FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
-----------------------------------
Quarter Ended September 30, 1994 Commission File # 0-12694
USLICO CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1278620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4601 Fairfax Drive, Arlington, Virginia 22203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (703) 875-3600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to the filing requirements
for at least the past 90 days.
Yes X No .
Indicate the number of shares or other units outstanding of each of
the issuer's classes of common stock, as of the latest practical
date.
Common Stock - $1.00 par value - 10,763,130 shares outstanding as
of November 8, 1994.<PAGE>
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USLICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of
September 30
1994 December 31
(Unaudited) 1993
------------- -------------
(In thousands)
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale, at market value
in 1994 and amortized cost in 1993................ $1,992,139 $1,994,934
Equity securities, at market........................ 3,800 5,623
Mortgage loans ..................................... 334,037 341,713
Policy loans........................................ 129,278 129,152
Short-term investments.............................. 18,302 31,108
Other long-term investments......................... 50,213 20,423
------------- -------------
Total investments..................................... 2,527,769 2,522,953
Cash.................................................. 627 6,689
Premiums and accounts receivable...................... 12,611 13,938
Due from reinsurers................................... 42,561 51,139
Deferred policy acquisition costs..................... 435,727 389,439
Real estate occupied by company....................... 7,049 7,188
Accrued investment income............................. 40,604 40,209
Federal income tax receivable......................... 6,405 14,910
Other assets.......................................... 29,529 33,632
Separate account assets............................... 339,727 330,764
Discontinued property and casualty operations ........ 653 1,234
------------- -------------
Total assets................................... $3,443,262 $3,412,095
============= =============
Liabilities and Shareholders' Equity
Policy reserves....................................... $2,573,412 $2,489,611
Unpaid claims and other policyholder liabilities...... 59,625 67,367
Deferred revenue liability............................ 46,961 46,464
Other liabilities..................................... 43,931 55,356
Convertible subordinated debentures................... 96,050 96,050
Federal income taxes.................................. 32,231 55,696
Separate account liabilities.......................... 333,390 324,495
Discontinued property and casualty operations ........ 653 1,234
------------- -------------
Total liabilities............................ 3,186,253 3,136,273
------------- -------------
Shareholders' Equity:
Common stock........................................ 14,435 14,460
Additional paid-in capital.......................... 159,154 159,710
Net unrealized investment gains (losses)............ (29,370) 2,544
Foreign currency translation adjustments............ (2,029) (1,600)
Retained earnings................................... 210,009 196,499
Treasury stock...................................... (95,190) (95,791)
------------- -------------
Total shareholders' equity.................. 257,009 275,822
------------- -------------
Total liabilities and shareholders' equity.. $3,443,262 $3,412,095
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
USLICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
---------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations.................... $ 45,740 $ 46,446 $ 136,571 $ 141,984
Net investment income................................ 50,785 49,625 150,597 148,553
Realized investment gains............................ 495 2,934 2,294 9,651
Other income......................................... 2,841 2,399 9,201 9,050
Gain on ship registry sale........................... - 2,118 - 2,118
---------- --------- --------- ---------
Total revenues..................................... 99,861 103,522 298,663 311,356
Benefits and expenses
Death, surrender and other benefits.................. 32,157 33,782 96,830 105,087
Increase in policy reserves.......................... 28,930 26,750 88,636 90,943
Amortization of deferred policy acquisition costs.... 9,504 10,139 28,844 29,982
Interest expense..................................... 1,993 1,993 5,979 5,979
General expenses..................................... 11,884 17,234 33,671 39,032
Commissions, premium taxes and fees.................. 6,741 6,226 21,500 24,861
---------- --------- --------- ---------
Total benefits and expenses........................ 91,209 96,124 275,460 295,884
---------- --------- --------- ---------
Operating income before income taxes................... 8,652 7,398 23,203 15,472
Income tax provision (benefit)....................... 2,770 (5,366) 7,755 (2,761)
---------- --------- --------- ---------
Net income............................................. $ 5,882 $ 12,764 $ 15,448 $ 18,233
========== ========= ========= =========
Net income per share
Primary
Net income .........................................$ 0.55 $ 1.19 $ 1.44 $ 1.70
========== ========= ========= =========
Fully diluted
Net income .........................................$ 0.51 $ 1.00 $ 1.37 $ 1.57
========== ========= ========= =========
<FN>
Earnings per share are based on weighted average shares outstanding. Fully diluted earnings per
share reflect the assumed conversion of the convertible debentures into shares of common stock.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
USLICO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30
1994 1993
----------- -----------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities................ $ 52,774 $ 42,913
INVESTING ACTIVITIES:
Proceeds from sales of fixed maturities available for sale. 103,042 60,553
Proceeds from maturities and calls of fixed maturities
available for sale....................................... 95,148 248,535
Proceeds from sale of equity securities.................... 1,715 9,392
Cost of long-term investments acquired..................... (313,928) (505,049)
Sale of real estate and leases............................. 1,434 3,787
----------- -----------
Net cash used in investing activities.................... (112,589) (182,782)
FINANCING ACTIVITIES:
Universal life-type contracts
Deposits received........................................ 201,540 244,071
Maturities and withdrawals............................... (158,674) (129,350)
Other......................................................... (1,919) (1,939)
----------- -----------
Net cash provided by financing activities................ 40,947 112,782
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,868) (27,087)
BALANCE OF CASH AND CASH EQUIVALENTS
Balance at beginning of year:
Cash...................................................... 6,689 9,366
Cash equivalents.......................................... 31,108 68,356
----------- -----------
37,797 77,722
Balance at end of period:
Cash...................................................... 627 1,884
Cash equivalents.......................................... 18,302 48,751
----------- -----------
$ 18,929 $ 50,635
=========== ===========
<FN>
Interest paid during each of the nine month periods ended September 30, 1994 and 1993
was $5,562,000.
Federal income taxes paid during the nine month periods ended September 30, 1994 and
1993 were $9,050,000 and $4,050,000 respectively.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
USLICO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
USLICO Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Additionally,
certain 1993 amounts have been reclassified to conform to 1994
presentations. In the opinion of management, all adjustments
considered necessary for fair presentation have been included in
these interim statements.
Operating results for the three-month period or the nine-month
period ended September 30, 1994 are not necessarily indicative of
the results that may be expected for the year ending December 31,
1994. For additional information, refer to the consolidated
financial statements and related notes incorporated by reference in
the Annual Report on Form 10-K for the year ended December 31,
1993.
2. Statement of Financial Accounting Standards No. 115
Effective January 1, 1994, the Company adopted Statement 115
entitled "Accounting for Certain Investments in Debt and Equity
Securities." In doing so, all fixed maturity securities were
designated as "available for sale" and adjusted to fair value in
the balance sheet with net unrealized gains and losses, net of
related income taxes and other adjustments, reported as a separate
component of shareholders' equity. As a result, this change in
accounting method has no effect on net earnings. As specified by
Statement 115, prior year amounts were not restated. The following
summarizes the effect of Statement 115 on the Company's financial
position (amounts in millions):
9/30/94 1/1/94
------- ------
Gross unrealized gains $ 23.0 $137.5
Gross unrealized losses (119.9) (8.5)
------- ------
Net unrealized gains (losses) (96.9) 129.0
Adjustment of deferred policy acquisition
costs and policy reserves 50.6 (81.6)
Tax effect 16.2 (16.6)
------ ------
Net after-tax increase (decrease)
in shareholders' equity $(30.1) $30.8
====== ====
<PAGE>
<PAGE>
3. Statements of Financial Accounting Standards Nos. 114 and 118
Statement 114, entitled "Accounting by Creditors for Impairment of
a Loan" and its similarly titled amendment, Statement 118,
prescribe the recognition criterion for loan impairment and the
measurement methods for certain impaired loans and loans whose
terms are modified in troubled debt restructurings. Both
statements are effective for fiscal years beginning after December
15, 1994. The Company has not yet adopted these new standards, and
has not yet determined the effect of the accounting standards on
its financial statements.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994, COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1993.
Financial results are summarized in the following table by major
components for the current year compared to 1993 (in millions):
Three Months Nine Months
Ended Ended
September 30 September 30
1994 1993 1994 1993
---- ---- ---- ----
Life insurance operations $10.2 $ 9.6 $27.5 $17.9
Realized investment gains* 0.5 2.2 1.7 5.7
Interest expense (2.0) (2.0) (6.0) (6.0)
Federal income tax (2.8) (3.4) (7.8) (6.0)
--- --- ---- ----
5.9 6.4 15.4 11.6
Special items (net of tax):
Ship registry business - 10.9 - 11.8
Group health business - (2.9) - (3.6)
Tax rate increase - (1.6) - (1.6)
--- ---- ---- ----
Net income $ 5.9 $12.8 $15.4 $18.2
=== ==== ==== ====
* The deferred acquisition cost (DAC) amortization and the
amortization of present value of future profits (PVFP) netted in the
realized investment gains amount above, and the portion of Federal
income tax applicable to the net amount, are as follows (in
millions):
Three Months Nine Months
Ended Ended
September 30 September 30
1994 1993 1994 1993
---- ---- ---- ----
Realized investment gains $0.5 $2.9 $2.3 $9.6
Amortization of DAC and PVFP - (0.7) (0.6) (3.9)
--- --- --- ---
Net 0.5 2.2 1.7 5.7
Federal income tax (0.1) (0.8) (0.6) (2.0)
--- --- --- ---
Net realized investment gains $0.4 $1.4 $1.1 $3.7
=== === === ===
<PAGE>
<PAGE>
Life insurance operations. Major factors contributing to the
improvement in operating earnings for both the quarter and the nine
months included lower mortality expense, particularly in the group
life line of business, and increased investment spreads on interest-
sensitive life insurance and annuity policies. The decrease in group
mortality is the primary reason for the decrease in death, surrender
and other benefits in 1994 compared to 1993 as reported in the
consolidated statements of income. Commissions, premium taxes and
fees decreased for the nine months of 1994 compared to the nine
months of 1993 primarily due to reduced expense for guaranty fund
assessments.
Realized investment gains decreased compared to 1993 due to the
reduced bond call activity that has resulted from higher interest
rates in 1994.
Ship registry business. The Company sold its ship registry and
corporate formation business during the third quarter of 1993,
realizing an after-tax gain of $10.9 million, or $1.01 per share.
This gain is comprised of $2.1 million of net proceeds from sale in
excess of carrying value and $8.8 million of previously unrecognized
tax benefits that will be realized as a result of the sale. Ship
registry income of $0.9 million in the first six months of 1993
represented dividends from the subsidiary that managed offshore
maritime and corporate registry programs prior to its sale.
Group health business. During the third quarter of 1993, the Company
made significant progress toward the resolution of various disputes
growing out of the group health business which produced large losses
in 1991, but the Company had not satisfactorily resolved all of the
disputes remaining at that time. Accordingly, estimates for future
legal and other costs associated with pursuing such matters to final
resolution were provided as of September 30, 1993, which when added
to related expenses previously incurred, resulted in total expenses
for the third quarter and the nine months of 1993 of $2.9 million and
$3.6 million (net of tax), respectively. The recognition of these
expenses in 1993 causes 1993 general expenses to be greater than 1994
general expenses.
Tax rate increase. $1.6 million of additional income tax expense was
recognized in the third quarter of 1993 to reflect the cumulative
effect on the Company's deferred tax liability resulting from the
increase in the Federal corporate tax rate from 34% to 35%, enacted
during the third quarter of 1993.
Financial condition and liquidity. Net cash provided by financing
activities decreased by $72 million for the nine-month period ended
September 30, 1994, as compared to the same period in 1993 largely
because of a decrease of $42 million in deposits received on
universal life-type contracts and an increase in maturities and
withdrawals on these contracts of $30 million for the same periods.
Net cash used in investing activities was reduced by the same
circumstances.<PAGE>
<PAGE>
Note 2 to the consolidated financial statements describes the effect
of unrealized gains and losses on the value of the Company's fixed
maturity investments. The net losses at September 30, 1994, compared
to net gains as of January 1, 1994, result from the increase in
interest rates that has occurred during 1994, which reduces the
market value of fixed maturity investments. The decrease in market
value of the Company's fixed maturity investments is not expected to
have a significant effect on results of operations or liquidity
because of the Company's asset/liability matching practices, which
give consideration not only to investment quality, diversification,
return and liquidity, but also recognize appropriate cash flow
characteristics of assets purchased, and match them as closely as
possible with the structure of interest-sensitive liabilities.<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 12, 1994, a shareholder of USLICO filed suit in the
Circuit Court of Arlington County, Virginia against USLICO, Daniel
J. Callahan, Glenn H. Gettier, Jr., David H. Roe, John A. Beck,
Robert E. Buchanan, Robert F. Cocklin, William V. McBride, Jack N.
Merritt, Thomas H. Moorer, Fioravante G. Perotta, David S. Smith,
Eli Weinberg and NWNL. Plaintiff alleges inter alia that she is a
shareholder of USLICO, and purports to bring the action on behalf
of a class consisting of all shareholders of USLICO for breach of
fiduciary duty in connection with the proposed Merger. Plaintiff
alleges inter alia that the proposed Merger is "wrongful, unfair
and harmful to USLICO's public shareholders...and represents an
attempt by defendants to aggrandize the personal and financial
positions and interest of board members at the expense of, and to
the detriment of the stockholders of the Company". Further
plaintiff alleges that the defendants failed to undertake an
adequate evaluation of USLICO's worth as a merger candidate, take
adequate steps to enhance USLICO's value, effectively expose USLICO
to an active and open auction or act independently to protect the
interests of the shareholders of USLICO. Plaintiff seeks an order
permitting the action to be maintained as a class action,
preliminarily and permanently enjoining the Merger, awarding
compensatory damages, attorneys fees and such other relief as the
court may grant. On October 24, 1994 USLICO, the only defendant to
have been served in the action, filed a timely demurrer asking that
the action be dismissed in its entirety on several grounds,
including that the complaint fails to state a claim under Virginia
law, plaintiff failed to follow the procedures required by Virginia
law in purporting to assert derivative claims on behalf of USLICO,
the complaint improperly seeks to obtain relief for an alleged
class of plaintiffs and the complaint improperly seeks remedies
unavailable in equity. Plaintiff has not responded to the
demurrer. If the complaint is not dismissed, the action will
vigorously be defended.
The Company, including its subsidiaries, is engaged in other
litigation in the ordinary course of business. In the opinion of
management, the litigation is not material.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
<PAGE>
ITEM 5: OTHER INFORMATION
On September 12, 1994, The NWNL Companies, Inc. ("NWNL") and
USLICO Corporation ("USLICO") announced they entered into an
Agreement and Plan of Merger ("Agreement") to combine the two
companies through the merger of USLICO into NWNL. The
Agreement provides for all USLICO shareholders to receive 0.69
shares of NWNL common stock for each share of USLICO common
stock, plus special cash distributions of $.50 per share
payable by USLICO immediately prior to the closing of the
merger. The exchange ratio of 0.69 is a fixed ratio, provided
the price of NWNL common stock remains between $28.26 and
$37.20 during a pricing period prior to closing. If the price
of NWNL common stock falls outside of these parameters, the
Agreement includes provisions to modify the ratio.
Completion of the merger is subject to normal closing
conditions, including approval by both NWNL and USLICO
shareholders and various regulatory approvals, including the
State Insurance Departments of Virginia and New York. Both
companies expect to mail proxy statements to shareholders
later this fall and hold shareholder meetings in late 1994 or
early 1995 to vote on the transaction. The companies intend
to complete the merger early in 1995.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
None <PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
USLICO CORPORATION
(Registrant)
/s/ DAVID H. ROE
DAVID H. ROE
PRESIDENT AND CHIEF OPERATING OFFICER
/s/ GLENN H. GETTIER, JR.
GLENN H. GETTIER, JR.
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
/s/ DAVID W. KARSTEN
DAVID W. KARSTEN
SENIOR VICE PRESIDENT AND CONTROLLER
DATE: November 10, 1994
<TABLE>
EXHIBIT 11
USLICO CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
PRIMARY
Net income $ 5,882 $ 12,764 $ 15,448 $ 18,233
======== ======== ======== ========
Weighted average number of shares
outstanding 10,763 10,755 10,763 10,755
======== ======== ======== ========
Net income per share $ 0.55 $ 1.19 $ 1.44 $ 1.70
======== ======== ======== ========
FULLY DILUTED
Net income - before interest adjustment $ 5,882 $ 12,764 $ 15,448 $ 18,233
After tax interest expense applicable
to convertible debentures 1,295 1,256 3,886 3,886
-------- -------- -------- --------
Net income - after interest adjustment $ 7,177 $ 14,020 $ 19,334 $ 22,119
======== ======== ======== ========
Weighted average number of
shares outstanding 10,763 10,755 10,763 10,755
Assuming conversion of
convertible subordinated debentures 3,360 3,360 3,360 3,360
-------- -------- -------- --------
Weighted average number of shares
outstanding as adjusted 14,123 14,115 14,123 14,115
======== ======== ======== ========
Net income per share $ 0.51 $ 1.00 $ 1.37 $ 1.57
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 1,992,139
<EQUITIES> 3,800
<MORTGAGE> 334,037
<REAL-ESTATE> 6,839
<TOTAL-INVEST> 2,527,769
<CASH> 627
<RECOVER-REINSURE> 3,203
<DEFERRED-ACQUISITION> 435,727
<TOTAL-ASSETS> 3,443,262
<POLICY-LOSSES> 2,573,412
<UNEARNED-PREMIUMS> 12,577
<POLICY-OTHER> 40,383
<POLICY-HOLDER-FUNDS> 6,664
<NOTES-PAYABLE> 96,050
<COMMON> 14,435
0
0
<OTHER-SE> 242,574
<TOTAL-LIABILITY-AND-EQUITY> 3,443,262
136,571
<INVESTMENT-INCOME> 150,597
<INVESTMENT-GAINS> 2,294
<OTHER-INCOME> 9,201
<BENEFITS> 96,830
<UNDERWRITING-AMORTIZATION> 28,844
<UNDERWRITING-OTHER> 55,171
<INCOME-PRETAX> 23,203
<INCOME-TAX> 7,755
<INCOME-CONTINUING> 15,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,448
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
