equity interest in the
Company and such shareholders will receive the Cash Consideration for each
share of Capital Stock of which they are the owner, (iii) all shareholders
other UCLIC will be unable to participate in any future appreciation of the
Capital Stock, and (iv) all shareholders other than UCLIC will be unable to
share in any future earnings or growth of the Company. In addition, if the
proposed Reverse Stock Split is approved, the Company will no longer file
any reports with the Securities and Exchange Commission and the Capital
Stock will be delisted from the Nasdaq National Market System.
If the proposed Reverse Stock Split is approved, shareholders of the
Company who dissent from the proposed Reverse Stock Split may comply with
the requirements of Section 1206(a)(4) of the NYIL or Section 806(b)(6) of
the New York Business Corporation Law (the "NYBCL"), if applicable, and
Section 623 of the NYBCL to obtain payment of the "fair value" of their
shares. See "Special Factors -- Rights of Dissenting Shareholders" in the
accompanying Proxy Statement for a description of the rights of dissenting
shareholders and a discussion of the procedures that must be followed by
shareholders to become dissenting shareholders. A copy of Section
1206(a)(4) of the NYIL and Sections 806(b)(6) and 623 of the NYBCL is
attached as Annex C to the accompanying Proxy Statement.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF CAPITAL STOCK
YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
PREPAID ENVELOPE WITHOUT DELAY. ANY SHAREHOLDER PRESENT AT THE SPECIAL
MEETING MAY VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE SPECIAL
MEETING AND ANY PROXY GIVEN BY A SHAREHOLDER MAY BE REVOKED AT ANY TIME
BEFORE IT IS EXERCISED.
By Order of the Board of Directors,
David F. Westerbeck
Secretary
December __, 1996
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<PAGE>
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
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<PAGE>
PROXY STATEMENT
THE MANHATTAN LIFE INSURANCE COMPANY
1876 WAYCROSS ROAD
CINCINNATI, OHIO 45240
_______________________________
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY __, 1997
_______________________________
This Proxy Statement is being furnished to the shareholders of
The Manhattan Life Insurance Company, a New York guarantee capital life
insurance company (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company to be used at a special
meeting of the shareholders to take place at 10:00 a.m., local time, on
January __, 1997, at the Company's Home Office, 111 West 57th Street, New
York, New York 10019, and any adjournments or postponements thereof (the
"Special Meeting"). This Proxy Statement and the attached Notice of
Special Meeting of Shareholders and the Proxy Card are first being mailed
to shareholders on or about December __, 1996.
At the Special Meeting, each holder of guarantee capital shares,
$2.00 par value per share, of the Company (the "Capital Stock") on January
__, 1997 will be asked to consider and vote upon a proposal to approve (i)
an amendment (the "Amendment") of Section 3 of the Company's Amended
Charter providing for a reduction in the authorized guarantee capital of
the Company from 5,000,000 shares of Capital Stock to 11 guarantee capital
shares, $835,406 par value per share (the "New Capital Stock"), (ii) a
303,784 to one reverse stock split of the Capital Stock, whereby each
shareholder that surrenders 303,784 shares of Capital Stock and contributes
cash in the amount of $227,838 (all of which cash amount will be
contributed to the guarantee capital of the Company), will receive in
exchange one share of New Capital Stock, and (iii) a cash payment of $7.50
per share (the "Cash Consideration") of the currently outstanding Capital
Stock in lieu of the issuance of any resulting fractional shares of New
Capital Stock to shareholders who, after the reverse stock split, own
fractional shares of New Capital Stock (items (i), (ii) and (iii) will be
considered one proposal and will be collectively referred to herein as the
"Reverse Stock Split").
Pursuant to the New York Insurance Law, the affirmative vote of
the holders of at least two-thirds of the outstanding
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<PAGE>
shares of Capital Stock entitled to vote thereon is required to approve the
Reverse Stock Split. The Union Central Life Insurance Company ("UCLIC"),
an Ohio domiciled mutual life insurance company which owns approximately
72.8% of the outstanding shares of Capital Stock, has advised the Company
that it intends to vote its shares in favor of the Reverse Stock Split.
Since UCLIC holds in the aggregate more than two-thirds of the Capital
Stock outstanding on the record date for the shareholder vote on the
Reverse Stock Split, it will have sufficient voting power to approve the
Reverse Stock Split without the approval of any other shareholders of the
Company.
The text of the proposed Amendment is set forth in Annex A to the
accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, it is anticipated that (i) UCLIC will be the sole holder of the
New Capital Stock, (ii) all shareholders other than UCLIC will cease to be
shareholders of the Company or to have any equity interest in the Company
and such shareholders will receive the Cash Consideration for each share of
Capital Stock of which they are the owner, (iii) all shareholders other
UCLIC will be unable to participate in any future appreciation of the
Capital Stock, and (iv) all shareholders other than UCLIC will be unable to
share in any future earnings or growth of the Company. In addition, if the
proposed Reverse Stock Split is approved, the Company will no longer file
any reports with the Securities and Exchange Commission and the Capital
Stock will be delisted from the Nasdaq National Market System.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT
IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
_________________________________
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
_________________________________
The date of this Proxy Statement is December __, 1996
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
SUMMARY 1
The Special Meeting 1
Purpose of the Special Meeting 1
Record Date; Voting; Vote Required 2
Reasons for the Reverse Stock Split 2
Recommendation of the Special Committee and the Board;
Fairness of the Reverse Stock Split 3
Opinion of the Financial Advisor 4
Certain Effects of and Conduct of the Company's
Business After the Reverse Stock Split 4
Interests of Certain Persons in the Reverse Stock
Split 5
Certain Federal Income Tax Consequences 5
Rights of Dissenting Shareholders 6
Exchange of Certificates and Payment for Fractional
Shares of New Capital Stock 7
Regulatory Approval 7
Financing and Expenses of the Reverse Stock Split 7
Selected Historical Financial Data of the Company 8
GENERAL 10
Purpose of the Special Meeting 10
Record Date; Voting; Vote Required 10
Amendment of Charter to Effect a Reverse Stock Split 11
SPECIAL FACTORS 12
Background of the Reverse Stock Split 12
Reasons for the Reverse Stock Split 20
Recommendation of the Special Committee and the
Board; Fairness of the Reverse Stock Split 22
Opinion of the Financial Advisor 29
Certain Effects of and Conduct of the Company's
Business After the Reverse Stock Split 38
Interests of Certain Persons in the Reverse Stock
Split 41
Certain Federal Income Tax Consequences 42
Certain Financial Projections 44
Rights of Dissenting Shareholders 51
Exchange of Certificates and Payment for
Fractional Shares of New Capital Stock 55
Financing and Expenses of the Reverse Stock Split 57
CERTAIN INFORMATION CONCERNING THE COMPANY AND UCLIC 57
REGULATORY APPROVAL 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 58
SECURITY OWNERSHIP OF MANAGEMENT 59
MANAGEMENT OF THE COMPANY 60
MANAGEMENT OF UCLIC 62
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY 66
TRANSACTIONS WITH PRINCIPAL SHAREHOLDER 66
MARKET PRICES FOR THE CAPITAL STOCK 67
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
DIVIDENDS 67
INDEPENDENT PUBLIC ACCOUNTANTS 69
FINANCIAL INFORMATION 70
ADDITIONAL INFORMATION 70
INDEX TO FINANCIAL INFORMATION OF THE COMPANY F-1
Annex A Form of Proposed Amendment to Amended
Charter of The Manhattan Life Insurance
Company A-1
Annex B Opinion of BT Securities Corporation B-1
Annex C Section 1206(a)(4) of the New York
Insurance Law and Sections 806(b)(6)
and 623 of the New York Business
Corporation Law C-1
</TABLE>
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<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. This summary is not intended to be a
complete description of the matters covered in this Proxy Statement and is
subject to, and qualified in its entirety by reference to, the more detailed
information contained elsewhere in this Proxy Statement, including the Annexes
hereto and the documents incorporated by reference herein. SHAREHOLDERS ARE
URGED TO CAREFULLY READ THIS PROXY STATEMENT AND THE ANNEXES HERETO IN THEIR
ENTIRETY.
THE SPECIAL MEETING
A special meeting of shareholders of The Manhattan Life Insurance
Company, a New York guarantee capital life insurance company (the "Company"),
and any adjournment or postponement of such meeting (the "Special Meeting"),
will take place at 10:00 a.m., local time, on January __, 1997, at the Home
Office of the Company, 111 West 57th Street, New York, New York 10019.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, each holder of guarantee capital shares, $2.00
par value per share, of the Company (the "Capital Stock") on the Record Date
(defined below) will be asked to consider and vote upon a proposal to approve
(i) an amendment (the "Amendment") of Section 3 of the Company's Amended Charter
(the "Charter") providing for a reduction in the authorized guarantee capital of
the Company from 5,000,000 shares of Capital Stock to 11 guarantee capital
shares, $835,406 par value per share (the "New Capital Stock"), (ii) a 303,784
to one reverse split of the Capital Stock, whereby each shareholder that
surrenders 303,784 shares of Capital Stock and contributes cash in the amount of
$227,838 (all of which cash amount will be contributed to the guarantee capital
of the Company), will receive in exchange one share of New Capital Stock, and
(iii) a cash payment of $7.50 per share (the "Cash Consideration") of the
currently outstanding Capital Stock in lieu of the issuance of any resulting
fractional shares of New Capital Stock to shareholders who, after the reverse
stock split, own fractional shares of New Capital Stock (items (i), (ii) and
(iii) will be considered one proposal and will be collectively referred to
herein as the "Reverse Stock Split"). See "General -- Amendment of Charter to
Effect a Reverse Stock Split."
<PAGE>
RECORD DATE; VOTING; VOTE REQUIRED
The close of business on January __, 1997 (the "Record Date") has been
fixed as the record date for determining holders of shares of Capital Stock
entitled to vote at the Special Meeting. As of the Record Date, 3,341,624
shares of Capital Stock were issued and outstanding and held of record by
approximately 2,000 holders. Each shareholder is entitled to 0.215 of a vote at
the Special Meeting for each share of Capital Stock held. Such percentage vote
is determined, in accordance with the Charter, by dividing 720,000 votes - the
total of which may be cast by the holders of the Capital Stock - by 3,341,624,
the number of shares of Capital Stock outstanding on the Record Date.
Pursuant to the New York Insurance Law (the "NYIL"), the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Capital
Stock entitled to vote thereon is required to approve the Reverse Stock Split.
Abstentions are not counted for purposes of determining whether the holders of
at least two-thirds of the outstanding shares of Capital Stock present in person
or by proxy at the Special Meeting voted in favor of the Reverse Stock Split
under the New York Business Corporation Law (the "NYBCL"). As of the Record
Date, The Union Central Life Insurance Company ("UCLIC"), an Ohio domiciled
mutual life insurance company, owned 2,433,345 shares of Capital Stock, or
approximately 72.8% of the outstanding shares of Capital Stock. UCLIC has
advised the Board of Directors of the Company (the "Board") that it intends to
vote in favor of the Reverse Stock Split. Since UCLIC holds more than two-
thirds of the Capital Stock outstanding on the Record Date, UCLIC will have
sufficient voting power to approve the Reverse Stock Split at the Special
Meeting without the approval of any other shareholders of the Company. See
"General -- Record Date; Voting; Vote Required" and "Security Ownership of
Certain Beneficial Owners."
REASONS FOR THE REVERSE STOCK SPLIT
The principal purpose of the Reverse Stock Split is to allow the
Company to present itself to the rating agencies as a strategic subsidiary of
UCLIC and not as a stand alone company. As a strategic subsidiary of UCLIC, the
Company should be able to maintain or improve its current rating of "A-
(Excellent)" with A.M. Best Company Inc. ("A.M. Best"), as well as obtain
favorable ratings from the other major rating organizations (i.e., Standard &
Poor's Corporation, Moody's Investors Service, Inc. and Duff & Phelps Credit
Rating Co.). Acquiring all of the shares of Capital Stock would also provide
UCLIC with significant benefits, including the opportunity to pursue the
regulatory
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<PAGE>
approval required for the redomestication of the Company to Ohio, the
mutualization of the Company and the merging of the Company into UCLIC. This
would align the policyholder interests of UCLIC with those of the policyholders
of the Company, and enable UCLIC to manage the Company's business on a mutual
company basis. There are no assurances, however, that such redomestication,
mutualization and merger of the Company would be approved by the New York
Insurance Department (the "NYID") after the Reverse Stock Split is effected, or
that if approved by the NYID, such transactions would occur. In addition, UCLIC
is unwilling to further integrate its operations with those of the Company
without owning 100% of the outstanding shares of Capital Stock because UCLIC
does not want to share the return on its investment in the Company with the
other shareholders of the Company. UCLIC is also concerned that further
integrating its operations with those of the Company would make it vulnerable to
minority shareholder lawsuits alleging self-dealing as a result of intercompany
transactions or marketing arrangements. Furthermore, the Reverse Stock Split
would make the Company a privately held company thereby eliminating the costs
related to its registration with the Securities and Exchange Commission (the
"SEC") and listing with the Nasdaq National Market System ("Nasdaq"), including
the expenses associated with servicing numerous shareholder accounts and the
reporting and accounting functions required by the SEC and Nasdaq. See "Special
Factors -- Background of the Reverse Stock Split" and "Special Factors --
Reasons for the Reverse Stock Split."
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE REVERSE
STOCK SPLIT
The Board has determined, based upon its evaluation and the
recommendation of a Special Committee of four independent directors created by
the Board (the "Special Committee") who are not employees of the Company, and
the presentation to the Board by the financial advisor to the Special Committee
of its financial analysis of the proposed Reverse Stock Split, that the Reverse
Stock Split is fair to the shareholders of the Company. Accordingly, the Board
has unanimously approved the Reverse Stock Split and recommends that the
shareholders vote FOR the Reverse Stock Split. In making its recommendation to
the Board, the Special Committee considered a number of factors, including the
opinion of its financial advisor, information regarding the financial condition,
results of operations and future prospects of the Company, recent market prices
and trading volumes for the Capital Stock, and the fact that the proposed
Reverse Stock Split as set forth in the Plan (defined below) is subject to the
approval or acceptance by the NYID. See "Special Factors -- Recommendation of
the Special Committee and the Board; Fairness
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<PAGE>
of the Reverse Stock Split" and "Special Factors -- Opinion of the Financial
Advisor."
OPINION OF THE FINANCIAL ADVISOR
Bankers Trust Company was retained by the Company to act as financial
advisor to the Special Committee in connection with the proposed reverse stock
split. Bankers Trust Company subsequently assigned its agreement to act as
financial advisor, with the Company's consent, to BT Securities Corporation, an
affiliate of Bankers Trust Company (Bankers Trust Company, during the period
prior to such assignment, and BT Securities Corporation, during the period
subsequent to such assignment, are referred to herein as "BT"). BT has
delivered its opinion to the Special Committee to the effect that, as of the
date of such opinion, the Cash Consideration to be received by the shareholders
of the Company other than UCLIC in the Reverse Stock Split is fair to such
shareholders from a financial point of view. The full text of the written
opinion of BT, which sets forth the assumptions made, procedures followed and
matters considered in connection with the opinion, is attached as Annex B hereto
and is incorporated herein by reference in its entirety. Shareholders are urged
to read such opinion in its entirety. See "Special Factors -- Opinion of the
Financial Advisor."
CERTAIN EFFECTS OF AND CONDUCT OF THE COMPANY'S BUSINESS AFTER THE REVERSE STOCK
SPLIT
Upon the effectiveness of the Reverse Stock Split, it is anticipated
that (i) UCLIC will be the sole shareholder of the Company and all other
shareholders of the Company will no longer have any continuing interest as
shareholders of the Company, (ii) the shareholders of the Company other than
UCLIC will not be able to participate in any future appreciation of the Capital
Stock, and (iii) the shareholders of the Company other than UCLIC will not be
able to share in any future earnings or growth of the Company. In addition,
upon the effectiveness of the Reverse Stock Split, (a) no market will exist for
the shares of Capital Stock, (b) the Company will apply for termination of the
registration of its shares of Capital Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and will no longer be obligated to file
reports under the Exchange Act, and (c) the Capital Stock will be delisted from
the Nasdaq. UCLIC has proposed the redomestication of the Company to Ohio, the
mutualization of the Company and the merging of the Company into UCLIC after the
Reverse Stock Split is effected, and has entered into preliminary discussions
with the NYID regarding such proposal. There are no assurances, however, that
such redomestication, mutualization and merger of the Company would be
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<PAGE>
approved by the NYID after the Reverse Stock Split is effected, or that if
approved by the NYID, such transactions would occur. See "Special Factors --
Reasons for the Reverse Stock Split" and "Special Factors -- Certain Effects of
and Conduct of the Company's Business After the Reverse Stock Split." In the
event that the Company is not redomesticated to Ohio, mutualized and merged into
UCLIC after the Reverse Stock Split is effected, the Company plans to initiate
negotiations with the NYID to revise the terms of the Commitment Letter (defined
below under the caption "Special Factors - Reasons for the Reverse Stock Split")
which contribute significantly to the excessive operating expenses incurred by
the Company and prevent the Company and UCLIC from operating synergistically.
In addition, the Company anticipates that it would implement certain cost
reduction strategies that would result in significant savings to the Company.
See "Special Factors -- Certain Effects of and Conduct of the Company's Business
After the Reverse Stock Split" and "Special Factors -- Reasons for the Reverse
Stock Split."
INTERESTS OF CERTAIN PERSONS IN THE REVERSE STOCK SPLIT
UCLIC owns approximately 72.8% of the outstanding shares of Capital
Stock and therefore has the ability to control the Company through the election
of a majority of the Board. UCLIC's nominees currently constitute a majority of
the Board. All of the nominees of UCLIC on the Board were present and voted at
the meeting of the Board at which the Reverse Stock Split was unanimously
approved. UCLIC holds a sufficient number of shares of Capital Stock to approve
the Reverse Stock Split. UCLIC has advised the Company that it intends to vote
its shares of Capital Stock in favor of the Reverse Stock Split. See "Special
Factors -- Interests of Certain Persons in the Reverse Stock Split."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash by a shareholder pursuant to the Reverse Stock
Split will be a taxable transaction for federal income tax purposes. Depending
upon the particular circumstances of each shareholder, the receipt of cash will
be treated either as received in exchange for Capital Stock or as a dividend to
the extent of the shareholder's ratable share of the Company's undistributed
earnings and profits. The receipt of New Capital Stock in exchange for
presently outstanding Capital Stock will not result in recognition of gain or
loss to the shareholder. See "Special Factors -- Certain Federal Income Tax
Consequences."
EACH HOLDER OF CAPITAL STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX
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<PAGE>
CONSEQUENCES TO SUCH HOLDER OF THE REVERSE STOCK SPLIT (INCLUDING THE
APPLICATION AND EFFECT OF FOREIGN, STATE, AND LOCAL INCOME AND OTHER TAX LAWS).
RIGHTS OF DISSENTING SHAREHOLDERS
If the proposed Reverse Stock Split is approved, a shareholder who
complies with Section 1206(a)(4) of the NYIL and Section 623 of the NYBCL, may
dissent from the proposed Reverse Stock Split and, in lieu of the payment of the
Cash Consideration, obtain payment of the "fair value" of such shareholder's
shares as determined under Section 623 of the NYBCL. In addition, Section
806(b)(6) of the NYBCL provides appraisal rights to shareholders who dissent
from the proposed Reverse Stock Split; provided, that the Reverse Stock Split
adversely affects certain specified rights of such dissenting shareholders as
set forth therein. A shareholder who wishes to assert such appraisal rights
must file with the Company a written objection to the proposed Reverse Stock
Split before the vote of shareholders at the Special Meeting is taken and by
otherwise complying with Section 1206(a)(4) of the NYIL or Section 806(b)(6) of
the NYBCL, if applicable, and Section 623 of the NYBCL. In addition, a
shareholder who wishes to assert such appraisal rights may not vote any of such
shareholder's shares of Capital Stock for the Reverse Stock Split. A vote
against the Reverse Stock Split does not constitute the required written
objection under the NYBCL and a failure to vote against the Reverse Stock Split
does not constitute a waiver of a shareholder's rights under the NYBCL. See
"Special Factors -- Rights of Dissenting Shareholders" for a statement of the
rights of dissenting shareholders and a description of the procedures required
to be followed to obtain the fair value of the shares of Capital Stock. A copy
of Section 1206(a)(4) of the NYIL and Sections 806(b)(6) and 623 of the NYBCL
are attached as Annex C hereto.
THE PROVISIONS OF SECTION 1206(a)(4) OF THE NYIL AND SECTIONS
806(b)(6) AND 623 OF THE NYBCL ARE COMPLEX AND TECHNICAL IN NATURE. ANY
SHAREHOLDER CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED HEREIN IN
CONNECTION WITH THE REVERSE STOCK SPLIT IS URGED TO CONSULT HIS OR HER OWN
COUNSEL. THE FAILURE BY A SHAREHOLDER TO COMPLY WITH THESE PROVISIONS WILL
RESULT IN THE LOSS OF HIS OR HER RIGHTS AS A DISSENTING SHAREHOLDER.
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<PAGE>
EXCHANGE OF CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES OF NEW CAPITAL STOCK
Pursuant to the Reverse Stock Split, if approved, all holders of
Capital Stock will surrender their shares of Capital Stock to the Company in
exchange for either shares of New Capital Stock or cash, as the case may be.
Each holder of Capital Stock that surrenders to the Company stock certificate(s)
representing 303,784 shares of Capital Stock and contributes cash in the amount
of $227,838 (all of which cash amount will be contributed to the guarantee
capital of the Company), will receive in exchange one share of New Capital
Stock. Each holder of Capital Stock that surrenders less than a group of 303,784
shares of Capital Stock (including shares of Capital Stock remaining after a
shareholder who owns in excess of 303,784 shares of Capital Stock surrenders a
group of 303,784 shares of Capital Stock) will receive $7.50 per share of the
currently outstanding Capital Stock in lieu of receiving fractional shares of
New Capital Stock. Such exchange and/or payment will be made by the Company upon
the physical surrender by shareholders of their certificates representing shares
of Capital Stock pursuant to the transmittal instructions to be mailed by the
Company to the shareholders. See "Special Factors -- Exchange of Certificates
and Payment for Fractional Shares of New Capital Stock."
REGULATORY APPROVAL
On October 4, 1996, the Company filed the Plan for Acquisition of
Minority Interests in The Manhattan Life Insurance Company (the "Plan") setting
forth the terms of the proposed Reverse Stock Split. [On December __, 1996, the
NYID approved the Plan, subject to the condition that this Proxy Statement be
mailed to shareholders of the Company by December 31, 1996 and the Reverse Stock
Split be effected by March 1, 1997.] See "Regulatory Approval."
FINANCING AND EXPENSES OF THE REVERSE STOCK SPLIT
The Board estimates that the amount of funds required by the Company
for the payment of the fractional share interests in the Reverse Stock Split
will be approximately $6,835,140. The Company will pay for such fractional
share interests using funds from its Guarantee Capital Reserve (as defined
herein) and funds from the aggregate amount of capital guaranteed to the
policyholders of the Company (the "Guarantee Capital"). Of the $6,835,140 that
will be required to pay for such fractional share interests, $1,822,704 will be
funded from the Guarantee Capital and $5,012,437 will be funded from the
Guarantee Capital Reserve. At June 30, 1996, the Company had Guarantee Capital
and a Guarantee Capital Reserve of approximately $6,683,000 and $15,526,000,
respectively, determined on a statutory basis of accounting. UCLIC will
contribute cash in the amount of $1,822,704 from its current funds to the
Guarantee Capital to maintain its balance of $6,683,000 as required by the NYID
and as set forth in the Plan. In addition, as part of the Plan, the
Company will not make any distributions to its shareholders after the Reverse
Stock Split is effected until the
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Guarantee Capital Reserve is restored to its balance at June 30, 1996 of
$15,526,000. See "Special Factors -- Certain Effects of and Conduct of the
Company's Business After the Reverse Stock Split" and "Special Factors --
Financing and Expenses of the Reverse Stock Split."
UCLIC will pay all additional fees, expenses and other transaction
costs to be incurred in connection with the Reverse Stock Split from its current
funds. See "Special Factors -- Financing and Expenses of the Reverse Stock
Split."
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following table sets forth selected historical financial data of
the Company and has been derived from the audited financial statements of the
Company for each of the two fiscal years ended December 31, 1995 and 1994 and
the unaudited financial statements for the nine months ended September 30, 1996
and 1995. See "Financial Information."
SELECTED FINANCIAL DATA
(GAAP Basis of Accounting)
<TABLE>
<CAPTION>
Nine Months Years ended December 31,
Ended -------------------------
September 30,
------------------
1996 1995 1995 1994
-------- -------- ------------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Insurance revenues $ 28,489 $ 30,108 $ 39,706 $ 38,539
Net income 1,413 1,337 1,446 1,891
Total assets 499,798 502,985 513,938 475,281
Shareholders' equity 31,460 30,403 31,308 26,578
Per share of Capital
Stock:
Net income* $ 0.42 $ 0.40 $ 0.43 $ 0.57
Book value 9.41 9.10 9.37 7.95
</TABLE>
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<PAGE>
* Net income per share of Capital Stock is based on the weighted average number
of shares outstanding for the periods indicated.
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<PAGE>
GENERAL
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders will be asked to consider and
vote upon a proposal to approve (i) an amendment (the "Amendment") of Section 3
of the Company's Amended Charter (the "Charter") providing for a reduction in
the authorized guarantee capital of the Company from 5,000,000 guarantee capital
shares, $2.00 par value per share (the "Capital Stock"), to 11 guarantee capital
shares, $835,406 par value per share (the "New Capital Stock"), (ii) a 303,784
to one reverse stock split of the Capital Stock, whereby each shareholder that
surrenders 303,784 shares of Capital Stock and contributes cash in the amount of
$227,838 (all of which cash amount will be contributed to the Guarantee
Capital), will receive in exchange one share of New Capital Stock, and (iii) a
cash payment in the amount of $7.50 per share (the "Cash Consideration") of the
currently outstanding Capital Stock in lieu of the issuance of any resulting
fractional shares of New Capital Stock to shareholders who, after the reverse
stock split, own fractional shares of New Capital Stock (items (i), (ii) and
(iii) will be considered one proposal and will be collectively referred to
herein as the "Reverse Stock Split").
The Company does not know of any other matters pertaining or relating
to the foregoing. However, in the event that any such matters do come up for
consideration and vote, the proxies will vote the shares in their discretion,
for or against such matters.
The Reverse Stock Split is described in more detail in subsequent
sections of this Proxy Statement.
RECORD DATE; VOTING; VOTE REQUIRED
Under Section 8 of the Charter, each shareholder is entitled to cast
0.215 of a vote for each share of Capital Stock held. Such percentage vote is
determined, in accordance with the Charter, by dividing 720,000 votes - the
total of which may be cast by the holders of the Capital Stock - by 3,341,624,
the number of shares of Capital Stock outstanding on the Record Date.
Pursuant to the NYIL, the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Capital Stock entitled to vote thereon
is required to approve the Reverse Stock Split. Abstentions are not counted for
purposes of determining whether the holders of at least two-thirds of the
outstanding shares of Capital Stock present in person or by proxy at the Special
Meeting voted in favor of the Reverse Stock Split under the NYBCL. As of the
Record Date, the Company had issued and outstanding 3,341,624 shares of Capital
Stock which were held by approximately 2,000 shareholders of record. UCLIC, the
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Company's principal shareholder, owned as of the Record Date, 2,433,345 shares
of Capital Stock or approximately 72.8% of the outstanding shares of Capital
Stock and has advised the Board that it intends to vote in favor of the Reverse
Stock Split. Since UCLIC holds more than two-thirds of the Capital Stock
outstanding on the Record Date, UCLIC will have sufficient voting power to
approve the Reverse Stock Split at the Special Meeting without the approval of
any other shareholders of the Company.
Shares of Capital Stock represented by properly executed proxies
received at or prior to the Special Meeting and which have not been revoked will
be voted in accordance with the instructions indicated thereon. If no
instructions are indicated on a properly executed proxy, such proxies will be
voted FOR the Reverse Stock Split. A shareholder who has given a proxy may
revoke such proxy at any time prior to its exercise at the Special Meeting by
(i) giving written notice of revocation to the Secretary of the Company, (ii)
properly submitting to the Company a duly executed proxy bearing a later date,
or (iii) attending the Special Meeting and voting in person. All written
notices of revocation and other communications should be addressed as follows:
The Manhattan Life Insurance Company, 1876 Waycross Road, Cincinnati, Ohio
45240, Attention: David F. Westerbeck, Secretary.
If the Special Meeting is adjourned or postponed for any purpose, at
any subsequent reconvening of the Special Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the meeting (except for any proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other matter at a previous meeting.
The cost of solicitation of proxies will be paid by UCLIC. Such cost
will include the reimbursement of banks, brokerage firms, nominees, fiduciaries,
and custodians for the expenses of forwarding solicitation material to
beneficial owners of shares of Capital Stock.
The mailing address of the principal executive offices of the Company
is 1876 Waycross Road, Cincinnati, Ohio 45240 and the mailing address of the
Home Office of the Company is 111 West 57th Street, New York, New York 10019.
AMENDMENT OF CHARTER TO EFFECT A REVERSE STOCK SPLIT
Pursuant to the terms of the Amendment, if approved, the authorized
Guarantee Capital of the Company would be reduced from 5,000,000 shares of
Capital Stock to 11 shares of New Capital Stock, each 303,784 shares of Capital
Stock then issued, together with the payment of $227,838 in cash (all of which
cash amount will be contributed to the Guarantee Capital), will be
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<PAGE>
automatically converted into one share of New Capital Stock, and each share of
Capital Stock owned by a shareholder whose share ownership would, as a result of
the Reverse Stock Split, be reduced to less than one share of New Capital Stock
(including shares of Capital Stock remaining after a shareholder who owns in
excess of 303,784 shares of Capital Stock surrenders 303,784 shares of Capital
Stock) will be automatically converted into the right to receive from the
Company, in lieu of the issuance of any fractional shares of New Capital Stock,
cash in the amount of $7.50 per share. The form of the Amendment is set forth
in Annex A to this Proxy Statement.
If the Reverse Stock Split is approved at the Special Meeting by the
holders of at least two-thirds of the issued and outstanding shares of Capital
Stock entitled to vote thereon, the Company will file the Amendment with the
office of the superintendent of the NYID as soon as practicable following the
Special Meeting. Under the NYIL, the Amendment will become effective on the
date of filing (such date of filing being referred to as the "Effective Date").
Fifth Third Bank, Cincinnati, Ohio, has been appointed as transfer agent (the
"Transfer Agent") to carry out the exchange of the certificates for New Capital
Stock and/or cash.
SPECIAL FACTORS
BACKGROUND OF THE REVERSE STOCK SPLIT
Since the early 1990s, the Company and UCLIC, its principal
shareholder, increasingly recognized that (i) the Charter and Commitment Letter
created certain operating, financial and marketing constraints that have
hindered and would continue to hinder the Company's operations and prevented the
Company and UCLIC from operating synergistically as discussed under the caption
"Special Factors - Reasons for the Reverse Stock Split," (ii) the capital
structure of the Company made it difficult to raise new capital because, among
other things, the Charter provides that only one-eighth of the return on capital
invested in the Company would inure to the benefit of shareholders, (iii) the
Company had not developed and would not likely develop in the foreseeable future
any significant trading market for the Capital Stock, and (iv) the Company had
incurred and would continue to incur substantial costs as a result of its status
as a public company under the Exchange Act.
In January 1993, the Company and UCLIC determined that it was both
appropriate and desirable to consider restructuring the capital structure of the
Company and improving the Company's operations. The Company then discussed with
UCLIC various alternatives for improving the long-term prospects of the Company,
including the possibility of taking the Company private. These alternatives
included a merger of the Company into UCLIC.
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<PAGE>
Such alternative was rejected for the reasons discussed below. Another
alternative discussed was a possible tender offer by UCLIC for all of the issued
and outstanding shares of Capital Stock. This alternative, however, was
rejected because there was no assurance that a tender offer by UCLIC would
assure a sufficient response resulting in UCLIC owning 100% of the Capital
Stock. For certain tax and other reasons, UCLIC was not willing to engage in a
transaction whereby it would acquire more than 80% but less than 100% of the
outstanding shares of Capital Stock. The Company also considered demutualizing
the Company in order to gain access to the capital markets and to clarify the
ownership interests of its shareholders, but rejected such alternative due to
the high expense of executing this strategy (legal, actuarial, investment
banking and other costs) relative to the size of the Company and the additional
complexity involved in determining the economic value to be assigned to the
policyholders of the Company.
Executives of UCLIC met with the Superintendent, Chief Deputy and
Chief of the Life Bureau of the NYID on February 5, 1993 to discuss the
possibility of merging the Company into UCLIC. The NYID advised UCLIC that its
current policy did not permit a merger of a New York domiciled life insurance
company such as the Company, with and into a non-New York domiciled life
insurance company. Thus, in order to effect such a merger, the NYID suggested
that UCLIC redomesticate from Ohio to New York. UCLIC considered the NYID's
suggestion and concluded that a merger under such conditions was inappropriate
because (i) it was unwilling to redomesticate to New York after existing for
more than 137 years as an Ohio company, and (ii) the NYID's requirement to
locate all of the merged company's insurance servicing functions in New York
would adversely impact UCLIC's "One Company Marketing Strategy" (as defined
below). See "Special Factors - Recommendation of the Special Committee and the
Board; Fairness of the Reverse Stock Split."
The Company convened a special meeting of the Board on July 20, 1993
at which UCLIC advised the Company that UCLIC would propose at the next regular
meeting of the Board in August a plan to take the Company private through a
reverse stock split with UCLIC as the sole remaining shareholder. The Board
also asked the outside directors to begin considering the formation of a
"fairness committee" that would evaluate the fairness of UCLIC's proposal to the
Company's shareholders other than UCLIC.
On August 17, 1993, the advisors to the Company met with
representatives of the NYID to discuss the proposed reverse stock split.
At a meeting of the Board on August 18, 1993, UCLIC proposed a plan to
acquire all of the outstanding Capital Stock through a reverse stock split, with
a cash payment of $5.125 per share to be made to the Company's minority
shareholders in lieu
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<PAGE>
of the issuance of fractional shares resulting from the reverse stock split. As
a result of the proposed reverse stock split, the Company would become a
privately held guarantee capital life insurance company with the expectation
that UCLIC would be the sole remaining shareholder. The Board authorized the
formation of a special committee of four independent directors to evaluate the
proposed reverse stock split and negotiate the terms and conditions of the
proposed reverse stock split on behalf of the shareholders of the Company other
than UCLIC, and to report to the Board with their recommendation. The Special
Committee was also authorized by the Board to engage a financial advisor, legal
counsel and any other advisors necessary to assist it in its consideration of
the UCLIC proposal. The Company issued a press release on August 23, 1993
announcing UCLIC's proposed reverse stock split and the formation of the Special
Committee.
In September 1993, the Special Committee retained a legal advisor and
BT to serve as its financial advisor.
In October, November and December 1993, BT, at the direction of the
Special Committee, conducted due diligence with respect to the Company. In
addition to reviewing certain public and non-public information concerning the
Company during this period, representatives of BT met with members of the senior
management of the Company and UCLIC to discuss the Company's business, financial
condition and prospects, and UCLIC'S plans for the Company.
On November 19, 1993, K. Thomas Kemp, Executive Vice President of Fund
American Companies ("Fund American"), indicated in a letter to Daniel Fischer,
President and CEO of the Company, that Fund American would be interested in
acquiring all of the outstanding shares of Capital Stock at a price
substantially in excess of the $5.125 per share proposed by UCLIC in the reverse
stock split transaction. Andrew Delaney, a holder of more than 5% of the
outstanding shares of Capital Stock (see "Security Ownership of Certain
Beneficial Owners"), was at the time a member of the Board of Directors of Fund
American and Chairman of the Audit Committee.
On November 30, 1993, Daniel J. Fischer forwarded a copy of K. Thomas
Kemp's November 19, 1993 letter to Laurence F. Whittemore, Chairman of the
Special Committee. In a letter dated December 7, 1993, Mr. Whittemore, at the
direction of the Special Committee after discussions with its legal and
financial advisors, informed Mr. Fischer that the Special Committee wanted the
Company to communicate with Mr. Kemp that the Company was prepared to fully
explore, in as expeditious a manner as possible, Fund American's potential
interest in acquiring all of the outstanding shares of Capital Stock.
On December 20, 1993, K. Thomas Kemp, in a letter to Daniel J.
Fischer, expressed Fund American's continued interest
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<PAGE>
in purchasing all of the outstanding shares of Capital Stock, subject to
satisfactory completion of due diligence matters, for a possible purchase price
between $8 to $10 per share payable in cash.
On January 6, 1994, representatives of Fund American, the Company, the
Special Committee and its legal and financial advisors met to explore Fund
American's interest in purchasing all of the outstanding shares of Capital Stock
and the process that would be involved if Fund American were to pursue its
proposal to purchase the Capital Stock.
The Special Committee subsequently granted Fund American permission to
discuss its proposal with UCLIC and advised Fund American that it expected Fund
American to perform its due diligence and report back to the Special Committee
with its determination of whether to pursue its proposal to acquire the
Company's shares. The Special Committee advised UCLIC that it should actively
pursue and consider the Fund American proposal.
In a letter dated January 12, 1994, K. Thomas Kemp informed Larry
Pike, President and CEO of UCLIC, of Fund American's offer to purchase, subject
to the satisfactory completion of due diligence, all of the Capital Stock held
by UCLIC for $8.50 per share, payable in cash. Mr. Kemp also indicated in such
letter that in connection with any purchase by Fund American of UCLIC's shares
of Capital Stock, Fund American would be prepared to purchase all of the
remaining shares of Capital Stock held by the public for the same purchase price
offered to UCLIC. On January 31, 1994, representatives of UCLIC met with Mr.
Kemp to discuss Fund American's offer to purchase UCLIC's shares of Capital
Stock.
During February and March 1994, Fund American completed its due
diligence review of the Company. By letter dated March 25, 1994, K. Thomas Kemp
informed Larry Pike of Fund American's offer to purchase all of the shares of
Capital Stock owned by UCLIC for $7.25 per share, payable in cash, subject to
the negotiation of a satisfactory purchase agreement and obtaining the necessary
regulatory approvals. Mr. Kemp stated in such letter that Fund American's
previous offer of January 12, 1993 of $8.50 per share was replaced by the offer
of $7.25 per share due to the disappointing 1993 fourth quarter results of the
Company. Mr. Kemp also indicated in such letter that if UCLIC agreed to accept
Fund American's offer, Fund American would be prepared to offer to purchase all
of the remaining shares of Capital Stock held by the public at the same purchase
price offered to UCLIC.
By letter dated April 8, 1994, UCLIC declined the Fund American offer.
UCLIC decided not to accept the Fund American offer primarily because it was not
interested in selling its shares of Capital Stock and instead preferred to
acquire all of
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<PAGE>
the outstanding shares of Capital Stock pursuant to the proposed reverse stock
split. UCLIC also decided not to accept Fund American's offer given the tax and
accounting implications of such a sale of its shares of Capital Stock at the
offered price. Shortly thereafter, Mr. Kemp orally informed the Company and
UCLIC that Fund American would not further pursue its offer to purchase the
Capital Stock of the Company.
From early 1994 to mid 1994, representatives of the Company and its
advisors participated in various discussions with the NYID regarding the
proposed reverse stock split, including a determination by the NYID of its role
in evaluating the fairness of the price to be paid to the shareholders of the
Company other than UCLIC.
On May 25, 1994, A.M. Best informed the Company by letter that the
Company's rating was downgraded from "A (Excellent)" to "A-(Excellent)." A.M.
Best also advised the Company that there could be a further downgrade of its
rating if the buy-out of the remaining outstanding minority ownership interest
in the Company is not completed by UCLIC.
Representatives of the Company, UCLIC and BT met with the NYID on July
7, 1994 to discuss the proposed reverse stock split and the procedures for
moving ahead on the transaction. The NYID informed the parties that the NYID
would need to retain an advisor to assist the NYID in reviewing the proposed
reverse stock split, including the fairness of the proposed price to be paid to
the shareholders of the Company other than UCLIC.
From July 1994 through early November 1994, the NYID interviewed and
considered potential advisors to assist the NYID in reviewing the Company's
proposed reverse stock split transaction. From late November 1994 through
October 1995, the NYID and its advisors conducted a due diligence review of the
Company.
On November 8, 1995, representatives of the NYID met with Daniel J.
Fischer, President and CEO of the Company, and informed him that the NYID was
prepared to approve the proposed Plan with a price of $8.00 per share of Capital
Stock.
From December 1995 to June 1996, representatives of the Company and
UCLIC participated in various discussions with the NYID regarding the proposed
reverse stock split and the NYID's valuation of the Capital Stock.
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<PAGE>
In May 1996, UCLIC received a letter dated May 16, 1996 from A.M. Best
in connection with its annual rating review for UCLIC. A.M. Best noted that, in
rating UCLIC, it considered the majority ownership which UCLIC maintained in the
Company and the capital deficiencies which existed at the Company (on a risk
adjusted basis) relative to its A.M. Best rating assignment of UCLIC.
On June 27, 1996, advisors to the Company met with representatives of
the NYID and requested that the NYID update its valuation of the Capital Stock
based on the Company's operating results as of December 31, 1995.
At a meeting on July 16, 1996, representatives of the NYID informed
the advisors to the Company that, based on its updated review, the NYID was
prepared to approve the proposed Plan with a price of $7.50 per share of Capital
Stock.
On July 31, 1996, representatives of BT met with representatives of
UCLIC to update the financial due diligence previously performed by BT and to
discuss the Company's request to the NYID to update the NYID's valuation of the
Capital Stock based on the Company's operating results as of December 31, 1995
and the NYID's subsequent revised valuation of the Capital Stock.
On August 5, 1996, Larry Pike, President and CEO of UCLIC, informed
the Special Committee that UCLIC believed that the NYID's valuation overstated
the value of the Capital Stock, and UCLIC continued to believe that its original
proposal to the Company of $5.125 per share was fair to the minority
shareholders of the Company. However, UCLIC advised the Special Committee that
it was prepared to complete the Reverse Stock Split based on the NYID's
valuation of the Capital Shares at $7.50 per share without further debate in the
interest of completing the Reverse Stock Split in an expeditious manner and for
the other reasons discussed under the caption "Special Factors - Recommendation
of the Special Committee and the Board; Fairness of the Reverse Stock Split."
In addition, UCLIC was concerned that further delays in completing the Reverse
Stock Split could result in a threatened downgrade in the Company's A.M. Best
rating, thus preventing the Company from effectively competing in its current
markets.
On August 8, 1996, Larry Pike sent a memorandum to the members of the
Special Committee and the independent directors of the Company outlining various
issues related to the proposed Reverse Stock Split, including the price per
share to be paid to minority shareholders of the Company and UCLIC's plans for
the Company following the completion of the Reverse Stock Split.
Certain representatives of UCLIC, the legal advisor to UCLIC, BT and
the legal advisor to the Special Committee met on August 20, 1996, to discuss
various issues relating to the
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proposed Reverse Stock Split, including: the role of the Special Committee in
evaluating the Reverse Stock Split; the basis and form of the fairness opinion
to be given by BT; the role of the NYID in evaluating the Reverse Stock Split;
the source of funds for paying cash to minority shareholders for fractional
shares of New Capital Stock resulting from the Reverse Stock Split; and UCLIC's
plans for the Company following the completion of the Reverse Stock Split,
including the possibility of redomesticating the Company to Ohio, mutualizing it
and then merging with UCLIC after the Reverse Stock Split is completed.
On September 5, 1996, the Special Committee met with its financial and
legal advisors to discuss, among other subjects, the status of BT's review and
analysis of the Company and its preliminary views as to the fairness of the
consideration to be received by the shareholders of the Company other than UCLIC
in the Reverse Stock Split; the bases for and scope of the fairness opinion to
be given by BT; the funding for the Reverse Stock Split; the role of the Special
Committee in evaluating the proposed Reverse Stock Split; the duties and
responsibilities of members of the Special Committee in respect of their
approval of the fairness of the consideration to be received by the shareholders
of the Company in the Reverse Stock Split; the applicable provisions of the NYIL
and the role of the NYID in respect of the Reverse Stock Split; the possibility
of a downgrade by A.M. Best of its rating of the Company; the uncertainties
pertinent to the capital structure of the Company; the NYID Agreement (defined
below under the caption "Dividends"); the recent operating performance of the
Company; and information provided to the Special Committee by UCLIC with respect
to its plans for the Company (including a potential redomestication to Ohio
followed by a mutualization of the Company and subsequent merger with UCLIC).
On September 6, 1996, Larry Pike discussed with the members of the
Special Committee via telephone the proposed Reverse Stock Split, including the
funding for the Reverse Stock Split. Following such telephone conversation,
Larry Pike sent a letter to the members of the Special Committee on September
19, 1996, discussing in greater detail the source of funds for the payment in
cash to minority shareholders of the Company for fractional share interests
resulting from the Reverse Stock Split, including the nature of the Guarantee
Capital Reserve and the Company's history with respect to the distribution of
cash to its shareholders. The letter also discussed UCLIC's plan for conducting
the Company after the proposed Reverse Stock Split is effected in the event that
a potential redomestication of the Company to Ohio followed by a mutualization
of the Company and merger into UCLIC did not occur.
On September 12 and 13, 1996, BT met with members of the management of
the Company and UCLIC to further update its earlier due diligence concerning the
Company's business,
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financial condition and prospects and UCLIC's plans for the
Company.
The Special Committee met with its legal advisor and BT on September
24, 1996 to further discuss the proposed Reverse Stock Split. At this meeting,
BT reviewed with the Special Committee the terms and background of the proposed
Reverse Stock Split and gave a presentation as to its financial analysis of the
proposed transaction. BT indicated that the $7.50 per share to be received in
the proposed Reverse Stock Split was well within the implied reference value
range derived from the various financial analyses performed by BT with the
exception of reference values based on GAAP and statutory book value. BT said
that the Company's unique capital structure made any valuation based on book
value inherently unreliable and that BT therefore did not view as significant
such indications of value in analyzing the fairness of the consideration to be
received in the proposed Reverse Stock Split. Specifically, BT noted that
restrictions contained in the Charter and the NYID Agreement (i) allocated to
the shareholders of the Company only one-eighth of its distributable income,
together with a portfolio rate of interest on such shareholder income
accumulated in the Guarantee Capital Reserve (although GAAP shareholders' equity
at June 30, 1996 accounted for nearly half of the total equity of the Company),
and (ii) imposed limitations on the amounts that could be paid to shareholders
in the form of dividends or other distributions. At the conclusion of its
presentation, BT indicated that it would be prepared to render its opinion as to
the fairness from a financial point of view of the Cash Consideration to be
received by the shareholders other than UCLIC in the Reverse Stock Split.
Following a discussion of the proposed Reverse Stock Split, the Special
Committee decided to adjourn in order to give members further opportunity to
reflect on the matters discussed at such meeting. The Special Committee met on
September 25, 1996 by telephone without its advisors to discuss such matters
further.
At a meeting on October 1, 1996, BT rendered to the Special Committee
its oral opinion, which was subsequently confirmed by its written opinion dated
as of October 1, 1996, to the effect that, as of such date, the Cash
Consideration to be received by the shareholders of the Company other than UCLIC
in the Reverse Stock Split was fair from a financial point of view. At such
meeting, the Special Committee resolved to recommend to the Board that it adopt
the Plan as fair from a financial point of view to the shareholders of the
Company other than UCLIC, subject to approval or acceptance of the Plan by the
NYID and the receipt by the Board of an opinion of counsel in connection with
the Reverse Stock Split and the Plan.
At a telephonic meeting on October 2, 1996, representatives of BT made
a presentation to the full Board with respect to its financial analysis of the
proposed Reverse Stock
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Split. Following such presentation and discussion, the full Board, based on the
recommendation of the Special Committee and BT's presentation, and after
reviewing all of the relevant factors, determined that the Reverse Stock Split
is fair to the shareholders of the Company and unanimously voted to approve the
Reverse Stock Split and the Plan. See "Special Factors -Recommendation of the
Special Committee and the Board; Fairness of the Reverse Stock Split" and
"Special Factors - Opinion of the Financial Advisor."
In reaching its conclusions, the Special Committee and the Board
considered a number of factors, including, without limitation, the written
opinion of BT and other factors described below under the caption "Special
Factors - Recommendation of the Special Committee and the Board; Fairness of the
Reverse Stock Split."
On October 4, 1996, the Company filed the Plan with the NYID. [On
December __, 1996, the NYID approved the Plan, subject to the condition that
this Proxy Statement be mailed to shareholders of the Company by December 31,
1996 and the Reverse Stock Split be effected by March 1, 1997.]
REASONS FOR THE REVERSE STOCK SPLIT
The principal purpose of the proposed Reverse Stock Split is to allow
the Company to present itself to the rating agencies as a strategic subsidiary
of UCLIC and not as a stand alone company. As a strategic subsidiary of UCLIC,
the Company should be able to maintain or improve its current rating of "A-
(Excellent)" with A.M. Best. The Company would also be in a position to obtain
favorable ratings from other rating organizations (i.e., Standard & Poor's
Corporation, Moody's Investors Service, Inc. and Duff & Phelps Credit Rating
Co.) which together with an "A (Excellent)" rating from A.M. Best would allow
the Company to better compete in its current markets. A.M. Best informed the
Company by letter dated May 25, 1994, that the Company's rating was downgraded
from "A (Excellent)" to "A-(Excellent)." A.M. Best also advised the Company
that there could be a further downgrade of its rating if the buy-out of the
remaining outstanding minority ownership interest in the Company is not
completed by UCLIC. The Company believes that a further downgrade in its A.M.
Best rating would make it very difficult for the Company to compete in its
current markets.
In addition, acquiring all of the Capital Stock would provide UCLIC
with the opportunity to pursue the regulatory approval required for the
redomestication of the Company to Ohio, the mutualization of the Company and the
merging of the Company into UCLIC. This would align the policyholder interests
of UCLIC with those of the policyholders of the Company, and enable UCLIC to
manage the Company's business on a mutual company basis. The Company's
policyholders would become policyholders of a larger
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mutual company with higher ratings and greater financial strength than the
Company. It would also permit the elimination of certain operating, financial
and marketing constraints created by the Charter and the commitment letter (the
"Commitment Letter") by and among UCLIC, the Company and the NYID which have
hindered the Company's operations. The Charter prevents the Company from
accessing the securities markets to raise additional capital. In addition, the
Charter makes it impractical and uneconomical for UCLIC to invest additional
capital in the Company since only one-eighth of the return on the capital
invested in the Company would inure to the benefit of UCLIC. The Commitment
Letter contributes significantly to the excessive operating expenses incurred by
the Company which amounted to $18.1 million for 1995 and prevents the Company
and UCLIC from operating synergistically. Specifically, the Commitment Letter
requires, among other things, that all underwriting, policyholder services and
claims functions be performed in the State of New York, and that the Company and
UCLIC maintain separate staffs to perform marketing, certain actuarial and
underwriting services functions. The Commitment Letter also prohibits dual
licensing of agents and cross-selling of UCLIC and Company products in New York.
In addition, UCLIC is unwilling to further integrate its operations
with those of the Company without owning 100% of the outstanding shares of
Capital Stock because UCLIC does not want to share the return on its investment
in the Company with the other shareholders of the Company. UCLIC is also
concerned that further integrating its operations with those of the Company
would make it vulnerable to minority shareholder lawsuits alleging self-dealing
as a result of intercompany transactions or marketing arrangements.
The Reverse Stock Split would enable the Company to become a privately
held company thereby eliminating the costs related to its registration with the
SEC and listing on the Nasdaq, including the expenses associated with servicing
numerous shareholder accounts and the reporting and accounting functions
required by the SEC and Nasdaq. For the year ended December 31, 1995, the
Company incurred costs associated with being a publicly held company of
approximately $300,000.
An ancillary benefit to the more than 2,000 minority shareholders of
the Company owning fewer than 303,784 shares of Capital Stock would be a
convenient, economical way to sell their shares of Capital Stock at greater than
prevailing market prices without incurring brokerage commissions.
Therefore, if the Reverse Stock Split is consummated and UCLIC owns
100% of the Capital Stock, the Company and UCLIC will benefit because of the
following reasons, among others: (i) the likelihood of a further downgrade in
the Company's current A.M. Best rating will be reduced and there will be a
possibility of a ratings upgrade, (ii) UCLIC will have the opportunity to
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pursue the regulatory approval required for the redomestication of the Company
to Ohio, the mutualization of the Company and the merging of the Company into
UCLIC which would, among other things, align the policyholder interests of UCLIC
with those of the policyholders of the Company and permit the elimination of
certain operating, financial and marketing constraints created by the Charter
and the Commitment Letter which have hindered the Company's operations and (iii)
the substantial costs incurred by the Company each year as a result of its
status as a public company will be eliminated.
The Company and UCLIC structured the transaction as a Reverse Stock
Split in order for the Company to become a privately held guarantee capital life
insurance company with UCLIC as the sole shareholder in the most expeditious,
efficient and least expensive manner. The Reverse Stock Split is also the only
viable method for UCLIC to acquire 100% of the outstanding shares of Capital
Stock. UCLIC is unwilling to engage in a transaction that would result in the
acquisition by UCLIC of more than 80% but less than 100% of the outstanding
shares of Capital Stock since adverse tax consequences to the Company would be
triggered. The Company and UCLIC also concluded that the other possible
alternatives would not permit the Company to become a privately owned guarantee
capital life insurance company with UCLIC as the sole shareholder or the
transaction costs to implement such other possible alternatives would be
substantially greater than the transaction costs to implement the Reverse Stock
Split. See "Special Factors -- Background of the Reverse Stock Split."
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE REVERSE
STOCK SPLIT
General. The Special Committee is composed of four of the six
independent directors who are not employees of the Company, namely Laurence F.
Whittemore who is the Chairman of the Special Committee, James H. McIlhenny,
Francis W. Murray III and Richard S. Przysinda. The Board had initially
requested all of the independent directors to serve on the Special Committee,
however, the schedules of two of the independent directors prevented them from
devoting the time necessary to perform the work of the Special Committee. The
remaining four independent directors were then requested by the Board to serve
on the Special Committee and they agreed to do so. Mr. Whittemore has been an
independent director of the Company since 1975 and for more than five years he
has been a partner of Brown Brothers Harriman & Company, a Wall Street
investment banking and brokerage firm. Mr. McIlhenny has been an independent
director of the Company since 1989 and he is the retired President and Chief
Executive Officer of the Council of Better Business Bureaus, Inc., a position he
held for more than five years. Mr. Murray has been an independent director of
the Company since 1973 and he is the retired Director of Bank of America's New
York
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Private Banking operation, a position he held for more than five years. Mr.
Przysinda has been an independent director of the Company since 1989 and he is
the retired Vice Chairman of Monroe Litho Inc., a lithographic printing company.
Mr. Przysinda also served for more than five years as President and Chief
Executive Officer of Monroe Litho Inc.
The Reverse Stock Split was not structured to require the approval of
at least a majority of the unaffiliated shareholders of the Company. The Board
and UCLIC concluded, despite not structuring the Reverse Stock Split in such
manner, that the Reverse Stock Split is fair from a procedural point of view to
the shareholders of the Company, other than UCLIC, because (i) a Special
Committee of independent directors of the Company was appointed by the Board to
evaluate the fairness of the consideration from a financial point of view to be
received by the shareholders of the Company other than UCLIC in the Reverse
Stock Split, (ii) the NYID has reviewed the Reverse Stock Split as set forth in
the Plan and has approved the Plan, and determined that a price of $7.50 per
share is fair to the shareholders of the Company, and (iii) the minority
shareholders of the Company are afforded dissenters' rights under New York law.
The Board was aware during the course of its deliberations that the
anticipated effect of the Reverse Stock Split was that UCLIC would be the only
remaining shareholder of the Company. It was also aware that the Reverse Stock
Split presented potential or actual conflicts of interest between the Company
and UCLIC since UCLIC has the ability to control the Board through the election
of a majority of the Board. The Board concluded, despite such effect and
potential or actual conflicts of interest, that the Reverse Stock Split is fair
to the Company other than UCLIC. See "Special Factors - Interests of Certain
Persons in the Reverse Stock Split."
Fairness of the Reverse Stock Split and Recommendation of the Special
Committee and the Board. On October 1, 1996, the Special Committee unanimously
resolved to recommend to the Board that it adopt the Plan as fair from a
financial point of view to the shareholders of the Company other than UCLIC,
subject to the approval or acceptance of the Plan by the NYID and the receipt by
the Board of an opinion of counsel in connection with the Reverse Stock Split
and the Plan.
In making its recommendation to the Board, the Special Committee
consulted with its legal advisor and BT, and considered a number of factors,
including, among other things, the following material factors, in no particular
order of significance:
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(1) the opinion and financial analyses and judgements furnished and
presented to the Special Committee by BT, its financial advisor;
(2) the advice and information provided to the Special Committee by
the management of the Company and UCLIC with respect to the rating of the
Company by A.M. Best;
(3) information regarding the financial condition, results of
operations, assets, liabilities, business and prospects of the Company, as well
as current industry conditions and trends as they relate to the Company and its
business;
(4) recent market prices and trading volumes for the Capital
Stock;
(5) the terms of the Charter and the attendant issues surrounding
ownership of the Company's undistributed earnings;
(6) the impact that the terms of the Charter and the ownership
structure of the Company has had and may continue to have on the ability of the
Company to raise capital and otherwise undertake certain corporate actions;
(7) the advice to the Special Committee from the management of the
Company and UCLIC with respect to plans being considered by the management of
the Company and UCLIC for the future operation of the Company and the
opportunity that the Plan offers to implement such plans;
(8) the undertakings furnished by UCLIC to the Company and by UCLIC
and the Company to the Superintendent of Insurance of the State of New York, in
each case in respect of the capital structure and operation of the Company;
(9) the strategic and financial alternatives presently available to
the Company;
(10) information furnished by management of the Company and UCLIC with
respect to prior discussions with respect to an acquisition of the Company by,
or its combination with a third party;
(11) the fact that the adoption of the Plan is subject to the approval
or acceptance of the Plan by the Superintendent of Insurance of the State of New
York pursuant to the NYIL; and
(12) the present and future application of the NYIL to the Company
until such time, if at all, the Company is permitted by the NYID to
redomesticate.
The foregoing sets forth the material information and factors
considered and given weight by the Special Committee. In
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view of the wide variety of factors considered in connection with its evaluation
of the Reverse Stock Split, the Special Committee did not find it practicable or
necessary to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the Special Committee may have given different weights to
different factors.
The Special Committee believed the consideration to be received in the
Reverse Stock Split was fair, from a financial point of view, to the
shareholders of the Company, other than UCLIC, for the following, among other,
reasons:
(1) its belief that the failure to approve the Reverse Stock Split
could have resulted in a downgrade by A.M. Best of its rating of the Company
which would likely significantly hamper new sales of insurance through existing
distribution channels;
(2) its and its financial advisor's belief that the capital structure
of the Company and the NYID Agreement made, and would continue to make it,
difficult for the Company to attract the capital necessary to enable the Company
to function effectively in the competitive and changing business environment in
which it operated because of the uncertainty as to the ownership of the
Company's statutory unassigned surplus, the dilution to the return on new
capital created by the distribution of 7/8's of the Company's income to
policyholders and the limitations imposed by the NYID on dividends and
distributions by the NYID Agreement;
(3) its and its financial advisor's analysis and judgments regarding
the strategies and financial alternatives otherwise available to the Company
(including that the Company could not be sold without the support of
UCLIC);
(4) the lack of liquidity in and limited amount of trading for the
Capital Stock and the prices at which shares of the Capital Stock have publicly
traded since November 1, 1991;
(5) the Special Committee's belief that generally accepted accounting
principles book value ($9.27 at June 30, 1996) while substantially higher than
$7.50 per share did not reflect an amount which could be realized in the near
term by shareholders of the Company and did not reflect an amount which could be
realized by shareholders in the event of a sale or other combination of the
Company and that valuations based on statutory book value ($6.90 at June 30,
1996) and adjusted statutory book value ($7.23 at June 30, 1996) also did not
reflect amounts which could be realized by shareholders in the event of a sale
or other combination of the Company;
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(6) the recent operating results for the Company, the inconsistent
operating performance of the Company's core life insurance business and the
Company's lack of critical mass;
(7) that the price of $7.50 per share exceeded the all-time high price
of $6.50 per share on January 29, 1993; was 76.5% higher than the $4.25 per
share price of the last trade prior to the Special Committee's approval of the
fairness of the consideration to be received by the shareholders of the Company
other than UCLIC in the Reverse Stock Split; and was 87.5% higher than the trade
of $4.00 per share four weeks prior to such approval;
(8) the price of $7.50 per share was higher than the last offer of
$7.25 per share made in March 1994 by Fund American;
(9) the "liquidation value" of the Capital Stock was not relevant
given the expense, uncertainties and difficulties inherent in any attempt to
liquidate an insurance company which has long-term policy obligations which
cannot be unilaterally abrogated; and
(10) while the price of $7.50 per share was at the lower end of
certain of the ranges of values determined by BT based on its analysis of
comparable transactions and the Company's discounted cash flow this price was
nevertheless fair given the uncertainties inherent in the capital structure of
the Company and its recent operating performance.
At a telephonic meeting of the Board on October 2, 1996, based on the
recommendation of the Special Committee and on the material factors and analysis
outlined above, which were considered by the Board, and the presentation by BT
at such meeting of its financial analysis of the proposed Reverse Stock Split,
the Board unanimously approved the Reverse Stock Split, and determined that the
Reverse Stock Split is fair to the shareholders of the Company. Accordingly,
the Board unanimously recommends that the shareholders of the Company vote FOR
the approval of the Reverse Stock Split.
Consideration of the Reverse Stock Split by UCLIC. UCLIC believes
that the Reverse Stock Split is fair to the minority shareholders of the Company
from a financial point of view for the reasons set forth below.
In 1993, UCLIC initially proposed to the Company that a price of
$5.125 per share be paid to the minority shareholders of the Company in a
proposed reverse stock split transaction. In mid 1994, the NYID determined that
it would need to conduct its own evaluation of the proposed reverse stock split,
including the fairness of the price to be paid to the minority shareholders of
the Company. After completing its valuation of the Capital
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Stock, the NYID ultimately informed the Company in July 1996 that it was
prepared to approve the proposed reverse stock split with a price of $7.50 per
share based on the NYID's own analysis and review of the proposed transaction.
At that point, UCLIC determined that it had three options: (i) it could request
that the Company abandon the proposed Reverse Stock Split; (ii) it could incur
significant delays in completing the transaction and fund the substantial
additional transaction costs that would be incurred by the Company in
negotiating with the NYID regarding the price to be paid to the minority
shareholders in the proposed Reverse Stock Split; or (iii) it could agree to
complete the Reverse Stock Split based on the price of $7.50 per share proposed
by the NYID. UCLIC chose to complete the Reverse Stock Split based on the NYID's
proposal of $7.50 per share for the following reasons: (a) UCLIC did not want to
fund the substantial additional transaction costs that would be incurred by the
Company in negotiating with the NYID regarding the $7.50 price since the
transaction costs that have been incurred by the Company thus far in attempting
to complete the transaction are already disproportionately high relative to the
size of the transaction; (b) UCLIC desires to proceed as expeditiously as
possible in completing the proposed Reverse Stock Split so that it can pursue
the regulatory approval required for the redomestication of the Company to Ohio,
the mutualization of the Company and the merging of the Company into UCLIC which
it views as the first step to solving the expense problem at the Company created
primarily by the Charter and the Commitment Letter as discussed under the
caption "Special Factors - Reasons for the Reverse Stock Split"; and (c) UCLIC
was concerned that further delays in completing the Reverse Stock Split could
result in a threatened downgrade in the Company's A.M. Best rating, thus
preventing the Company from effectively competing in its current markets.
In addition to completing the Reverse Stock Split based on the price
of $7.50 per share proposed by the NYID for the reasons described above, UCLIC
believes that the consideration to be received in the Reverse Stock Split is
fair to the minority shareholders of the Company from a financial point of view
for the following reasons, among others: (i) the price of $7.50 per share
exceeded the current market price of the Capital Stock of $4.00 per share on the
date the board of directors of UCLIC made its determination; (ii) the lack of
liquidity in and limited amount of trading for the Capital Stock and the prices
at which shares of the Capital Stock have publicly traded since November 1,
1991; (iii) the price of $7.50 per share was higher than the only third party
offer of $7.25 per share made in March 1994 by Fund American; (iv) the recent
operating results for the Company, the inconsistent operating performance of the
Company's core life insurance business and the Company's lack of critical mass;
and (v) the "liquidation value" of the Capital Stock was not relevant given the
expense, uncertainties and difficulties inherent in any
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attempt to liquidate an insurance company which has long-term policy obligations
which cannot be unilaterally abrogated.
UCLIC has not made any recommendation to the shareholders of
the Company with respect to the Reverse Stock Split.
Consideration of Alternatives. The Board and UCLIC considered the
merits of various other alternatives to the Reverse Stock Split. They
determined that one of the alternatives considered, a merger of the Company into
UCLIC, would not be feasible because the NYID advised UCLIC that its current
policy did not permit a merger of a New York domiciled life insurance company
such as the Company, with and into a non-New York domiciled life insurance
company. The NYID suggested that in order to effect such a merger that UCLIC
redomesticate from Ohio to New York. UCLIC considered the NYID's suggestion and
concluded that a merger under such conditions was inappropriate because (i) it
was unwilling to redomesticate to New York after existing for more than 137
years as an Ohio company, and (ii) the NYID's requirement to locate all of the
merged company's insurance servicing functions in New York would adversely
impact UCLIC's "One Company Marketing Strategy" by forcing a physical separation
between its customer service operation that would be located in New York and the
rest of its insurance operations that would be located in Ohio. UCLIC's "One
Company Marketing Strategy" is a comprehensive, customer-centered strategy
designed to leverage UCLIC's resources to better serve its customers and is a
key component of its business strategy.
The Board and UCLIC also considered a tender offer by UCLIC for all of
the Capital Stock. They determined that such alternative would not be feasible
because there would be no assurance that a tender offer by UCLIC would assure a
sufficient response resulting in UCLIC owning 100% of the Capital Stock since
the vast majority of the Company's shareholders hold small numbers of the shares
of Capital Stock and the Company does not have current or forwarding addresses
for many of its shareholders.
The Board and UCLIC also considered demutualizing the Company in order
to gain access to the capital markets and to clarify the ownership interests of
its shareholders, but determined that such alternative was not feasible due to
the high expense of executing such a strategy (legal, actuarial, investment
banking and other costs) relative to the size of the Company and the additional
complexity involved in determining the economic value to be assigned to the
policyholders of the Company.
The Board and UCLIC also determined that it would be difficult to
locate a third party willing to ultimately consummate the purchase the Company
because of the unique capital
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structure of the Company and the operating, financial and marketing constraints
created by the Charter and Commitment Letter. UCLIC also determined that it was
not interested in selling its shares of Capital Stock, but rather UCLIC
preferred to pursue the possibility of a reverse stock split transaction for the
reasons provided under the caption "Special Factors -Reasons for the Reverse
Stock Split." No third party has expressed any interest in pursuing formal
negotiations for the purchase of the Company except for Fund American as
discussed under "Special Factors -Background of the Reverse Stock Split." See
"Special Factors - Background of the Reverse Stock Split" and "Special Factors -
Reasons for the Reverse Stock Split."
OPINION OF THE FINANCIAL ADVISOR
BT was retained by the Special Committee as its financial advisor in
connection with the reverse stock split proposed by UCLIC, among other things,
to assist the Special Committee in evaluating the proposed reverse stock split,
render an opinion as to the fairness from a financial point of view of the
consideration to be received by the shareholders of the Company other than UCLIC
in the transaction, and assist the Special Committee in its negotiations with
UCLIC. No limitations were imposed by the Special Committee, UCLIC or the
Company upon the scope of BT's investigation or otherwise with respect to the
opinion rendered by BT, except that as a result of UCLIC's 72.8% ownership of
the Company's Capital Stock and its statements that it did not intend to sell
such interest, BT was not requested by the Special Committee to solicit, and did
not solicit, any third party indications of interest for any potential
transaction involving the Company.
On October 1, 1996, BT rendered to the Special Committee its oral
opinion, which was subsequently confirmed by its written opinion dated as of
October 1, 1996, to the effect that, as of such date, the Cash Consideration to
be received by the shareholders of the Company other than UCLIC in the Reverse
Stock Split was fair from a financial point of view.
The full text of BT's written opinion dated as of October 1, 1996,
which includes the assumptions made, procedures followed and matters considered,
is attached hereto as Annex B. SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN
ITS ENTIRETY.
In conducting its analysis and arriving at its opinion, BT, among
other things, (i) reviewed certain publicly available financial statements and
other information of the Company; (ii) reviewed certain internal financial
statements and other financial and operating data concerning the Company
prepared by the management of the Company; (iii) discussed the past and current
operations, financial condition and prospects of the Company with the management
of the Company and UCLIC; (iv) discussed with the management of UCLIC their
reasons for the
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proposed transaction and their plans for the Company; (v) reviewed certain
financial projections for the Company prepared by the management of the Company;
(vi) reviewed the historical stock prices and trading volumes of the Company's
Capital Stock; (vii) compared certain financial and market data for selected
publicly-traded companies in lines of business it considered reasonably
comparable to that of the Company; (viii) reviewed the terms of certain other
acquisitions and transactions, to the extent publicly available, that it
believed to be relevant; (ix) performed a discounted cash flow analysis of the
Company's Capital Stock; (x) performed a component valuation analysis of the
Company's Capital Stock; (xi) conducted such other financial studies, analyses,
and investigations, and considered such other information as it deemed necessary
and appropriate; and (xii) reviewed the Plan.
In rendering its opinion, BT relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to it from public sources, that was provided to BT by the Company or
its representatives, or that was otherwise reviewed by BT, including the
accuracy, completeness and fairness of the allocation of income and equity as
between the policyholders of the Company and the holders of shares of Capital
Stock reflected in the Company's financial statements. BT also assumed, with
the permission of the Company and on the basis of the views of counsel to the
Company described in the notes to the Company's financial statements, that, to
the extent any assets of the Company remain after satisfaction of the claims of
policyholders and other creditors of the Company in the event of its liquidation
or dissolution, the unassigned statutory surplus of the Company would be
distributable one-eighth to the holders of shares of Capital Stock and seven-
eighths to the policyholders of the Company. BT also assumed that such
allocations would be applicable in its calculation of statutory book value and
adjusted statutory book value. With respect to the financial projections
supplied to BT, BT has assumed that they were reasonably prepared and reflected
the best currently available estimates and judgments of the management of the
Company as to the future operating and financial performance of the Company. BT
expressed no opinion with respect to such projections or the assumptions on
which they are based. BT did not assume any responsibility for making and did
not make any independent evaluation of the Company's assets or liabilities or
any independent verification of any of the information reviewed by BT. BT did
not express any opinion with respect to legal matters relating to the Reverse
Stock Split and relied as to all legal matters relating to the Reverse Stock
Split on advice of counsel. BT's opinion is based on economic, market,
financial and other conditions, as they existed on the date of the BT opinion.
The BT opinion was delivered for use and consideration by the Special
Committee, and as noted therein, does not address
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the Special Committee's underlying business decision to recommend the Reverse
Stock Split and does not constitute a recommendation to the Special Committee or
to any shareholder with respect to any approval of the Reverse Stock Split. The
summary of the opinion of BT set forth in this proxy statement is qualified in
its entirety by reference to the full text of such opinion.
In preparing its opinion to the Special Committee, BT performed a
variety of financial and comparative analyses, including those described below.
A copy of BT's written presentation to the Special Committee has been included
as an exhibit to the Schedule 13E-3 and will be available for inspection and
copying at the principal executive offices of the Company during its regular
business hours by any interested shareholder of the Company or such
shareholder's representative designated in writing. The summary of BT's
analyses set forth below does not purport to be a complete description of the
analyses underlying BT's opinion. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, BT did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, BT believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying such analyses and its opinion. With respect to the comparable
company analysis, comparable insurance industry transaction analysis, comparable
life insurance acquisition analysis, and comparable transaction premium analysis
summarized below, no public company, transaction, or acquisition utilized as a
comparison is identical to the Company, its Capital Stock or the Reverse Stock
Split and such analyses necessarily involve complex considerations and judgments
concerning the differences in financial and operating characteristics of the
companies and other factors that could affect the acquisition or public trading
values of the companies concerned. In its analysis, BT made numerous
assumptions with respect to the Company, industry performance, general business,
economic, market and financial conditions and other matters. Any estimates
contained in such analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses.
The following is a summary of the analyses BT utilized in arriving at
its opinion as to the fairness of the consideration to be received by the
minority shareholders in the Reverse Stock Split and that BT discussed with the
Special Committee on September 24, 1996.
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Comparable Company Analysis. BT reviewed certain publicly available
information regarding twelve public life insurance companies determined by BT to
be engaged in businesses comparable to those of the Company. In this regard, BT
noted that although such companies were considered similar to the Company
insofar as they participate in business segments similar to the Company's, none
of the companies has the same management, makeup, size, capital structure and
combination of businesses as the Company. In performing the comparable public
company analysis, BT selected the following publicly traded life insurance
companies (the "Comparable Companies"): Allied Life Financial Corporation,
American Heritage Life Investment Corporation, Cotton States Life Insurance,
Erie Family Life Insurance, Home Beneficial Corporation, Intercontinental Life
Corporation, Investors Heritage Life Insurance Company, Kansas City Life
Insurance Company, Protective Life Corporation, Reliable Life Insurance Company,
Security-Connecticut Corporation and USLIFE Corporation. Using publicly
available information, BT analyzed, among other things, certain historical and
financial data for each of the Comparable Companies. BT compared the multiples
of stock price to GAAP earnings per share and operating earnings per share for
the last twelve months ended June 30, 1996 (except December 31, 1995 for
Reliable Life Insurance Company), fiscal year 1996 and 1997 estimated earnings
per share (as published by Institutional Brokers Estimate System and Zacks
Investment Research) and GAAP book value per share including and excluding the
FAS 115 adjustment as of June 30, 1996 (except December 31, 1995 for Reliable
Life Insurance Company). BT also analyzed the total equity market value plus the
amount of holding company debt and preferred stock ("Firm Value") as a multiple
of adjusted statutory capital and surplus as of December 31, 1995. Adjusted
statutory capital and surplus for the Company is defined as the sum of Guarantee
Capital, Guarantee Capital Reserve, one-eighth of Unassigned Surplus, one-eighth
of the Asset Valuation Reserve, and one-eighth of the Interest Maintenance
Reserve. Variances in multiples for different companies may reflect such
considerations as operating earnings history, capitalization, operating and
financial leverage, asset quality, reserve adequacy, return on surplus and
return on equity. BT derived high, low, mean and median multiples from the
foregoing analysis of the Comparable Companies and applied them to certain
financial data relating to the Capital Stock of the Company. The mean and median
multiples of the last twelve months GAAP earnings, last twelve months GAAP
operating earnings, GAAP 1996 estimated earnings, GAAP 1997 estimated earnings,
GAAP book value (including FAS 115), GAAP book value (excluding FAS 115) and
adjusted statutory capital and surplus were 10.55x and 9.73x, 11.45x and 10.66x,
9.59x and 9.45x, 8.88x, and 8.84x, 1.08x and 0.87x, 1.13x and 0.93x, and 2.02x
and 1.89x, respectively. This analysis resulted in an implied value reference
range (based on the mean and median values resulting from application of each
methodology) for the Capital Stock of $4.52 to $5.13 per share excluding values
based on GAAP book value and adjusted statutory
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capital and surplus, and $4.52 to $13.85 per share including values based on
GAAP book value and adjusted statutory capital and surplus.
Comparable Life Insurance Acquisition Analysis. BT reviewed publicly
available information for selected transactions involving the acquisition of
life insurance companies since 1993 (the "Selected Transactions"). In reviewing
these transactions, several factors were considered including: (i) the lack of
public information for subsidiary and private company transactions which
represent a significant portion of the merger and acquisition activity; and (ii)
the lack of directly comparable transactions. The selected transactions were not
intended to represent the complete list of life insurance company transactions
which have occurred. Rather such transactions included only selected recent
transactions involving life insurance companies. Such Selected Transactions were
used in this analysis because the companies involved were deemed by BT to
operate in similar business or have similar financial characteristics to the
Company. The transactions reviewed included the following: Conseco Inc./Bankers
Life Holding Corporation; GE Capital Corporation/First Colony Corporation;
Conseco Inc./Life Partners Group; Atlantic American Corporation/Bankers Fidelity
Life Insurance Company; GE Capital Corporation/Life Insurance Company of
Virginia; Sammons Enterprises/NACOLAH Holding Corporation; Sun America/Ford Life
Insurance Company; American General Corporation/Independent Insurance Group;
SunAmerica/CalFarm Life Insurance Company; AmVestors Financial
Corporation/Financial Benefit Group; Jefferson-Pilot Corporation/Alexander
Hamilton Life Insurance Company; American Annuity Group/Laurentian Capital
Corporation; Life Re Corporation/John Deere Life Insurance Group; Standard
Management Corporation/Dixie National Life Insurance Company; AmericoLife
Inc./Kansas Life Insurance Company; Conseco Inc./CCP Insurance; ARM Financial
Group/SBM Company; Life Partners Group/Lamar Financial Group; American General
Corporation/Franklin Life Insurance Company; Pioneer Financial
Services/Connecticut National Life Insurance Company; Torchmark
Corporation/American Income Holding Inc.; Intercontinental Life
Corporation/Meridian Life Insurance Company; NWNL Companies/USLICO Corporation;
GE Capital Corporation/Harcourt General Insurance Group; GE Capital
Corporation/Heritage Insurance Group; Conseco Capital Partners II L.P./Statesman
Group; Protective Life Corporation/Wisconsin National Life Insurance Company;
Liberty Corporation/North American National Corporation; United Insurance
Companies/Southern Educators Life Insurance. BT reviewed the consideration paid
in such transactions in terms of the price paid for the common stock plus the
amount of all holding company debt and preferred stock assumed, repaid, or
redeemed in such transactions (the "Transaction Value") as a multiple of
adjusted statutory capital and surplus as of the last fiscal year ended prior to
the announcement of such transactions. Adjusted statutory capital and surplus
for the Company is defined as the sum of Guarantee
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Capital, Guarantee Capital Reserve, one-eighth of Unassigned Surplus, one-eighth
of the Asset Valuation Reserve, and one-eighth of the Interest Maintenance
Reserve. Variances in multiples for different transactions may reflect such
considerations as earnings history, leverage, reserve adequacy, asset quality,
and return on surplus. Additionally, BT reviewed the consideration paid in such
transactions (the "Equity Value") as a multiple of GAAP net income and GAAP net
operating income for the last twelve months prior to the announcement of such
transaction and as a multiple of GAAP book value as of the last fiscal quarter
ended prior to the announcement of such transaction. Variances in multiples for
different transactions may reflect such considerations as operating earnings
history, capitalization, and return on equity. Additionally, BT determined, in
such transactions involving acquisitions of publicly traded companies, the
percentage premium that such Equity Value represented when compared to the share
trading price of each acquired company one day, one week, and four weeks prior
to the announcement of such transaction. BT derived high, low, mean, median, and
adjusted average multiples or percentages, as the case may be, from the
foregoing analysis and applied or compared such multiples or percentages, as
applicable, to certain financial data relating to the Capital Stock of the
Company. The mean and median multiples of GAAP net income, GAAP net operating
income, and adjusted statutory book value were 12.89x and 11.23x, 15.63x and
14.44x, and 2.13x and 1.79x, respectively, and the mean, median, and adjusted
average multiple of GAAP book value were 1.43x, 1.08x, and 1.16x, respectively.
BT determined that the mean and median premiums to market one day, one week and
four weeks prior to announcement of the transaction were 19.5% and 20.0%, 22.1%
and 24.5%, and 26.8% and 25.0%, respectively. This analysis resulted in an
implied value reference range (based on the mean, median and adjusted average
values resulting from application of each methodology) for the Capital Stock of
$5.00 to $6.63 per share excluding values based on GAAP book value and adjusted
statutory book value, and $5.00 to $14.56 per share including values based on
GAAP book value and adjusted statutory book value.
Comparable Insurance Industry Minority Squeeze-out Transaction
Analysis. BT reviewed publicly available information for selected transactions
involving the acquisition of the remaining minority interest in publicly traded
insurance companies, including life and property & casualty companies, since
1990 (the "Minority Squeeze-out Transactions"). In reviewing these
transactions, several factors were considered including, among others, the lack
of directly comparable transactions. The Minority Squeeze-out Transactions were
not intended to represent the complete list of remaining minority interest
transactions involving insurance companies which have occurred. The
transactions reviewed included the following: Conseco Inc./Bankers Life Holding
Corporation; PXRE Corporation/ Transnational Re Corporation; Atlantic American
Corporation/
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Bankers Fidelity Life Insurance Company; ACMAT Corporation/United Coasts
Corporation; SCOR S.A./SCOR US Corporation; Berkshire Hathaway Inc./GEICO
Corporation; Conseco Inc./CCP Insurance; National Mutual Insurance
Company/Celina Financial Corporation; Leucadia National Corporation/PHL Corp;
Christiana General Insurance Corporation/Belvedere Corporation; and Academy
Mergerco/Academy Insurance Group. BT reviewed the consideration paid in such
transactions in terms of the price paid for the common stock plus the amount of
all holding company debt and preferred stock assumed, repaid, or redeemed in
such transactions (the "Transaction Value") as a multiple of adjusted statutory
capital and surplus as of the last fiscal year ended prior to the announcement
of such transactions. Adjusted statutory capital and surplus for the Company is
defined as the sum of Guarantee Capital, Guarantee Capital Reserve, one-eighth
of Unassigned Surplus, one-eighth of the Asset Valuation Reserve, and one-eighth
of the Interest Maintenance Reserve. Variances in multiples for different
transactions may reflect such considerations as earnings history, leverage,
reserve adequacy, asset quality, and return on surplus. Additionally, BT
reviewed the consideration paid in such transactions (the "Equity Value") as a
multiple of GAAP net income and GAAP net operating income for the last twelve
months prior to the announcement of such transaction and as a multiple of GAAP
book value as of the last fiscal quarter ended prior to the announcement of such
transaction. Variances in multiples for different transactions may reflect such
considerations as operating earnings history, capitalization, and return on
equity. Additionally, BT determined, in such transactions involving acquisitions
of publicly traded companies, the percentage premium that such Equity Value
represented when compared to the share trading price of each acquired company
one day, one week, and four weeks prior to the announcement of such transaction.
BT derived high, low, mean, median and adjusted average multiples or
percentages, as the case may be, from the foregoing analysis and applied or
compared such multiples or percentages, as applicable, to certain financial data
relating to the Capital Stock of the Company. The mean and median multiples of
GAAP net income, GAAP net operating income, and GAAP book value were 13.36x and
10.41x, 17.02x and 15.46x, and 1.27x and 1.02x, respectively, and the mean,
median, and adjusted average multiple of adjusted statutory capital and surplus
were 4.28x, 2.13x, and 2.31x, respectively. BT determined that the mean and
median premiums to market one day, one week, and four weeks prior to
announcement of the transaction were 22.2% and 20.0%, 28.0% and 25.0%, and 27.2%
and 25.3%, respectively. This analysis resulted in an implied value reference
range (based on the mean, median, and adjusted average values resulting from
application of each range) for the Capital Stock of $5.01 to $7.22 per share
excluding values based on GAAP book value and adjusted statutory capital and
surplus, and $5.01 to $15.84 per share including values based on GAAP book value
and adjusted statutory capital and surplus.
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Comparable All Industry Minority Squeeze-out Transaction Premium
Analysis. BT reviewed the consideration paid in certain transactions involving
the acquisition of the remaining minority interest in publicly traded companies,
including all industries (the "Minority Squeeze-outs"). BT reviewed 78 such
transactions since 1990 that it considered to be comparable to the proposed
Reverse Stock Split. Using publicly available information, BT determined that
the mean, median, and adjusted average premiums to market one day, one week, and
four weeks prior to announcement of the transaction were 28.6% and 22.4% and
23.0%, 32.4% and 24.9% and 28.5%, and 34.5% and 28.8% and 30.9%, respectively.
This analysis resulted in an implied value reference range (based on the mean,
median, and adjusted average values resulting from application of each
methodology) for the Capital Stock of $5.15 to $5.96 per share.
Discounted Cash Flow Analysis. BT performed a discounted cash flow
analysis pursuant to which the value of the Capital Stock was estimated by
adding (i) the estimated net present value of projected dividends plus (ii) the
estimated net present value of the terminal value of the stock, based upon
certain operating and financial assumptions, forecasts and other information
provided to BT by the management of the Company. BT was provided with five year
stand-alone financial projections for the period ending December 31, 2000 on
both a GAAP and statutory basis. For purposes of this analysis, BT utilized
discount rates of 8.0% to 16.0% and terminal values based on GAAP net income and
GAAP book value of 6.0 to 13.5 and 0.50 to 1.25, respectively and, in arriving
at its implied reference range, utilized discount rates of 10% to 14% and
terminal values based on GAAP net income and GAAP book value of 8.0 to 12.0 and
0.60 to 1.0, respectively. BT relied on its understanding of required equity
returns in the life insurance business to derive discount rates and the
comparable public company analysis to derive the multiples used to calculate
terminal values. This analysis resulted in an implied value reference range for
the Capital Stock of $5.33 to $7.86 per share excluding values based on GAAP
book value, and $5.33 to $8.54 per share including values based on GAAP book
value.
Component Valuation Analysis. BT performed a component valuation
analysis of the Capital Stock based on its judgment that due to the unique
characteristics of the Capital Stock, a valuation of each component of the net
income credited to the Capital Stock was appropriate. For this analysis, BT
divided the net income per share for the Capital Stock for the twelve months
ended June 30, 1996 into components consisting of the interest credited to the
Guarantee Capital Reserve and the Capital Stock's one-eighth share of
distributable income. BT applied a range of discount rates from 8.0% to 16.0%
to the interest credited to the Guarantee Capital Reserve component to determine
a per share value assuming this component was valued as a perpetual income
stream. BT applied a range of multiples from 6.0 to 13.5 to the
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Capital Stock's one-eighth share of distributable income to determine a per
share value assuming this component was valued based on a multiple of income. BT
relied on its understanding of comparable fixed income instruments to derive
discount rates and the comparable public company analysis to derive the
multiples used to calculate the value of the component based on distributable
income. These analyses resulted in an implied value reference range for the sum
of the components of $3.98 to $5.98 per share.
Historical Capital Stock Trading Analysis. BT reviewed and analyzed
the historical trading prices and volume at which the Capital Stock has traded
since the inception of trading in November, 1991. BT noted that although the
Capital Stock is listed on Nasdaq, the trading activity in the shares is limited
and relatively illiquid as evidenced by the wide spread between the bid and
asked prices for the shares. BT concluded that the results of this analysis,
when considered in light of the other analyses, were supportive of its
conclusion that, as of the date of its opinion, the Cash Consideration to be
received by the shareholders of the Company other than UCLIC in the Reverse
Stock Split is fair to such shareholders form a financial point of view.
BT is an internationally recognized investment banking firm engaged in
the evaluation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. BT was selected as the
Special Committee's financial advisor based upon such expertise and its
reputation in investment banking and mergers and acquisitions.
Other than its engagement by the Company in connection with the
Reverse Stock Split, BT has rendered no services to and has had no material
relationship with the Company, UCLIC, or to any of their directors, officers, or
other affiliates during the last five years, and does not contemplate a material
relationship. The Company has agreed to pay BT a fee in the aggregate amount of
$825,000 in connection with its engagement by the Special Committee. In
addition, the Company has agreed to reimburse BT for its out-of-pocket expenses,
including the reasonable fees of its legal counsel, and to indemnify BT against
certain liabilities, including liabilities arising under Federal securities
laws.
In the ordinary course of business, BT and its affiliates may trade
the Capital Stock of the Company for their own account and for the accounts of
their respective customers, and accordingly, at any time, may hold a long or
short position in such securities.
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CERTAIN EFFECTS OF AND CONDUCT OF THE COMPANY'S BUSINESS AFTER THE REVERSE STOCK
SPLIT
General Effects. If the Reverse Stock Split is consummated, the
authorized Guarantee Capital would be reduced from 5,000,000 shares of Capital
Stock to 11 shares of New Capital Stock. The terms of the guarantee capital
shares of the Company before and after the Reverse Stock Split will remain the
same with the exception of the number of authorized shares and the par value
thereof.
The Company will, as a result of the Reverse Stock Split, become a
privately held guarantee capital life insurance company and it is anticipated
that UCLIC will be the sole holder of all the outstanding shares of New Capital
Stock. In addition, it is anticipated that upon the effectiveness of the
Reverse Stock Split, the shareholders of the Company other than UCLIC will not
be able to participate in any future appreciation of the Capital Stock or in any
future earnings or growth of the Company, and will no longer have any continuing
interest as shareholders of the Company.
The interest of UCLIC in the statutory net book value and
distributable earnings of the Company will increase from approximately 72.8% to
100% as a result of the Reverse Stock Split. On the basis of the financial
statement information contained in the Company's statutory financial statements
for the quarter ended June 30, 1996, as a result of the Reverse Stock Split,
UCLIC's interest in the statutory net book value of the Company will increase
from $21,105,000 to $23,970,000, which balance includes the $1,822,704 capital
contribution from UCLIC, and UCLIC's assets will increase from $4,251,758,000 to
$4,252,801,000 and its statutory surplus will increase from $217,542,000 to
$218,585,000.
All shareholders owning fewer than 303,784 shares of Capital Stock
will have the right to receive from the Company, in lieu of fractional shares of
New Capital Stock, cash in the amount of $7.50 for each share of Capital Stock.
Such shareholders will cease to be shareholders of the Company or to have any
interest in the Company and, therefore, will not share in its future earnings
and growth, if any, and will not have any right to vote on any corporate matter.
After the Reverse Stock Split is effected, the aggregate amount of
Guarantee Capital and the unassigned surplus of the Company are expected to
remain at their balances at June 30, 1996, of approximately $6,683,000 and
$6,773,000, respectively, determined on a statutory basis of accounting.
Although $1,822,704 of the Guarantee Capital will be used by the Company to pay
cash in lieu of issuing fractional shares of New Capital Stock resulting from
the Reverse Stock Split, the Guarantee Capital will not change after the Reverse
Stock Split
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is effected, because the NYID has required as part of the Plan that UCLIC
contribute $1,822,704 to the Guarantee Capital in addition to surrendering the
2,433,345 shares of Capital Stock held by UCLIC in exchange for which UCLIC will
receive 8 shares of New Capital Stock. The balance of the Guarantee Capital
Reserve will decrease by approximately $5,012,000 after the payment of cash by
the Company in lieu of issuing fractional shares of New Capital Stock resulting
from the Reverse Stock Split. Pursuant to the Plan, however, the Company will
not make any distributions to its shareholders after the Reverse Stock Split is
effected until the Guarantee Capital Reserve is restored to its balance at June
30, 1996 of $15,526,000. Based on June 30, 1996 information, the Company's Risk
Based Capital (the "RBC") ratio would decrease from 302% to 260% as a result of
the reduction of the Guarantee Capital Reserve. Although the Company's surplus
will decrease by approximately $5,012,000 as a result of the Reverse Stock
Split, the Company believes that the 260% RBC ratio would still exceed the
average RBC ratio for 130 U.S. life insurance companies (comprising 85% of
estimated 1995 U.S. life industry assets) monitored by Townsend & Schupp. The
average RBC ratio for these companies for 1995 was 243%.
The "Guarantee Capital Reserve" is a reserve created by the Company in
January 1986 pursuant to its Charter to accumulate the profits of the Company
attributable to the Capital Stock that have not been distributed to the
shareholders of the Company because either (i) the Board decided to conserve the
Company's statutory capital or (ii) the NYID prohibited the Company from paying
shareholders cash distributions because the Company's statutory earnings and/or
the increase in unassigned surplus was deemed insufficient to meet the NYID's
criteria for payment to the Company's shareholders.
In addition, upon completion of the Reverse Stock Split, the Company
will become a wholly-owned subsidiary of UCLIC, which change in ownership will
have federal tax consequences for both the Company and UCLIC. Specifically,
UCLIC will receive any shareholder dividends from the Company on a tax-free
basis, resulting in a tax savings of 35% with respect to the otherwise taxable
portion of any Company dividend distribution. UCLIC's mutual company surplus tax
will also increase by approximately $150,000 per year since the difference
between the Company's statutory and tax equity will be included in the average
equity base used to determine UCLIC's surplus tax. In addition, the Company
would lose the benefit of the small business deduction, a special deduction
available only to life insurance companies with consolidated assets of less than
$500 million, which provided the Company with a tax benefit of $609,000 for
1995. Furthermore, the Company's tax liability will increase by approximately
$150,000 per year due to the lengthening of the amortization period for the
Company's tax basis deferred acquisition costs from 60 months to 120 months.
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Termination of Exchange Act Registration and Listing on Nasdaq. The
shares of Capital Stock are currently registered under the Exchange Act.
Registration of the shares of the Capital Stock may be terminated upon
application of the Company to the SEC if the shares are neither listed on a
national securities exchange nor held by 300 or more holders of record.
The Company currently intends to make an application for termination of
registration of the shares of Capital Stock under the Exchange Act as promptly
as possible after filing the Amendment with the NYID. Termination of
registration of the shares of Capital Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Company to
its shareholders and to the SEC and would make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) of the Exchange Act, the requirement of furnishing a proxy statement
pursuant to Section 14(a) in connection with shareholder meetings, and the
requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions, no longer applicable to the Company. Furthermore, the
ability of "affiliates" of the Company and persons holding "restricted
securities" of the Company to dispose of such securities pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended, may be impaired or
eliminated.
In addition, the Capital Stock will be delisted from the Nasdaq which
will terminate the Company's public trading market and relieve the Company of
any further obligations to comply with the rules and regulations relating to
Nasdaq listing.
Effect on Market for Shares of Capital Stock. If the Reverse Stock
Split is approved and, as contemplated, the shares of Capital Stock are
deregistered under the Exchange Act and delisted on the Nasdaq, the Company will
not have any market for its shares of Capital Stock.
Conduct of the Company's Business after the Reverse Stock Split. As
discussed under "Special Factors -- Reasons for the Reverse Stock Split", UCLIC
has proposed the redomestication of the Company to Ohio, the mutualization of
the Company and the merging of the Company into UCLIC after the Reverse Stock
Split is effected, and has entered into preliminary discussions with the NYID
regarding such proposal. There are no assurances, however, that such
redomestication, mutualization and merger of the Company would be approved by
the NYID after the Reverse Stock Split is effected, or that if approved by the
NYID, such transactions would occur. If such transactions are not effected upon
consummation of the Reverse Stock Split, the Company plans to implement certain
cost reduction strategies, including initiating negotiations with the NYID to
revise the terms of the Commitment Letter which contribute significantly to the
excessive operating expenses incurred by the Company and prevent the Company and
UCLIC from operating synergistically as discussed
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under "Special Factors -Reasons for the Reverse Stock Split." In addition, UCLIC
anticipates that it would implement certain cost-reduction strategies as
discussed below that should result in significant savings to the Company. The
implementation of such cost-reduction strategies has been deferred pending
resolution of the Reverse Stock Split and UCLIC's proposal for the
redomestication of the Company to Ohio, the mutualization of the Company and the
merging of the Company into UCLIC. Such cost-reduction strategies include: (i)
conversion of the Company's outdated data processing system to an updated data
processing system currently being utilized by UCLIC that would help reduce
future data processing problems and improve user and programmer productivity;
(ii) a reduction in the number of the Company's employees that would result in a
more streamlined management, greater operational efficiency and a reduction of
excess capacity; and (iii) a reduction in rent paid by the Company for its
leased office space in the City of New York by subletting a portion of such
unused office space. Furthermore, UCLIC may also increase its commitment and
support to the Company as follows: (a) maintain the Company's capital by not
withdrawing permitted shareholder distributions; (b) provide "first excess"
reinsurance to the Company or use financial reinsurance to fund the costs of new
business; (c) provide the Company with marketing support, product development
and market research, and product competitiveness analyses; and (d) use its
brokerage distribution system to sell UCLIC's individual, group and pension
products which do not compete with the Company's products and vice versa (the
Commitment Letter would need to be amended to permit such activities in the
State of New York).
Except as indicated in this Proxy Statement, neither the Company nor
its management has any current plans or proposals that relate to or would result
in an extraordinary corporate transaction, such as a merger, reorganization or
liquidation; a sale or transfer of any material amount of its assets of the
Company; any change in the present Board or management of the Company; or any
material change in the present dividend rate or policy of indebtedness or
capitalization of the Company.
INTERESTS OF CERTAIN PERSONS IN THE REVERSE STOCK SPLIT
UCLIC owns approximately 72.8% of the outstanding shares of Capital
Stock and therefore has the ability to control the Company through the election
of a majority of the Board. UCLIC's nominees currently constitute a majority of
the Board. Larry R. Pike, a director of the Company, is the President, Chief
Executive Officer and Chairman of the Board of Directors of UCLIC. Stephen R.
Hatcher, a director of the Company, is Executive Vice President and Chief
Financial Officer of UCLIC. John H. Jacobs, a director of the Company, is an
Executive Vice President of UCLIC. Daniel J. Fischer, James N. Kotsonis and
Glen D. Nicholson are directors and employees of the Company. In addition,
Lothar A. Vasholz, a director of the Company, is a
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self-employed life insurance consultant and has an agency contract with UCLIC.
The nominees of UCLIC on the Board were present and voted at the meeting of the
Board at which the Reverse Stock Split was unanimously approved.
UCLIC holds a sufficient number of shares of Capital Stock to approve
the Reverse Stock Split. UCLIC has advised the Company that it intends to vote
its shares of Capital Stock in favor of the Reverse Stock Split. The Board
concluded, despite such potential or actual conflicts of interest, that the
Reverse Stock Split is fair to the Company other than UCLIC.
Francis W. Murray, III and Stuart B. Upson, both of whom serve as
directors of the Company, own shares of the Company's Capital Stock as detailed
in the section titled "Security Ownership of Management." Mr. Murray also
served on the Special Committee.
Except as set forth above, to the best knowledge of the Company and
UCLIC, there are no actual or potential conflicts of interest between the
Company, on the one hand, and the Company's executive officers or directors or
UCLIC or its executive officers, directors or affiliates, on the other hand.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury Regulations thereunder,
judicial authority, and current administrative rulings and practice, in each
case, as of the date hereof. The summary set forth below is only a general
description of certain of the federal income tax consequences of the Reverse
Stock Split to the shareholders without reference to the particular facts and
circumstances of any particular shareholder. The tax treatment of each
shareholder will depend in part upon his particular situation. Certain tax
consequences not described herein may be applicable to particular classes of
taxpayers, such as financial institutions, broker-dealers and persons who are
not citizens or residents of the United States. EACH HOLDER OF CAPITAL STOCK
SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO SUCH HOLDER OF THE REVERSE STOCK SPLIT (INCLUDING THE
APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL INCOME AND OTHER TAX LAWS).
Exchange of Capital Stock Solely for Cash. A shareholder owning fewer
than 303,784 shares will receive only cash in the transaction and generally will
recognize capital gain or loss (provided the Capital Stock is held as a capital
asset) equal to the difference between the cash received and the shareholder's
adjusted tax basis in the surrendered Capital Stock. Any such capital gain or
loss will be a long-term capital gain or loss if the shareholder's holding
period for the Capital Stock exceeds one year as of the effective date of the
Amendment.
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Cash received by shareholders who own New Capital Stock after the
Reverse Stock Split (including any constructive ownership under Code Section
318) may be a taxable dividend to the extent provided by Code Section 302.
Generally, the Code Section 318 constructive ownership rules treat a person as
owning (i) shares owned by certain relatives, related corporations,
partnerships, trusts and estates and (ii) shares the holder has an option to
acquire. Shareholders should consult their personal tax advisors as to the issue
of constructive ownership and the possibility of dividend treatment under Code
Section 302.
Exchange of Capital Stock for New Capital Stock. The receipt of New
Capital Stock in exchange for Capital Stock will not result in the recognition
of gain or loss to a shareholder. The adjusted tax basis of a shareholder in
the New Capital Stock generally will equal the sum of the shareholder's adjusted
tax basis in the Capital Stock exchanged for New Capital Stock (excluding the
basis of any Capital Stock exchanged for cash received in lieu of fractional
shares of New Capital Stock) and the amount of cash contributed to the Company
in connection with the Reverse Stock Split. The holding period of a shareholder
in the New Capital Stock received in exchange for Capital Stock will include
such shareholder's holding period in the surrendered Capital Stock provided the
Capital Stock was held as a capital asset.
A shareholder who owns 303,784 or more shares of Capital Stock and
does not hold a number of shares of Capital Stock that is evenly divisible by
303,784 will receive both shares of New Capital Stock and cash in lieu of
fractional shares of New Capital Stock. A shareholder receiving cash in lieu of
fractional shares of New Capital Stock generally will recognize capital gain or
loss (provided the Capital Stock is held as a capital asset) equal to the
difference between the cash received and the shareholder's adjusted tax basis in
the Capital Stock "exchanged" for fractional shares of New Capital Stock unless
the Reverse Stock Split has the "effect of the distribution of a dividend."
If the Reverse Stock Split has the effect of a distribution of a
dividend, the cash received in lieu of fractional shares of New Capital Stock
will be treated as a dividend to the extent of the shareholder's ratable share
of the Company's undistributed earnings and profits, and the balance of the cash
will be treated as received in exchange for property. Taxable gain or loss will
be realized on this exchange of property equal to the difference between the
portion of the cash not treated as a dividend and the shareholder's adjusted tax
basis in the Capital Stock exchanged for cash. The Federal income tax rules
that determine whether the cash received will have the "effect of the
distribution of a dividend" are beyond
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the scope of this discussion and should be discussed with a personal tax
advisor.
Any capital gain or loss recognized by a shareholder receiving cash in
lieu of fractional shares of New Capital Stock will be long-term capital gain or
loss if the shareholder's holding period for the Capital Stock exceeds one year
as of the effective date of the Amendment.
Withholding and Backup Withholding. Special taxation and withholding
rules may apply to any shareholder that is a nonresident alien or a foreign
corporation. Those rules are beyond the scope of this discussion and should be
discussed with a personal tax advisor. Shareholders will be required to provide
their social security or other taxpayer identification numbers (or, in some
instances, certain other information) to the Transfer Agent (as defined below)
in connection with the Reverse Stock Split to avoid backup withholding
requirements that might otherwise apply. See "Special Factors -- Exchange of
Certificates and Payment for Fractional Shares of New Capital Stock." The
letter of transmittal will require each shareholder to deliver such information
when the Capital Stock certificates are surrendered following the effective date
of the Amendment. Failure to provide such information may result in backup
withholding.
Ordinary Income and Capital Gains Tax Rate Differential. The top
marginal federal income tax rate applicable to ordinary income (including
dividend income)is 39.6% for individuals and 35% for corporations. The top
marginal federal income tax rate applicable to "net capital gains" (i.e., net
gain from the sale of capital assets held for more than one year reduced by any
net loss from the sale of capital assets held for one year or less) for
individuals is 28%. Capital losses generally cannot be applied to offset
ordinary income.
CERTAIN FINANCIAL PROJECTIONS
The Company does not, as a matter of course, publicly disclose
projections as to future operating results or other financial information. In
connection with BT's fairness analysis of the proposed Reverse Stock Split, the
Company furnished BT with certain forecasted financial information (the
"Forecasted Financial Information") regarding the Company that was prepared by
management of the Company. The Forecasted Financial Information set forth below
is included herein only because it was considered by the Board and the Special
Committee during the course of their respective deliberations regarding the
proposed Reverse Stock Split and because it was furnished to BT. The Forecasted
Financial Information was not included in this Proxy Statement to induce the
shareholders of the Company to vote for approval of the Reverse Stock Split.
None of the Company or any of its directors or officers, makes any
representation with
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respect to the accuracy of the Forecasted Financial Information when compared to
actual performance and results and is not responsible for the difference between
the Forecasted Financial Information and actual performance or results. The
Forecasted Financial Information is based on management's assumptions, including
those set forth below. Such assumptions involve judgements with respect to,
among other things, future economic conditions and future business decisions,
all of which are difficult or impossible to accurately predict and many of which
are beyond the control of the Company. Accordingly, it is expected that there
will be differences between actual and projected results, and actual results may
be materially higher or lower than projected results.
The Forecasted Financial Information below was not prepared with a
view to public disclosure or compliance with published guidelines of the SEC,
nor were they prepared in accordance with the guidelines established by the
American Institute of Certified Public Accountants for preparation and
presentation of financial projections. The Forecasted Financial Information
does not purport to present operations in accordance with generally accepted
accounting principles and have not been audited, compiled or otherwise examined
by the Company's independent accountant, or by any other independent
accountants. Accordingly, neither the Company's independent accountant nor any
other independent accountants assume responsibility for the Forecasted Financial
Information presented below.
Set forth below is certain projected financial information for the
Company which present forecasts of operating results and certain projected
balance sheet information for the years ending December 31, 1996 through
December 31, 2000, under three different scenarios. The fundamental assumptions
used in the Forecasted Financial Information are described under each scenario
below.
SCENARIO NO. 1: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT
DOES NOT OCCUR.
. Insurance revenues: Revenues for existing business were based on the
Company's recent persistency experience, and
revenues from new business were based on
management's estimates of new business production
and persistency assumptions used in pricing new
business.
. Benefits: Benefits for existing business were projected
based on the Company's recent mortality
experience, and benefits for new
-45-
<PAGE>
business were based on mortality assumptions used
in pricing that business.
. Insurance expenses: Insurance expenses were based on current expense
levels adjusted for the variance between current
new business levels and forecasted new business
levels.
SCENARIO NO. 2: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT
DOES NOT OCCUR AND THE SHAREHOLDERS MAXIMIZE SHAREHOLDER
DISTRIBUTIONS.
. Insurance revenues;
Benefits: Same as Scenario No. 1 above.
. Insurance expenses: Scenario No. 1 assumptions adjusted in 1996
through 2000 for favorable expense variances
generated through September 30, 1996; in 1997 for
severance pay and data processing conversion costs
and in 1998 through 2000 for the favorable impact
of the cost reduction strategies described herein
under the caption "Special Factors -Certain
Effects of and Conduct of the Company's Business
after the Reverse Stock Split" on pages 40-41.
. Shareholders'
equity: Distributions out of the Guaranteed
Capital Reserve to shareholders for the maximum
amount allowed by the NYID are assumed. Amounts
assumed paid are as follows:
1996: $0
1997: $1,891,000
1998: $0
1999: $4,785,000
2000: $5,181,000
-46-
<PAGE>
SCENARIO NO. 3: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT IS
COMPLETED IN 1996 AND THE SHAREHOLDER DISTRIBUTIONS ARE
SUSPENDED UNTIL THE GUARANTEE CAPITAL RESERVE BALANCE EQUALS
THE BALANCE AT JUNE 30, 1996.
. Insurance revenues;
Benefits: Same as Scenario No. 1 above.
. Insurance expenses: Same as Scenario No. 2 above.
. Shareholders' equity: In 1996, the Guarantee Capital Reserve is
charged for the $5,012,000 cost of the Reverse
Stock Split. No shareholder distributions from
the Guarantee Capital Reserve are assumed in
any year.
-47-
<PAGE>
<TABLE>
<CAPTION>
SCENARIO NO. 1: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT DOES NOT OCCUR
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
-------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Insurance revenues $ 39,909 $ 41,789 $ 43,362 $ 44,589 $ 45,558
Net Investment income 33,349 32,254 32,048 31,793 31,641
Net realized gains (losses) on investments 0 0 0 0 0
Total revenue 73,258 74,043 75,410 76,382 77,199
Benefits and policyholder dividends 50,182 50,523 51,709 52,561 53,172
Expenses 21,055 21,120 21,143 21,155 21,145
-------- ----------- ----------- ----------- -----------
Income from operations before federal income
taxes 2,021 2,400 2,558 2,666 2,882
Federal income taxes 315 486 507 489 534
-------- ----------- ----------- ----------- -----------
Net income 1,706 1,914 2,051 2,177 2,348
Shareholders' dividends 0 0 0 0 0
-------- ----------- ----------- ----------- -----------
Change in shareholders' equity 1,706 1,914 2,051 2,177 2,348
Shareholders' equity at beginning of the year 31,308 33,014 34,928 36,979 39,156
-------- ----------- ----------- ----------- -----------
Shareholders' equity at end of the year $ 33,014 $ 34,928 $ 36,979 $ 39,156 $ 41,504
======== =========== =========== =========== ===========
Total Assets $514,434 $ 515,314 $ 515,373 $ 516,801 $ 518,586
Per share of Capital Stock:/(1)(2)/
Net income $ 0.51 $ 0.57 $ 0.61 $ 0.65 $ 0.70
Dividends declared $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Shareholders' equity $ 9.88 $ 10.45 $ 11.07 $ 11.72 $ 12.42
</TABLE>
(1) Amounts reported in the summary of net income and the summary of net income
per share of Capital Stock are calculated in accordance with the Charter as
discussed in Notes 1, 2 and 3 of Notes to Financial Statements included in
the Company's December 31, 1995 10-K filing.
(2) Earnings (loss) per share of Capital Stock are based upon the weighted
average number of shares outstanding of 3,341,624 for all periods
presented.
-48-
<PAGE>
<TABLE>
<CAPTION>
SCENARIO NO. 2: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT DOES NOT OCCUR
AND SHAREHOLDERS MAXIMIZE SHAREHOLDER DISTRIBUTIONS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Insurance revenues $ 39,909 $ 41,789 $ 43,362 $ 44,589 $ 45,558
Net Investment income 33,340 32,202 31,908 31,519 31,186
Net realized gains (losses) on investments 114 0 0 0 0
Total revenue 73,363 73,991 75,270 76,108 76,744
Benefits and policyholder dividends 50,807 49,928 53,428 55,056 55,865
Expenses 20,290 21,896 18,787 17,600 17,591
------------ ----------- ----------- ----------- -----------
Income from operations before federal income
taxes 2,266 2,167 3,055 3,452 3,288
Federal income taxes 470 339 902 1,073 1,086
------------ ----------- ----------- ----------- -----------
Net income 1,796 1,828 2,153 2,379 2,202
Shareholders' dividends 0 (1,891) 0 (4,785) (5,181)
------------ ----------- ----------- ----------- -----------
Change in shareholders' equity 1,796 (63) 2,153 (2,406) (2,979)
Shareholders' equity at beginning of the year 31,308 33,104 33,041 35,194 32,788
------------ ----------- ----------- ----------- -----------
Shareholders' equity at end of the year $ 33,104 $ 33,041 $ 35,194 $ 32,788 $ 29,809
============ =========== =========== =========== ===========
Total Assets $ 515,248 $ 513,456 $ 515,337 $ 514,676 $ 513,829
Per share of Capital Stock:/(1)(2)/
Net income $ 0.54 $ 0.55 $ 0.64 $ 0.71 $ 0.66
Dividends declared $ 0.00 $ 0.57 $ 0.00 $ 1.43 $ 1.55
Shareholders' equity $ 9.91 $ 9.89 $ 10.53 $ 9.81 $ 8.92
</TABLE>
(1) Amounts reported in the summary of net income and the summary of net income
per share of Capital Stock are calculated in accordance with the Charter as
discussed in Notes 1, 2 and 3 of Notes to Financial Statements included in
the Company's December 31, 1995 10-K filing.
(2) Earnings (loss) per share of Capital Stock are based upon the weighted
average number of shares outstanding of 3,341,624 for all periods
presented.
-49-
<PAGE>
<TABLE>
<CAPTION>
SCENARIO NO. 3: FORECASTED OPERATING RESULTS ASSUMING REVERSE STOCK SPLIT IS COMPLETED AND THE
SHAREHOLDER DISTRIBUTIONS ARE SUSPENDED UNTIL THE GUARANTEE CAPITAL RESERVE BALANCE
EQUALS THE BALANCE AT JUNE 30, 1996
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Insurance revenues $ 39,909 $ 41,789 $ 43,362 $ 44,589 $ 45,558
Net Investment income 33,055 31,912 31,636 31,503 31,555
Net realized gains (losses) on investments 114 0 0 0 0
Total revenue 73,078 73,701 74,998 76,092 77,113
Benefits and policyholder dividends 50,602 50,052 53,464 55,294 56,081
Expenses 20,291 21,895 18,789 17,600 17,590
------------ ----------- ----------- ----------- -----------
Income from operations before federal income
taxes 2,185 1,754 2,745 3,198 3,442
Federal income taxes 419 287 853 1,070 1,152
------------ ----------- ----------- ----------- -----------
Net income 1,766 1,467 1,892 2,128 2,290
Shareholders' dividends 0 0 0 0 0
Funding of Reverse Stock Split (5,012) 0 0 0
------------ ----------- ----------- ----------- -----------
Change in shareholders' equity (3,246) 1,467 1,892 2,128 2,290
Shareholders' equity at beginning of the year 31,308 28,062 29,529 31,421 33,549
------------ ----------- ----------- ----------- -----------
Shareholders' equity at end of the year $ 28,062 $ 29,529 $ 31,421 $ 33,549 $ 35,839
============ =========== =========== =========== ===========
Total Assets $ 510,002 $ 509,863 $ 511,520 $ 515,631 $ 520,267
Per share of Capital Stock:/(1)(2)/
Net income $ 0.53 $ 0.44 $ 0.57 $ 0.64 $ 0.69
Dividends declared $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Shareholders' equity $ 8.40 $ 8.84 $ 9.40 $ 10.04 $ 10.73
</TABLE>
(1) Amounts reported in the summary of net income and the summary of net income
per share of Capital Stock are calculated in accordance with the Charter as
discussed in Notes 1, 2 and 3 of Notes to Financial Statements included in
the Company's December 31, 1995 10-K filing.
(2) Earnings (loss) per share of Capital Stock are based upon the weighted
average number of shares outstanding of 3,341,624 for all periods
presented.
-50-
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
To effect the Reverse Stock Split, the Company is required to adopt
the Amendment. The adoption of the Amendment will establish the right of
appraisal for the shareholders who dissent from the Amendment. Such appraisal
rights arise under Section 1206(a)(4) of the NYIL and are exercised pursuant to
the procedure specified in Section 623 of the NYBCL (the "Appraisal Statute").
In addition, Section 806(b)(6) of the NYBCL grants appraisal rights to
dissenting shareholders upon amendment of a corporate charter provided that such
amendment adversely affects certain specified rights of such dissenting
shareholders. If their rights are adversely affected in the manner prescribed
in Section 806(b)(6), such dissenting shareholders must exercise their appraisal
rights pursuant to the procedure set forth in the Appraisal Statute. Pursuant
to the Appraisal Statute, such dissenting shareholders will be entitled to have
their Capital Stock appraised by a New York court and to receive payment of the
"fair value" of such shares as determined by the court. The Appraisal Statute
is reprinted in its entirety as Annex C to this Proxy Statement. The following
discussion is not a complete statement of the law pertaining to appraisal rights
under the NYBCL and is qualified in its entirety by the full text of the
Appraisal Statute. Any shareholder who wishes to exercise such appraisal rights
or who wishes to preserve his right to do so, should review the following
discussion and Annex C carefully because failure to timely and properly comply
with the procedures specified will result in the loss of dissenters' appraisal
rights under the NYBCL.
All references in the Appraisal Statute and in this summary to a
"shareholder" are to the record holder of the Capital Stock at the Record Date
as to which appraisal rights are asserted. A person having a beneficial
interest in shares of Capital Stock that are held of record in the name of
another person such as a broker or nominee must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect whatever appraisal rights the beneficial owner may have.
A shareholder wishing to exercise his/her appraisal rights (i) must
deliver to the Company, prior to or at the Special Meeting but before the vote
is taken on the Reverse Stock Split, a written objection to the Reverse Stock
Split (the "Notice of Election"), which shall include a notice of his/her
election to dissent, his/her name and residence address, the number of shares of
Capital Stock as to which he/she dissents and a demand for payment of the fair
value of his/her shares (which Notice of Election must be in addition to and
separate from any proxy or vote against the Reverse Stock Split and should be
addressed to The Manhattan Life Insurance Company, 1876 Waycross Rd.,
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<PAGE>
Cincinnati, Ohio 45240, Attention: Secretary and (ii) must not vote in favor of
the Reverse Stock Split. BECAUSE A PROXY THAT DOES NOT CONTAIN VOTING
INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED FOR APPROVAL OF THE PROPOSED
TRANSACTION, A SHAREHOLDER WHO VOTES BY PROXY AND WHO WISHES TO EXERCISE HIS/HER
RIGHTS AS A DISSENTING SHAREHOLDER MUST (a) VOTE AGAINST THE ADOPTION OF THE
REVERSE STOCK SPLIT, OR (b) ABSTAIN FROM VOTING ON THE REVERSE STOCK SPLIT.
Neither a vote against the Reverse Stock Split, in person or by proxy, nor a
proxy directing such vote for an abstention will in and of itself constitute a
written objection to the Reverse Stock Split satisfying the requirements of the
Appraisal Statute (shareholders who timely file such written objection and who
do not vote their Capital Stock in favor of the Reverse Stock Split are referred
to hereinafter as "Dissenting Shareholders" and the shares as to which such
Dissenting Shareholder dissents are hereinafter referred to as "Dissenting
Shares").
A shareholder may not dissent as to less than all of the shares as to
which he/she has a right to dissent, held by him/her of record, that he/she owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. Furthermore, if the Capital Stock is owned of
record in a fiduciary capacity such as by a trustee, guardian, or custodian, the
demand should be made in that capacity, and if the Capital Stock is owned of
record by more than one person, as in joint tenancy or tenancy in common, the
demand should be made by or for all owners of record. An authorized agent,
including one of two or more joint owners, may execute the demand for appraisal
for a holder of record; however, such agent must identify the record owner or
owners and expressly state, in such demand, that the agent is acting as agent
for the record owner or owners of such Capital Stock.
Within 10 days after the date on which shareholders approve the
Reverse Stock Split, the Company must send written notice by registered mail to
each Dissenting Shareholder that the Reverse Stock Split has been approved and
adopted.
At the date on which the Reverse Stock Split is consummated (the
"Consummation Date"), each Dissenting Shareholder will cease to have any of the
rights of a shareholder of the Company except the right to be paid the fair
value of his/her shares and any of the other rights under the Appraisal Statute.
A Notice of Election may be withdrawn by a Dissenting Shareholder prior to
his/her acceptance in writing of an offer made by the Company to pay for the
value of such Dissenting Shares, except that a Notice of Election may not be
withdrawn later than 60 days following the Consummation Date unless the Company
shall fail to make a timely offer to pay for the value of the Dissenting Shares,
in which case such Dissenting Shareholder shall have 60 days from the date
-52-
<PAGE>
such offer was made to withdraw his/her election. In either event, after such
time, a Notice of Election may not be withdrawn without the written consent of
the Company. In order to be effective, withdrawal of a Notice of Election must
be accompanied by a return to the Company of any advance payment made to the
Dissenting Shareholder by the Company as described below.
If any shareholder who demands appraisal of his/her Capital Stock
under the Appraisal Statute effectively withdraws or loses such right to
appraisal after the Consummation Date, such shareholder shall have all rights as
a shareholder as of the Consummation Date reinstated.
At the time of filing of the Notice of Election, or within one month
thereafter, Dissenting Shareholders must submit the certificates representing
their Capital Stock to the Company or its transfer agent, and the Company or the
transfer agent, as the case may be, shall note conspicuously thereon that a
Notice of Election has been filed and shall return the certificates to the
Dissenting Shareholders. Any Dissenting Shareholder who fails to submit his/her
certificates for such notation shall, at the option of the Company exercised by
written notice to such Dissenting Shareholder within 45 days of the date of
filing of such Notice of Election, lose his/her appraisal rights unless a court,
for good cause shown, shall otherwise direct.
Within 15 days after the expiration of the period within which
shareholders may file their Notice of Election, or within 15 days after the
Consummation Date, whichever is later (but in no case later than 90 days after
the shareholders' vote adopting the Reverse Stock Split), the Company must make
a written offer to pay for the Capital Stock held by the Dissenting Shareholder
at a price which the Company considers to be their fair value. It is
anticipated that such fair value will be determined by the Board based on
numerous factors including, among others, the share price of the Capital Stock,
the financial performance and condition of the Company, the Company's prospects
for the future, customary valuation methods in the securities and financial
markets for determining fair value of shares and all other factors which the
Board deems relevant. This offer will be accompanied by a statement setting
forth the aggregate number of shares of Capital Stock with respect to which
Notices of Election to dissent have been received and the aggregate number of
holders of such shares.
If the Reverse Stock Split has been consummated at the time the offer
is made, the offer will be accompanied by (i) advance payment to each Dissenting
Shareholder who has submitted his/her certificates for notation thereon of the
election to dissent of an amount equal to 80% of such offer, or (ii) as to each
Dissenting Shareholder who has not yet submitted his/her certificates for
notation thereon of the election to dissent, a statement that advance payment to
him/her of an amount equal to
-53-
<PAGE>
80% of the amount of such offer will be made by the Company promptly upon
submission of his/her certificates. If the Reverse Stock Split has not been
consummated at the time of the making of such offer, such advance payment or
statement as to advance payment will be sent to each shareholder entitled
thereto upon consummation of the Reverse Stock Split. Acceptance of such
advance payment by a Dissenting Shareholder will not constitute a waiver of
his/her dissenter's rights. If the Reverse Stock Split is not consummated
within 90 days after approval of the Reverse Stock Split by the shareholders,
such offer may be conditioned upon the consummation of the Reverse Stock Split.
If within 30 days after the making of such offer, the Company and any
Dissenting Shareholder agree on the price to be paid for such shareholders'
Dissenting Shares, the Company will pay the agreed price to such holder within
60 days after the later of the date such offer was made or the Consummation
Date, upon surrender of certificates representing such holder's Capital Stock.
No such payment shall be made at any time when the Company is insolvent or when
payment would render it insolvent.
If the Company fails to make an offer within the 15-day period
described above, or if it makes an offer and any Dissenting Shareholder fails to
agree with it within 30 days of the making of such offer, the Company shall,
within 20 days, institute a special proceeding in the appropriate court to
determine the rights of Dissenting Shareholders and to fix the fair value of
their shares. The Company has not determined whether it will institute such a
special proceeding. However, if the Company does not institute such a
proceeding within such 20-day period, any one Dissenting Shareholder may, within
30 days after such 20-day period expires, institute a proceeding for the same
purpose. If such proceeding is not instituted by the Dissenting Shareholder
within such 30-day period, the shareholder's dissenters' rights shall be
extinguished unless the New York Supreme Court, for good cause shown, shall
otherwise direct. All Dissenting Shareholders, other than those who agreed with
the Company as to the price to be paid for their shares of Capital Stock, will
be made parties to such proceeding pursuant to the Appraisal Statute.
With respect to Dissenting Shareholders who are entitled to payment,
the court shall proceed to fix the value of the Capital Stock which shall be the
fair value as of the close of business on the day prior to the date of the
Special Meeting. In fixing the fair value of the shares, the court will
consider the nature of the Reverse Stock Split and its effects on the Company
and its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable circumstances and
all other relevant factors. The court will determine the fair value of the
shares of Capital Stock without a jury and without referral to an
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<PAGE>
appraiser or referee. The final order by the court shall include an allowance
for interest (unless the court finds the refusal of any Dissenting Shareholder
to accept the Company's offer as arbitrary, vexatious, or otherwise not in good
faith) of such rate as the court finds to be equitable, accruing from the
Consummation Date to the date of payment.
Each party in the appraisal proceeding shall bear its own costs and
expenses, including counsel fees. The court may, however, in its discretion,
apportion and assess any of the costs, fees and expenses incurred by the Company
against Dissenting Shareholders (including those who withdraw their Notice of
election) if the court finds that their refusal to accept the Company's offer of
payment was arbitrary, vexatious or otherwise not in good faith. Similarly, the
costs, fees and expenses incurred by Dissenting Shareholders may be apportioned
and assessed by the court, in its discretion, against the Company if the fair
value of the shares as determined by the court materially exceeds the amount
which the Company offered to pay or under certain other circumstances, including
a failure by the Company to follow certain procedures of the Appraisal Statute.
Within 60 days after the final determination of the proceeding, the
Company shall pay to each Dissenting Shareholder the amount found in such
proceeding to be due such shareholder, upon surrender of the certificates of
Capital Stock.
Any shareholder who duly demands, prior to the Special Meeting, an
appraisal in compliance with the Appraisal Statute will not, after the
Consummation Date, be entitled to vote the shares subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares, except dividends or other distributions payable to shareholders of
record as of a date prior to the Consummation Date.
THE PROVISIONS OF SECTION 1206(a)(4) OF THE NYIL AND SECTIONS
806(b)(6) AND 623 OF THE NYBCL ARE COMPLEX AND TECHNICAL IN NATURE. ANY
SHAREHOLDER CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE IN
CONNECTION WITH THE REVERSE STOCK SPLIT IS URGED TO CONSULT HIS OR HER OWN
COUNSEL. THE FAILURE BY A SHAREHOLDER TO COMPLY WITH THESE PROVISIONS WILL
RESULT IN THE LOSS OF HIS OR HER RIGHTS AS A DISSENTING SHAREHOLDER.
EXCHANGE OF CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES OF NEW CAPITAL STOCK
As soon as practicable after the Effective Date, the Company will mail
to the shareholders a letter of transmittal (the "Letter of Transmittal")
containing instructions with respect to the surrender of shares of Capital Stock
to the Transfer Agent in exchange for either New Capital Stock or cash, as the
case may be. Each shareholder that surrenders to the Company stock
certificate(s) representing 303,784 shares of
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<PAGE>
Capital Stock and contributes cash in the amount of $227,838 (all of which
amount will be contributed to the Guarantee Capital) and delivers to the Company
the properly executed and completed Letter of Transmittal (and such evidence of
ownership of such shares as the Company may require), will receive in exchange a
stock certificate representing one share of New Capital Stock. Each shareholder
that owns less than 303,784 shares of Capital Stock (including shares of Capital
Stock remaining after a shareholder who owns in excess of 303,784 shares of
Capital Stock returns a group of 303,784 shares of Capital Stock) will receive
$7.50 in cash from the Company for each share of Capital Stock, in lieu of
fractional shares of New Capital Stock, only by transmitting stock
certificate(s) for shares of Capital Stock to the Company, together with the
properly executed and completed Letter of Transmittal and such evidence of
ownership of such shares as the Company may require. The Reverse Stock Split
will occur on the Effective Date without any further action on the part of the
shareholders of the Company and without regard to the date or dates on which
certificates formerly representing shares of Capital Stock are physically
surrendered.
If the Reverse Stock Split is effected, any shareholder holding fewer
than 303,784 shares of the currently issued and outstanding Capital Stock will
cease to have any rights with respect to the Capital Stock of the Company,
except to be paid in cash, as described in this Proxy Statement. No interest
will be paid or accrued on the cash payable to shareholders after the Reverse
Stock Split is effected.
THE LETTER OF TRANSMITTAL WILL BE TRANSMITTED BY THE COMPANY TO
SHAREHOLDERS AT A DATE SUBSEQUENT TO THE EFFECTIVE DATE. SHAREHOLDERS SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED AND
SHOULD SURRENDER THEIR CERTIFICATES ONLY WITH SUCH LETTER OF TRANSMITTAL.
No service charges will be payable by shareholders in connection with
the exchange of certificates or the payment of cash in lieu of issuing
fractional shares of New Capital Stock, all expenses of which will be borne by
the Company.
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<PAGE>
FINANCING AND EXPENSES OF THE REVERSE STOCK SPLIT
Estimated fees and expenses incurred and to be incurred by the Company
in connection with the Reverse Stock Split are approximately as follows:
<TABLE>
<CAPTION>
Approximate
Item Amount
- ---- -----------
<S> <C>
Payment of Cash Consideration $6,835,140
Legal Fees and Expenses $ 555,000
Accounting Fees and Expenses $ 10,000
Commission Filing Fee $ 1,367
Printer's Fees and Expenses $ 15,000
Investment Banking Fees and Expenses $ 847,000
Fees and Expenses of advisors to
the NYID $ 205,000
Miscellaneous Expenses $ 45,000
==========
Total $8,513,507
</TABLE>
The Company will pay the Cash Consideration from its Guarantee Capital
Reserve and Guarantee Capital. As of June 30, 1996, the Company had Guarantee
Capital and a Guarantee Capital Reserve of approximately $6,683,000 and
$15,526,000, respectively, determined on a statutory basis of accounting. Of
the $6,835,141 that will be required to pay for such fractional share interests,
$1,822,704 will be funded from the Guarantee Capital and $5,012,437 will be
funded from the Guarantee Capital Reserve. UCLIC will contribute cash in the
amount of $1,822,704 from its current funds to the Guarantee Capital to maintain
its balance of $6,683,000 as required by the NYID and as set forth in the Plan.
In addition, as part of the Plan, the Company will not make any distributions to
its shareholders after the Reverse Stock Split is effected until the Guarantee
Capital Reserve is restored to its balance at June 30, 1996 of $15,526,000. See
"Special Factors -- Certain Effects of and Conduct of the Company's Business
After the Reverse Stock Split."
Other than as set forth above, UCLIC will pay all fees and expenses
and other transaction costs incurred in connection with the Reverse Stock Split
from its current funds.
CERTAIN INFORMATION CONCERNING
THE COMPANY AND UCLIC
The Company was incorporated as a guarantee capital life insurance
company under the laws of the State of New York in 1850. Its activities consist
primarily of writing life and health insurance. The Company's principal
executive offices are located at 1876 Waycross Road, Cincinnati, Ohio 45240.
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<PAGE>
UCLIC was incorporated as a stock life insurance company under the
laws of the State of Ohio in 1867 and was later mutualized in 1954. Its
activities are predominantly in the individual and group life, individual and
group disability income, and individual and group annuity businesses. UCLIC's
principal executive offices are located at 1876 Waycross Road, Cincinnati, Ohio
45240.
REGULATORY APPROVAL
The Plan was submitted to the NYID on October 4, 1996. [On December
__, 1996, the NYID approved the Plan in connection with the Reverse Stock Split,
subject to the condition that this Proxy Statement be mailed to shareholders of
the Company by December 31, 1996 and the Reverse Stock Split be effected by
March 1, 1997.]
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of October 15, 1996,
with respect to persons known to the Company to be beneficial owners of more
than 5% of the Company's outstanding shares of Capital Stock. Unless otherwise
indicated, the beneficial ownership of shares includes sole investment and
voting power with respect to such shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Title of Name and Address of Beneficial Percent of
Class Beneficial Owner Ownership Class/1/
- ----------- ------------------- ---------- ----------
<S> <C> <C> <C>
Capital The Union Central 2,433,345 72.8%
Stock Life Insurance
Company
1876 Waycross Road
Cincinnati, Ohio 45240
Capital Andrew Delaney 180,301 5.4%
Stock 2727 Allen Parkway, #460
Houston, Texas 77019
</TABLE>
__________________________
/1/ Percentages are calculated based upon the number of total shares
outstanding (3,341,624).
-58-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the shares of the Company's Capital Stock
owned by all directors and by all executive officers and directors as a group as
of October 15, 1996. Unless otherwise indicated, beneficial ownership includes
sole voting and investment power as to the shares.
<TABLE>
<CAPTION> Amount and
Nature of
Title of Name of Beneficial Beneficial Percent of
Class Owner Ownership Class
- -------- ------------------- ----------- ----------
<S> <C> <C> <C>
Capital Daniel J. Fischer 0 0
Stock
Capital James N. Kotsonis 0 0
Stock
Capital Stephen R. Hatcher 0 0
Stock
Capital John H. Jacobs 0 0
Stock
Capital Thomas E. Lovejoy, III 0 0
Stock
Capital James H. McIlhenny 0 0
Stock
Capital Francis W. Murray, III 5,300 *
Stock
Capital Glenn D. Nicholson 0 0
Stock
Capital Larry R. Pike 0 0
Stock
Capital Richard S. Przysinda 0 0
Stock
Capital Stuart B. Upson 1,537 *
Stock
Capital David F. Westerbeck 0 0
Stock
Capital Lothar A. Vasholz 0 0
Stock
Capital Laurence F. Whittemore 0 0
Stock
Capital All executive officers
Stock & 6,837 *
directors as a group
(14 persons)/1/
</TABLE>
__________________________
* Less than one percent of the issued and outstanding shares of Capital Stock.
-59-
<PAGE>
/1/ The Company's directors and executive officers as a group beneficially own
6,837 shares, less than 0.21% of the Company's issued and outstanding
shares of Capital Stock. No single officer or director owns more than 0.16%
of the Company's issued and outstanding shares of Capital Stock.
MANAGEMENT OF THE COMPANY
The executive officers and directors of the Company are as follows
(unless otherwise indicated, the business address of each of the persons listed
below is at the Company's principal executive offices and each of such persons
is a citizen of the United States of America):
<TABLE>
<CAPTION>
Name Position
- ------------------------ -----------------------
<S> <C>
Daniel J. Fischer President, Chief
Executive Officer,
General Counsel and
Director
James N. Kotsonis Senior Vice President,
Chief Actuary, Chief
Financial Officer,
Treasurer and Director
Glenn D. Nicholson Senior Vice President,
Chief Marketing
Officer and Director
David F. Westerbeck Secretary
Stephen R. Hatcher Director
John H. Jacobs Director
Thomas E. Lovejoy III Director
James H. McIlhenny Director
Francis W. Murray III Director
Larry R. Pike Director
Richard S. Przysinda Director
Stuart B. Upson Director
Lothar A. Vasholz Director
Laurence F. Whittemore Director
</TABLE>
Mr. Fischer's principal occupation and employment is as President,
Chief Executive Officer and General Counsel of the Company, positions he has
held since December 11, 1992. From 1990 to 1992, he was the President, Chief
Operating Officer and General Counsel of the Company. Previously, he was Senior
Vice
-60-
<PAGE>
President and General Counsel of the Company from 1987 to 1990. He has
been a Director of the Company since 1990.
Mr. Kotsonis' principal occupation and employment is as Senior Vice
President, Chief Actuary, Treasurer and Chief Financial Officer of the Company,
positions he has held since 1996. From 1990 to 1996, he was Senior Vice
President, Chief Financial Officer and Chief Actuary. He has been a Director of
the Company since 1992.
Mr. Nicholson has served as the Company's Senior Vice President and
Chief Marketing Officer since 1991. He was previously Vice President of
Marketing and Product Development of Manhattan National Life Insurance Company.
He has been a director of the Company since 1993.
Mr. Westerbeck has served as Secretary of the Company since 1990. Mr.
Westerbeck's principal occupation and employment is as Senior Vice President,
General Counsel and Secretary of UCLIC, positions he has held since 1994. From
1990 to 1994, he served as Vice President, General Counsel and Secretary of
UCLIC. From 1985 to 1990, he was Vice President and Secretary of UCLIC.
Mr. Hatcher has been a Director of the Company since 1989. His
principal occupation and employment is as Executive Vice President and Chief
Financial Officer of UCLIC, positions he has held since 1995 and 1991,
respectively. He served as Senior Vice President of UCLIC from 1983 to 1995.
Mr. Jacobs has been a Director of the Company since May 15, 1996. His
principal occupation and employment is as an Executive Vice President of UCLIC,
a position he has held since 1995. For more than five years he has served in
various executive capacities with UCLIC.
Mr. Lovejoy has been a Director of the Company since 1986 and is a
member of the Corporate Governance Committee. Since 1994, he has been Counselor
to the Secretary on Biodiversity and Environment Affairs at the Smithsonian
Institution, a national museum organization located at 1000 Jefferson Drive
S.W., Washington, D.C. 20560. From 1987 to 1994, he was the Assistant Secretary
for External Affairs of The Smithsonian Institution.
Mr. McIlhenny has been a Director of the Company since 1989 and is a
member of the Corporate Governance Committee. He has been retired since 1994.
He formerly served as President and Chief Executive Officer of the Council of
Better Business Bureaus, Inc., a consumer protection organization located at
4200 Wilson Blvd., Arlington, Virginia 22209 for more than five years.
-61-
<PAGE>
Mr. Murray has been a Director of the Company since 1973 and is a
member of the Corporate Governance Committee. He is a retired Director of N.Y.
Private Banking, Bank of America, a national banking organization located at 335
Madison Avenue New York, New York 10017, a position that he served in for more
than five years. Mr. Murray beneficially owns five thousand three hundred shares
of Capital Stock.
Mr. Pike has been a Director of the Company since 1989. Since February
1990, he has served as Chairman of the Board, President and Chief Executive
Officer of UCLIC. From 1989 to 1990 he was President and Chief Operating
Officer of UCLIC. He also served as Executive Vice President of UCLIC from 1987
to 1989.
Mr. Przysinda, a Director of the Company since 1989 and a member of
the Corporate Governance Committee, was formerly Vice Chairman of Monroe Litho,
Inc., a lithographic printing company located at 39 Delevan Street, Rochester,
New York 14605. He also served for more than five years as President and Chief
Executive Officer of Monroe Litho, Inc.
Mr. Upson has been a Director of the Company since 1971 and is a
member of the Corporate Governance Committee. Since 1989 he has served as the
Chairman of Saatchi & Saatchi DFS, an advertising agency located at 375 Hudson
Street, New York, New York 10014. Mr. Upson beneficially owns one thousand five
hundred thirty seven shares of Capital Stock.
Mr. Vasholz has been a Director of the Company since 1995. He has
been a self-employed life insurance consultant since 1995. He was formerly
Executive Vice President and Corporate Marketing Officer of UCLIC for more than
five years.
Mr. Whittemore has been a Director of the Company since 1975 and is
Chairman of the Corporate Governance Committee. For more than the past five
years, he has been a partner of the investment banking and brokerage firm Brown
Brothers Harriman & Company located at 59 Wall Street, New York, New York 10005.
MANAGEMENT OF UCLIC
The executive officers and directors of UCLIC are as follows (unless
otherwise indicated, the business address of each of the persons listed below is
at UCLIC's principal executive offices and each of such persons is a citizen of
the United States of America):
-62-
<PAGE>
<TABLE>
<CAPTION>
Name Position
- ------------------------------ ----------------------
<S> <C>
Larry R. Pike President, Chief
Executive Officer,
Chairman of the Board
and Director
Stephen R. Hatcher Executive Vice
President and Chief
Financial Officer
Charles W. Grover Executive Vice
President
John H. Jacobs Executive Vice
President
George L. Clucas Senior Vice President
Dale D. Johnson Senior Vice President
Gerald A. Lockwood Senior Vice President
and Corporate Actuary
David F. Westerbeck Senior Vice
President,
General Counsel and
Secretary
Philip G. Barach Director
V. Anderson Coombe Director
William A. Friedlander Director
William G. Kagler Director
Lawrence A. Leser Director
Francis V. Mastrianna, Ph.D. Director
Mary D. Nelson Director
Paul G. Pearson, Ph.D. Director
Thomas E. Petry Director
Myrtis H. Powell, Ph. D. Director
Dudley S. Taft Director
John M. Tew, Jr., M.D. Director
</TABLE>
Mr. Pike's principal occupation and employment is as Chairman of the
Board, President and Chief Executive Officer of UCLIC, positions he has held
since February 1990. From 1989 to 1990 he was the President and Chief Operating
Officer of UCLIC. Mr. Pike has been a Director of UCLIC since April 1989 and is
a member of the Executive Committee. He is also a Director of the Company.
-63-
<PAGE>
Mr. Hatcher's principal occupation and employment is as Executive Vice
President and Chief Financial Officer of UCLIC, positions he has held since 1995
and 1991, respectively. He served as Senior Vice President of UCLIC from 1983
to 1995.
Mr. Grover's principal occupation and employment since 1995 is as
Executive Vice President of UCLIC. Prior to 1994 he was Vice President of U.S.
Marketing at Manufacturers Life Insurance Company, a life insurance company
located at 200 Bloor Street, Toronto, Canada M4W IE5.
Mr. Jacobs' principal occupation and employment since 1995 is as
Executive Vice President of UCLIC. From 1992 to 1995 he served as a Senior Vice
President of UCLIC and from 1989 to 1992 he served as a Vice President of UCLIC.
He has been a Director of the Company since 1995.
Mr. Clucas' principal occupation and employment since 1991 is as
Senior Vice President of UCLIC. He has also served as the chief investment
officer of UCLIC since 1990. Since 1990, Mr. Clucas also has served as
President and Chief Executive Officer of Carillon Advisers, Inc., a subsidiary
of UCLIC.
Mr. Johnson's principal occupation and employment since 1994 is as a
Senior Vice President of UCLIC. From 1990 to 1994 he served as a Vice President
of UCLIC.
Mr. Lockwood's principal occupation and employment is as Senior Vice
President and Corporate Actuary of UCLIC, positions he has held since 1991.
From 1989 to 1991, he served as a Vice President and Corporate Actuary of UCLIC.
Mr. Westerbeck's principal occupation and employment is as Senior Vice
President, General Counsel and Secretary of UCLIC, positions he has held since
1994. From 1990 to 1994, he served as Vice President, General Counsel and
Secretary of UCLIC. From 1985 to 1990, he was Vice President and Secretary of
UCLIC. Mr. Westerbeck has also served as Secretary of the Company since 1990.
Mr. Barach has been a Director of UCLIC since May 1988 and is a member
of the Audit Committee. From 1973 to 1993, he served as Chairman of the Board
and Chief Executive Officer of United States Shoe Corp., a specialty retailing
company, located at One Eastwood Drive, Cincinnati, Ohio 45227.
Mr. Coombe has been a Director of UCLIC since May 1971 and is a member
of the Audit Committee. Since 1949 he has served as the Chairman of the Board
of The Wm. Powell Company, an industrial valve manufacturing company located at
2503 Spring Grove Avenue, Cincinnati, Ohio 45214.
-64-
<PAGE>
Mr. Friedlander has been a Director of UCLIC since May 1983 and is a
member of the Audit Committee. Since 1987 he has served as the Chairman of the
Board of Bartlett & Co., an investment advisory firm, located at 36 E. 4th
Street, Cincinnati, Ohio 45202.
Mr. Kagler has been a Director of UCLIC since May 1984. He is
retired. From 1990 to November 1995 he was the President and Chief Executive
Officer of Skyline Chili, Inc., a chili restaurant chain and franchiser, located
at Chiquita Center, 250 E. 5th Street, Cincinnati, Ohio 45202.
Mr. Leser has been a Director of UCLIC since May 1988 and is a member
of the Executive Committee. Since August 18, 1994 he has been the Chairman of
the Board and the Chief Executive Officer of The E.W. Scripps Company, a
diversified media company, located at 312 Walnut Street, 28th Floor, Cincinnati,
Ohio 45202. Previously, for more than five years, he was the President and
Chief Executive Officer of The E.W. Scripps Company.
Dr. Mastrianna has been a Director of UCLIC since May 1986. Since
1987 he has been the Dean of the College of Information Science and Business
Administration and a professor at Slippery Rock University located at Slippery
Rock, Pennsylvania 16057.
Ms. Nelson has been a Director of UCLIC since 1995. Since 1974, she
has been the President of Nelson and Company, an actuarial consulting firm
located at 105 Fourth Street, Cincinnati, Ohio 45202.
Dr. Pearson has been a Director of UCLIC since August 1986. Since
1992 he has been a President Emeritus at Miami University, located at Oxford,
Ohio 45056. From 1981 to 1992, he was President and a professor of zoology at
Miami University.
Mr. Petry has been a Director of UCLIC since June 1981 and is a member
of the Executive Committee. Since 1968 he has served as the Chairman of the
Board and Chief Executive Officer of Eagle-Picher Industries, Inc., a
manufacturer of among other things diatomaceous earth products and industrial
controls, located at 580 Walnut Street, Cincinnati, Ohio 45202.
Ms. Powell has been a Director of UCLIC since 1996. Since 1989, Ms.
Powell has been Vice President for Student Affairs, Miami University, located at
113 Warfield Hall, Oxford, Ohio 45056.
Mr. Taft has been a Director of UCLIC since August 1977 and is a
member of the Executive Committee and Audit Committee. Since 1987 he has been
the President and a Director of Taft Broadcasting Company, a telecommunications
company located at
-65-
<PAGE>
1808 Cincinnati Commerce Center, 600 Vine Street, Cincinnati, Ohio 45202.
Dr. Tew has been a Director of UCLIC since May 1985. Since 1984 he
has been a professor and Chairman of the Department of Neurosurgery at the
University of Cincinnati Medical Center, 231 Bethesda Avenue, Cincinnati, Ohio
45267 and since 1969 he has been a Director of the Mayfield Neurological
Institute located at 506 Oak Street, Cincinnati, Ohio 45219.
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following table sets forth selected historical financial data of
the Company and has been derived from the audited financial statements of the
Company for each of the two fiscal years ended December 31, 1995 and 1994 and
the unaudited financial statements for the nine months ended September 30, 1996
and 1995. See "Financial Information."
SELECTED FINANCIAL DATA
(GAAP Basis of Accounting)
<TABLE>
<CAPTION>
Nine Months Years ended December 31,
Ended -------------------------
September 30,
------------------
1996 1995 1995 1994
-------- -------- ------------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Insurance revenues $ 28,489 $ 30,108 $ 39,706 $ 38,539
Net income 1,413 1,337 1,446 1,891
Total assets 499,798 502,985 513,938 475,281
Shareholders' equity 31,460 30,403 31,308 26,578
Per share of Capital
Stock:
Net income* $ 0.42 $ 0.40 $ 0.43 $ 0.57
Book value 9.41 9.10 9.37 7.95
</TABLE>
* Net income per share of Capital Stock is based on the weighted average number
of shares outstanding for the periods indicated.
TRANSACTIONS WITH PRINCIPAL SHAREHOLDER
The Company shares certain expenses with UCLIC. Certain directors of
the Company are also directors and employees of UCLIC. These expenses are
initially paid by UCLIC, which is
-66-
<PAGE>
reimbursed by the Company on an actual usage bases. In 1995, the Company's share
of such expenses was $3,195,000 for legal and accounting services and other
office services (including proportionate salaries and other employee benefits),
rent and related expenses and miscellaneous expenses such as office supplies,
postage, subscriptions and travel.
MARKET PRICES FOR THE CAPITAL STOCK
The Capital Stock is traded on the Nasdaq under the symbol "MLIC".
The Capital Stock began trading on January 2, 1992. The following table sets
forth the high and low sales prices per share of the Capital Stock on the Nasdaq
for each quarter during the past two fiscal years and each quarter of the
current fiscal year.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $4.25 $3.75 $5.00 $3.25 $5.50 $4.25
Second Quarter 5.00 4.00 5.25 3.25 5.00 4.25
Third Quarter 5.25 4.00 5.25 3.75 5.00 3.25
Fourth Quarter 8.50 4.25 5.25 3.50 5.00 3.75
(through
December 6,
1996)
</TABLE>
On October 1, 1996, the last full trading day prior to the public
announcement on October 2, 1996 that the Board had approved the Plan, the
closing sales price of the Capital Stock on the Nasdaq was $4.25 per share. On
December __, 1996, the closing sales price of the Capital Stock on the Nasdaq
was $____ per share.
DIVIDENDS
The payment of cash dividends by the Company to its shareholders is
dependent upon compliance with certain regulatory limits and restrictions
imposed by the Charter. The Charter provides for three types of shareholder
distributions:
(i) Interest at a specified rate on the par value of the Capital
Stock issued and outstanding ($195,000 annually);
(ii) A distribution of the shareholders' portion of the Company's
profits. Such amounts may, at the discretion
-67-
<PAGE>
of the Board, be distributed as a stock dividend of additional shares of
Capital Stock, paid in cash subject to certain limits and prior
regulatory approval, or reserved for the benefit of the shareholders in
the Guaranteed Capital Reserve; and
(iii) Interest, at the Company's portfolio earnings rate on invested
assets, on the accumulated balance in the Guaranteed Capital Reserve.
Interest on the Capital Stock may be paid in any year dividends are
distributed to policyholders and is not subject to prior regulatory approval.
Historically, the shareholders' portion of Company profits has been equal to $1
for every $7 of policyholders' dividends paid on traditional, participating
policies. Cash dividends are limited based on the Company's prior year
statutory earnings, or increase in statutory surplus, and are further subject to
prior approval by the NYID. For financial statements prepared in accordance
with GAAP, the Guaranteed Capital Reserve is included in shareholders' equity.
From 1985 to 1989, the NYID prohibited the Company from making any
cash dividends to its shareholders based on the Company's financial condition
and operating results for 1984. Some of the factors that entered into the
NYID's decision to suspend cash distributions to the Company's shareholders are
as follows:
(i) At the end of 1984, the ratio of the Company's total capital to
its insurance reserves was 4.89%. NYID policy prohibits the payment of
shareholder dividends when such ratio falls below 5%. In addition, the ratio of
the Company's total capital to its total liabilities was 2.83%. The Company's
Guaranteed Investment Contract liabilities, which amounted to $372 million for
1984, accounted for most of the difference between the 4.89% ratio and the 2.83%
ratio.
(ii) The Company reported an operating loss for 1984 of $608,000 that
was caused primarily by strain on the Company's reserves resulting from sales of
individual and group immediate annuities used to fund lottery, structured
settlement and pension obligations. Statutory losses in the individual and
group annuity lines of business amounted to $6.0 million for 1984.
(iii) During 1984, the Company acquired surplus relief insurance
amounting to $2.5 million in order to partially fund the cost of immediate
annuities. The surplus relief reinsurance reduced the amount of the reported
statutory loss for 1984 and it increased the statutory surplus at the end of
1984.
In November 1990, the Company reached an agreement with the NYID (the
"NYID Agreement") permitting the Company to credit interest on its Guarantee
Capital Reserve at the Company's
-68-
<PAGE>
portfolio rate and setting forth guidelines under which cash payments may be
distributed by the Company to its shareholders, subject to prior approval by the
NYID. The NYID Agreement provides that:
(i) If the Company's statutory-basis surplus is less than or equal to
9% of it statutory policy reserves, then principal and interest distributions
from the Guarantee Capital Reserve are limited to the lesser of the prior year's
statutory gain from operations (after policyholders' dividends and federal
income taxes and before realized gains and losses) or the prior year's increase
in statutory surplus, or
(ii) If the Company's statutory-basis surplus exceeds 9% of statutory
policy reserves, the principal and interest distributions from the Guarantee
Capital Reserve are limited to the greater of the prior year's statutory gain
from operations (after policyholders' dividends and federal income taxes and
before realized gains and losses) or the prior year's increase in statutory
surplus.
No cash distributions were permitted to be made to the shareholders of
the Company under the NYID Agreement in 1994 since the Company recorded both a
statutory loss before net realized gains and losses and a decrease in statutory
surplus for the year ended December 31, 1994. Although cash distributions were
permitted to be made to the shareholders of the Company in 1993 and 1995 under
the NYID Agreement, UCLIC did not recommend the maximum cash shareholder
distributions permitted under the NYID Agreement for such years because UCLIC
was in the process of discussing the proposed Reverse Stock Split with the NYID,
including its proposal to use funds from the Guarantee Capital Reserve to pay
cash in lieu of issuing fractional shares resulting from the Reverse Stock
Split. An alternative approach would have been for UCLIC to recommend the
maximum shareholder distributions permitted by the NYID Agreement to be made in
1993 and 1995, and to use its share of such shareholder distributions to make a
capital contribution to the Company for the purpose of funding the amount
required to pay cash in lieu of issuing fractional shares resulting from the
Reverse Stock Split. UCLIC did not take such alternative approach because it
believed that taking such alternative approach would have been an inefficient
use of capital since its share of the maximum permitted shareholder
distributions would have been fully taxable.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Ernst & Young LLP, the Company's independent
accountants for the last and current fiscal year, are not expected to be at the
Special Meeting.
-69-
<PAGE>
FINANCIAL INFORMATION
The Company hereby incorporates by reference the financial information
contained in Part II, Item 8 of the 1995 10-K, the report of the independent
auditors thereon contained in Part II, Item 8 of the 1995 10-K, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II, Item 7 of the 1995 10-K, and the financial information
contained in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (the "September 1996 10-Q"), and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Part I, Item 2 of the September 1996 10-Q, which is
attached to this Proxy Statement.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the SEC. The Company has filed a Schedule 13E-3 with the
SEC in connection with the proposed Reverse Stock Split. This Proxy Statement
does not contain all of the information set forth in the Schedule 13E-3, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The Schedule 13E-3, including exhibits and other filings made by the
Company as described above, may be inspected and copied at the public reference
facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials
can also be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
By order of the Board of Directors,
/s/ David S. Westerbeck
-----------------------------------
David S. Westerbeck
Secretary
-70-
<PAGE>
INDEX TO FINANCIAL INFORMATION OF THE COMPANY
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Item 7 of Part II
of the 1995 10-K)........................................... F-2
Audited Financial Statements (Item 8 of Part II of the
1995 10-K):
Report of Management.................................... F-15
Report of Independent Auditors.......................... F-16
Financial Statements:
Balance Sheets as of December 31, 1995
and 1994..................................................... F-17
Statements of Income for the years
ended December 31, 1995, 1994 and 1993............... F-18
Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993............... F-19
Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993............... F-20
Notes to Financial Statements......................... F-21
Supplementary Data:
Summarized Quarterly Financial Data
(Unaudited).......................................... F-51
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2 of Part I of the
September 1996 10-Q)........................................ F-57
Unaudited Financial Statements (Item 1 of Part I of the
September 1996 10-Q):
Condensed Balance Sheets - September 30, 1996 and
December 31, 1995...................................... F-73
Condensed Statements of Income - Three Months, Nine
Months and Twelve Months ended
September 30, 1996 and 1995.............................. F-74
Statement of Shareholders' Equity - Nine Months
ended September 30, 1996............................... F-75
Condensed Statements of Cash Flows - Nine Months
ended September 30, 1996 and 1995...................... F-76
Notes to Condensed Financial Statements................. F-77
</TABLE>
F-1
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is an analysis of the results of operations and financial
condition of the Company. The financial statements and related notes and
schedules included elsewhere in this Form 10-K should be read in conjunction
with this analysis.
Results of Operations:
Earnings. The Company's charter provides for the allocation of its after-tax
profits between its shareholders and its policyholders. The shareholders'
portion includes interest on undistributed shareholder profits accumulated at
interest in the Guarantee Capital Reserve (GCR), plus one-eighth of
distributable income (i.e, income after income taxes and interest on the GCR,
but before policyholder dividends). The table below summarizes the
shareholders' share of net income:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Distributable income:
Income before cumulative effect
of changes in methods
of accounting $1,446 $1,891 $1,454
Policyholders' dividends and
participation in operations 3,157 6,923 4,665
Less interest credited to GCR (995) (902) (788)
------ ------ ------
Distributable income $3,608 $7,912 $5,331
====== ====== ======
Shareholders' share of net income:
1/8 of distributable income $ 451 $ 989 $ 666
Interest credited to GCR 995 902 788
Cumulative effect of change
in method of accounting
for postretirement benefits
other than pensions -- -- (340)
------ ------ ------
Net income $1,446 $1,891 $1,114
====== ====== ======
</TABLE>
F-2
<PAGE>
Insurance Revenues and Benefits Expenses. Below is a breakdown of insurance
revenues, policyholder benefits, change in policy reserves and interest expense
by lines of business:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
------- ------- -------
(in thousands)
<S> <C> <C> <C>
INSURANCE REVENUES:
Individual Traditional Life $28,712 $28,117 $26,659
Individual Universal Life 10,986 10,414 10,141
Annuities & GIC's 8 8 20
------- ------- -------
TOTAL INSURANCE REVENUES $39,706 $38,539 $36,820
======= ======= =======
POLICYHOLDER BENEFITS:
Death Benefits:
Individual Traditional Life $20,143 $15,256 $18,274
Individual Universal Life 7,835 6,134 8,063
------- ------- -------
Total Death Benefits 27,978 21,390 26,337
------- ------- -------
Surrender Benefits:
Individual Traditional Life 7,625 9,079 7,083
------- ------- -------
Other Benefits:
Individual Traditional Life 1,819 1,281 1,263
Annuities & GIC's 6,180 6,660 6,705
------- ------- -------
Total Other Benefits (1) 7,999 7,941 7,968
------- ------- -------
TOTAL POLICYHOLDER BENEFITS $43,602 $38,410 $41,388
======= ======= =======
CHANGE IN POLICY RESERVES:
Individual Traditional Life $(2,629) $(3,263) $(2,205)
Individual Universal Life 25 190 --
Annuities & GIC's 1,966 (3,138) 775
------- ------- -------
TOTAL CHANGES IN POLICY RESERVES $ (638) $(6,211) $(1,430)
======= ======= =======
INTEREST EXPENSE:
Individual Universal Life $ 4,740 $ 4,710 $ 4,363
Annuities & GIC's 5,130 5,377 5,564
------- ------- -------
TOTAL INTEREST EXPENSE $ 9,870 $10,087 $ 9,927
======= ======= =======
</TABLE>
(1) Other benefits include matured endowment payouts and annuity benefit
payouts.
F-3
<PAGE>
The following discussion describes the results in more detail.
Individual Traditional Life. The insurance revenue in 1995 increased slightly
when compared to prior years due to the continued success of a new whole life
participating product introduced at the end of 1991. Before the introduction of
this product, the Company concentrated its marketing efforts on the sale of its
universal life insurance product.
In the past there was an industry wide shift in product mix towards interest
sensitive products, and as a result, management believes that profit margins
industry wide have decreased significantly. The industry profit margins on
interest sensitive products have been historically lower than profit margins on
traditional life products. The profit margins on traditional life products are
following this industry trend as the Company has had to make traditional
products more competitive with interest sensitive products either by increasing
the product dividend scale or by decreasing the premiums. Due to current
economic conditions, management believes there will be an industry trend back to
traditional whole life products. As a result, the Company introduced a new
participating product in 1991. Management plans to continue developing whole
life participating products in the future in order to increase the book of
business that pays policy dividends. Growth in the traditional life line of
business is expected to continue in 1996.
In 1995, individual traditional life policyholder death benefits increased
while surrender benefits decreased when compared to the prior year. The reserve
decreases in 1995 and 1994 resulted primarily from the net release of reserves
on terminated traditional policies exceeding the increase in reserves
established on new and existing business. The decrease in life reserves was
smaller in 1995 compared to the same period in 1994 because of the increase in
new business and decrease in surrenders, offset by the higher death benefits.
Individual Universal Life. Universal life revenues increased in 1995 compared
to 1994 due to an increase in the number of universal life policies in force.
Individual universal life death benefits increased in 1995 compared to 1994
due to unfavorable mortality.
Consistent with industry practice, the Company has the opportunity to adjust
crediting rates on individual life insurance to reflect market conditions. The
current economic environment and market rates have caused the increase in the
interest in crediting rates. The weighted average annual interest rates
credited to the Company's individual universal life products were 6.5%, 6.4% and
6.8% in 1995, 1994 and 1993, respectively.
Annuities and GIC's. Annuity revenues are not significant because the Company
suspended the sale of guaranteed interest contracts (GIC's) in 1985 to reduce
the asset/liability mismatch resulting from funding GIC's with commercial
mortgages and to strengthen its capital position as measured by the ratio of its
statutory surplus to total assets. In 1988, the Company began issuing SPDA's due
to the availability of sufficient capital and improved operating results. The
sales of SPDA's had been very insignificant and as a result, the Company
suspended the sale of SPDA's in October, 1993. However, as a result of the
upturn in interest rates in 1994, the Company reopened the sale of this product
effective October 1994 and saw a return to active sales in 1995. However, the
Company again closed the sale of SPDA's effective January 1, 1996, due to the
reduction in interest rates.
F-4
<PAGE>
Interest expense continues to decrease as a result of the reduction in the
Company's GIC liabilities and a reduction in interest crediting rates. These
planned withdrawals are leveling off because over ninety-one percent of the GIC
liability remaining at December 31, 1995 represents the investment contracts
owned by the Company's pension plan. The weighted average annual interest rates
credited on the Company's annuity products are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Guaranteed Interest Contracts 6.0% 6.3% 6.6%
Single Premium Deferred Annuity 6.2% 5.6% 6.1%
</TABLE>
The increase in annuity reserves during 1995 was the result of recording a
$3,300,000 addition to reserves due to the results of the December 31, 1995
Regulation 126 testing adopted and promulgated by the New York Insurance
Department (the Department). (See Liquidity for further discussion.)
Investment Income. Net investment income increased $2,464,000 and $136,000 in
1995 and 1994, respectively. Net investment income decreased $2,143,000 in 1993.
The increase in 1995 is due primarily to the collection of default interest
totalling $1,803,000 on a mortgage loan. In July, 1995, the mortgager paid this
loan in full, thus paying the remaining default interest due. The slight
increase in 1994 resulted primarily from the receipt of $829,000 of interest
from mortgages that were on nonaccrual status at December 31, 1993 offset by
maturities and calls of higher yielding assets and the reinvestment of these
funds at current lower yields, and a lower level of invested assets. The
decrease in 1993 resulted primarily from maturities and calls of higher yielding
assets and the reinvestment of these funds at current lower yields. Net
investment yield was 7.78% (excluding the $1,803,000 in default interest), 7.59%
and 7.48% for the years ended December 31, 1995, 1994 and 1993, respectively.
Net investment yield including the $1,803,000 of default interest was 8.21% for
the year ended December 31, 1995. The investment yield is affected by bond
market conditions, as well as the conditions of specific markets such as real
estate. Refer to Note 4 of Notes to Financial Statements for breakdown of net
investment income by class of investment.
Realized Gains (Losses). The Company realized net gains (losses) on
investments of $1,140,000, ($1,446,000) and $4,222,000 in 1995, 1994 and 1993,
respectively. The net realized gains in 1995 are a result of investment sales
activity in fixed income securities offset by a $42,000 increase in allowance
for potential mortgage losses and a $450,000 writedown of a fixed income
security. Bond sales activity has centered around investing for new product cash
flows, providing asset portfolio matching with insurance liabilities, improving
the portfolio's investment yield, and producing solid total return performance.
The net realized loss in 1994 resulted from lower market prices due to higher
interest rates and a $240,000 writedown of a fixed income security. The 1993
realized gains are the result of an increase in the volume of investment sales
activity offset by a $668,000 increase in the allowance for potential mortgage
losses and a $660,000 writedown of a fixed income security. (See Investments for
further discussion.)
The provision for mortgage losses has fluctuated between periods. The
Company establishes the mortgage reserve based upon its continuing review of the
mortgage portfolio and individual problem mortgages. The allowance for
potential loan losses is affected to a significant degree by general economic
conditions. While the Company believes it has provided adequate mortgage
reserves, subsequent economic and market conditions may require establishing
additional reserves. See Investments and Note 4 of Notes to Financial
Statements for further discussion and analysis.
Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition
and insurance expenses increased $2,211,000, $221,000 and $763,000 in 1995, 1994
and 1993, respectively. The increase in 1995 is mainly due to an increase in
commissions and general expenses, particularly salary and fringe benefit costs.
The increase in 1994 is mainly due to an increase in the amortization of DAC
offset by a decrease in other
F-5
<PAGE>
operating expenses. The increase in amortization of DAC was due to an increase
in surrenders. The increase in 1993 is mainly due to an increase in renewal
commissions and general expenses offset by a decrease in amortization of DAC.
Policyholders' Dividends and Participation in Operations. The Company's
charter provides for the allocation of its distributable income (income before
policyholders' dividends but after federal income taxes) between its
shareholders and its policyholders on a one-eighth/seven-eighths basis. Refer to
Notes 2 and 3 of Notes to Financial Statements for further discussion. The
following schedule summarizes policyholders' dividends and participation in
operations:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ --------
(in thousands)
<S> <C> <C> <C>
Distributable income -
(See Footnote 2 of
Notes to Financial Statements) $ 3,608 $7,912 $ 5,331
======= ====== ========
Policyholders' dividends
and participation
in operations $ 3,157 $6,923 $ 4,665
======= ====== ========
Policyholders' dividends $ 5,018(1) $4,219(2) $ 5,500
Increase (decrease)
in policyholders' equity (1,861)(3) 2,704 (835)(4)(3)
------- ------ --------
Total policyholders' dividends
and participation in operations $ 3,157 $6,923 $ 4,665
======= ====== ========
</TABLE>
(1) The fluctuation in the balance is due to a decrease in the number of
participating policies surrendered and an increase in the dividends paid
on the participating block of business. See Insurance Revenues and Benefit
Expenses.
(2) The fluctuation in the balance is due to increase in the number of
participating policies surrendered in 1994 when compared to 1993. See
Insurance Revenues and Benefit Expenses.
(3) The decrease in the policyholders' equity is due to the cash dividends
paid to policyholders exceeding seven-eighths of distributable income. See
The Impact of Corporate Charter on the Company's Dividend Policy and
Earnings included herein for discussion on the allocation of distributable
income between policyholders and shareholders.
(4) Excludes the $2,383,000 policyholders' share of the cumulative effect of
change in method of accounting for postretirement benefits other than
pensions described in Note 11 of Notes to Financial Statements.
Federal Income Tax. The Company provides deferred taxes pursuant to Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Refer to Note 6 of Notes to Financial Statements for further discussion.
Financial Condition:
Liquidity. Due to the Company's decision in 1985 to discontinue selling
certain types of annuity products and to limit the renewals of outstanding GIC's
as they mature, the Company has had to maintain a liquidity structure within the
investment portfolio to enable it to fund the maturing GIC's. The Company has
effected an orderly withdrawal from the GIC market by quoting renewal rates
which have encouraged GIC contractholders to withdraw their funds as they
mature. As a result of this strategy, the GIC liability has continued to
decrease each year from $46,847,000 at December 31, 1990 to $18,154,000 at
F-6
<PAGE>
December 1,1995. Withdrawals from investment contracts which include GIC's and
accumulation annuity products have continued to decrease from $15,753,000 for
the year ended December 31, 1992 to $9,407,000 for the year ended December 31,
1995. Over 91% of the remaining liability at December 31, 1995 represents
investment contracts owned by the Company's pension plan. The liquidity
structure within the investment portfolio is beginning to change with lower
levels of cash being held as the GIC maturities are leveling off. Cash and other
highly liquid assets held at December 31, 1995 are deemed more than adequate to
meet the Company's liquidity needs.
The Company is domiciled in New York and subject to Regulation 126 adopted
and promulgated by the Department. Under this regulation, the Company is
required to annually file a report which summarizes the results of projecting
asset and liability cash flows under multiple interest rate scenarios. The
tests performed prior to 1993 indicated that no adverse mismatching existed.
Due to the continued decline in the interest rates earned by the Company on its
assets, the results of the 1993 Regulation 126 tests required the Company to
record an additional statutory reserve totalling $2,600,000 based on test
results as of December 31, 1993. The GAAP reserves also increased by a similar
amount. As of December 31, 1994, similar cash flow testing indicated that no
additional reserves were required. Due to the decrease in the long-term
expectation of the Company's investment yield versus the expected yield used
when pricing the structured settlement and lottery annuities from 1981 to 1986,
the Company recorded an additional statutory reserve totalling $1,400,000 based
on test results as of December 31, 1995. An additional GAAP reserve of
$3,300,000 was recorded and is included in the increase (decrease) in reserves
on the Statements of Income.
The Company had positive operating cash flows of $7,562,000, $7,811,000, and
$868,000 in 1995, 1994, and 1993, respectively. The slight decrease in
operating cash flows during 1995 is primarily due to a $6,299,000 increase in
policyholder benefits paid, a $772,000 increase in commissions paid, and a
$1,017,000 decrease in annuity considerations offset by a $5,803,000 increase in
premiums and deposits received, of which $4,100,000 represents annuity deposits
received, and a $2,706,000 increase in investment income received. The increase
in premiums and increase in benefits are discussed in Insurance Revenue and
Benefits Expense. The increase in investment income is discussed in Investment
Income. The increase in operating cash flows during 1994 is primarily due to a
$1,169,000 increase in premiums received and a $5,186,000 decrease in
policyholder benefits paid offset by a $1,398,000 decrease in investment income
received. The increase in operating cash flows during 1993 is primarily due to
a $1,972,000 increase in premiums received offset by a $1,333,000 decrease in
investment income received.
The Company has no material off-balance-sheet risks, except for mortgage
commitments in the normal course of business. Refer to Note 7 of Notes to
Financial Statements for further discussion.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
F-7
<PAGE>
Capital Resources. The following comparison of the Company's capital ratios
demonstrates the adequacy of the Company's statutory surplus:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---------- --------
<S> <C> <C>
Ratio of statutory surplus
plus the investment
valuation reserve to
statutory assets
Manhattan Life 7.4% 8.2%
Industry * 7.3%
Ratio of statutory surplus
plus the investment valuation
reserve to invested assets
Manhattan Life 7.6% 8.5%
Industry * 9.3%
Risk-Based Capital (RBC) Ratio 306.0% 279.0%
</TABLE>
*Source: The Townsend & Schupp Company's annual survey of 228 of the largest
U.S. life insurance companies ranked by total assets. (Comparative
ratios as of December 31, 1995 are not available.)
The decrease in the above surplus ratios is primarily the result of two
factors. The Company recorded a statutory net loss of $2,102,000 for the year
ended December 31, 1995. In addition, a $1,400,000 additional statutory reserve
was recorded by the Company. This was required as a result of requirements of
Regulation 126 adopted and promulgated by the Department. See Note 8 of Notes
to Financial Statements and Liquidity section for additional information.
The RBC ratio increased due to improved mortgage experience and a revision in
the formula used to calculate the ratio. The revised formula includes more
recent industry experience when compared to the prior year. See Insurance
Regulations for additional information on RBC.
The Company had no surplus relief reinsurance agreements or other types of
surplus financing transactions in effect at December 31, 1995 and 1994.
F-8
<PAGE>
Investments. The current investment strategy for the Company is designed to
maintain the portfolio's overall quality, yield, liquidity, asset/liability
structure, asset diversification, and to avoid issuer concentration and higher
risk assets. All of the investments in the portfolio are well within
diversification, quality and other requirements of state insurance laws. The
Company directed most of its new investment cash flow in 1995 to the acquisition
of investment grade bonds and commercial mortgages.
The composition of the Company's invested assets is as follows:
<TABLE>
<CAPTION>
Category December 31, 1995 Percent December 31, 1994 Percent
- -------- ----------------- ------- ----------------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Mortgaged-Backed Securities $ 98,793 22% $105,661 26%
Corporate bonds 226,245 50 187,099 45
-------- --- -------- ---
Total Fixed Maturities 325,038 72 292,760 71
Common Stock 2 0 4 0
Real Estate Owned 6,388 1 7,910 2
Commercial Mortgages 70,048 16 63,209 15
Policy Loans 51,740 11 50,720 12
-------- --- -------- ---
TOTAL INVESTMENTS $453,216 100% $414,603 100%
======== === ======== ===
</TABLE>
This schedule excludes cash held by the Company totalling $711,000 and
$2,545,000 at December 31, 1995 and 1994, respectively.
On November 15, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115
Special Report). In accordance with provisions in the SFAS 115 Special Report,
the Company chose to reclassify all held-to-maturity securities to available-
for-sale at December 31, 1995. At the date of transfer, the amortized cost of
these securities was $312,690,000, ($98,793,000 of mortgage-backed securities
and $226,245,000 of corporate bonds) with a market value totalling $325,038,000.
(See Notes 1 and 4 of the Notes to Financial Statements.)
At December 31, 1994 and 1993, all investments were classified as held-to-
maturity except fixed maturities classified as available-for-sale with a market
value totalling $241,784,000 ($105,661,000 of mortgage-backed securities and
$136,123,000 of corporate bonds) and $255,893,000 ($103,994,000 of mortgage-
backed securities and $151,899,000 of corporate bonds), respectively, which were
classified as investments available-for-sale (See Notes 1 and 4 of the Notes to
Financial Statements).
Fixed Maturities. Investments in fixed maturities represent the majority of
the invested assets of the Company. The investments are carefully selected as to
quality, maturity and yield to insure the ability to meet policyholder claims in
a timely manner and provide increases to the Company's growth capital for the
further vitality of its business. The Company also seeks to match the rates it
credits on its investment spread products to reflect the amounts the Company
earns on its invested assets. A mix of government bonds, mortgaged-backed
securities, asset-backed securities, corporate bonds and money market
instruments are utilized to meet these objectives.
F-9
<PAGE>
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) at
December 31, 1993. The Statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. SFAS 115 requires the Company's
investment securities to be divided into three separate categories and it
prescribes different accounting practices for each category:
. Investments held-to-maturity are valued at amortized
cost if management has the intent and ability to hold
the securities until maturity.
. Investments available-for-sale, which may or may not be
sold before maturity, are marked to the current value,
with unrealized gains and losses, net of taxes, reported
as a separate component of equity.
. Finally, investments held-for-trading purposes are marked
to the current market prices, with any unrealized gains
or losses charged against earnings.
Prior to the reclassification of all fixed maturity investments to the
"available-for-sale" classification, the Company sold two bonds classified as
"held-to-maturity". This is not considered to be inconsistent with their
original classification because both bonds were sold due to a significant
deterioration in the issuers' credit worthiness. The first bond's amortized
cost at sale was $1,000,000 and a loss of $125,000 was realized. The second
bond's amortized cost at sale was $1,000,000, and a loss of $58,000 was
realized.
The following table identifies changes in investment value and unrealized
gain (loss) resulting from changes in the market value of investments classified
as "Available-for-Sale":
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
--------- ---------- -----
<S> <C> <C> <C>
Market Value
at December 31, 1995 $325,038 $2 $325,040
Book Value at
December 31, 1995 312,690 2 312,692
======== ======= ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ======= ========
Market Value
at December 31, 1994 $241,784 4 241,788
Book Value
at December 31, 1994 261,360 2 261,362
-------- ------- --------
Unrealized Gain (Loss)
as of December 31, 1994: $(19,576) $2 $(19,574)
======== ======= ========
Market Value
at December 31, 1993 $255,893 $ -- $255,893
Book Value
at December 31, 1993 247,525 -- 247,525
-------- ------- --------
Unrealized Gain as of
December 31, 1993: $ 8,368 $ -- $ 8,368
======== ======= ========
</TABLE>
The change in unrealized gains (losses) net of deferred income taxes, caused
increases (decreases) in shareholders' equity of $3,284,000, ($2,955,000), and
$690,000 at December 31, 1995, 1994 and 1993, respectively. The change in
unrealized gains (losses) net of deferred income taxes, caused increases
(decreases) in policyholders' equity of $22,987,000, ($20,688,000), and
$4,833,000 at December 31, 1995, 1994, and 1993, respectively. The change in
unrealized gain (loss) from December 31, 1994 is a result of
F-10
<PAGE>
reclassifying our entire investment portfolio to the available-for-sale category
in accordance with the SFAS 115 Special Report and the overall change in the
securities market between 1995 and 1994. The change in the unrealized gain
(loss) from December 31, 1993 is a result of market price changes due to higher
interest rates.
Management periodically reviews its fixed maturities portfolio to determine
if factors evidencing an other than temporary impairment in value exist for
individual securities. In making this determination, management evaluates the
strength of the issuer's liquidity and its continued ability to service its
contractual obligations and the occurrence of events of default. Two bonds in
the "available-for-sale" portfolio are currently in default: El Paso Electric
and Elder Beerman. El Paso Electric, a corporate utility bond with a $1,200,000
par value, was also in default at December 31, 1994. The issuer filed Chapter
11 bankruptcy in January, 1992. Due to a court ruling at the end of 1992, the
issuer resumed making interest payments on its secured bonds, such as the
Company's issue. The bond is well secured by blanket first mortgage liens on all
major operating assets of the issuer. Therefore, management does not anticipate
a loss to the Company. Elder Beerman, a corporate unsecured bond with a
$1,000,000 par value, filed bankruptcy in October, 1995. In the fourth quarter,
1995, a $450,000 permanent write down on the investment was recorded and is
included in realized gains (losses) in the Statements of Income. The remaining
carrying value of $550,000 reflects management's estimated recovery on this
investment.
No other bonds in the portfolio are considered to be permanently impaired.
The weighted average maturity of the marketable bond portfolio excluding
mortgaged-backed securities was 7.4 years as of December 31, 1995.
The Company decreased its investment in mortgaged-backed securities from 26%
of invested assets at December 31, 1994 to 22% of invested assets at December
31, 1995. Mortgaged-backed securities are subject to risks associated with
variable prepayments. As such, these securities may have a different actual
maturity than planned at the time of purchase. Securities that have an
amortized cost that is greater than par and that are backed by mortgages that
prepay faster than expected will incur a reduction in yield or an increase in
yield if prepaid slower than expected. Those securities that have an amortized
cost that is less than par and that prepay faster than expected will generate an
increase in yield or a decrease in yield if prepaid slower than expected. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayment in a
changing interest rate environment, and the repayment priority of the securities
in the overall securitization schedule.
The Company limits the extent of those risks by generally avoiding securities
whose cost significantly exceeds par, by purchasing securities that are backed
by stable collateral, and by concentrating on securities with enhanced priority
in their trust structure. Such securities with reduced risk typically have a
lower yield but high liquidity than higher-risk mortgaged-backed securities. At
selected times, higher-risk securities may be purchased if they do not
compromise the safety of the Company's general portfolio. At December 31, 1995,
the Company does not have a significant amount of higher-risk mortgaged-backed
securities. The Company's mortgage portfolio is structured to produce
acceptable yields while minimizing the risk of prepayment uncertainty.
High-yield, below investment grade securities included in the investment
portfolio increased to $24,357,000 (market: $24,531,000) at December 31, 1995
from $23,236,000 (market: $21,537,000) at December 31, 1994 and amounted to
approximately 5% of invested assets and approximately 5% of total assets at
December 31, 1995. Of these securities, $24,357,000 and $17,601,000 were
classified as available-for-sale at December 31, 1995 and 1994, respectively.
Management believes that the current level of investment in high-yield
securities, at only 5% of invested assets, offers desired returns without undue
risk. The interest rates available on those high-yield below--investment-grade
securities are significantly higher than are available on other corporate debt
securities. Also, the risk of loss due to default by the borrower is
significantly greater
F-11
<PAGE>
with respect to such below-investment-grade securities because those securities
are generally unsecured and are often subordinated to other creditors of the
issuer and issued by companies that usually have high levels of indebtedness.
The Company attempts to minimize the risks associated with those below-
investment-grade securities by limiting the exposure to any one issuer and by
closely monitoring the credit worthiness of such issuers. The Company's
management does not presently anticipate its investments in high yield
securities will increase significantly or have any significant adverse effect on
the Company's financial condition or income from operations.
Real Estate Owned. Real Estate acquired through foreclosure or "in-substance
foreclosure" amounted to $6,388,000 and $7,910,000 at December 31, 1995 and
1994, respectively. The decrease is due to the sale of a portion of one real
estate owned property for $1,522,000 during the third quarter, 1995. No gain or
loss was incurred on the sale. Real estate owned is valued as follows:
. Upon foreclosure, the carrying value of the property is recorded at the
lower of cost or net realizable value, which becomes its new cost basis.
Net realizable value for real estate is determined based upon internal and
external appraisals and other available information about the property,
which may take into consideration a number of factors, including; (i)
discounted cash flows; (ii) sales of comparable properties; (iii)
geographic location of property and related market conditions; and (iv)
disposition costs. The net realizable value determined by the Company may
be greater than the price which may be realized if the Company were forced
to liquidate such properties on an immediate basis. The Company has the
intent and ability to hold these assets until appropriate sales
opportunities arise. Foreclosed properties are actively managed by the
Company in order to maximize net realizable value.
. Subsequent to foreclosure, the carrying value of the property is
periodically evaluated and written down, if necessary, to reflect any
additional amounts considered unrecoverable upon sale.
. At the time of the sale, the difference between the sales price and the
carrying value is recorded as a realized gain or loss.
Mortgages. In 1995, the Company's mortgage loans on real estate increased
$6,839,000 from $63,209,000 at December 31, 1994 to $70,048,000 at December 31,
1995, net of an allowance for potential mortgage loan losses of $1,381,000 and
$1,339,000 at December 31, 1995 and December 31, 1994, respectively. During the
fourth quarter of 1994, the Company began participating in new loan fundings
with Union Central. Union Central owns 72.8% of the Company's guarantee capital
shares. Refer to Note 1 of Notes to the Financial Statements for further
discussion. New loan fundings, on a participating basis, continued with Union
Central during 1995 in order to geographically diversify the existing portfolio.
In 1995, the Company participated in 60 new originations, with the Company's
percentage totalling $18,946,000 out of a total loan amount of $134,487,000.
The Company's mortgage portfolio is monitored closely through the review of
loan and property information such as annual operating statements, property
inspection reports, and real estate tax records. This information is evaluated
in light of current economic conditions and other factors such as geographic and
property-type loan concentrations. This evaluation is part of the regular
review to determine whether adjustments to the allowance for potential mortgage
losses appear warranted.
The Company also monitors its mortgage portfolio in an attempt to identify
loans which are not currently classified as delinquent, but where the Company
has knowledge which causes it to have concerns as to the ability of borrowers to
comply with the present loan repayment terms. These loans ("watchlist loans")
are subject to increased scrutiny and review by the Company. Watchlist loans
totalled $13,964,000 and
F-12
<PAGE>
$20,901,000 at December 31, 1995 and December 31, 1994, respectively. These
loans were considered by management in establishing the $1,381,000 mortgage loan
loss reserve.
It is the Company's policy to place mortgages on nonaccrual status when it
appears probable that accrued interest will not be recovered. None of the
Company's mortgages were on nonaccrual status at December, 1995 or December 31,
1994.
The Company classifies mortgages that are 90 days or more delinquent as to
interest and/or principal payments or those in the process of foreclosure as
being in default. None of the Company's mortgages were in default as of December
31, 1995 or at December 31, 1994. As part of the valuation process, management
reviews loans individually and makes economic estimates of property values and
probability estimates of losses occurring based on the analysis of operating
statements, compilation of current and projected market data, a review of
property inspection reports, appraisals and judgments regarding the financial
strength of individual borrowers. This valuation process was used by management
in establishing the $1,381,000 mortgage loan loss reserve as of December 31,
1995. Included in the mortgage loan loss reserve are amounts provided for
specific properties for which management believes market conditions or other
factors indicate the net realizable value of the underlying collateral is less
than the mortgage balance (and any accrued interest). Net realizable value for
real estate assets is determined based upon the market value of a property which
takes into consideration capital improvements and leasing activities. Management
believes the Company's mortgage loan loss reserve is adequate. However,
management cannot predict with assurance where the economy is headed or how the
mortgage portfolio would be affected by various economic circumstances.
Management closely monitors the mortgage portfolio and regularly reviews the
mortgage loan reserves to determine whether adjustments to the reserve or asset
values appear warranted.
There has been no troubled debt restructurings since year end 1989.
F-13
<PAGE>
A summary of the characteristics of the Company's mortgage portfolio (before
deducting the valuation reserve of $1,381,000 and $1,339,000 at December 31,
1995 and December 31, 1994, respectively) follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Percent Percent
Geographic Diversification: of Total of Total
-------- --------
<S> <C> <C> <C> <C>
New England $ 1,486 2.1% $ 1,724 2.7%
Middle Atlantic 27,029 37.8 37,179 57.6
South Atlantic 6,317 8.8 1,953 3.0
East North Central 6,328 8.9 4,637 7.2
West North Central 4,614 6.4 3,490 5.4
East South Central 1,694 2.4 1,484 2.3
West South Central 8,893 12.5 7,126 11.0
Mountain 5,889 8.2 2,275 3.5
Pacific 9,179 12.9 4,680 7.3
------- ---- ------- ----
Total $71,429 100.0% $64,548 100.0%
======= ======= ======= ======
PROPERTY TYPE:
Office $16,078 22.5% $19,139 29.6%
Apartment 22,325 31.3 22,138 34.3
Retail 24,308 34.0 18,954 29.4
Industrial 6,433 9.0 2,216 3.4
Residential 2,025 2.8 377 0.6
Other 260 .4 1,724 2.7
------- ---- ------- ----
Total $71,429 100.0% $64,548 100.0%
======= ======= ======= ======
Maturities:
Past Maturity $ 2 0.0% $ 2 0.0%
Maturing within 1 year 12,757 17.9 1,543 2.4
Maturing in 2-5 years 25,527 35.7 44,271 68.6
Maturing in 6-10 years 5,836 8.2 11,236 17.4
Maturing in over 10 years 27,307 38.2 7,496 11.6
======= ==== ======= ====
Total $71,429 100.0% $64,548 100.0%
======= ======= ======= ======
</TABLE>
F-14
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
-----------------------------------
REPORT OF MANAGEMENT
The management of The Manhattan Life Insurance Company is responsible for the
accuracy and consistency of the financial statements. The financial statements
have been prepared in accordance with generally accepted accounting principles
and include, where required, amounts based upon management's informed estimates
and judgments. The notes to the financial statements are an integral part of
the financial statements and should be read as such.
Management maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded and that transactions are
properly recorded and executed in accordance with management's authorization.
The system of internal accounting controls is supported by the careful selection
and training of qualified personnel, segregation of responsibilities,
established policies and procedures, and a program of internal audits.
The Board of Directors has appointed a Corporate Governance Committee, composed
entirely of directors who are not officers or employees of The Manhattan Life
Insurance Company or The Union Central Life Insurance Company. The Corporate
Governance Committee is responsible for reviewing reports of management,
internal auditors, regulators and independent auditors regarding accounting
policies and practices, audit results, and internal controls. The Committee
reviews the work of each in order to satisfy itself that each group is properly
discharging its responsibilities. The internal auditor and independent auditors
have free access to the Committee, without the presence of management, to
discuss any matter which they believe should be brought to the attention of the
Committee.
The financial statements have been audited by Ernst & Young LLP, independent
auditors, whose report appears herein.
Daniel J. Fischer
President and
Chief Executive Officer
F-15
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
The Manhattan Life Insurance Company
We have audited the accompanying balance sheets of The Manhattan Life Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. Our audits also included the financial statement
schedules listed in the Index at Item 14 (a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Manhattan Life Insurance
Company at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the financial statements, the Company made certain
accounting changes in 1995, 1994 and 1993.
/s/ Ernst & Young LLP
Cincinnati, Ohio
March 1, 1996
F-16
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held-to-maturity,
at amortized cost
(market: 1994-$48,913) $ -- 50,976
Fixed maturities available-for-sale
(amortized cost: 1995 - $312,690;
1994-$261,360) 325,038 241,784
Equity securities, at market
(cost: 1995-$2; 1994 - $2) 2 4
Mortgage loans 70,048 63,209
Real estate acquired through foreclosure 6,388 7,910
Policy loans 51,740 50,720
-------- --------
Total investments 453,216 414,603
Cash 711 2,545
Accrued investment income 6,498 6,637
Deferred policy acquisition costs 41,264 40,613
Furniture, equipment and leaseholds,
at cost, less accumulated
depreciation (1995-$2,707; 1994-$2,561) 512 581
Federal income tax recoverable 486 1,349
Deferred federal income taxes -- 2,089
Other assets 11,251 6,864
-------- --------
Total assets $513,938 $475,281
======== ========
LIABILITIES
Policy liabilities:
Future policy benefits $349,534 $342,726
Guaranteed interest contracts 18,154 19,808
Policyholders' funds on deposit 24,759 22,765
Policy and contract claims 8,646 5,623
Policyholders' dividends 27,719 27,960
-------- --------
Total policy liabilities 428,812 418,882
Amounts held in escrow
and accrued expenses 4,865 4,872
Other liabilities 6,741 5,426
Deferred federal income taxes 1,563 --
-------- --------
Total liabilities 441,981 429,180
POLICYHOLDERS' EQUITY 40,649 19,523
SHAREHOLDERS' EQUITY
Guarantee Capital Shares, $2 Par Value 6,683 6,683
(5,000,000 shares authorized,
3,341,624 shares
issued and outstanding)
Retained earnings 23,606 22,160
Unrealized gain (loss)
on fixed maturities classified
as available-for-sale 1,019 (2,265)
-------- --------
Total shareholders' equity 31,308 26,578
-------- --------
Total liabilities, policyholders'
equity and shareholders' equity $513,938 $475,281
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
REVENUE
Insurance revenue:
Traditional life insurance
premiums $ 28,712 $ 28,117 $ 26,659
Universal life policy charges 10,986 10,414 10,141
Annuities 8 8 20
Net investment income 35,598 33,134 32,998
Net realized gains (losses)
on investments 1,140 (1,446) 4,222
Other 18 48 135
---------- ---------- ----------
Total revenue 76,462 70,275 74,175
BENEFITS AND EXPENSES
Benefits 43,602 38,410 41,388
Decrease in reserves for
future policy benefits (638) (6,211) (1,430)
Interest expense:
Universal life 4,740 4,710 4,363
Investment products 5,130 5,377 5,564
Underwriting, acquisition
and insurance expenses 20,461 18,250 18,029
Policyholders' dividends
and participation
in operations 3,157 6,923 4,665
---------- ---------- ----------
Total benefits and expenses 76,452 67,459 72,579
Income before federal income
taxes and cumulative effect
of changes in methods of
accounting 10 2,816 1,596
Federal income tax (benefit)
expense (1,436) 925 142
---------- ---------- ----------
Income before cumulative
effect of change in methods
of accounting 1,446 1,891 1,454
Cumulative effect of change
in method of accounting for
postretirement benefits
other than pensions -- -- (340)
---------- ---------- ----------
Net income $ 1,446 $ 1,891 $ 1,114
========== ========== ==========
Earnings per share:
Income before cumulative
effect of changes
in methods of accounting $ .43 $ .57 $ .43
Cumulative effect of change
in method of accounting for
postretirement benefits
other than pensions -- -- (.10)
---------- ---------- ----------
Net income $ .43 $ .57 $ .33
========== ========== ==========
Weighted average number
of shares outstanding 3,341,624 3,341,624 3,341,624
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Unrealized
Gain (Loss) Unrealized
Guarantee on Available (Losses) Total
Capital Retained for Sale on Equity Shareholders'
Shares Earnings Securities Securities Equity
----------- ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $ 6,683 $ 19,762 $ -- $ (18) $ 26,427
Net income for 1993 -- 1,114 -- -- 1,114
Shareholder dividends ($.18 per share) -- (607) -- -- (607)
Increase in unrealized appreciation on
fixed maturities classified as
available-for-sale, net of income tax -- -- 690 -- 690
Decrease in unrealized depreciation
on equity securities 18 18
--------- --------- ---------- ---------- ---------
Balance at December 31, 1993 6,683 20,269 690 -- 27,642
Net income for 1994 -- 1,891 -- -- 1,891
Decrease in unrealized appreciation
on fixed maturities classified as
available-for-sale, net of income tax -- -- (2,955) -- (2,955)
--------- --------- ---------- ---------- ---------
Balance at December 31, 1994 6,683 22,160 (2,265) -- 26,578
Net income for 1995 -- 1,446 -- -- 1,446
Increase in unrealized appreciation
on fixed maturities classified as
available-for-sale,
net of income taxes -- -- 3,284 -- 3,284
--------- --------- ---------- ---------- ---------
Balance at December 31, 1995 $ 6,683 $ 23,606 $ 1,019 $ -- $ 31,308
========= ========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,446 $ 1,891 $ 1,114
Charges (credits) to net income
not affecting cash:
Policyholders' share of income
(loss) in excess of
(less than) dividends paid (1,861) 2,704 (835)
Interest credited to interest
sensitive contracts 5,130 5,377 5,564
Interest credited to
universal life policies 4,740 4,710 4,363
Accrual of discount on
investments, net (750) (896) (976)
Net realized (gains) losses
on investments (1,140) 1,446 (4,250)
Depreciation 146 646 194
Amortization of deferred
policy acquisition costs 3,581 3,607 2,847
Deferred federal income taxes
(benefits) (2,000) 798 (2,538)
Change in operating assets
and liabilities:
Accrued investment income 139 23 1,366
Policy acquisition costs deferred (4,232) (5,284) (5,354)
Federal income tax recoverable
(payable) 863 (617) (207)
Postretirement benefit other
than pensions liability 37 104 1,621
Policy liabilities 4,580 (7,432) 1,407
Other items, net (3,117) 734 (3,448)
-------- -------- --------
Cash provided by
operating activities 7,562 7,811 868
-------- -------- --------
INVESTING ACTIVITIES
Purchases of investments
and loans originated:
Fixed maturities and equity
securities held-to-maturity -- (8,558) (227,778)
Fixed maturities and equity
securities available-for-sale (127,814) (184,601) --
Mortgage loans and real estate (18,706) (3,025) (921)
Purchases of furniture,
equipment and leaseholds (77) (726) (275)
Sales, maturities, redemptions
and repayments of investments:
Fixed maturities and equity
securities held-to-maturity 1,818 3,847 206,051
Fixed maturities and equity
securities available-for-sale 127,325 168,616 --
Mortgage loans and real estate 13,482 17,516 27,970
Policy loans, net (1,020) 4,294 2,320
Short-term investments, net 116 250 409
-------- -------- --------
Cash provided (used)
by investing activities (4,876) (2,387) 7,776
-------- -------- --------
FINANCING ACTIVITIES
Dividends to Shareholders -- -- (607)
Premiums/deposits to interest
sensitive contracts 4,223 162 677
Receipts from universal life
policies credited to
policyholder account balances 6,359 7,063 7,241
Return of policyholder account
balances on universal life
policies (5,695) (6,095) (4,165)
Withdrawals from interest
sensitive contracts (9,407) (9,294) (9,848)
-------- -------- --------
Cash used by financing
activities (4,520) (8,164) (6,702)
-------- -------- --------
Increase (decrease) in cash (1,834) (2,740) 1,942
Cash at beginning of year 2,545 5,285 3,343
-------- -------- --------
Cash at end of year $ 711 $ 2,545 $ 5,285
======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the year for
federal income taxes $ 700 $ 1,250 $ 1,755
Policyholders' share of
cumulative effect of change
in accounting principle -- -- (2,383)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION
- --------------------------------------
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and reflect all adjustments which are,
in the opinion of management, necessary to present fairly the financial position
of The Manhattan Life Insurance Company (the Company) as of December 31, 1995
and 1994, and the statements of income, shareholders' equity and cash flows for
the years ended December 31, 1995, 1994, and 1993.
At December 31, 1995 and 1994, The Union Central Life Insurance Company (Union
Central), a Cincinnati based mutual life insurance company, owned 72.8% of the
Company's guarantee capital shares.
In 1993 the Company announced that a special committee of its independent
directors had been formed to consider the fairness of a proposal to eliminate
minority interests in the Company's guarantee capital shares by using a reverse
stock split to reduce all outstanding minority shares to fractional shares
payable in cash. The proposal was made by Union Central. Under the proposal, the
Company's minority shareholders would receive $5.125 for each guarantee capital
share held immediately prior to the consummation of the proposed transaction.
The special committee has been authorized by the Board of Directors to engage a
financial advisor, legal counsel and any other advisor necessary to assist it in
its consideration of the proposal.
The reverse stock split is an established method for eliminating minority
shareholders. This technique, which is a form of amendment to a corporation's
certificate of incorporation pursuant to state law, allows a corporation to
reverse split its outstanding shares of stock into a lesser number of
outstanding shares of stock. In the situation where a reverse stock split is
aimed at eliminating minority shareholders, the corporation may issue one new
share of stock in exchange for a number of old shares in excess of the number of
such old shares held by the largest minority shareholder. As a result, the
holdings of all minority shareholders would be reduced to a fraction of a share
for which they would be paid cash in lieu of the issuance of a certificate for
such fractional shares.
Union Central has proposed the Company effect a 1-for-303,784 reverse stock
split of its guarantee capital shares which would result in (i) the elimination
of minority shareholder interests in the Company, and (ii) Union Central being
the sole remaining holder of the guarantee capital shares. The ratio of 1-for-
303,784 was chosen by the board to ensure the largest single minority
shareholder, and consequently all other minority shareholders, would have their
holdings reduced to a fraction of a share for which they would be paid a fair
price in cash. As of December 31, 1995, the Company had 3,341,624 guarantee
capital shares issued and outstanding; of these shares, Union Central owned
2,433,345 or approximately 72.8%. It is anticipated the reverse stock split
would reduce the number of guarantee capital shares issued and outstanding from
3,341,624 to 8. It is anticipated the remaining 908,279 guarantee capital
shares held by shareholders other than Union Central will be returned in
exchange for cash in the aggregate amount of approximately $4,655,000. The par
value of the guarantee capital shares will be increased from $2.00 per share to
$835,406 per share. The aggregate amount of capital guaranteed to the Company's
policyholders will remain at its current balance of $6,683,248.
All holders of guarantee capital shares will return their shares to the Company
for either new guarantee capital shares or cash. Each holder of guarantee
capital shares that returns a group of 303,784 shares together with cash in the
amount of $227,838, will receive in exchange one new guarantee capital share.
Each holder that
F-21
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS
returns less than a group of 303,784 guarantee capital shares (including a
shareholder who owns in excess of 303,784 guarantee capital shares) will receive
$5.125 in cash for each guarantee capital share returned.
Pursuant to the exchange, Union Central will return to the Company 2,433,345
guarantee capital shares plus cash in the amount of $1,822,704 in exchange for
which it will receive 8 new guarantee capital shares and approximately $15,700
in cash for the remaining guarantee capital shares in excess of the amount
required for each new guarantee capital share. The Company does not anticipate
any of the minority shareholders will accumulate the number of guarantee capital
shares required to be exchanged for a new guarantee capital share.
The Company proposes to use funds from the Guarantee Capital Reserve (GCR) to
pay for the guarantee capital shares held by its minority shareholders after the
reverse stock split.
The proposal is subject to approval of the Company's guarantee capital
shareholders, as well as its Board of Directors. The proposal is currently
being reviewed by the New York Insurance Department (the Department) and their
independent counsel.
The accompanying financial statements include balances and transactions with
certain companies which are affiliated through common ownership. Related party
transactions, which are material to the accompanying financial statements, were
conducted with Union Central and Carillon Advisers, Inc. (CAI), an investment
adviser. (See Note 12 of Notes to the Financial Statements for a discussion on
related party transactions.)
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
INVESTMENTS
- -----------
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) on
December 31, 1993. The Statement addresses the accounting and reporting for
investment in equity securities that have readily determinable fair values and
for all investments in debt securities. SFAS 115 requires the Company's
investment portfolio to be divided into three separate categories and it
prescribes different accounting practices for each category:
. Investments held-to-maturity are valued at amortized
cost if management has the intent and ability to hold
the securities until maturity.
. Investments available-for-sale, which may or may not
be sold before maturity, are valued at the current
value, with unrealized gains and losses, net of taxes,
reported as a separate component of equity.
. Investments held-for-trading purposes are valued at
the current market prices, with any unrealized gains
or losses charged against earnings.
On November 15, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115
Special Report). In accordance with provisions in the SFAS 115 Special Report,
the
F-22
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Company chose to reclassify all held-to-maturity securities to available-for-
sale. At the date of transfer, the amortized cost of those securities was
$312,690,000.
The following table identifies changes in investment value and unrealized
gain (loss) resulting from changes in the market value of investments classified
as "Available-for-Sale":
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Market Value
at December 31, 1995 $325,038 $ 2 $325,040
Book Value
at December 31, 1995 312,690 2 312,692
======== ======== ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ======== ========
Market Value
at December 31, 1994 $241,784 4 241,788
Book Value
at December 31, 1994 261,360 2 261,362
-------- -------- --------
Unrealized Gain (Loss)
as of December 31, 1994: $(19,576) $ 2 $ 19,574)
======== ======== ========
Market Value
at December 31, 1993 $255,893 $ -- $255,893
Book Value
at December 31, 1993 247,525 -- 247,525
-------- -------- --------
Unrealized Gain as of
December 31, 1993: $ 8,368 $ -- $ 8,368
======== ======== ========
</TABLE>
The change in unrealized gains (losses) net of deferred income taxes, caused
increases (decreases) in shareholders' equity of $3,284,000, ($2,955,000), and
$690,000 at December 31, 1995, 1994 and 1993, respectively. The change in
unrealized gains (losses) net of deferred income taxes, caused increases
(decreases) in policyholders' equity of $22,987,000, ($20,688,000), and
$4,833,000 at December 31, 1995, 1994, and 1993, respectively. The change in
unrealized gain (loss) from December 31, 1994 is a result of reclassifying our
entire investment portfolio to the available-for-sale category in accordance
with the SFAS 115 Special Report and the overall change in the securities market
between 1995 and 1994. The change in the unrealized gain (loss) from December
31, 1993 is a result of market price changes due to higher interest rates.
F-23
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Other investments are reported on the following bases:
. Equity securities (common stocks and nonredeemable preferred stocks) are
carried at market. Unrealized gains or losses (differences between cost and
market), net of applicable federal income taxes and policyholders'
participation, are reflected in shareholders' equity.
. Mortgage loans on real estate are carried at their aggregate unpaid balance
less unamortized discount and less an allowance for possible losses.
. During the first quarter of 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors of Impairment of a
Loan " (SFAS 114). SFAS 114 was amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition" (SFAS 118). SFAS 114 and SFAS 118 require that an impaired
mortgage loan's fair value be measured based on the present value of future
cash flows discounted at the loan's effective interest rate, at the loan's
observable market price, or at the fair value of the collateral if the loan
is collateral dependent. If the fair value of a mortgage loan is less than
the recorded investment in the loan, the difference is recorded as an
allowance for mortgage loan losses. The change in the allowance for mortgage
loan losses is reported with realized gains or losses on investments.
Interest income on impaired loans is accrued on the net reported value of the
impaired loans; changes in actual or estimated cash flows are charged or
credited to the allowance for mortgage loan losses. The adoption of SFAS 114
and SFAS 118 had an immaterial effect on the financial statements of the
Company.
. Real estate acquired through foreclosure is carried at the lower of cost or
its net realizable value.
. Policy loans are reported at unpaid balances.
The market values of fixed maturities and stocks represent quoted market values
from published sources or calculated market values using the "yield method" if
no quoted market values are obtainable.
Changes in market values of available for sale securities, after deferred income
taxes, after adjustment for participating policyholders' share of earnings and
deferred income tax effects, are reported as unrealized gain or loss directly in
shareholders' equity and, accordingly, have no effect on net income.
Realized gains and losses on sales of investments, and declines in the value of
investments judged to be other-than-temporary, are recognized on a specific
identification basis.
Interest is not accrued on mortgage loans or bonds for which principal or
interest payments are determined to be uncollectible.
FURNITURE, EQUIPMENT AND LEASEHOLDS
- -----------------------------------
Depreciation is computed on the straight-line method over the estimated useful
lives of the respective assets, not to exceed 10 years for office furniture and
5 years for electronic data processing equipment. Depreciation is computed for
leasehold improvements on the straight-line method over the shorter of the
remaining lease term or useful life of improvements.
F-24
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
REVENUES, BENEFITS AND EXPENSES
- -------------------------------
Traditional Life Insurance Products
- -----------------------------------
Traditional life insurance products include those products with fixed and
guaranteed premiums and benefits, and consist principally of whole life
insurance policies, term insurance policies, certain limited-payment life
insurance policies, and certain annuities with life contingencies. Premiums for
traditional products are recognized as revenue when due.
The liabilities for future policy benefits for traditional life insurance are
computed primarily by the net level premium method, including assumptions as to
investment yields, mortality and withdrawal rates anticipated at the earliest
date of issue for each grouping of issue years, modified as necessary to reflect
anticipated trends and include a provision for possible unfavorable deviations.
Reserves on most individual policies are based on assumed investment yields that
range from 3% to 10%. Withdrawal rates are based principally on the Company's
own experience and vary by issue age, type of coverage and duration.
The costs of acquiring new traditional individual life business, principally
commissions, certain policy issue and underwriting expenses (such as medical
examination and inspection report fees) and certain agency expenses, all of
which vary with and are primarily related to the production of new and renewal
business, are deferred to the extent that such costs are deemed recoverable
through future gross premiums. Such deferred acquisition costs are amortized
over the anticipated premium paying period of the related policies, generally
not to exceed 30 years, using assumptions consistent with those used to develop
policy benefit reserves.
Universal Life and Other Interest Sensitive Products
- ----------------------------------------------------
Interest sensitive products include universal life and other flexible premium
life insurance policies, guaranteed interest contracts, individual deferred
annuities and annuities without life contingencies. Revenues for universal life
and other interest sensitive products consist of policy charges for the cost of
insurance, policy administration charges, and surrender charges that have been
assessed against policyholder account balances during the period.
Benefit reserves for universal life and other interest sensitive products are
computed in accordance with the retrospective deposit method and represent
policy account balances before applicable surrender charges. Policy benefits
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances and interest credited to policy
account balances. Interest crediting rates for universal life and other
interest sensitive products ranged from 5.50% to 7.60% during most of 1995.
However, at December 31, 1995, this range narrowed to 5.50% to 7.00%.
The Company is domiciled in New York and subject to Regulation 126 adopted and
promulgated by the Department. Under this regulation, the Company is required
to annually file a report which summarizes the results of projecting asset and
liability cash flows under multiple interest rate scenarios. The tests
performed prior to 1993 indicated that no adverse mismatching existed. Due to
the continued decline in the interest rates earned by the Company on its assets,
the results of the 1993 Regulation 126 tests required the Company to record an
additional statutory reserve totalling $2,600,000 based on test results as of
December 31, 1993. The GAAP reserves also increased by a similar amount. As of
December 31, 1994, similar cash flow testing indicated no additional reserves
were required. Due to the decrease in the long-term expectation of the
F-25
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Company's investment yield versus the expected yield used when pricing the
structured settlement and lottery annuities from 1981 to 1986, the results of
the Regulation 126 tests required the Company to record an additional reserve
totalling $3,300,000 as of December 31, 1995, and it is included in the increase
(decrease) in reserves on the Statements of Income.
Commissions and other costs of acquiring universal life and other interest
sensitive products that vary with and are primarily related to the production of
new and renewal business are deferred to the extent that such costs are deemed
recoverable through future estimated gross profits. Acquisition costs for
universal life and other interest sensitive products are amortized over the
lives of the policies in proportion to the present value of expected gross
profits from surrender charges and investment, mortality, and expense margins.
The amortization is adjusted retrospectively when estimates of current or future
gross profits (including the impact of investment gains and losses) to be
realized from a group of products are revised.
REINSURANCE
- -----------
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
insurance to other insurance enterprises or reinsurers under excess coverage and
coinsurance contracts. The Company retains a maximum of $300,000 of coverage
per individual life (reduced from $400,000 effective September 1, 1994).
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies. Premiums assumed from other companies have been added
to direct premiums and premiums ceded to other companies have been deducted from
direct premiums to determine premium income.
POLICY AND CONTRACT CLAIMS
- --------------------------
Policy claim reserves represent the estimated gross cost of all reported and
unreported claims incurred through December 31, 1995. The reserves for unpaid
claims are estimated using individual case-basis valuations and statistical
analyses. These estimates are subject to the effects of trends in claim
severity and frequency. Although considerable variability is inherent in such
estimates, management believes that the reserves for claims are adequate. The
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
POLICYHOLDERS' FUNDS ON DEPOSIT
- -------------------------------
The liability for policyholders' funds on deposit is generally established at
the policyholders' accumulated cash values plus amounts providing for guaranteed
interest.
DIVIDENDS TO POLICYHOLDERS
- --------------------------
Certain life insurance policies contain dividend payment provisions which enable
the policyholder to participate in the earnings of the Company. The allocation
of dividends to participating policyowners is based upon a comparison of
experienced rates of mortality, interest and expense as determined periodically
for representative plans of insurance, issue ages and policy durations, with the
corresponding rates assumed in the calculation of premiums. The participating
insurance in force receiving dividends accounted for 20.5%, 22.1% and 21.6% of
the total insurance in force at December 31, 1995, 1994 and 1993, respectively.
Dividend payments which
F-26
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
totalled $5,259,000 in 1995, are approved by the Company's Board of Directors on
an annual basis. The liability for future policyholder dividends is based on
the dividend scale in effect at the time the policy was issued.
POLICYHOLDERS' EQUITY
- ---------------------
The Company's charter (see Notes 2 and 3) provides for the allocation of its
profits between its shareholders and its policyholders on a one-eighth/seven-
eighths basis. The profits allocated are equal to income after taxes and
interest on the GCR, but before policyholder dividends. Accordingly, the
Company's Statements of Income reflect an allocation of the results of income to
reflect the policyholders' participation in the operations of the Company. The
Company's Balance Sheets reflect an allocation of the policyholders'
participation in undistributed surplus, adjusted to reflect the policyholders'
share of the change in unrealized gains or (losses) on fixed maturities
classified as "available for sale" totalling $22,987,000 net of income taxes of
$4,946,000 (includes the change in the valuation allowance of $4,550,000) at
December 31, 1995. Interest added to the GCR is reflected in the Statements of
Income as a reduction of policyholders' dividends and participation in the
results of operations.
FEDERAL INCOME TAXES
- --------------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, (SFAS 109), "Accounting for Income Taxes". In
accordance with SFAS 109, income taxes are provided using the liability method
for financial accounting and reporting of income taxes. Under this method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying the applicable tax rate to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Under the requirements of SFAS 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. The Omnibus Budget Reconciliation Act of 1993 did not change
the tax rates for the Company, as taxable income remains under the $10 million
threshold.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" (SFAS 106). SFAS 106 requires an accrual during the years that the
employee renders the necessary service, for the expected cost of providing
certain health care and life insurance benefits to an employee and the
employee's beneficiaries and covered dependents after the employees leave the
service of the Company. Prior to the adoption of SFAS 106, the Company expensed
the costs of such benefits as they were paid. SFAS 106 allows the recognition
of the cumulative effect of the liability in the year of adoption or the
amortization of the accumulated postretirement benefit obligation (APBO) over a
period of up to twenty years. The Company elected to recognize the cumulative
effect of this obligation as of January 1, 1993. The cumulative effect of
adopting SFAS 106 increased expenses $2,723,000, (net of taxes totalling
$1,133,000) which reduced net income by $340,000 after giving effect to the
$2,383,000 reduction in policyholders' equity related to this change in
accounting policy. (See Note 11).
The APBO at December 31, 1995 and 1994 totalled $4,145,000 and $4,108,000,
respectively, and is included in other liabilities in the Balance Sheets. SFAS
106 expense totalled $277,000, $304,000, and $331,000 in 1995, 1994 and 1993,
respectively, and is included in underwriting, acquisition and insurance
expenses in the Statements of Income.
F-27
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
POSTEMPLOYMENT BENEFITS
- -----------------------
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS
112). SFAS 112 requires companies to adopt accrual accounting for workers
compensation, disability, severance pay, COBRA, and other benefits provided
after employment but before retirement. Prior to the adoption of SFAS 112, the
Company expensed the costs of such benefits as they were paid. The adoption of
SFAS 112 had an immaterial effect on the financial statements of the Company.
EARNINGS PER SHARE
- ------------------
Calculations of earnings per share are based upon the weighted average number of
guarantee capital shares outstanding during each year.
FAIR VALUES OF FINANCIAL INSTRUMENTS
- ------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," (SFAS 107) requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS 107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company. Certain accounting,
actuarial, and regulatory bodies are continuing to study the methodologies to be
used to develop fair value information, particularly as that concept relates to
liabilities for insurance contracts. Accordingly, care should be exercised in
deriving conclusions about the Company's business or financial condition based
on the fair value information presented herein.
The Company closely monitors the level of its insurance liabilities, the level
of interest rates credited to its interest sensitive products, and the assumed
interest margin provided for within the pricing structure of its other products.
Those amounts are taken into consideration in the Company's overall management
of interest rate risk that attempts to minimize exposure to changing interest
rates through the matching of investment maturities with amounts expected to be
due under insurance contracts. As such, the Company believes that it has
reduced the volatility inherent in its "fair value" adjusted shareholders'
equity, although such volatility will not be reduced completely. The Company
has used discount rates in its determination of fair value for its liabilities
that are consistent with market yields for related assets. The use of the asset
market yield is consistent with management's opinion that the risks inherent in
the Company's asset and liability portfolios are similar, and the fact that fair
values for both assets and liabilities generally will react in much the same
manner during periods of interest rate changes. However, that assumption might
not result in fair values that are consistent with values obtained through an
actuarial appraisal of the Company's business or values that might arise in a
negotiated transaction.
F-28
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the Balance
- -------------------------------
Sheets for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are based on
- ---------------------
quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services. The fair values for equity securities are based
on quoted market prices and are recognized in the Balance Sheets.
The carrying amounts and fair values of the Company's investments in fixed
maturities (held-to-maturity and available-for-sale) and equity securities are
as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturities
held-to-maturity $ -- $ -- $ 50,976 $ 48,913
Fixed maturities
available-for-sale 325,038 325,038 241,784 241,784
Equity securities 2 2 4 4
-------------- ------------- ------------- --------------
$ 325,040 $ 325,040 $ 292,764 $ 290,701
============== ============= ============= ==============
</TABLE>
Refer to Note 4 of Notes to Financial Statements for additional fair value
disclosures.
Mortgage loans: The fair values for commercial and residential mortgages in
- --------------
good standing are estimated using interest rates currently being offered for
similar loans to borrowers with similar credit ratings in comparison with actual
interest rates and maturity dates. Fair values for mortgages with potential
loan losses are based on discounted cash flow analysis of the underlying
properties.
The carrying amounts and fair values of the Company's investments in mortgages
are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial $71,169 $73,997 $64,171 $65,036
Residential 260 260 377 377
------- -------- ------- --------
71,429 74,257 64,548 65,413
Less allowance
for mortgages losses (1,381) -- (1,339) --
------- -------- ------- --------
$70,048 $74,257 $63,209 $65,413
======= ======== ======= ========
</TABLE>
F-29
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Policy loans: Management is unable to ascertain the estimated life of the
- ------------
policy loan portfolio. Due to the excessive costs which would be incurred to
determine this information, management considers the estimation of the policy
loans fair value to be impracticable. The interest rates charged on policy
loans ranged between 4.80% and 8.94%. The nature of a policy loan ensures that
the outstanding loan balance will be fully recoverable, because the balance owed
to the Company is always equal to or lower than the cash value of the insurance
policy owed to the policyholder. Policy loans are stated at their aggregate
unpaid balance on the Balance Sheets.
Investment contracts: Fair values for the Company's liabilities under
- --------------------
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The carrying amounts and fair values of the Company's liabilities for
investment-type insurance contracts are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
(in thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Guaranteed interest contracts $18,154 $18,201 $19,808 $19,651
Single premium immediate annuities
(Lottery - Certain) 32,222 36,169 32,625 37,209
-------- -------- -------- --------
$50,376 $54,370 $52,433 $56,860
======== ======== ======== ========
</TABLE>
All other of the Company's insurance contracts are excluded from SFAS 107
disclosure requirements or are immaterial. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
2. SHAREHOLDER DIVIDENDS
The payment of cash dividends by the Company to its shareholders is dependent
upon compliance with certain regulatory limits and restrictions imposed by the
Company's charter. The Company's charter provides for three types of
shareholder distributions:
a) Interest at a specified rate on the par value of the
guarantee capital shares issued and outstanding
($195,000 annually),
b) Interest, at the Company's portfolio earnings rate on
invested assets, on the accumulated balance in the GCR,
and
c) A distribution of the shareholders' portion of the
Company's profits. Such amounts may, at the discretion
of the Company's Board of Directors, be distributed as
a stock dividend of additional
F-30
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
guarantee capital shares, paid in cash subject to certain limits and prior
regulatory approval, or reserved for the benefit of the shareholders in a
GCR.
Interest on the guarantee capital shares may be paid in any year dividends are
distributed to policyholders and is not subject to prior regulatory approval.
Historically, the shareholders' portion of Company profits has been equal to $1
for every $7 of policyholders' dividends paid on traditional, participating
policies. Cash dividends are limited based on the Company's prior year
statutory earnings or increase in statutory surplus, and are further subject to
prior approval by the Department. The GCR represents a restricted segment of
statutory unassigned surplus, and as such, does not represent a commitment or
liability to pay shareholder dividends. For financial statements prepared in
accordance with generally accepted accounting principals, the GCR is included in
shareholders' equity.
The Company and the Department have agreed to the following guidelines under
which shareholder distributions from the GCR would be permitted, subject to
prior approval by the Department:
If the Company's statutory-basis surplus is less than or equal to 9% of its
statutory policy reserves, then principal and interest distributions are
limited to the lesser of the prior year statutory gain from operations
(after policyholders' dividends and federal income taxes and before realized
gains and losses), or the prior year's increase in statutory surplus or,
If its statutory-basis surplus exceeds 9% of statutory policy reserves, the
principal and interest distributions are limited to the greater of the prior
year statutory gain from operations (after policyholders' dividends and
federal income taxes and before realized gains and losses), or the prior
year increase in statutory surplus.
The foregoing limits are subject to adjustment, by the Department, for unusually
large realized gains or the effects of surplus relief reinsurance transactions.
Based on the formula described above, no shareholder dividends will be paid in
1996, because the Company recorded both a statutory loss before net realized
gains and losses and a decrease in statutory surplus for the year ended 1995.
Since the Company plans to eliminate minority interests in the Company's
guarantee capital shares by using a reverse stock split to reduce all
outstanding minority shares to fractional shares payable in cash, it made no
cash dividend payments to its shareholders from principal or interest
accumulated in the GCR for the year ended December 31, 1995. See Note 1 of
Notes to the Financial Statements for detailed discussion about the reverse
stock split. The Company made no cash dividend payments to its shareholders
from principal or interest accumulated in the GCR during 1994, because the
Company recorded both a statutory loss before net realized gains and losses and
a decrease in statutory surplus for the year ended 1993. The Department
approved the Company's request to make a cash dividend payment of $607,000 to
its shareholders from the principal and interest accumulated in the GCR in 1993.
The balance in the GCR was $14,910,000, $13,171,000, and $11,478,000 at December
31, 1995, 1994 and 1993, respectively, and the ratio of the Company's surplus to
its policy reserves was 7.70%, 8.88%, and 8.27%, respectively. Interest added
to the GCR amounted to $995,000, $902,000, and $788,000, for the years ended
December 31, 1995, 1994 and 1993, respectively, and it was included in the
Company's Statements of Income as a reduction of policyholders' dividends and
participation in operations.
F-31
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the allocation of the Company's net income
between the shareholders and the policyholders:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Distributable income:
Income before cumulative effect
of changes in methods of
accounting $1,446 $1,891 $1,454
Policyholders' dividends and
participation in operations 3,157 6,923 4,665
Less interest credited to GCR (995) (902) (788)
------ ------ ------
Distributable income $3,608 $7,912 $5,331
====== ====== ======
Shareholders' share of net income:
1/8 of distributable income $ 451 $ 989 $ 666
Interest credited to GCR 995 902 788
Cumulative effect of change
in method of accounting for
postretirement benefits
other than pensions -- -- (340)
------ ------ ------
Net income $1,446 $1,891 $1,114
====== ====== ======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the Statements
of Income) $3,157 $6,923 $4,665
====== ====== ======
</TABLE>
3. SHAREHOLDERS' SHARE OF SURPLUS
The Company is the only existing life insurance company domiciled in New York
which has authorized and outstanding guarantee capital shares. Neither
applicable New York state law nor the Company's charter contain express
provisions establishing the extent of the interest of the holders of the
guarantee capital shares in the statutory unassigned surplus (total surplus less
guarantee capital shares and GCR) of the Company and there has never been a
judicial determination of the extent of such interest. Further, the laws
applicable to the Company do not provide for its voluntary liquidation or
dissolution; the Company may only be liquidated under the supervision of the New
York Superintendent of Insurance in the event of insolvency. In such a
liquidation or dissolution, the entire assets of the Company would be used to
satisfy claims of creditors and policyholders and there would be no statutory
unassigned surplus for distribution to the holders of the guarantee capital
shares. Accordingly, in the opinion of counsel to the Company, no unqualified
legal opinion can be rendered as to the degree, if any, to which the holders of
the guarantee capital shares would be entitled to participate in any current or
liquidating distribution of unassigned surplus. However, in the view of such
counsel, if there should occur a liquidation or other winding-up of the
Company's business in which assets exceeded liabilities on policies and the
claims of other creditors, or if there should occur a partial distribution of
surplus in the absence of such a liquidation or winding-up, although there are
reasonable arguments which could be made to the effect that the entire
unassigned surplus would be distributable solely to the policyholders or solely
to the shareholders, the more likely outcome if the question should be litigated
is that it would be held that one-eighth of the unassigned surplus would be
distributable to the shareholders and seven-eighths to the policyholders. See
Notes 1 and 2 of Notes to Financial Statements for a discussion of the
methodology
F-32
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
used to allocate current and accumulated profits between the shareholders and
the policyholders in the accompanying financial statements.
4. INVESTMENTS
Major sources of net investment income by class of investment are summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturities $24,698 $23,413 $22,049
Mortgage loans 8,505 7,815 9,035
Real estate 1,606 1,117 817
Policy loans 3,087 2,959 3,159
Short-term investments 364 330 411
Other 113 89 41
------- ------- -------
38,373 35,723 35,512
Investment expenses 2,775 2,589 2,514
------- ------- -------
Net investment income $35,598 $33,134 $32,998
======= ======= =======
</TABLE>
Net realized investment gains (losses) by class of investment are summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Fixed maturities $ 1,007 $(1,425) $ 5,192
Preferred stock -- -- (324)
Common stock 140 -- --
Mortgage loans (7) (21) (632)
Real estate -- -- 16
Short-term investments -- -- (2)
Other -- -- (28)
------- ------- -------
Net realized gains (losses)
on investments $ 1,140 $(1,446) $ 4,222
======= ======= =======
</TABLE>
The net realized gains in 1995 are a result of investment sales activity in
fixed income securities offset by a $42,000 increase in allowance for potential
mortgage losses and a $450,000 writedown of a fixed income security. Bond sales
activity has centered around investing for new product cash flows, providing
asset portfolio matching with insurance liabilities, improving the portfolio's
investment yield, and producing solid total return performance. The net
realized loss in 1994 resulted from lower market prices due to higher interest
rates and a $240,000 writedown of a fixed income security. The 1993 realized
gains are the result of
F-33
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
an increase in the volume of investment sales activity offset by a $668,000
increase in the allowance for potential mortgage losses and a $660,000 writedown
of a fixed income security.
The entire preferred stock portfolio was sold during the first quarter of 1993
at an interest rate related pretax loss of $324,000.
The carrying amounts and fair values of the Company's fixed maturity investments
at December 31, 1995, 1994, and 1993 are as follows by category of investment.
(The Company held no held-to-maturity securities at December 31, 1995. The
Company held no trading securities at December 31, 1995 and 1994):
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 23,405 $ 695 $ -- $ 24,100
Foreign government bonds 150 4 -- 154
Obligations of states of
the U.S. and political
subdivisions of the
states 273 6 -- 279
Corporate securities 190,885 11,889 (1,062) 201,712
Mortgaged-backed securities 97,977 2,765 (1,949) 98,793
-------- -------- -------- --------
Total fixed maturities 312,690 15,359 (3,011) 325,038
Equity securities 2 -- -- 2
-------- -------- -------- --------
Total $312,692 $ 15,359 $ (3,011) $325,040
======== ======== ======== ========
</TABLE>
F-34
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
- ----------------
Corporate securities $ 50,976 $ 455 $ (2,518) $ 48,913
AVAILABLE-FOR-SALE
- ------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 1,370 $ 13 $ (27) $ 1,356
Foreign government bonds 150 -- -- 150
Obligations of states of
the U.S. and political
subdivisions of the states 1,884 13 (71) 1,826
Corporate securities 140,731 401 (8,341) 132,791
Mortgaged-backed securities 117,225 420 (11,984) 105,661
Total fixed maturities 261,360 847 (20,423) 241,784
Equity securities 2 2 -- 4
-------- -------- -------- --------
Total $261,362 $ 849 $(20,423) $241,788
======== ======== ======== ========
</TABLE>
F-35
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The amortized cost and estimated market value of debt securities for each
investment category, by contractual maturity, are as follows (expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties):
<TABLE>
<CAPTION>
December 31, 1995
--------------------
Estimated
Amortized Market
Cost Value
--------- ---------
(in thousands)
<S> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
Due in one year or less $ 5,022 $ 5,201
Due after one year
through five years 40,539 41,399
Due after five years
through ten years 81,613 86,267
Due after ten years 20,028 21,740
-------- --------
147,202 154,607
Mortgaged-backed securities 97,977 98,793
Other securities with
multiple repayment dates 67,511 71,638
-------- --------
Total $312,690 $325,038
======== ========
</TABLE>
The Company employs an investment strategy whereby funds are invested in a
variety of asset classes and sectors at the highest return possible commensurate
with stability of return and prudent investment practices to ensure a well
diversified investment portfolio with good performance.
The Company owned $23,357,000 and $21,655,000 of fixed maturities considered
below investment grade at December 31, 1995 and 1994, respectively. Investment
grade is defined as NAIC 2 or above which generally corresponds to "Baa3" and
higher on Moody's ratings and "BBB-" and higher on Standard & Poor's bond
ratings.
At December 31, 1995 and 1994, investments in bonds totalling $2,145,000 and
$1,277,000, respectively, were on deposit with state insurance departments to
satisfy regulatory requirements.
Prior to the reclassification of all fixed maturity investments to the
"available-for-sale" classification, the Company sold two bonds classified as
"held-to-maturity". This remains consistent with their original classification
because both bonds were sold due to a significant deterioration in the issuers'
credit worthiness. The amortized cost at sale was $1,000,000 for each bond, and
losses of $125,000 and $58,000 were realized.
F-36
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Proceeds, gross realized gains and gross realized losses from the sales of
investments in debt securities follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1995 1994 1993
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Proceeds $100,858 $150,092 $181,137
Gross Realized Gains 2,795 2,351 5,132
Gross Realized Losses 1,697 3,582 1,169
</TABLE>
The Company has no material off-balance-sheet risk, except for mortgage
commitments in the normal course of business. Refer to Note 7 of Notes to the
Financial Statements for further discussion.
Changes in the difference between market value and cost of investments were as
follows (brackets denote market value below cost):
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Excess of market over cost,
January 1, 1993 $ 5,700 $(229) $ 5,471
Change for 1993 5,634 229 5,863
-------- ----- --------
Excess of market over cost,
December 31, 1993 11,334 0 11,334
Change for 1994 (32,973) 2 (32,971)
-------- ----- --------
Excess of market over cost,
December 31, 1994 (21,639) 2 (21,637)
Change for 1995 33,987 (2) 33,985
-------- ----- --------
Excess of market over cost,
December 31, 1995 $ 12,348 $ 0 $ 12,348
======== ===== ========
</TABLE>
At December 31, 1993, excess of market over cost for "investments held-to-
maturity" and "investments available-for-sale" were $2,966,000 and $8,368,000,
respectively.
At December 31, 1994, excess of cost over market for "investments held-to-
maturity" and "investments available-for-sale" were ($2,063,000) and
($19,576,000), respectively.
At December 31, 1995, excess of cost over market for "investments available-for-
sale" was $12,348,000.
F-37
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Mortgages are stated at their aggregate unpaid balances, less an allowance for
loan losses of $1,381,000, $1,339,000, and $3,187,000 at December 31, 1995,
1994, and 1993, respectively. Activity in the allowance for mortgage loss is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balances at the beginning
of the year $1,339 $ 3,187 $2,954
Provisions for potential
mortgage loan loss 42 217 668
Losses charged against
the mortgage loan
loss reserve -- (2,065) (435)
------ ------- ------
Balance at the end of the year $1,381 $ 1,339 $3,187
====== ======= ======
</TABLE>
The provision for mortgage losses has fluctuated between periods. The Company
establishes the mortgage reserve based upon its continuing review of the
mortgage portfolio and individual problem mortgages. The allowance for
potential loan losses is affected to a significant degree by general economic
conditions. While the Company believes it has provided adequate mortgage
reserves, subsequent economic and market conditions may require establishing
additional reserves.
The Company's mortgage portfolio is monitored closely through the review of loan
and property information such as debt service coverage, annual operating
statements and property inspection reports. This information is evaluated in
light of current economic conditions and other factors such as geographic and
property-type loan concentrations. This evaluation is part of the regular
review to determine whether adjustments to the allowance for potential loan
losses are warranted. Management believes the mortgage loss reserve is
sufficient to provide for potential loan losses. However, management cannot
predict with assurance where the economy is headed or how the mortgage and real
estate portfolios would be affected by various economic circumstances.
The Company's commercial mortgage portfolio is well diversified by property
type, and becoming more diversified geographically. The over-concentration in
the Middle Atlantic region, predominantly New York City and New York State, has
been reduced in 1995 to 37.8% of the portfolio as of December 31, 1995 compared
to 57.6% of the portfolio as of December 31, 1994. Further progress is expected
in 1996 as existing mortgages mature and new loans are originated.
The Company invests in a diversity of mortgages consisting of office, apartment,
retail, industrial, and residential loans. No property type represents more
that 35% of the portfolio. The Company controls credit risk through origination
guidelines and monitoring procedures.
During the fourth quarter, 1994, the Company began participating in new mortgage
fundings with Union Central in order to diversify its existing portfolio and the
advantage of attractive yield opportunities. It is the Company's policy that
all new first mortgage participations not exceed 75% of the value of the
underlying property collateral. This investment strategy continued in 1995 and
will continue in 1996.
At December 31, 1995, none of the Company's commercial real estate loans were 60
days or more delinquent.
Real estate acquired through foreclosure or "in-substance foreclosure" amounted
to $6,388,000 (fair value: $6,541,000) and $7,910,000 (fair value: $7,910,000)
at December 31, 1995 and 1994, respectively. The
F-38
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
decrease is due to the sale of a portion of one real estate owned property for
$1,522,000 during the third quarter, 1995. No gain or loss was incurred on the
sale. Real estate owned is valued as follows:
. Upon foreclosure, the carrying value of the property is recorded at the lower
of cost or net realizable value, which becomes its new cost basis. Net
realizable value for real estate is determined based upon independent
appraisals and other available information about the property, which may take
into consideration a number of factors, including; (i) discounted cashflows;
(ii) sales of comparable properties; (iii) geographic location of property
and related market conditions; and (iv) disposition costs. The Company has
the intent and ability to hold these assets until appropriate sales
opportunities arise. Foreclosed properties are actively managed by the
Company in order to maximize net realizable value.
. Subsequent to foreclosure, the carrying value of the property is periodically
evaluated and written down, if necessary, to reflect any additional amounts
considered unrecoverable upon sale.
. At the time of the sale, the difference between the sales price and the cost
(carrying value) is recorded as a realized gain or loss.
Investments which exceeded 10% of total shareholders' equity at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
Carrying
Description Value
- ----------- -------
(in thousands)
<S> <C>
Fixed Maturities:
- ----------------
Prudential Home Mortgage Securities Company
1993 24 B1 $ 4,383
Mortgage Loans on Real Estate:
- -----------------------------
Beekman Estates $ 3,775
Four Stores Limited Partnership 5,259
Jem and Jade Realty 3,413
Montclair Apartments 3,406
</TABLE>
5. REINSURANCE
In the ordinary course of business, the Company cedes reinsurance to other
insurers and reinsurers. The Company stopped assuming business in 1990. These
arrangements provide greater diversification of business and limit the maximum
net loss potential on large risks. The Company retains the risk for varying
amounts of individual insurance up to a maximum of $300,000 on any one life
(reduced from $400,000 effective September 1, 1994). Double indemnity benefits
are reinsured for risks in excess of $50,000 on any one insured. Amounts not
retained are ceded to other underwriters automatically or on a facultative basis
depending upon the circumstances. Ceded reinsurance recoveries were $8,510,000,
$2,472,000 and $5,915,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-39
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Reinsurance ceded contracts do not relieve the Company from its obligations to
policyholders. The Company remains liable to its policyholders for the portion
reinsured to the extent that any reinsurer does not meet its obligations for
reinsurance ceded to it under the reinsurance agreements. Failure of reinsurers
to honor their obligations could result in losses to the Company; consequently,
allowances will be established for amounts deemed or estimated to be
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers. No losses
are anticipated, and, based on management's evaluation, there are no
concentrations of credit risk at December 31, 1995.
The effect of reinsurance on premiums and amounts earned is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Direct premiums and amounts
assessed against policyholders $43,003 $41,311 $38,051
Reinsurance assumed 2,260 2,115 2,775
Reinsurance ceded (5,557) (4,887) (4,006)
------- ------- -------
Net premiums and amounts earned $39,706 $38,539 $36,820
======= ======= =======
</TABLE>
Life insurance in-force ceded to other companies totalled $940,302,000,
$848,248,000 and $787,514,000 at December 31, 1995, 1994 and 1993, respectively.
Life insurance in-force assumed from other companies totalled $571,114,000,
$658,645,000 and $876,749,000 at December 31, 1995, 1994 and 1993, respectively.
6. FEDERAL INCOME TAXES
The provision for federal income taxes does not bear the customary relationship
to income before taxes due to the presentation of taxes on a total Company basis
which is based on the sum of shareholders' and policyholders' pretax income.
Effectively, 7/8th's of the tax expense is allocated to the policyholders in the
final allocation of net income. See the calculation of policyholders' dividends
and participation in operations included in Note 2 of Notes to the Financial
Statements.
In accordance with SFAS 109, a valuation allowance of $5,201,000 was established
at December 31, 1994 for the portion of the deferred tax asset relating to the
SFAS 115 unrealized losses that cannot be recovered through carryback against
prior year capital gains.
F-40
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows :
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ 13,854 $ 13,657
Basis differences on bonds 410 634
Unrealized gains - SFAS 115 4,198 --
Other 520 525
-------- --------
Total deferred tax liabilities 18,982 14,816
-------- --------
Deferred tax assets:
Policyholder dividends 9,424 9,506
Future policy benefits 2,041 616
Premium - based DAC adjustment 2,713 2,418
Investment valuation reserves 473 459
Retirement plan accruals 2,191 1,983
Investment income differences 19 13
Unrealized losses - SFAS 115 -- 6,655
Other 558 456
-------- --------
Total deferred tax assets 17,419 22,106
Valuation allowance for
deferred tax assets -- (5,201)
-------- --------
Net deferred tax assets 17,419 16,905
-------- --------
Net deferred tax liabilities
(assets) $ 1,563 $ (2,089)
======== ========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current $ 564 $ 127 $ 1,547
Deferred (2,000) 798 (1,405)
------- ------- --------
Total $(1,436) $ 925 $ 142
======= ======= ========
</TABLE>
F-41
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
A reconciliation of the provision for federal income taxes as presented in the
financial statements and income taxes calculated using the statutory corporate
tax rate follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Income from operations $ 10 $2,816 $1,596
Policyholders' share of income
(loss) in excess of
(less than) dividends paid (1,861) 2,704 (835)
------- ------ ------
Income (loss) subject to
federal income tax $(1,851) $5,520 $ 761
======= ====== ======
Application of federal
income tax rate $ (648) $1,932 $ 266
Small company deduction for
life insurance companies (609) (157) (486)
Dividend received deduction -- -- (3)
Change in valuation allowance
(1993: net of amount allocated
to the adoption of FAS 106) -- (516) 338
Other (179) (334) 27
------ ------
Total tax expense $(1,436) $ 925 $ 142
======= ====== ======
</TABLE>
The top corporate tax rate used in the regular tax calculation increased from
34% to 35% effective January 1, 1993 due to passage of the Omnibus Budget
Reconciliation Act of 1993. However, the Company continues to be taxed at 34%
as taxable income has remained below the $10,000,000 threshold.
Prior to 1984, a portion of the Company's income was not subject to income tax,
but was accumulated for income tax purposes in a special memorandum tax account
designated "policyholders' surplus account" (PSA). Under provisions of the Tax
Reform Act of 1984, the PSA was frozen at its December 31, 1983 balance. The
PSA will become subject to tax at current rates if these amounts are distributed
or if the balance of the account exceeds certain limitations under the Internal
Revenue Code. The Company does not intend to take action or expect events to
occur that will result in any such tax. However, if events did occur the
maximum tax at current rates would be $472,000. The balance in the PSA at
December 31, 1995 and 1994, was $1,348,000.
F-42
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
7. COMMITMENTS AND CONTINGENT LIABILITIES
Leases
- ------
The Company leases its home office space and warehouse space under noncancelable
operating leases expiring in 2002 and 1996, respectively. The Company has the
option to extend the lease of the warehouse space to 2001 at an average annual
rent of $52,500. The Company currently plans to extend the lease to 2001. Future
minimum lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
(in thousands)
<S> <C>
1996 $ 984
1997 964
1998 964
1999 964
2000 964
After 2000 1,928
------
Total $6,768
======
</TABLE>
Total rental expense for the years ended 1995, 1994 and 1993 under operating
leases amounted to $1,107,000, $1,159,000 and $1,164,000, respectively.
Guaranty Fund Assessments
- -------------------------
The economy and other factors have caused an increase in the number of insurance
companies that are under regulatory supervision. This circumstance is expected
to result in an increase in assessments by state guaranty funds, or voluntary
payments by solvent insurance companies, to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurers financial strength and, in certain instances, may be offset against
future premium taxes. The amount of any future assessments under these laws
were estimated and an accrual of $160,000 and $206,000 is included in other
liabilities at December 31, 1995 and 1994, respectively. This estimated
liability was based on data provided by the National Organization of Life and
Health Insurance Guaranty Associations.
Litigation
- ----------
In the normal course of business, the Company is subject to various claims and
litigation primarily arising from claims made under insurance policies and
contracts. Management believes that the resolution of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
F-43
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Mortgage Commitments
- --------------------
At December 31, 1995, the Company has outstanding participation agreements with
Union Central to fund 24 mortgages in early 1996 totalling $5,980,000. These
transactions are in the normal course of business for the Company.
8. STATUTORY RESULTS OF OPERATIONS AND SURPLUS AS REPORTED TO REGULATORY
AUTHORITIES
The Company files statutory-basis financial statements with regulatory
authorities. The Company's statutory-basis financial statements are prepared in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of New York, the Company's state of domicile. Surplus and net
income (loss) as reflected in the Company's statutory-basis financial statements
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Capital and surplus,
at year end $28,770 $32,671 $30,642
======= ======= ========
Net income (loss) $(2,102) $ 1,356 $(5,115)
======= ======= ========
</TABLE>
The statutory net loss for 1995 was due to unfavorable claim experience. The
higher mortality in 1995 was an unexpected result and does not represent a trend
expected for the future. The Company closely monitors its underwriting
practices to make certain that the mortality risks it accepts are adequately
priced.
The reduction in capital and surplus in 1995 is the result of the $2.1 million
net loss and a $1.4 million strengthening of reserves for the structured
settlement and lottery annuities. The reserve strengthening resulted from the
continued decrease in the long-term expectation of the Company's investment
yield versus the expected yield used when pricing these annuities from 1981 to
1986.
The Company stopped selling these annuities in 1986, and assuming there are no
substantial downturns in interest rates, the Company expects that the additional
reserve established in 1995 will cover the projected future losses on this
closed block of business.
F-44
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
9. SUPPLEMENTAL FINANCIAL STATEMENT DATA
Details of certain income statement account balances are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Underwriting, acquisition
and insurance expenses:
Deferred policy
acquisition costs
amortization $ 3,581 $ 3,607 $ 2,847
Other operating expenses 16,880 14,643 15,182
------- ------- --------
Total $20,461 $18,250 $18,029
======= ======= ========
</TABLE>
The increase in other operating expenses is mainly due to increased commissions
and general expenses, particularly salary and fringe benefit costs.
10. EMPLOYEE BENEFITS
The Company has a defined benefit pension plan, The Manhattan Life Insurance
Company Employees Retirement Plan (the Plan), and an unfunded excess benefit
plan, the Manhattan Life Insurance Company Excess Benefit Plan (the Excess
Plan), covering substantially all employees. The Plan's benefit is based on an
employee's years of service with the Company and average compensation, not to
exceed $150,000, over a five consecutive year period preceding retirement. The
Excess Plan's benefit is based on the amount in excess of the benefits which
would have been paid under the Plan without regard to the Internal Revenue
Service Limitations.
The Company's funding policy for the Plan has historically been to contribute
the maximum amount deductible for federal income tax purposes. The
contributions totalled $215,000 and $125,000 in 1995 and 1994, respectively. No
contributions were made to the Plan in 1993. All Plan assets are invested in
guaranteed interest contracts issued by the Company.
Pension expense includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994 1993
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 197 $ 252 $ 222
Interest cost on projected
benefit obligation 1,019 1,409 1,329
Actual return on plan assets (689) (976) (974)
Net amortization and deferral (237) (327) (295)
------ ------ ------
Net pension expense included
in Underwriting, acquisition,
and insurance expenses
at end of year $ 290 $ 358 $ 282
====== ====== ======
</TABLE>
F-45
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
A table setting forth the Plan's funded status and the pension liability for
both the Plan and the Excess Plan included in the Company's Balance Sheets
follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$16,084 and $15,525 for
1995 and 1994, respectively $16,173 $15,543
======= =======
Projected benefit obligation $18,239 $17,385
Plan assets at fair value 16,616 16,607
------- -------
Projected benefit obligation
higher than plan assets 1,623 778
Unrecognized net gain 249 846
Prior service cost not yet
recognized in net periodic
pension cost (14) (16)
Unrecognized net obligation
being recognized over 15 years (371) (240)
Adjustment required to recognize
minimum liability - Excess Plan 60 --
------- -------
Pension liability included in
the Amounts held in escrow and
accrued expenses at end of year $ 1,547 $ 1,368
======= =======
<CAPTION>
December 31,
------------
1995 1994 1993
---- ------- -------
<S> <C> <C> <C>
Assumptions used to determine
the status of the plan were:
Discount rate 8.00% 8.00% 8.00%
Rate of increase in future
compensation levels 5.00% 6.00% 6.00%
Expected long-term rate of
return on assets 8.00% 8.00% 8.00%
</TABLE>
Of the total net pension expense and pension liability, $20,000 and $80,000
represents the Excess Plan's share of these balances, respectively, at December
31, 1995.
The Company has a contributory savings plan for employees meeting certain
service requirements which qualifies under Section 401(k) of the Internal
Revenue Code. This plan allows eligible employees to contribute up to certain
prescribed limits of their pre-tax compensation, with the Company matching 50%
of the first 6% of participant contributions. The Company's matching
contributions to this plan were $90,000, $96,000 and $88,000 for 1995, 1994 and
1993, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for its
eligible retired employees. The plan provides postretirement medical and life
benefits to full time employees who have worked 15 years and attained age 55
while in service with the Company. The plan is contributory and contains other
cost-sharing features such as deductibles and coinsurance. Retirees who retired
prior to January 1, 1991 do not make any
F-46
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
contributions. The accounting of the plan anticipates future cost-sharing
changes which are consistent with the Company's expressed intent to require
current and future retirees to pay the cost of medical, prescription drug and
dental benefits in excess of 175 percent of the costs incurred by the Company to
provide such benefits in 1993.
In 1993, the Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions"
(SFAS 106). SFAS 106 requires an accrual, during the years that the employee
renders the necessary service, for the expected cost of providing certain health
care and life insurance benefits to an employee and the employee's beneficiaries
and covered dependents. Prior to the adoption of SFAS 106, the Company expensed
the costs of such benefits as they were paid. SFAS 106 allows the recognition
of the cumulative effect of the liability in the year of adoption or the
amortization of the accumulated postretirement benefit obligation (APBO) over a
period of up to twenty years. The Company elected to recognize the cumulative
effect of this obligation as of January 1, 1993. The cumulative effect of
adopting SFAS 106 reduced net income by $340,000 after deferred taxes of
$1,133,000 and giving effect to the $2,383,000 reduction in policyholders'
equity related to this change in accounting policy. The APBO at December 31,
1995 and 1994 totalled $4,145,000 and $4,108,000, respectively, and is included
in other liabilities in the Balance Sheets. This liability will be funded from
future earnings. The SFAS 106 expense totalled $277,000, $304,000 and $331,000
for 1995, 1994 and 1993, respectively, and is included in underwriting,
acquisition and insurance expenses in the Statements of Income. Adoption of SFAS
106 had the effect of increasing expense in 1993 by $148,000.
F-47
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's Balance Sheets:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
-------- -------
(in thousands)
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $2,832 $2,668
Fully eligible active
plan participants 568 404
Other active plan participants 530 477
------ -------
Accumulated postretirement
benefit obligation in excess
of plan assets 3,930 3,549
Unrecognized net loss
from past experience 215 559
Accrued postretirement benefit ------ -------
cost included in other
liabilities at end of year $4,145 $4,108
====== =======
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
----- ------ -------
(in thousands)
<S> <C> <C> <C>
Service cost $ 34 $ 37 $ 26
Interest cost 282 270 305
Net amortization and deferral (39) (3) --
----- ------ -------
Net periodic postretirement
benefit cost included in
Underwriting, acquisition,
and insurance expenses
at end of year $ 277 $ 304 $ 331
===== ====== =======
</TABLE>
The 1995 weighted-average annual assumed rate of increase per capita cost of
covered benefits (i.e., health care cost trend rate) is 11.2% for medical Pre-65
and 10.9% for medical Post-65, and are assumed to decrease gradually to 6.95% by
2007 and remain at that level thereafter. Because participants are required to
participate in increases, the health care cost trend rate assumption has an
insignificant effect on the amounts reported.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% and 8.25% at December 31, 1995 and
1994, respectively. The expected rate of compensation increase is 5.5% per
year.
12. TRANSACTIONS WITH RELATED PARTIES
The Company transacts business with certain companies that are affiliated
through common ownership.
F-48
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Union Central provides facilities and certain data processing, accounting,
legal, administrative and executive services to the Company for a fee based on
the actual direct and indirect costs of providing such services. Fees paid by
the Company to Union Central totalled $2,239,000, $2,511,000 and $2,399,000 for
1995, 1994 and 1993, respectively.
CAI, a wholly owned subsidiary of Union Central provides investment advisory
services to the Company, and charges the Company a fee based on the type and
amount of assets under its management. Payments to CAI for such services
totalled $956,000, $951,000 and $959,000, for 1995, 1994, and 1993,
respectively.
Details of the net payable to affiliates included in other assets and other
liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
----- -----
(in thousands)
<S> <C> <C>
Carillon Advisers, Inc. $ 80 $ 79
Union Central 297 99
----- -----
$ 377 $ 178
===== =====
</TABLE>
13. INDUSTRY SEGMENTS INFORMATION
All operations of the Company are classified and summarized in industry
segments. Allocations of investment income and certain general expenses are
based on a number of assumptions and estimates, and reported operating results
by segment would change if different methods were applied. Certain assets are
not individually identifiable by segment and, accordingly, have been allocated
by formulas. Depreciation expense and capital expenditures are not considered
material. Financial information by industry segment follows:
<TABLE>
<CAPTION>
Individual Individual
Life Life Annuities
(Traditional) (Universal) & GIC's Total
------------- ----------- ------- -----
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
- ----------------------------
Total revenues $ 47,325 $ 18,390 $ 10,747 $ 76,462
Amortization of deferred
acquisition costs 2,512 1,066 3 3,581
Income (loss) before
federal income taxes 1,122 639 (1,751) 10
Income (loss) after
federal income taxes 1,538 91 (183) 1,446
Identifiable assets
at year end 273,363 106,624 133,951 513,938
</TABLE>
F-49
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Individual Individual
Life Life Annuities
(Traditional) (Universal) & GIC's Total
------------- ----------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
- ----------------------------
Total revenues $ 45,495 $16,022 $ 8,758 $ 70,275
Amortization of deferred
acquisition costs 2,639 952 16 3,607
Income (loss) before
federal income taxes 2,633 559 (376) 2,816
Income (loss) after
federal income taxes 1,777 160 (46) 1,891
Identifiable assets
at year end 257,759 93,642 123,880 475,281
Year Ended December 31, 1993
- ----------------------------
Total revenues $ 48,643 $15,258 $ 10,274 $ 74,175
Amortization of deferred
acquisition costs 2,060 745 42 2,847
Income (loss) before
federal income taxes
and cumulative effect
of change in method of
accounting for post-
retirement benefits other
than pensions 3,188 (429) (1,163) 1,596
Income (loss) before
cumulative effect of
change in method of
accounting for
postretirement benefits
other than pensions 1,864 (119) (291) 1,454
Income (loss) after
federal income taxes
and cumulative effect
of change in method of
accounting for post-
retirement benefits other
than pensions 1,615 (201) (300) 1,114
Identifiable assets
at year end 275,655 92,344 133,663 501,662
</TABLE>
See discussion about individual line of business results included in
Management's Discussion and Analysis of Financial Condition and Results of
operations under the caption Insurance Revenues and Benefit Expenses.
F-50
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
SUPPLEMENTARY DATA
- ------------------
Summarized Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1995
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Insurance and other revenues $ 9,880 $10,004 $10,242 $ 9,598
Net investment income 8,199 8,419 10,266(a) 8,714
Realized gains (losses) on
investments - net (562) (430) 1,336 796
------- ------- ------- -------
Total revenue 17,517 17,993 21,844 19,108
------- ------- ------- -------
Benefits 10,096 12,238 13,801 16,699
Expenses 5,185 5,135 5,178 4,963
Policyholders' dividends and
participation in operations 1,606 706 2,100 (1,255)(b)
------- ------- ------- -------
Total benefits and expenses 16,887 18,079 21,079 20,407
------- ------- ------- -------
Income (loss) before federal
income taxes 630 (86) 765 (1,299)
Federal income tax expense
(benefit) 166 (397) 202 (1,407)(c)
------- ------- ------- -------
Net income $ 464 $ 311 $ 563 $ 108
======= ======= ======= =======
Net income per share $ .14 $ .09 $ .17 $ .03
======= ======= ======= =======
<CAPTION>
1994
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Insurance and other revenues $ 9,591 $ 9,599 $ 9,496 $ 9,901
Net investment income 8,869 8,420 7,714 8,131
Realized gains (losses) on
investments - net 217 (482) (141) (1,040)
------- ------- ------- -------
Total revenue 18,677 17,537 17,069 16,992
------- ------- ------- -------
Benefits 9,475 10,310 10,621 11,880
Expenses 4,586 4,550 4,243 4,871
Policyholders' dividends and
participation in operations 2,981 1,898 1,799 245
------- ------- ------- -------
Total benefits and expenses 17,042 16,758 16,663 16,996
------- ------- ------- -------
Income (loss) before federal
income taxes 1,635 779 406 (4)
Federal income tax expense
(benefit) 1,011 272 (87) (271)
------- ------- ------- -------
Net income $ 624 $ 507 $ 493 $ 267
======= ======= ======= =======
Net income per share $ .19 $ .15 $ .15 $ .08
======= ======= ======= =======
</TABLE>
(a) The increase in net investment income in the third quarter, 1995, was due
primarily to the collection of default interest totalling $1,803,000 on a
mortgage loan. In July, 1995, the mortgager paid the loan-in-full, thus paying
the remaining default interest due.
(b) The decrease in policyholders' dividends and participation in operations is
due to allocating seven-eighths of total Company loss for the fourth quarter to
the policyholders. The majority of the loss is the result of establishing an
additional reserve totalling $3,300,000 in the fourth quarter as a result of the
Regulation 126 tests. See Note 2 of Notes to the Financial Statements for the
calculation of policyholders' dividends and participation in operations and Note
1 of Notes to the Financial Statements for further information about Regulation
126 testing.
F-51
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
SUPPLEMENTARY DATA
Summarized Quarterly Financial Data (Unaudited)(continued)
(c) The federal income tax benefit in the fourth quarter, 1995 is due to the
total Company pretax loss in the fourth quarter. See Note 6 of Notes to the
Financial Statements for an explanation of how income tax is calculated.
Quarterly financial data should be read in conjunction with the financial
statements and notes hereto.
F-52
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
Schedule I - Summary of investments - other than investments in related parties
December 31, 1995
-------------------------------------
(in thousands)
Column A Column B Column C Column D
Amount at
which shown
in the
Balance
Type of investment Cost Value(1) Sheets
- ------------------------------ --------- ------------ ------------
Available-for-sale securities:
Fixed maturities:
United States Government
and agencies and
authorities $ 23,405 $ 24,100 $ 24,100
Foreign Government 150 154 154
State, municipalities and
political subdivisions 273 279 279
Mortgaged-backed securities 97,977 98,793 98,793
Public utilities 30,113 32,094 32,094
All other corporate bonds 160,772 169,618 169,618
-------- -------- --------
Total Fixed Maturities 312,690 325,038 325,038
Equity securities 2 2 2
Mortgage loans on real estate 70,048 74,257 70,048(2)
Real estate acquired through
foreclosure 6,388 6,541 6,388
Policy loans 51,740 51,740 51,740
-------- -------- --------
Total investments $440,868 $457,578 $453,216
======== ======== ========
(1) Represents market value of fixed maturities and equity securities at the
balance sheet date determined on the basis of year end market prices. Fair
values of mortgage loans in good standing are estimated using interest
rates currently being offered for similar loans to borrowers with similar
credit ratings in comparison with actual interest rates and maturity dates.
Fair values of mortgages with potential loan losses are based on discounted
cash flow analysis of the underlying properties. Fair values of policy
loans are based on estimated realizable value.
(2) Balance represents value of mortgage loans net of an allowance for
potential loan losses.
F-53
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
Schedule III - Supplementary insurance information
<TABLE>
<CAPTION>
Other Premium
Deferred policy revenue
policy Future claims and and
acquisition policy benefits policy
Segment costs benefits payable charges
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
- ----------------------------
Individual Life (Traditional) $21,896 $179,662 $58,690 $28,712
Individual Life (Universal) 19,368 84,268 2,350 10,986
Annuities & GIC's -- 85,604 18,238 8
-------- -------- ------- -------
Total $ 41,264 $349,534 $79,278 $39,706
======== ======== ======= =======
Year ended December 31, 1994:
- ----------------------------
Individual Life (Traditional) $21,956 $181,771 $54,804 $28,117
Individual Life (Universal) 18,654 78,915 1,487 10,414
Annuities & GIC's 3 82,040 19,865 8
-------- -------- ------- -------
Total $ 40,613 $342,726 $76,156 $38,539
======== ======== ======= =======
Year ended December 31, 1993:
- ----------------------------
Individual Life (Traditional) $20,969 $185,317 $55,323 $26,659
Individual Life (Universal) 17,949 73,375 1,749 10,141
Annuities & GIC's 18 87,195 21,431 20
-------- -------- ------- -------
Total $ 38,936 $345,887 $78,503 $36,820
======== ======== ======= =======
<CAPTION>
Benefits
and Amortization
(1) interest of deferred
Net credited policy Other
Investment to policy- acquisition operating
Segment income holders costs expenses
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
- ----------------------------
Individual Life (Traditional) $18,149 $ 26,957 $ 2,512 $12,935
Individual Life (Universal) 6,932 12,601 1,066 3,447
Annuities & GIC's 10,517 13,276 3 498
-------- -------- ------- -------
Total $ 35,598 $ 52,834 $ 3,581 $16,880
======== ======== ======= =======
Year ended December 31, 1994:
- ----------------------------
Individual Life (Traditional) $17,604 $ 22,353 $ 2,639 $11,578
Individual Life (Universal) 5,703 10,844 952 2,712
Annuities & GIC's 9,827 9,089 16 353
-------- -------- ------- -------
Total $ 33,134 $ 42,286 $ 3,607 $14,643
======== ======== ======= =======
Year ended December 31, 1993:
- ----------------------------
Individual Life (Traditional) $ 17,775 $ 24,414 $ 2,060 $11,447
Individual Life (Universal) 5,169 12,426 745 3,350
Annuities & GIC's 10,054 13,045 42 385
-------- -------- ------- -------
Total $ 32,998 $ 49,885 $ 2,847 $15,182
======== ======== ======= =======
</TABLE>
(1) Net investment income was allocated using the segmentation of invested
assets method.
F-54
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
Schedule IV - Reinsurance
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Description amount companies companies amount to net
- ----------- ------ --------- ----------- ------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance in force $3,326,087 $940,302 $571,114 $2,956,899 19%
========== ======== ======== ==========
Insurance revenues:
Life insurance and annuities $ 43,003 $ 5,557 $ 2,260 $ 39,706 6%
========== ======== ======== ==========
Year ended December 31, 1994:
Life insurance in force $3,142,462 $848,248 $658,645 $2,952,859 22%
========== ======== ======== ==========
Insurance revenues:
Life insurance and annuities $ 41,311 $ 4,887 $ 2,115 $ 38,539 5%
========== ======== ======== ==========
Year ended December 31, 1993:
Life insurance in force $2,960,585 $787,514 $876,749 $3,049,820 29%
========== ======== ======== ==========
Insurance revenues:
Life insurance and annuities $ 38,051 $ 4,006 $ 2,775 $ 36,820 8%
========== ======== ======== ==========
</TABLE>
F-55
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
------------------------------------
Schedule V - Valuation and qualifying accounts
<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Charged to Balance at
Description of period expense other accounts Deductions end of period
- ----------- --------- ------- -------------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for bond
credit losses $ -- $ -- $ -- $ -- $ --
========== ======== ======== ======== ==========
Allowance for mortgage
loan losses 1,339 42 -- -- 1,381
========== ======== ======== ======== ==========
Year ended December 31, 1994:
Allowance for bond
credit losses $ -- $ -- $ -- $ -- $ --
========== ======== ======== ======== ==========
Allowance for mortgage
loan losses 3,187 217 -- (2,065) 1,339
========== ======== ======== ======== ==========
Year ended December 31, 1993:
Allowance for bond
credit losses $ 500 $ -- $ -- $ (500) $ --
========== ======== ======== ======== ==========
Allowance for mortgage
loan losses 2,954 668 -- (435) 3,187
========== ======== ======== ======== ==========
</TABLE>
F-56
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis highlights the major trends affecting the three
months and nine months ended September 30, 1996. To provide a basis for the
discussion, reference should be made to the financial statements, notes to
financial statements and supplementary financial data included in the Annual
Report for the year ended December 31, 1995.
General. The Manhattan Life Insurance Company (the Company) maintains its
Home Offices at 111 West 57th Street, New York, New York 10019; (212) 484-9300.
The Company was incorporated under the laws of New York in 1850.
At September 30, 1996 and December 31, 1995, The Union Central Life
Insurance Company (Union Central) owned 72.8% of the Company's guarantee capital
shares.
See Note 1 of Notes to Condensed Financial Statements for discussion about
the proposal to eliminate minority shareholders.
While the Company is authorized to write life, health insurance and annuity
business, its business consists primarily of individual life insurance and
annuity business. The Company writes insurance both on a participating basis,
where a portion of the premium is returned to policyholders in the form of
dividends, and on a nonparticipating basis. Nonparticipating insurance does not
pay dividends to policyholders, and in comparison with participating policies,
generally has lower premiums. The Company does not issue group life insurance
policies.
The Company operates in a highly competitive industry in which it does not
hold a significant market share. The Company competes not only with other life
insurance companies but also with other financial institutions. By offering a
full line of products including interest-sensitive products, both with and
without life contingencies, the Company meets this competition for its selected
customer group.
Impact of the Corporate Charter on the Company's Dividends Policy. The
Company is a guarantee capital life insurance company. Its stock is not common
stock. The term "guarantee" refers to the fact that the capital supplied by the
shareholders is "guaranteed" to the Company and does not constitute in any
manner a guarantee by anyone or of any assets of the Company. The Company's
stock represents capital guaranteed to the Company as an enterprise primarily
for the benefit of the Company's policyowners. Life insurance companies with
guarantee capital like the Company's stock were well known in the early 1800's
and at the time the Company was organized in 1850. The guarantee capital form
of business organization is not well known today, and management believes the
Company is the only life insurance company in the United States retaining this
form of organization. Because of the Company's unusual corporate status, the
legal rights of holders of the Company's stock are uncertain in some respects,
including the right to share in unassigned surplus in the unlikely event of
liquidation. New York law does not provide any specific guidance as to the
relative rights of shareholders and policyholders with respect to unassigned
surplus, and the Company has not been able to obtain an unqualified legal
opinion as to those rights. While the Company believes the shareholders and
policyholders would share in unassigned surplus according to their respective
one-eighth/seven-eighths share of profits, there can be no assurance that such
would be the case. As of
F-57
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
September 30, 1996 the Company's unassigned statutory surplus amounted to
$6,163,000, of which the one-eighth portion which should presumably be
attributable to holders of the Company's stock was $770,000. If it should prove
to be the case that the Company shareholders have no entitlement to unassigned
statutory surplus, they would stand to lose, collectively, such one-eighth share
thereof.
The payment of cash dividends by the Company to its shareholders is
dependent upon compliance with certain regulatory limits and restrictions
imposed by the Company's charter. The Company's charter provides for three
types of shareholder distributions:
a) Interest at a specified rate on the par value of the guarantee capital
shares issued and outstanding ($195,000 annually),
b) Interest, at the Company's portfolio earnings rate on invested assets,
on the accumulated balance in the Guarantee Capital Reserve (GCR), and
c) A distribution of the shareholders' portion of the Company's profits.
Such amounts may, at the discretion of the Company's Board of
Directors, be distributed as a stock dividend of additional guarantee
capital shares, paid in cash subject to certain limits and prior
regulatory approval, or reserved for the benefit of the shareholders
in a GCR.
Interest on the guarantee capital shares may be paid in any year dividends
are distributed to policyholders and is not subject to prior regulatory
approval.
Historically, the shareholders' portion of Company profits has been equal to
$1 for every $7 of policyholders' dividends paid on traditional, participating
policies. Cash dividends are limited based on Company's prior year statutory
earnings, or increase in statutory surplus, and are further subject to prior
approval by the Department. For financial statements prepared in accordance
with generally accepted accounting principles, the GCR is included in
shareholders' equity.
The Company and the Department have agreed to the following guidelines under
which shareholder distributions from the GCR will be permitted, subject to prior
approval by the Department:
If the Company's statutory-basis surplus is less than or equal to 9% of its
statutory policy reserves, then principal and interest distributions are
limited to the lesser of the prior year statutory gain from operations,
(after policyholders' dividends and federal income taxes and before
realized gains and losses) or the prior year's increase in statutory
surplus or,
If its statutory-basis surplus exceeds 9% of statutory policy reserves, the
principal and interest distributions are limited to the greater of the
prior year statutory gain from operations, (after policyholders' dividends
and federal income taxes and before realized gains and losses) or the prior
year increase in statutory surplus.
The foregoing limits are subject to adjustment by the Department for the
effects of surplus relief reinsurance transactions. Based on the formula
described above, no shareholder dividends will be paid in 1996, because the
Company recorded both a statutory loss before net realized gains and losses and
a decrease in statutory surplus for the year ended 1995. Since the Company
plans to eliminate minority interests in the Company's guarantee capital shares
by using a reverse stock split to reduce all outstanding minority shares to
fractional shares payable in cash, it made no cash dividend payments to its
shareholders from principal or
F-58
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
interest accumulated in the GCR for the year ended December 31, 1995. See Note 1
of Notes to Condensed Financial Statements for detailed discussion about the
reverse stock split.
The GCR is a restricted segment of the Company's total statutory surplus,
and does not represent a commitment or liability to pay shareholder dividends.
Interest credited to the GCR, which is a significant component of net income,
depends on the unpaid reserve balance and the Company's portfolio interest rate.
Changes in the GCR balance are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
Balance at beginning of period $14,910 $13,171
1/7 of policyholder dividends paid 530 744
Interest at the portfolio rate
from the prior period 925 995
------- -------
Balance at end of period $16,365 $14,910
======= =======
Average portfolio rate
for the prior period 7.62% 8.31%
======= =======
</TABLE>
The ratio of the Company's statutory surplus to its policy reserves was
7.68%, and 7.70%, at September 30, 1996 and December 31, 1995, respectively.
It should also be noted that the trend in the life insurance industry has
been away from sales of traditional participating policies towards interest
sensitive and term products. Since the amounts distributable to the Company
shareholders have been historically tied to the amounts distributable to holders
of participating policies (on the one-eighth/seven eighths basis), to the extent
the number of outstanding participating policies decrease or the dividend scale
on these policies decreases, the amount of profits potentially distributable to
holders of the Company's guarantee capital shares will decrease. The Company's
management is working to counter this trend. In 1991, management developed and
introduced a whole life participating policy, Par Flex, designed to compete with
interest sensitive products. Since 1991, the number of Par Flex policies in
force has increased from 61 to 2,474 at September 30, 1996, resulting in an
increase in annualized gross premiums of $5,745,000 and an increase in in force
of $226,274,000. In addition, the Par Flex plan has developed a dividend
liability of $322,000 at September 30, 1996. Management plans to continue
developing whole life participating products in the future.
F-59
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Results of Operations:
Earnings. The Company's charter provides for the allocation of its after-
tax profits between its shareholders and its policyholders. The shareholders'
portion includes interest on undistributed shareholder profits accumulated at
interest in the GCR, plus one-eighth of distributable income (i.e, income after
income taxes and interest on the GCR, but before policyholder dividends). The
table below summarizes the shareholders' share of net income:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
-------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Distributable income:
Net income $ 469 $ 563 $1,413 $1,337
Policyholders' dividends and
participation in operations 1,214 2,100 3,414 4,412
Less interest credited to GCR (295) (262) (925) (707)
------ ------ ------ ------
Distributable income $1,388 $2,401 $3,902 $5,042
====== ====== ====== ======
Shareholders' share of net income:
1/8 of distributable income 174 301 488 630
Interest credited to GCR 295 262 925 707
------ ------ ------ ------
Net income $ 469 $ 563 $1,413 $1,337
====== ====== ====== ======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividend and participation
in operations in the statements
of income) $1,214 $2,100 $3,414 $4,412
====== ====== ====== ======
</TABLE>
F-60
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's charter ameliorates the effect on shareholders of
deteriorating economic conditions, investment losses, losses resulting from
asset/liability mismatches, mortality losses, or losses resulting from any other
adverse experience by causing seven-eights of the amount of such losses to be
charged to policyholders' equity. For example, if the Company experienced a
$1,000,000 extraordinary loss on mortality in a given financial quarter, the
shareholders' share of the loss would be $125,000 on a generally accepted
accounting principles (GAAP) pre-tax basis. On the other hand, if the Company as
an enterprise experienced a $1,000,000 extraordinary gain from operations for a
given financial period, the shareholders' share of the gain would be $125,000 of
income on a pre-tax basis.
Insurance Revenues, Policyholder Benefit Expenses and Interest Expenses.
Below is a breakdown of insurance revenues, policyholder benefit expenses and
interest expenses by lines of business:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
------ ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
INSURANCE REVENUE:
Individual Traditional Life Premiums $6,312 $ 7,391 $19,477 $21,920
Individual Universal Life
Policy Charges 3,078 2,844 9,008 8,180
Annuities and GICS 1 1 4 8
------ ------- ------- -------
TOTAL INSURANCE REVENUE $9,391 $10,236 $28,489 $30,108
====== ======= ======= =======
POLICYHOLDER BENEFITS:
Death Benefits:
Individual Traditional Life $5,116 $ 5,541 $13,565 $14,643
Individual Universal Life 1,456 2,801 5,385 5,635
------ ------- ------- -------
Total Death Benefits 6,572 8,342 18,950 20,278
------ ------- ------- -------
Surrender Benefits:
Individual Traditional Life 2,052 2,048 6,389 5,899
------ ------- ------- -------
Change in Policy Reserves:
Individual Traditional Life (951) (771) (3,779) (2,260)
Annuities and GICS 24 (179) (311) (1,206)
------ ------- ------- -------
Total Changes in Policy Reserves (927) (950) (4,090) (3,466)
------ ------- ------- -------
Other Benefits:
Individual Traditional Life 313 374 1,136 1,400
Annuities and GICS 1,511 1,406 4,605 4,720
------ ------- ------- -------
Total Other Benefits (1) 1,824 1,780 5,741 6,120
------ ------- ------- -------
TOTAL POLICYHOLDER BENEFITS $9,521 $11,220 $26,990 $28,831
====== ======= ======= =======
INTEREST EXPENSE:
Individual Universal Life $1,283 $ 1,272 $ 3,753 $ 3,492
Annuities and GICS 1,178 1,309 3,585 3,812
------ ------- ------- -------
TOTAL INTEREST EXPENSE $2,461 $ 2,581 $ 7,338 $ 7,304
====== ======= ======= =======
</TABLE>
(1) Other benefits include matured endowment payouts and annuity benefit
payouts.
The following discussion describes the results in more detail.
F-61
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Individual Traditional Life. Individual traditional life insurance revenues
decreased as production decreased when compared to the same period in the prior
year, and ceded premiums increased.
In the past there was an industry wide shift in product mix towards interest
sensitive products, and as a result, management believes that profit margins
industry wide have decreased significantly. The industry profit margins on
interest sensitive products have been historically lower than profit margins on
traditional life products. The profit margins on traditional life products are
following this industry trend as the Company has had to make traditional
products more competitive with interest sensitive products by decreasing
premiums. The Company introduced a new participating product in 1991.
Management plans to continue developing whole life participating products in the
future in order to increase the book of business that pays policy dividends.
Individual traditional life policyholder death benefits decreased and
surrenders increased for the nine months ended September 30, 1996 compared to
the same period in the prior year due to random fluctuations which are inherent
in the life insurance industry. The decrease in life reserves was larger in
1996 compared to the same period in 1995, due to less new business in 1996
compared to 1995, and an increase in the level of surrenders.
Individual Universal Life. Universal life revenues, for the nine months
ended September 30, 1996, increased compared to the same period in 1995 due to
an increase in the number of universal life policies in-force. Growth in this
line of business is expected to continue in 1996.
Individual universal life death benefits for the nine months ended September
30, 1996, decreased compared to the same period in the prior year.
Interest expense increased slightly between periods since the increase in
universal life in-force more than offset the decrease in interest crediting
rates from 6.44% for the nine month period ended September 30, 1995 to 6.26% for
the same period in 1996. Consistent with industry practice, the Company has the
opportunity to adjust crediting rates on individual universal life insurance to
reflect market conditions. The current economic environment and market rates
have caused the decrease in the interest crediting rates.
Annuities and GIC's. Guaranteed Interest Contracts (GIC's) revenues are not
significant because the Company suspended the sale of GIC's in 1985 to reduce
the asset/liability mismatch resulting from funding GIC's with commercial
mortgages and to strengthen its capital position as measured by the ratio of its
statutory surplus to total assets. Over ninety-eight percent of
the GIC liability remaining at September 30, 1996 represents investment
contracts owned by the Company's pension plan.
In 1988, the Company began issuing single premium deferred annuities
(SPDA's) due to the availability of sufficient capital and improved operating
results. The sales of SPDA's had been very insignificant and as a result, the
Company suspended the sale of SPDA's in October, 1993. However, as a result of
the upturn in interest rates in 1994, the Company reopened the sale of this
product effective October, 1994 and saw a return to active sales in 1995.
However, the Company again closed the sale of SPDA's effective January 1, 1996,
due to the reduction in interest rates.
F-62
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Interest expense for the period ending September 30, 1996 remains consistent
when compared to the period ending September 30, 1995. The weighted average
annual interest rates credited on the Company's annuity products are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ------
<S> <C> <C> <C> <C>
Guaranteed Interest Contracts 5.95% 5.99% 5.98% 6.02%
Single Premium Deferred Annuity 5.91% 6.33% 6.08% 6.17%
</TABLE>
Investment Income. Investment activities are an integral part of the
Company's business, with investment income representing a major component of
total revenues. The major categories of net investment income by class of
investment are summarized as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
-------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $5,751 $ 6,371 $17,982 $18,378
Mortgages 1,773 3,340 5,287 6,895
Real estate 363 380 1,063 1,174
Policy loans 756 801 2,269 2,302
Short-term investments 52 122 99 272
Other 17 27 85 90
------ ------- ------- -------
8,712 11,041 26,785 29,111
Investment expenses (272) (775) (1,790) (2,227)
------ ------- ------- -------
Net investment income $8,440 $10,266 $24,995 $26,884
====== ======= ======= =======
</TABLE>
For the nine months ended September 30, 1996, net investment income
decreased $1.9 million from the same period in 1995 as net investment yield
decreased from 8.31% at September 30, 1995 to 7.69% at September 30, 1996, and
the amount of overall invested assets decreased. The net investment yield was
affected by a $1.8 million default interest collection on a mortgage payoff
during 1995. Investment expenses decreased in the quarter and nine months ended
September 30, 1996 due to a settlement of a lawsuit related to a mortgage loan.
The Company recovered approximately $368,000 of previously incurred expenses in
the quarter ended September 30, 1996.
F-63
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
REALIZED GAINS (LOSSES). Realized investment gains (losses) by class of
investment are summarized as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
----- ------ ----- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ (52) $ 887 $ 309 $ 868
Equity securities -- 113 (3) 113
Mortgages 20 336 (35) (637)
----- ------ ----- -----
Realized gain (losses) on investments $ (32) $1,336 $ 271 $ 344
===== ====== ===== =====
</TABLE>
The net realized gains in 1996 are a result of investment sales activity in
the available-for-sale portfolio of fixed income securities offset by a $35,000
increase in the allowance for potential mortgage losses.
Proceeds, gross realized gains and gross realized losses from the sales of
investments in debt securities classified as available-for-sale follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Proceeds $11,458 $24,823 $79,746 $82,604
Gross Realized Gains 94 833 1,488 1,960
Gross Realized Losses (298) (217) (1,317) (1,478)
</TABLE>
The provision for mortgage losses has fluctuated between periods. The
Company establishes the mortgage reserve based upon its continuing review of the
mortgage portfolio and individual problem mortgages. The allowance for
potential mortgage losses is affected to a significant degree by general
economic conditions. While the Company believes it has provided adequate
mortgage reserves, subsequent economic and market conditions may require
establishing additional reserves. See Investments for further information.
Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition
and insurance expenses for the nine months ended September 30, 1996 decreased
when compared to the same period in 1995 due to less new business, and decreased
operating costs.
F-64
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Policyholders' Dividends And Participation In Operations. The Company's
charter provides for the allocation of its distributable income (income before
policyholders' dividends but after federal income taxes) between its
shareholders and its policyholders on a one-eighth/seven-eighths basis. Refer
to Notes 2 and 3 of Notes to Condensed Financial Statements for further
discussion. The following schedule summarizes policyholders' dividends and
participation in operations:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Distributable income -
(See Footnote 2 of
Notes to Financial Statements) $1,388 $2,401 $3,902 $5,042
====== ====== ====== =======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the
Statements of Income) $1,214 $2,100 $3,414 $4,412
====== ====== ====== =======
Policyholders' dividends $ 929 $1,184 $ 813 $3,941
Increase in policyholders' equity 285 916 2,601 471
------ ------ ------ -------
Total policyholders'
dividends and
participation in operations $1,214 $2,100 $3,414 $4,412
====== ====== ====== =======
</TABLE>
During the nine months ended September 30, 1996, the policyholders' dividend
liability, because of a change in estimate, was reduced by approximately
$2,700,000. This caused a decrease in policyholders' dividends, and an increase
in the policyholders' participation in operations. The effect on total
policyholders' dividends and participation in operations, because of the unique
corporate structure, (see Note 2 and 3 of Notes to the Condensed Financial
Statements) was limited to 7/8th's of the total federal income tax effect,
$827,000.
Insurance Regulations. Life insurance companies are subject to regulation
and supervision primarily by their respective states of domicile and also by
each state in which they are authorized to do business. The extent of such
regulation varies from state to state. All states impose statutory
restrictions, primarily for the protection of policyholders, administered by
regulatory agencies with broad discretionary authority. The Company is required
to submit detailed annual reports to the insurance regulatory agency in each
state in which it is licensed. Such statements must comply with rules of the
National Association of Insurance Commissioners (NAIC). In accordance with
rules and practices of the NAIC, the Company is examined periodically by
representatives of insurance departments of states where it is licensed to do
business. The Company was last examined for the four year period ended December
31, 1993. Reports and statements filed by the Company are open to inspection by
the public at the offices of the Department in Albany, New York and New York,
New York.
The Company also can be required, under the solvency or guaranty laws of
most states in which it does business, to pay assessments (up to prescribed
limits) to fund policyholder losses or liabilities of insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurers financial strength and, in
certain instances, may be offset against future premium taxes. The amount of
any future assessments under these laws cannot reasonably be
F-65
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
estimated. However, management believes that such assessments will not have a
material adverse effect on the Company's financial condition.
Federal Income Taxes. The Company is taxed under the life insurance company
provisions of the Internal Revenue Code (the Code). Under the Code, a life
insurance company's taxable income incorporates income from all sources,
including premiums, investment income and certain changes in reserves.
Amendments to the Code adopted in 1990 require life insurance companies to
capitalize and amortize policy acquisition costs calculated by prescribed
formulas. These deferred acquisition costs are determined based on Internal
Revenue Service (IRS) prescribed percentages of net premiums that vary by type
of policy. Prior tax law permitted these costs to be deducted as they were
incurred. By deferring deductions, this law has the effect of increasing the
current tax incurred, and decreasing deferred taxes payable by a corresponding
amount. This provision of the act resulted in increases in the Company's taxable
income of $311,000 and $532,000 for the three months and nine months ended
September 30, 1996 compared to $193,000 and $667,000 for the same periods in
1995.
Included in the Condensed Balance Sheets at September 30, 1996 and December
31, 1995 is a net deferred tax asset of $2,762,000 and a net deferred tax
liability of $1,563,000, respectively. The shift from a net deferred tax
liability to a net deferred tax asset occurred as a result of recording an
unrealized loss of $2,937,000 on our investment portfolio at September 30, 1996
compared to an unrealized gain of $12,348,000 at December 31, 1995. (See Note 4
of Notes to Condensed Financial Statements for further information.) As
discussed in the preceding paragraph, the overall net deferred tax asset is
primarily the result of the accumulation of deferred acquisition costs that will
be deductible in future periods. Based on offsetting deferred tax credits,
taxable income in the carryback period, and expected future taxable income, it
is management's determination that it is more likely than not that the net
deferred tax asset will be realized.
Certain proposals to make additional changes in the federal income tax laws
and regulations affecting insurance companies or insurance products continue to
be considered at various levels in the United States Congress and the Internal
Revenue Service. The Company can not predict whether any additional tax reform
measures will be adopted in the foreseeable future or, if adopted, whether such
measures will have a material effect on its operations.
FINANCIAL CONDITION:
Liquidity. The Company is domiciled in New York and subject to Regulation
126 adopted and promulgated by the Department. Under this regulation, the
Company is required to annually file a report which summarizes the results of
projecting asset and liability cash flows under multiple interest rate
scenarios. Due to the decrease in the long-term expectation of the Company's
investment yield versus the expected yield used when pricing the structured
settlement and lottery annuities issued from 1981 to 1986, the Company recorded
an additional statutory reserve totalling $1,400,000 based on test results as of
December 31, 1995. An additional GAAP reserve of $3,300,000 was recorded as of
December 31, 1995.
The Company has no material off-balance-sheet risks, except for mortgage
commitments made in the normal course of business.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
F-66
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Capital Resources. The following comparison of the Company's capital ratios
demonstrates the adequacy of the Company's statutory surplus:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Ratio of statutory surplus plus
the asset valuation reserve to
statutory assets
Manhattan Life 7.5% 7.4%
Industry * 9.6%
Ratio of statutory surplus plus
the asset valuation reserve to
invested assets
Manhattan Life 7.8% 7.6%
Industry * 10.0%
</TABLE>
* Source: The Townsend & Schupp Company's annual survey of 254 of the largest
U.S. life insurance companies ranked by total assets. (Comparative
ratio's as of September 30, 1996 are not available.)
The increase in the above ratios is a result of a statutory gain from
operations of $799,000 for the period ended September 30, 1996.
The difference between the Company's 1995 ratios compared to the industry
ratios is the result of two factors. The Company recorded a statutory net loss
of $2,102,000 for the year ended December 31, 1995. In addition, a $1,400,000
additional statutory reserve was recorded by the Company. This was required as
a result of requirements of Regulation 126 adopted and promulgated by the
Department. See Liquidity Section for more information.
The Company has no surplus relief reinsurance agreements or other types of
surplus financing transactions in effect at September 30, 1996 or December
31,1995.
F-67
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Investments. The current investment strategy for the Company is designed to
maintain the portfolio's overall quality, yield, liquidity, asset/liability
structure, asset diversification, and to avoid issuer concentration and higher
risk assets. All of the investments in the portfolio are well within
diversification, quality and other requirements of state insurance laws. The
Company is directing most of its new investment cash flow in 1996 to the
acquisition of investment grade bonds, mortgage-backed securities, and
commercial mortgages.
The composition of the Company's invested assets is as follows (in
thousands):
<TABLE>
<CAPTION>
Category September 30, 1996 Percent December 31, 1995 Percent
- -------- ------------------ ------- ----------------- -------
<S> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-Backed Securities $ 87,625 20% $ 98,793 22%
Corporate Bonds 208,518 48 226,245 50
-------- --- -------- ---
Total Fixed Income Securities 296,143 68 325,038 72
Other Invested Assets 23 0 -- 0
Short-term 2,100 0 -- 0
Common Stock -- -- 2 0
Commercial Mortgages 78,747 18 70,048 16
Real Estate Owned 7,394 2 6,388 1
Policy Loans 50,055 12 51,740 11
-------- --- -------- ---
TOTAL INVESTMENTS $434,462 100% $453,216 100%
======== === ======== ===
</TABLE>
This schedule excludes cash held by the Company totalling $1,259,000 and
$711,000 at September 30, 1996 and December 31, 1995, respectively.
Fixed Income Securities. Investments in fixed maturities represent the
majority of the invested assets of the Company. The investments are carefully
selected as to quality, maturity and yield to insure the ability to meet
policyholder claims in a timely manner and provide increases to the Company's
growth capital for the further vitality of its business. The Company also seeks
to match the rates it credits on its investment spread products to reflect the
amounts the Company earns on its invested assets. A mix of government bonds,
mortgaged-backed securities, asset-backed securities, corporate bonds and money
market instruments are utilized to meet these objectives.
On November 15, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115
Special Report). In accordance with provisions in the SFAS 115 Special Report,
the Company chose to reclassify all held-to-maturity securities to available-
for-sale at December 31, 1995. In addition, there were equity securities
classified as available-for-sale with market values totaling $2,000 at December
31, 1995. There were no equity securities held at September 30, 1996.
F-68
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table identifies changes in investment value and unrealized
gain (loss) resulting from changes in the market value of investments classified
as "Available-for-Sale" (in thousands):
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES TOTAL
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Market Value at September 30, 1996 $296,143 $ -- $296,143
Book Value at September 30, 1996 299,080 -- 299,080
-------- ------ --------
Unrealized (Loss) as of
September 30, 1996: $ (2,937) $ -- $ (2,937)
======== ====== ========
Market Value at December 31, 1995 $325,038 $2 $325,040
Book Value at December 31, 1995 312,690 2 312,692
======== ====== ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ====== ========
Change in Unrealized Gain from
December 31, 1995: $(15,285) $ -- $(15,285)
======== ====== ========
Shareholders' 1/8 share of
change in unrealized gain
from December 31, 1995 $ (1,911) $ -- $ (1,911)*
======== ====== ========
Policyholders' 7/8 share of
change in unrealized gain
from December 31, 1995 $(13,374) $ -- $(13,374)*
======== ====== ========
</TABLE>
* The change in unrealized gains (losses) caused shareholders' equity to
decrease $1,261 (net of deferred taxes of $650) and policyholders' equity
to decrease $8,827 (net of deferred taxes of $4,547) for the nine months
ended September 30, 1996.
Management periodically reviews its fixed maturities portfolio to determine
if factors evidencing an other than temporary impairment in value exist for
individual securities. In making this determination, management evaluates the
strength of the issuer's liquidity and its continued ability to service its
contractual obligations and the occurrence of events of default. As of
September 30, 1996, no bonds were in default.
The weighted average maturity of the marketable bond portfolio excluding
mortgaged-backed securities was 8.83 years as of September 30, 1996.
At September 30, 1996, the Company continued to invest in mortgage-backed
securities. The mortgage-backed securities are subject to risks associated with
variable prepayments. As such, those securities may have a different actual
maturity than planned at the time of purchase. Securities that have an
amortized cost that is greater than par and that are backed by mortgages that
prepay faster than expected will incur a reduction in yield or an increase in
yield if prepaid slower than expected. Those securities that have an amortized
cost that is less than par and that prepay faster than expected will generate an
increase in yield or a decrease in yield if prepaid slower than expected. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayment in a
changing interest rate environment, and the repayment priority of the securities
in the overall securitization schedule.
F-69
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company limits the extent of those risks by generally avoiding
securities whose cost significantly exceeds par, by purchasing securities that
are backed by stable collateral, and by concentrating on securities with
enhanced priority in their trust structure. Such securities with reduced risk
typically have a lower yield but higher liquidity than higher-risk mortgage-
backed securities. At selected times, higher-risk securities may be purchased
if they do not compromise the safety of the Company's general portfolio. At
September 30, 1996, the Company does not have a significant amount of higher-
risk mortgage-backed securities. The Company's CMO portfolio is structured to
produce acceptable yields while minimizing the risk of prepayment uncertainty.
High-yield, below investment grade securities included in the investment
portfolio increased to $34,964,000 (market: $34,906,000) at September 30, 1996
from $24,357,000 (market: $24,531,000) at December 31, 1995 and amounted to
approximately 6.38% of invested assets and approximately 5.5% of total assets at
September 30, 1996. Management believes that the current level of investment in
high-yield securities, at only 6.38% of invested assets, offers desired returns
without undue risk. The interest rates available on those high-yield below-
investment-grade securities are significantly higher than are available on other
corporate debt securities. Also, the risk of loss due to default by the
borrower is significantly greater with respect to such below-investment-grade
securities because those securities are generally unsecured and are often
subordinated to other creditors of the issuer and issued by companies that
usually have high levels of indebtedness. The Company attempts to minimize the
risks associated with those below-investment-grade securities by limiting the
exposure to any one issuer and by closely monitoring the credit worthiness of
such issuers. The Company's management does not presently anticipate its
investments in high yield securities will have any significant adverse effect on
the Company's financial condition or income from operations.
Real Estate Owned. Real Estate acquired through foreclosure or "in-
substance" foreclosure amounted to $7,394,000 and $6,388,000 at September 30,
1996 and December 31, 1995. The increase is due to the capitalization of
building improvements. It is valued as follows:
. Upon foreclosure, the carrying value of the property is recorded at
the lower of cost or net realizable value, which becomes its new cost
basis. Net realizable value for real estate is determined based upon
internal or external appraisals and other available information about
the property, which may take into consideration a number of factors,
including; (i) discounted cashflows; (ii) sales of comparable
properties; (iii) geographic location of property and related market
conditions; and (iv) disposition costs. The net realizable value
determined by the Company may be greater than the price which may be
realized if the Company were forced to liquidate such properties on an
immediate sale basis. The Company has the intent and ability to hold
these assets until appropriate sales opportunities arise. Foreclosed
properties are actively managed by the Company in order to maximize
net realizable value.
. Subsequent to foreclosure, the carrying value of the property is
periodically evaluated and written down, if necessary, to reflect any
additional amounts considered unrecoverable upon sale.
. At the time of the sale, the difference between the sales price and
the carrying value is recorded as a realized gain or loss.
Mortgages. At September 30, 1996 the Company's mortgage loans on real
estate increased $8,699,000 from $70,048,000 at December 31, 1995 to $78,747,000
at September 30, 1996, net of an allowance for potential mortgage loan losses of
$1,416,000 and $1,381,000 at September 30, 1996 and
F-70
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
December 31, 1995, respectively. During the fourth quarter of 1994, the Company
began participating in new loan fundings with Union Central. New loan fundings,
on a participating basis, continue with Union Central during 1996 in order to
geographically diversify the existing portfolio. During the first nine months of
1996, the Company participated in 63 new originations totalling $17,550,000 out
of a total loan amount of $131,196,000.
The Company's mortgage portfolio is monitored closely through the review of
loan and property information such as annual operating statements, property
inspection reports, and real estate tax records. This information is evaluated
in light of current economic conditions and other factors such as geographic and
property-type loan concentrations. This evaluation is part of the regular
review to determine whether adjustments to the allowance for potential mortgage
losses appear warranted.
The Company also monitors its mortgage portfolio in an attempt to identify
loans which are not currently classified as delinquent, but where the Company
has knowledge which causes it to have concerns as to the ability of borrowers to
comply with the present loan repayment terms. These loans ("watchlist loans")
are subject to increased scrutiny and review by the Company. Watchlist loans
totalled $9,204,000 and $13,964,000 at September 30, 1996 and December 31, 1995,
respectively. These loans were considered by management in establishing the
$1,416,000 mortgage loan loss reserve.
It is the Company's policy to place mortgages on nonaccrual status when it
appears probable that accrued interest will not be recovered. None of the
Company's mortgages were on nonaccrual status at September 30, 1996 or December
31, 1995.
The Company classifies mortgages that are 90 days or more
delinquent as to interest and/or principal payments or those in the process of
foreclosure as being in default. None of the Company's mortgages were in
default as of September 30, 1996 or at December 31, 1995. As part of the
valuation process, management reviews loans individually and makes economic
estimates of property values and probability estimates of losses occurring based
on the analysis of operating statements, compilation of current and projected
market data, a review of property inspection reports, appraisals and judgments
regarding the financial strength of individual borrowers. This valuation
process was used by management in establishing the $1,416,000 mortgage loan loss
reserve as of September 30, 1996. Included in the mortgage loan loss reserve
are amounts provided for specific properties for which management believes
market conditions or other factors indicate the net realizable value of the
underlying collateral is less than the mortgage balance (and any accrued
interest). Net realizable value for real estate assets is determined based upon
the market value of a property which takes into consideration capital
improvements and leasing activities. Management believes the Company's mortgage
loan loss reserve is adequate. However, management cannot predict with
assurance where the economy is headed or how the mortgage portfolio would be
affected by various economic circumstances. Management closely monitors the
mortgage portfolio and regularly reviews the mortgage loan reserves to determine
whether adjustments to the reserve or asset values appear warranted.
There have been no troubled debt restructurings since year end 1989.
F-71
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
A summary of the characteristics of the Company's mortgage portfolio (before
deducting the valuation reserve of $1,436,000 and $1,381,000 at September 30,
1996 and December 31, 1995, respectively) follows ($ in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Percent Percent
Geographic Diversification: of Total of Total
-------- --------
<S> <C> <C> <C> <C>
New England $ 1,285 1.6% $ 1,486 2.1%
Middle Atlantic 20,380 25.4 27,029 37.8
South Atlantic 10,193 12.7 6,317 8.8
East North Central 9,882 12.3 6,328 8.9
West North Central 4,525 5.6 4,614 6.4
East South Central 2,472 3.1 1,694 2.4
West South Central 10,725 13.4 8,893 12.5
Mountain 9,038 11.3 5,889 8.2
Pacific 11,663 14.6 9,179 12.9
------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
Property Type:
Office $21,880 27.3% $16,078 22.5%
Apartment 20,071 25.0 22,325 31.3
Retail 28,730 35.8 24,308 34.0
Industrial 6,543 8.2 6,433 9.0
Residential 232 0.3 260 .4
Other 2,707 3.4 2,025 2.8
------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
Maturities:
Past Maturity $ 0 0.0% $ 2 0.0%
Maturing within 1 year 1,195 1.5 12,757 17.9
Maturing in 2-5 years 23,755 29.6 25,527 35.7
Maturing in 6-10 years 9,927 12.4 5,836 8.2
Maturing in over 10 years 45,286 56.5 27,307 38.2
------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
</TABLE>
F-72
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands except share amounts)
Part I. Financial Information
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Fixed income securities
available-for-sale $296,143 $325,038
Equity securities, at market -- 2
Mortgage loans 78,747 70,048
Real estate acquired through
foreclosure 7,394 6,388
Policy loans 50,055 51,740
Other invested assets 23 --
Short-term investments 2,100 --
-------- --------
Total Investments 434,462 453,216
Cash 1,259 711
Deferred policy acquisition costs 41,694 41,264
Furniture, equipment and
leaseholds,at cost,
less accumulated depreciation
(1996 - $2,819; 1995 - $2,707) 468 512
Other assets 21,915 18,235
-------- --------
TOTAL ASSETS $499,798 $513,938
======== ========
LIABILITIES
Policy liabilities $422,281 $428,812
Other liabilities 11,634 13,169
-------- --------
TOTAL LIABILITIES 433,915 441,981
-------- --------
POLICYHOLDERS' EQUITY 34,423 40,649
SHAREHOLDERS' EQUITY
Guarantee Capital Shares,
$2 Par Value
(5,000,000 shares authorized
3,341,624 shares issued and
outstanding) 6,683 6,683
Retained earnings 25,019 23,606
Unrealized gain (loss) on
fixed maturities classified
as available-for-sale (242) 1,019
-------- --------
TOTAL SHAREHOLDERS' EQUITY 31,460 31,308
-------- --------
TOTAL LIABILITIES,
POLICYHOLDERS' EQUITY
AND SHAREHOLDERS' EQUITY $499,798 $513,938
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-73
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Insurance revenues $ 9,391 $10,236 $28,489 $30,108
Net investment income 8,440 10,266 24,995 26,884
Net realized gains
(losses) on investments (32) 1,336 271 344
Other 5 6 16 17
---------- ---------- ---------- ----------
Total revenue 17,804 21,844 53,771 57,353
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Policyholder benefits 9,521 11,220 26,990 28,831
Interest expense 2,461 2,581 7,338 7,304
Underwriting, acquisition
and insurance expenses 3,980 5,178 13,179 15,498
Policyholders' dividends
and participation in
operations 1,214 2,100 3,414 4,412
---------- ---------- ---------- ----------
Total benefits and expenses 17,176 21,079 50,921 56,045
---------- ---------- ---------- ----------
Income before federal
income taxes 628 765 2,850 1,308
Federal income tax expense
(benefit):
Current 111 231 565 703
Deferred 48 (29) 872 (732)
---------- ---------- ---------- ----------
159 202 1,437 (29)
---------- ---------- ---------- ----------
Net income $ 469 $ 563 $ 1,413 $ 1,337
========== ========== ========== ==========
Earnings per share $.14 $.17 $.42 $.40
========== ========== ========== ==========
Weighted average number
of shares outstanding $3,341,624 3,341,624 $3,341,624 3,341,624
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-74
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Guarantee on Available Total
Capital Retained for Sale Shareholders'
Shares Earnings Securities Equity
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 6,683 $ 23,606 $ 1,019 $ 31,308
Net income for the nine months
ended September 30, 1996 -- 1,413 -- 1,413
Unrealized depreciation in
value of fixed income
securities classified as
available-for-sale,
net of income taxes -- -- (1,261) (1,261)
-------- -------- -------- --------
Balance at September 30, 1996 $ 6,683 $ 25,019 $ (242) $ 31,460
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-75
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,413 $ 1,337
Charges (credits) to net income
not affecting cash:
Policyholders' share of
income in excess of
dividends paid 2,602 471
Interest credited to interest
sensitive products 3,585 3,812
Interest credited to
universal life policies 3,753 3,492
Accrual of discount on
investments, net (339) (622)
Realized (gains) on
investments, net (271) (344)
Depreciation 112 110
Amortization of deferred
policy acquisition costs 2,812 2,614
Deferred federal income
tax expense (benefit) 872 (732)
Change in operating assets
and liabilities:
Accrued investment (income) (267) (433)
Policy acquisition costs deferred (3,242) (3,067)
Federal income tax recoverable 235 1,003
Policy liabilities (8,420) (1,151)
Other items, net (860) (1,205)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 1,985 5,285
-------- --------
INVESTING ACTIVITIES
Purchases of investments:
Fixed income securities and
equity securities
held-to-maturity -- (3,038)
Fixed income securities and
equity securities
available-for-sale (78,757) (99,296)
Mortgage loans and real estate (22,059) (10,758)
Short-term investments, net (2,035) (1,766)
Purchases of furniture,
equipment and leaseholds (68) (89)
Sales, maturities, redemptions
and repayments of investments:
Fixed income securities
and equity securities
held-to-maturity -- 5,400
Fixed income securities
and equity securities
available-for-sale 92,846 90,240
Mortgage loans and real estate 12,400 12,516
Policy loans, net 1,685 (1,324)
-------- --------
CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 4,012 (8,115)
-------- --------
FINANCING ACTIVITIES
Premiums/deposits to
interest sensitive contracts 143 3,937
Withdrawals from interest
sensitive contracts (6,910) (5,558)
Receipts from universal life
policies credited to
policyholder account balances 4,943 4,565
Return of policyholder account
balances on universal
life policies (3,625) (3,677)
-------- --------
CASH USED BY FINANCING ACTIVITIES (5,449) (733)
-------- --------
Increase (decrease) in cash 548 (3,563)
Cash at beginning of period 711 2,545
-------- --------
Cash (Overdraft) at end of period $ 1,259 $ (1,018)
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-76
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of The Manhattan Life
Insurance Company (the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
for any interim period are not necessarily indicative of results for the year.
The unaudited interim condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Annual Report of the Company for the year ended December 31, 1995.
In 1993 the Company announced that a special committee of its independent
directors had been formed to consider the fairness of a proposal to eliminate
minority interests in the Company's guarantee capital shares by using a reverse
stock split to reduce all outstanding minority shares to fractional shares
payable in cash. The proposal was made by Union Central.
The reverse stock split is an established method for eliminating minority
shareholders. This technique, which is a form of amendment to a corporation's
certificate of incorporation pursuant to state law, allows a corporation to
reverse split its outstanding shares of stock into a lesser number of
outstanding shares of stock. In a situation where a reverse stock split is
aimed at eliminating minority shareholders, the corporation may issue one new
share of stock in exchange for a number of old shares in excess of the number of
such old shares held by the largest minority shareholder. As a result, the
holdings of all minority shareholders would be reduced to a fraction of a share
for which they would be paid cash in lieu of the issuance of a certificate for
such fractional shares.
On October 2, 1996, the Company announced that its Board of Directors
unanimously adopted a plan for acquisition of its minority interests in its
guarantee capital shares. It is anticipated that the Plan, which would be
effective pursuant to a 1 for 303,784 reverse split of the Company's outstanding
guarantee capital shares, would result in the elimination of minority
shareholder interests and Union Central being the sole remaining holder of the
guarantee capital shares of the Company. Pursuant to the Plan, the Company's
minority shareholders would receive $7.50 in cash for each guarantee capital
share held by them immediately prior to the consummation of the proposed
transaction in lieu of the issuance of any fractional new guarantee capital
shares resulting from the reverse stock split.
As of September 30, 1996, the Company had 3,341,624 guarantee capital shares
issued and outstanding; of these shares, Union Central owned 2,433,345 or
approximately 72.8%. It is anticipated the Plan would reduce the number of
guarantee capital shares issued and outstanding from 3,341,624 to 8. It is
anticipated the remaining 908,279 guarantee capital shares held by shareholders
other than Union Central will be exchanged for cash in the aggregate amount of
approximately $6,812,000. The par value of the guarantee capital shares will be
increased from $2.00 per share to $835,406 per share.
All holders of guarantee capital shares will return their shares to the Company
for either new guarantee capital shares or cash. Each holder of guarantee
capital shares that returns a group of 303,784 shares together with cash in the
amount of $227,838, will receive in exchange one new guarantee capital share.
Each holder that returns less than a group of 303,784 guarantee capital shares
(including a shareholder who owns in excess of 303,784 guarantee capital shares)
will receive $7.50 in cash for each guarantee capital share returned.
F-77
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Pursuant to the exchange, Union Central will return to the Company 2,433,345
guarantee capital shares plus cash of approximately $1,800,000 in exchange for
which it will receive 8 new guarantee capital shares and approximately $23,000
in cash for the remaining guarantee capital shares in excess of the amount
required for each new guarantee capital share. The Company does not anticipate
any of the minority shareholders will accumulate the number of guarantee capital
shares required to be exchanged for a new guarantee capital share.
The Company proposes to use funds from the Guarantee Capital Reserve (GCR) of
approximately $5,012,000 and Guarantee Capital of approximately $1,800,000 to
pay for the guarantee capital shares held by its minority shareholders after the
reverse stock split. Union Central will contribute approximately $1,800,000 to
the Company's Guarantee Capital; as a result the aggregate amount of capital
guaranteed to the Company's policyholders will remain at its current balance of
$6,683,000.
Manhattan Life will call a Special Meeting of its shareholders to consider and
vote upon the proposed transaction. The proposed transaction is subject to the
affirmative vote of shareholders holding at least two-thirds of the outstanding
guarantee capital shares. Union Central owns approximately 72.8% of the
Company's outstanding guarantee capital shares and, therefore, has sufficient
voting power to approve the reverse stock split without the affirmative vote of
any other shareholder of the Company. Union Central has advised the Company
that it intends to vote its shares in favor of the reverse stock split. The
proposed transaction is also subject to review by the New York Insurance
Department (the Department). The Company presently expects the proposed
transaction will be completed in the fourth quarter of 1996.
As more fully described in Note 4 to the Condensed Financial statements, during
first quarter 1995, the company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114).
NOTE 2. SHAREHOLDER DIVIDENDS
The payment of cash dividends by the Company to its shareholders is dependent
upon compliance with certain regulatory limits and restrictions imposed by the
Company's charter. The Company's charter provides for three types of
shareholder distributions:
a) Interest at a specified rate on the par value of the guarantee capital
shares issued and outstanding ($195,000 annually),
b) Interest, at the Company's portfolio earnings rate on invested assets, on
the accumulated balance in the GCR, and
c) A distribution of the shareholders' portion of the Company's profits. Such
amounts may, at the discretion of the Company's Board of Directors, be
distributed as a stock dividend of additional guarantee capital shares,
paid in cash subject to certain limits and prior regulatory approval, or
reserved for the benefit of the shareholders in a GCR.
Interest on the guarantee capital shares may be paid in any year dividends are
distributed to policyholders and is not subject to prior regulatory approval.
Historically, the shareholders' portion of Company profits has been equal to $1
for every $7 of policyholders' dividends paid on traditional, participating
policies. Cash dividends are limited based on the Company's prior year
statutory earnings, or increase in statutory surplus, and are further subject to
prior approval by the Department. The GCR represents a restricted segment of
statutory unassigned surplus, and as such, does not
F-78
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
represent a commitment or liability to pay shareholder dividends. For financial
statements prepared in accordance with generally accepted accounting principles,
the GCR is included in shareholders' equity.
The Company and the Department have agreed to the following guidelines under
which shareholder distributions from the GCR would be permitted, subject to
prior approval by the Department:
If the Company's statutory-basis surplus is less than or equal to 9% of its
statutory policy reserves, then principal and interest distributions are
limited to the lesser of the prior year statutory gain from operations,
(after policyholders' dividends and federal income taxes and before
realized gains and losses) or the prior year's increase in statutory
surplus or,
If its statutory-basis surplus exceeds 9% of statutory policy reserves, the
principal and interest distributions are limited to the greater of the
prior year statutory gain from operations, (after policyholders' dividends
and federal income taxes and before realized gains and losses) or the prior
year increase in statutory surplus.
The foregoing limits are subject to adjustment, by the Department, for unusually
large realized gains or the effects of surplus relief reinsurance transactions.
Based on the formula described above, no shareholder dividends will be paid in
1996, because the Company recorded both a statutory loss before net
realized gains and losses and a decrease in statutory surplus for the year ended
1995. Since the Company plans to eliminate minority interests in the Company's
guarantee capital shares by using a reverse stock split to reduce all
outstanding minority shares to fractional shares payable in cash, it made no
cash dividend payments to its shareholders from principal or interest
accumulated in the GCR for the year ended December 31, 1995. See Note 1 of
Notes to Condensed Financial Statements for detailed discussion about the
reverse stock split.
The balance in the GCR was $16,365,000 and $14,910,000 at September 30, 1996 and
December 31, 1995, respectively, and the ratio of the Company's statutory
surplus to its policy reserves was 7.68% and 7.70%, respectively. Interest
added to the GCR amounted to $925,000, and $707,000 for the nine months ended
September 30, 1996, and 1995, respectively, and it was included in the Company's
results of operations as a reduction of policyholders' dividends and
participation in operations.
F-79
<PAGE>
The following table summarizes the allocation of the Company's net income
between the shareholders and the policyholders:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------ ------ ------ -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Distributable income:
Net income $ 469 $ 563 $1,413 $1,337
Policyholders' dividends
and participation in
operations 1,214 2,100 3,414 4,412
Less interest credited
to GCR (295) (262) (925) (707)
------ ------ ------ -------
Distributable income $1,388 $2,401 $3,902 $5,042
====== ====== ====== =======
Shareholders' share
of net income:
1/8 of distributable income $ 174 $ 301 $ 488 $ 630
Interest credited to GCR 295 262 925 707
------ ------ ------ -------
Net income $ 469 $ 563 $1,413 $1,337
====== ====== ====== =======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the
Statements of Income) $1,214 $2,100 $3,414 $4,412
====== ====== ====== ======
</TABLE>
NOTE 3. SHAREHOLDERS' SHARE OF SURPLUS
The Company is the only existing life insurance company domiciled in New York
which has authorized and outstanding guarantee capital shares. Neither
applicable New York State law nor the Company's charter contain express
provisions establishing the extent of the interest of the holders of the
guarantee capital shares in the statutory unassigned surplus (total surplus less
guarantee capital shares and GCR) of the Company and there has never been a
judicial determination of the extent of such interest. Further, the laws
applicable to the Company do not provide for its voluntary liquidation or
dissolution; the Company may only be liquidated under the supervision of the New
York Superintendent of Insurance in the event of insolvency. In such a
liquidation or dissolution, the entire assets of the Company would be used to
satisfy claims of creditors and policyholders and there would be no statutory
unassigned surplus for distribution to the holders of the guarantee capital
shares. Accordingly, in the opinion of counsel to the Company, no unqualified
legal opinion can be rendered as to the degree, if any, to which the holders of
the guarantee capital shares would be entitled to participate in any current or
liquidating distribution of unassigned surplus. However, in the view of such
counsel, if there should occur a liquidation or other winding-up of the
Company's business in which assets exceeded liabilities on policies and the
claims of other creditors, or if there should occur a partial distribution of
surplus in the absence of such a liquidation or winding-up, although there are
reasonable arguments which could be made to the effect that the entire
unassigned surplus would be distributable solely to the policyholders or solely
to the shareholders, the more likely outcome if the question should be litigated
is that it would be held that one-eighth of the unassigned surplus would be
distributable to the shareholders and seven-eighths to the policyholders. See
Note 2 of Notes to Condensed Financial Statements for a discussion of the
methodology used to allocate current and accumulated profits between the
shareholders and the policyholders in the accompanying financial statements.
F-80
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 4. ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors of Impairment of a Loan"
(SFAS 114). SFAS 114 was amended by Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition"
(SFAS 118). SFAS 118 had no impact on the Company's adoption of SFAS 114.
SFAS 114 and SFAS 118 require that an impaired mortgage loan's fair value be
measured based on the present value of future cash flows discounted at the
loan's effective interest rate, at the loan's observable market price, or at the
fair value of the collateral if the loan is collateral dependent. If the fair
value of a mortgage loan is less than the recorded investment in the loan, the
difference is recorded as an allowance for mortgage loan losses. The change in
the allowance for mortgage loan losses is reported with realized gains or losses
on investments. Interest income on impaired loans is accrued on the net
reported value of the impaired loans; changes in actual or estimated cash flows
are charged or credited to the allowance for mortgage loan losses. The adoption
of SFAS 114 had an immaterial effect on the financial statements of the Company.
On November 15, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115
Special Report). In accordance with provisions in the SFAS 115 Special Report,
the Company chose to reclassify all held-to-maturity securities to available-
for-sale at December 31, 1995. At the date of transfer, the amortized cost of
those securities was $312,690,000, with a market value totaling $325,038,000
($98,793,000 of mortgage-backed securities and $226,245,000 of corporate bonds).
For the nine month period ended September 30, 1996, the amortized cost of the
available-for-sale securities was $299,080,000, with a market value totaling
$296,143,000 ($87,625,000 of mortgage-backed securities and $208,518,000 of
corporate bonds). In addition, there were equity securities classified as
available-for-sale with market values totaling $2,000 at December 31, 1995.
There were no equity securities held at September 30, 1996.
F-81
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following table identifies changes in investment value and unrealized gain
(loss) resulting from changes in the market value of investments classified as
"Available-for-Sale":
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Market Value at September 30, 1996 $296,143 $ -- $296,143
Book Value at September 30, 1996 299,080 -- 299,080
-------- ------ --------
Unrealized (Loss) as of
September 30, 1996: $ (2,937) $ -- $ (2,937)
======== ====== ========
Market Value at December 31, 1995 $325,038 $ 2 $325,040
Book Value at December 31, 1995 312,690 2 312,692
======== ====== ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ====== ========
Change in Unrealized Gain from
December 31, 1995: $(15,285) $ -- $(15,285)
======== ====== ========
Shareholders' 1/8 share of
change in unrealized gain
from December 31, 1995 $ (1,911) $ -- $ (1,911)*
======== ====== ========
Policyholders' 7/8 share
of change in unrealized gain
from December 31, 1995 $(13,374) $ -- $(13,374)*
======== ====== ========
</TABLE>
* The change in unrealized gains (losses) caused shareholders' equity to
decrease $1,261 (net of deferred taxes of $650) and policyholders' equity
to decrease $8,827 (net of deferred taxes of $4,547) for the nine months
ended September 30, 1996.
F-82
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 5. FEDERAL INCOME TAXES
The provision for federal income taxes does not bear the customary relationship
to income before taxes due to the presentation of taxes on a total Company basis
which is based on the sum of shareholders' and policyholders' share of pretax
income. Effectively, 7/8th's of the tax expense is allocated to the
policyholders in the final allocation of net income. See the calculation of
policyholders' dividends and participation in operations included in Note 2 of
Notes to the Condensed Financial Statements.
For the nine months ended September 30, 1996, the policyholders' dividend
liability, because of a change in estimate, was reduced by approximately
$2,700,000. This caused a $945,000 increase in deferred federal income tax
expense. However, because of the unique corporate structure, (see Note 2 and 3
of Notes to the Condensed Financial Statements) the effect on shareholder's net
income as a result of this adjustment was limited to 1/8th of the deferred
federal income tax expense, $118,000.
The Company is taxed under the life insurance company provisions of the Internal
Revenue Code (the Code). Under the Code, a life insurance company's taxable
income incorporates income from all sources, including premiums, investment
income and certain changes in reserves. Amendments to the Code adopted in 1990
require life insurance companies to capitalize and amortize policy acquisition
costs calculated by prescribed formulas. These deferred acquisition costs are
determined based on Internal Revenue Service (IRS) prescribed percentages of net
premiums which vary by type of policy. Prior tax law permitted these costs to
be deducted as they were incurred. By deferring deductions, this law has the
effect of increasing the current tax incurred, and decreasing deferred taxes
payable by a corresponding amount. This provision of the act resulted in
increases in the Company's taxable income of $311,000 and $532,000 for the three
months and nine months ended September 30, 1996 compared to $193,000 and
$667,000 for the same periods in 1995.
Included in the Condensed Balance Sheets at September 30, 1996 and December 31,
1995 is a net deferred tax asset of $2,762,000 and a net deferred tax liability
of $1,563,000, respectively. The shift from a net deferred tax liability to a
net deferred tax asset occurred as a result of recording an unrealized loss of
$2,937,000 on the Company's investment portfolio at September 30, 1996 compared
to an unrealized gain of $12,348,000 at December 31, 1995. (See Note 4 of Notes
to Condensed Financial Statements for further information). As discussed in the
preceding paragraph, the overall net deferred tax asset is primarily the result
of the accumulation of deferred acquisition costs that will be deductible in
future periods. Based on offsetting deferred tax credits, taxable income in the
carryback period and expected future taxable income, it is management's
determination that it is more likely than not that the net deferred tax asset
will be realized.
F-83
<PAGE>
ANNEX A
FORM OF PROPOSED AMENDMENT
TO AMENDED CHARTER OF
THE MANHATTAN LIFE INSURANCE COMPANY
The first sentence of Section 3 of the Amended Charter of The
Manhattan Life Insurance Company shall be amended to read as follows:
"There shall be an authorized Guarantee Capital of nine million one hundred
eighty-nine thousand four hundred sixty-six dollars ($9,189,466) to be divided
into eleven (11) shares of the par value of eight hundred thirty-five thousand
four hundred six dollars ($835,406) each, which shall be personal property
transferable on the books of the Company in conformity with its By-Laws."
A-1
<PAGE>
ANNEX B
OPINION OF BT SECURITIES CORPORATION
As of October 1, 1996
Special Committee of the Board of Directors
Manhattan Life Insurance Company
P.O. Box 5656
Cincinnati, OH 45201
Gentlemen
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the Guarantee Capital Shareholders of Manhattan Life
Insurance Company ("MLIC"), other than Union Central Life Insurance Company (the
"Public Unaffiliated Shareholders"), of the consideration to be received by the
Public Unaffiliated Shareholders in the proposed reverse stock-split (the
"Proposed Transaction") pursuant to the Plan for Acquisition of Minority
Interests in MLIC adopted on October 2, 1996 by the MLIC Board of Directors (the
"Plan"). As set forth more fully in the Plan, in the Proposed Transaction, each
Public Unaffiliated Shareholder would be entitled to receive a cash payment of
$7.50 for each share of guarantee capital stock, $2.00 par value per share (a
"Guarantee Capital Share"), owned by such shareholder, in lieu of the issuance
of any fractional shares of guarantee capital stock, $835,406 par value per
share (a "New Capital Share") resulting from the Proposed Transaction (the
"Transaction Consideration").
In arriving at our opinion, we have reviewed, analyzed and relied upon material
bearing upon the financial and operating condition and prospects of MLIC and we
have considered such financial and other factors as we have deemed appropriate,
including, among other things, the following:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of
the Company;
(iii) discussed the past and current operations, financial condition and
prospects of the Company with the management of the Company and Union
Central Life Insurance Company ("UCLIC"), respectively;
(iv) discussed with the management of UCLIC their reasons for the proposed
transaction and their plans for MLIC;
(v) reviewed certain financial projections for the Company prepared by the
<PAGE>
The Special Committee of the Board of Directors
Manhattan Life Insurance Company
Page 2
management of the Company;
(vi) reviewed the historical stock prices and trading volumes of the
Company's Guarantee Capital Shares;
(vii) compared certain financial and market data for selected publicly-
traded companies in lines of business we considered reasonably
comparable to that of the Company;
(viii) reviewed the terms of certain other acquisitions and
transactions, to the extent publicly available, that we believed
to be relevant;
(ix) performed a discounted cash flow analysis of the Company's
Guarantee Capital Shares;
(x) performed a component valuation analysis of the Company's
Guarantee Capital Shares;
(xi) conducted such other financial studies, analyses, and
investigations, and considered such other information as BT
Securities Corporation ("BTS") deemed necessary and appropriate;
and
(xii) reviewed the Plan.
We have taken into account our assessment of general economic, market, and
financial and other conditions and our experience in other transactions, as well
as our experience in securities valuation and our knowledge of the insurance
industry generally. Our opinion is necessarily based upon the information made
available to us and conditions as they exist and can be evaluated as of the date
hereof.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy, completeness and fairness of all of the financial and
other information that was available to us from public sources, that was
provided to BTS by the Company or its representatives, or that was otherwise
reviewed by BTS, including the accuracy, completeness and fairness of the
allocation of income and equity as between the policyholders of the Company and
the holders of shares of Capital Stock reflected in the Company's financial
statements. We have also assumed, with your permission and on the basis of the
views of counsel to the Company described in the notes to the Company's
financial statements, that, to the extent any assets of the Company remain after
satisfaction of the claims of policyholders and other creditors of the Company
in the event of its liquidation or dissolution, the unassigned statutory surplus
of the Company would be distributable one-eighth to the holders of Guarantee
Capital Shares and seven-eighths to the
B-2
<PAGE>
The Special Committee of the Board of Directors
Manhattan Life Insurance Company
Page 3
policyholders of the Company. We have also assumed that such allocations would
be applicable in our calculation of statutory book value and adjusted statutory
book value. With respect to the financial projections supplied to BTS, BTS has
assumed that they were reasonably prepared and reflected the best currently
available estimates and judgements of the management of the Company as to the
future operating and financial performance of the Company. BTS expressed no
opinion with respect to such projections or the assumptions on which they are
based. BTS did not assume any responsibility for making and did not make any
independent evaluation of the Company's assets or liabilities or any independent
verification of any of the information reviewed by BTS.
We were not requested to solicit, and accordingly have not solicited, third
party indications of interest with respect to any transaction with MLIC.
It is understood that we were retained by the Special Committee, and that our
opinion as expressed herein is limited to the fairness, from a financial point
of view, to the Public Unaffiliated Shareholders of the Transaction
Consideration and does not address the Special Committee's underlying business
decision to recommend the Proposed Transaction. This letter does not constitute
a recommendation to the Special Committee or to any Public Unaffiliated
Shareholder of MLIC with respect to any approval of the Proposed Transaction.
We have acted as financial advisor to the Special Committee of the Company in
connection with this Proposed Transaction and will receive a fee for our
services.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Transaction Consideration to be
received by the Public Unaffiliated Shareholders in the Proposed Transaction is
fair to such holders from a financial point of view.
Very truly yours,
BT SECURITIES CORPORATION
By: /s/ W. Dana LaForge
----------------------------------
W. Dana LaForge, Managing Director
B-3
<PAGE>
ANNEX C
SECTION 1206(a)(4) OF THE NEW YORK INSURANCE LAW AND SECTIONS 806(b)(6) AND
623 OF THE NEW YORK BUSINESS CORPORATION LAW
Ins. Law (S) 1206 Amendments to charters and increase of capital of
insurance corporations
(a) Any domestic insurance corporation may amend its charter as
follows:
(4) Notwithstanding any other provisions of this section, if the
corporation has a guarantee capital represented by shares, it may amend any
provisions of its charter, including, without limitation, the increase,
reduction or retirement of its capital and the interest thereon and the increase
or decrease in the number or par value of the shares representing its capital,
upon filing in the office of the superintendent, with his approval endorsed
thereon, a certificate setting forth such amendments which shall become
effective upon such filing. The certificate shall have been approved by its
board of directors or trustees and consented to by holders of at least two-
thirds of its outstanding shares. Such consent shall be given, either in person
or by proxy, in writing or by vote at a meeting held on at least twenty days
notice. Any holder of shares of guarantee capital not in favor of any such
increase, decrease or retirement, who signifies such objection in the manner
prescribed by section six hundred twenty-three of the business corporation law,
shall have his rights determined in accordance with the provisions of such
section of the business corporation law. All provisions of subsection (a) of
section four thousand two hundred seven of this chapter shall apply to the
payment of any cash dividends from profits to the holders of shares of such
guarantee capital.
Bus. Corp. (S) 806 Provisions as to certain proceedings
(b) The following provisions shall apply to amendments and changes
under this article, except under section 808 (Reorganization under act of
congress):
(6) A holder of any adversely affected shares who does not vote for
or consent in writing to the taking of such action shall, subject to and by
complying with the provisions of section 623 (Procedure to enforce shareholder's
right to receive payment for shares), have the right to dissent and to receive
payment for such shares, if the certificate of amendment (A) alters or abolishes
any preferential right of such shares having preferences; or (B) creates, alters
or abolishes any provision or right in respect of the redemption of such shares
or any sinking fund for the redemption or purchase of such shares; or (C) alters
or abolishes any preemptive right of such holder to acquire
C-1
<PAGE>
shares or other securities; or (D) excludes or limits the right of such holder
to vote on any matter, except as such right may be limited by the voting rights
given to new shares then being authorized of any existing or new class.
Bus. Corp. (S) 623 Procedure to enforce shareholder's right to receive
payment for shares
(a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares,
as to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all
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of the shares of such owner, as to which such nominee or fiduciary has a right
to dissent, held of record by such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of
election must be accompanied by the return to the corporation of any advance
payment made to the shareholder as provided in paragraph (g). If a notice of
election is withdrawn, or the corporate action is rescinded, or a court shall
determine that the shareholder is not entitled to receive payment for his
shares, or the shareholder shall otherwise lose his dissenter's rights, he shall
not have the right to receive payment for his shares and he shall be reinstated
to all his rights as a shareholder as of the consummation of the corporate
action, including any intervening preemptive rights and the right to payment of
any intervening dividend or other distribution or, if any such rights have
expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within
one month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate
bearing such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee
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shall acquire no rights in the corporation except those which the original
dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within
which shareholders may file their notices of election to dissent, or within
fifteen days after the proposed corporate action is consummated, whichever is
later (but in no case later than ninety days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to pay
for his shares at a specified price which the corporation considers to be their
fair value. Such offer shall be accompanied by a statement setting forth the
aggregate number of shares with respect to which notices of election to dissent
have been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the certificates
representing his shares to the corporation, as provided in paragraph (f), of an
amount equal to eighty percent of the amount of such offer, or (2) as to each
shareholder who has not yet submitted his certificates a statement that advance
payment to him of an amount equal to eighty percent of the amount of such offer
will be made by the corporation promptly upon submission of his certificates. If
the corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the
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United States Securities and Exchange Commission. If within thirty days after
the making of such offer, the corporation making the offer and any shareholder
agree upon the price to be paid for his shares, payment thereof shall be made
within sixty days after the making of such offer or the consummation of the
proposed corporate action, whichever is later, upon the surrender of the
certificate for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation without
an office in this state, such proceeding shall be brought in the county where
the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the
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shareholders' authorization date. In fixing the fair value of the shares, the
court shall consider the nature of the transaction giving rise to the
shareholder's right to receive payment for shares and its effect on the
corporation and its shareholders, the concepts and methods then customary in the
relevant securities and financial markets for determining fair value of shares
of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept
the corporate offer of payment for his shares was arbitrary, vexatious or
otherwise not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting shareholders
who are parties to the proceeding, including any who have withdrawn their
notices of election as provided in paragraph (e), if the court finds that their
refusal to accept the corporate offer was arbitrary, vexatious or otherwise not
in good faith. The court may, in its discretion, apportion and assess all or
any part of the costs, expenses and fees incurred by any or all of the
dissenting shareholders who are parties to the proceeding against the
corporation if the court finds any of the following: (A) that the fair value of
the shares as determined materially exceeds the amount which the corporation
offered to pay; (B) that no offer or required advance payment was made by the
corporation; (C) that the corporation failed to institute the special proceeding
within the period specified therefor; or (D) that the action of the corporation
in complying with its obligations as provided in this
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section was arbitrary, vexatious or otherwise not in good faith. In making any
determination as provided in clause (A), the court may consider the dollar
amount or the percentage, or both, by which the fair value of the shares as
determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinate to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of the paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the
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ground that such corporate action will be or is unlawful or fraudulent as to
him.
(l) Except as otherwise expressly provided in this section, any notice
to be given by a corporation to a shareholder under this section shall be given
in the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations).
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PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
THE MANHATTAN LIFE INSURANCE COMPANY
JANUARY __, 1997
The undersigned hereby appoints DANIEL J. FISCHER, LARRY R. PIKE,
FRANCIS W. MURRAY, III AND JOHN M. LUCAS or any one of them, proxies, each
having power to substitute another person, to vote all the guarantee capital
stock of The Manhattan Life Insurance Company (the "Company") held of record on
January __, 1997 at the Special Meeting of Shareholders to be held at The
Manhattan Life Insurance Company's Home Office, 111 West 57th Street, New York,
New York on January __, 1997 at 10:00 a.m., local time, and at any adjournment
or postponement of such meeting.
THIS PROXY MAY BE REVOKED BY A PROXY EXECUTED AT A LATER DATE OR
OTHERWISE, AS SET FORTH IN THE MANHATTAN LIFE INSURANCE COMPANY'S PROXY
STATEMENT WHICH ACCOMPANIED THIS CARD.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED BELOW
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THE PROXY WILL BE
VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE AMENDMENT (AS DESCRIBED IN THE
MANHATTAN LIFE INSURANCE COMPANY'S PROXY STATEMENT DATED DECEMBER __, 1996).
(1) FOR [ ] AGAINST [ ] ABSTAIN [ ] the proposal to amend Section 3 of
the Company's Amended Charter which would provide for a reduction in the
authorized guarantee capital of the Company from 5,000,000 guarantee capital
shares, $2.00 par value per share (the "Capital Stock"), to 11 guarantee
capital shares, $835,406 par value per share (the "New Capital Stock"), effect
a 303,784 to one reverse stock split of the Capital Stock, whereby each
shareholder that surrenders 303,784 shares of Capital Stock and contributes
cash in the amount of $227,838 (all of which cash amount will be contributed to
the guarantee capital of the Company), will receive in exchange one share of
New Capital Stock, and provide for a cash payment in the amount of $7.50 per
share of the currently outstanding Capital Stock in lieu of the issuance of any
resulting fractional shares of New Capital Stock to shareholders who, after the
reverse stock split, own fractional shares of New Capital Stock, all as stated
in The Manhattan Life Insurance Company's Proxy Statement dated December __,
1996.
(2) In their discretion, the parties are authorized to vote upon such
other matters as may properly come before the meeting or any adjournment or
postponement thereof.
(Please sign and date on reverse side)
Dated: __________________, 1996
Signature _________________________
<PAGE>
When signing as Guardian, Executor, Administrator,
Attorney, Trustee, etc., please give full title as
such. If a corporation, please sign full corporate
name and sign name by President or other authorized
officer, giving title. If a partnership, sign in
partnership name by authorized person's name and
title.
PLEASE DATE AND SIGN EXACTLY
AS THE NAME APPEARS ON THIS PROXY
