SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 31, 1995
PIONEER FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in charter)
Delaware 1-10522 36-2479273
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1750 East Golf Road, Schaumburg, Illinois 60173
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 995-0400
(Former name or former address, if changed since last report)
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The balance sheets of Connecticut National Life Insurance Company
("Connecticut") at December 31, 1993 and 1994, and the related statements of
income and statements of stockholder's equity and statements of cash flows
for the years ended December 31, 1993 and 1994, including the notes thereto,
together with the related Accountants' Report, attached hereto as Exhibit
99(a), are hereby incorporated by reference.
(b) Pro forma financial information.
The unaudited pro forma combined condensed balance sheet of Pioneer
Financial Services, Inc. ("Pioneer") and Connecticut as of December 31, 1994,
and the unaudited pro forma combined condensed income statement of Pioneer
and Connecticut for the year ended December 31, 1994, attached hereto as
Exhibit 99(b), are hereby incorporated by reference.
(c) Exhibits.
Exhibit No. Description of Document
----------- -----------------------
2(a) Stock Purchase Agreement dated November 21, 1994
among the Registrant, United Life Holdings, Inc. and
GRENEL Financial Corporation (together with a list
briefly identifying the contents of all omitted
exhibits, schedules and appendices thereto). The
Registrant agrees to provide copies of such
exhibits, schedules and appendices to the Commission
upon request.
23(a) Consent of Deloitte & Touche LLP
99(a) The balance sheets of Connecticut National Life
Insurance Company ("Connecticut") at December 31,
1993 and 1994, and the related statements of income
and statements of stockholder's equity and
statements of cash flows for the years ended
December 31, 1993 and 1994, including the notes
thereto, together with the related Accountants'
Report.
99(b) The unaudited pro forma combined condensed balance
sheet of Pioneer and Connecticut as of December 31,
1994, and the unaudited pro forma combined condensed
income statement of Pioneer and Connecticut for the
year ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
PIONEER FINANCIAL SERVICES, INC.
Date: April 15, 1995 By: /s/ David I. Vickers
David I. Vickers,
Vice President, Treasurer and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
2(a) Stock Purchase Agreement dated November 21, 1994 among the
Registrant, United Life Holdings, Inc. and GRENEL Financial
Corporation (together with a list briefly identifying the contents
of all omitted exhibits, schedules and appendices thereto) is
incorporated herein by reference to Exhibit 2(a) to the
Registrant's Form 8-K dated January 31, 1995, of which this
Amendment No. 1 on Form 8-K/A forms a part. The Registrant agrees
to provide copies of such exhibits, schedules and appendices to the
Commission upon request.
23(a) Consent of Deloitte & Touche LLP.
99(a) The balance sheets of Connecticut National Life Insurance Company
("Connecticut") at December 31, 1993 and 1994, and the related
statements of income and statements of stockholder's equity and
statements of cash flows for the years ended December 31, 1993 and
1994, including the notes thereto, together with the related
Accountants' Report.
99(b) The unaudited pro forma combined condensed balance sheet of Pioneer
Financial Services, Inc. ("Pioneer") and Connecticut as of
December 31, 1994, and the unaudited pro forma combined condensed
income statement of Pioneer and Connecticut for the year ended
December 31, 1994.
Exhibit 23(a)
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration
Statement pertaining to the Nonqualified Stock Option Plan of Pioneer
Financial Services, Inc. (Form S-8 No. 33-37305), the Pioneer Financial
Services, Inc. Employee Savings and Stock Ownership Plan (Form S-8 No. 33-
45894), and the National Benefit Plans, Inc. 1992 Agent Stock Purchase Plan
(Form S-8 No. 33-53686) of our report dated February 8, 1995, with respect to
the financial statements of Connecticut National Life Insurance Company for
the years ended December 31, 1993 and 1994 included in the Current Report on
Form 8-K of Pioneer Financial Services, Inc. (as amended by the Amendment No.
1 to Current Report on Form 8-K/A), dated January 31, 1995.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Hartford, Connecticut
April 14, 1995
Exhibit 99(a)
CONNECTICUT NATIONAL LIFE INSURANCE COMPANY
Financial Statements for the Years Ended
December 31, 1994 and 1993 and
Independent Auditors Report
Independent Auditors' Report
Board of Directors
Connecticut National Life Insurance Company
We have audited the accompanying balance sheets of Connecticut National Life
Insurance Company as of December 31, 1994 and 1993, and the related
statements of income, stockholder's equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 Connecticut National Life
Insurance Company at December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As described in Note 2 to the financial statements, on January 1, 1994 the
Company adopted a new accounting standard for investments. As described in
Notes 1 and 12, on January 31, 1995, the Company was sold to Pioneer
Financial Services, Inc.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 8, 1995
Connecticut National Life Insurance Company
Balance Sheets
(In Thousands)
December 31
-----------------
1994 1993
---- ----
Assets
Investments (Note 3):
Investment securities held to maturity,
at amortized cost (fair value $168,342) $ - $158,124
Available for sale - at fair value
(Amortized cost $218,048) 211,033 -
Mortgage loans 7,983 18,222
Real Estate 1,900 2,284
Policy loans (Note 6) 53,159 18,951
-------- --------
Total investments 274,075 197,581
Cash and equivalents 16,371 5,925
Premiums and other receivables 2,069 2,145
Reinsurance receivables (Note 6) 87,099 160,154
Accrued investment income 4,366 2,183
Deferred policy acquisition costs 16,015 14,489
Other 469 86
-------- --------
$400,464 $382,563
======== ========
Liabilities and Stockholder's Equity
Future policy benefits (Note 6) $351,848 $349,432
Unearned income
and other policy liabilities (Note 6) 23,639 8,324
Policy and contract claims 1,291 4,376
Amounts due to reinsurers 2,904 2,835
General expenses and other liabilities 1,966 1,638
-------- --------
Total liabilities 381,648 366,605
Commitments and contingencies (Note 9) - -
Redeemable preferred stock, par value $5,
65,500 shares authorized, none issued (Note 7) - -
Stockholder's equity (Note 8):
Common stock, par value $8.40, 300,000 shares
authorized, issued and outstanding 2,520 2,520
Additional paid-in capital 72,407 72,407
Unrealized loss of $7,015 on available for sale
securities, net of unrealized loss of $7,201
guaranteed by reinsurers (Note 3) 186 -
Accumulated deficit (56,297) (58,969)
-------- --------
Total stockholder's equity 18,816 15,958
-------- --------
$400,464 $382,563
======== ========
See notes to financial statements.
Connecticut National Life Insurance Company
Statements of Income
(In Thousands, Except Per Share Amounts)
Years Ended December 31
----------------------
1994 1993
---- ----
Revenues:
Premiums and policyholder fees earned (Note 6) $ 20,423 $ 20,570
Investment income (Note 3) 15,197 16,427
Realized investment gains (Note 3) 68 1,170
-------- -------
35,688 38,167
Benefits and Expenses:
Life and annuity benefits (Note 6) 10,877 12,892
Interest credited to contractholders 9,956 11,426
Insurance and general expenses (Note 11) 8,503 10,358
Amortization of deferred policy acquisition
costs 3,080 1,827
-------- -------
32,416 36,503
-------- -------
Income before income taxes (benefit) 3,272 1,664
Income taxes (benefit) (Note 5) 600 (10)
-------- -------
Net income before preferred dividends 2,672 1,674
Preferred dividends - 707
-------- -------
Net income available for common stockholder $ 2,672 $ 967
======== =======
Net income per common share $ 8.91 $ 3.22
======== =======
Average common shares outstanding 300,000 300,000
======== =======
See notes to financial statements.
Connecticut National Life Insurance Company
Statements of Stockholder's Equity
(In Thousands)
Unrealized
Gain
(Loss) on Total
Additional Available Stock-
Common Paid-In for Sale Accumulated holder's
Stock Capital Securities Deficit Equity
------ ---------- ---------- ---------- --------
Balance at
January 1, 1993 $ 2,520 $ 72,407 $ - $ (59,936) $14,991
Net income - - - 1,674 1,674
Cash dividends declared -
Preferred Stock
($10.47 per share) - - - (707) (707)
------- --------- --------- --------- -------
Balance at
December 31, 1993 2,520 72,407 - (58,969) 15,958
Cumulative effect of
adoption of
accounting standard
for investments as
of January 1, 1994
(Note 2) - - 10,218 - 10,218
Net income - - - 2,672 2,672
Change in unrealized
appreciation
(depreciation)
during the period - - (10,032) - (10,032)
------- --------- --------- --------- -------
Balance at
December 31, 1994 $ 2,520 $ 72,407 $ 186 $ (56,297) $18,816
======= ========= ========= ========= =======
See notes to financial statements.
Connecticut National Life Insurance Company
Statements of Cash Flows
(In Thousands)
Years Ended December 31
---------------------------
1994 1993
---- ----
Operating activities:
Net income $ 2,672 $ 1,674
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in premiums receivable (76) (173)
Increase (decrease) in policy liabilities (354) 5,344
Deferral of policy acquisition costs (4,606) (4,370)
Amortization of deferred policy
acquisition costs 3,080 1,827
Change in other assets and liabilities (393) (392)
Amortization and accretion 90 130
Realized investment gains (68) (1,170)
------- --------
Net cash provided by operating activities 345 2,870
Investing activities:
Purchases of investments (28,813) (42,217)
Sales of investments 4,541 41,171
Maturities of investments 34,959 33,991
Net cash transferred to reinsurer (Note 6) - (36,181)
Proceeds from repayment of policy loans 7,777 7,209
Policy loans issued (8,363) (8,452)
------- --------
Net cash provided by (used in) investing
activities 10,101 (4,479)
Financing activities:
Dividends paid on preferred stock - (2,656)
Call of preferred stock - (6,750)
------- --------
Net cash used in financing activities - (9,406)
------- --------
Increase (decrease) in cash and equivalents 10,446 (11,015)
Cash and equivalents at beginning of year 5,925 16,940
------- --------
Cash and equivalents at end of year $16,371 $ 5,925
======= ========
See notes to financial statements.
Connecticut National Life Insurance Company
Notes to Financial Statements
Years Ended December 31, 1994 and 1993
1. The Company
At December 31, 1994, Connecticut National Life Insurance Company (the
Company or CNL) was a wholly-owned subsidiary of GRENEL Financial Corporation
(GFC). The Empire Life Insurance Company (Empire) owned 51% of the
outstanding common stock of GFC and Guardian Royal Exchange, plc, a UK
corporation, owned the remaining 49% of the common stock. Effective April,
1993, the Company changed its state of domicile from New Jersey to
Connecticut.
On November 21, 1994, GFC entered into a definitive agreement for the sale of
all of CNL's outstanding common shares to a wholly-owned subsidiary of
Pioneer Financial Services, Inc. (PFS). On December 27, 1994, GFC and CNL
entered into an indemnification agreement with PFS and Manhattan National
Life Insurance Company (a wholly-owned subsidiary of PFS) whereby CNL and GFC
are indemnified for any losses and expenses related to reinsurance agreements
with Lincoln National and Hannover (see Note 6). As discussed in Note 12,
the closing of the sale was completed on January 31, 1995 with the approval
of the Department of Insurance of the State of Connecticut. The Company's
financial statements reflect the historical accounts of the Company without
regard to this sale.
2. Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP).
Investments
Effective January 1, 1994 the Company adopted Financial Accounting Standards
Board FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under this standard, fixed maturity securities that CNL
has both the positive intent and ability to hold to maturity are carried at
amortized cost. Fixed maturities that CNL does not have the positive intent
and ability to hold to maturity are classified as available for sale and
carried at fair value. Unrealized holding gains and losses on securities
classified as available for sale are included as a separate component of
stockholder's equity, net of guarantee by reinsurers. Prior to January 1,
1994 fixed maturity securities were carried at amortized cost.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses on the sale of
investments are determined on the specific identification basis.
Mortgage loans on real estate are first liens and are generally carried at
the aggregate of unpaid principal balances. Real estate held for sale is
carried at the lower of aggregate cost or estimated market value. Realized
losses recorded for impairment established a new cost basis in the asset.
Policy loans are stated at the aggregate of unpaid loan balances which are
not in excess of cash surrender values of the related policies.
Cash and Equivalents
Cash includes cash on hand and short-term investments with original
maturities of less than three months at the time of purchase.
Revenues
Revenues for interest-sensitive life insurance and annuities consist of
charges assessed against policy account values. For life and accident and
health insurance, premiums are recognized as revenue when due.
Future Policy Benefits
The liabilities for future policy benefits related to interest-sensitive life
and annuity insurance policies are calculated based on accumulated fund
values. As of December 31, 1994, interest credited during the contract
accumulation period ranged from 5% to 6.5%. Investment spreads and mortality
gains are recognized as profits when realized, based on the difference
between actual experience and amounts credited or charged to policies.
The liabilities for future policy benefits on other life and accident and
health insurance policies have been computed by a net level method based on
estimated future investment yield, mortality or morbidity, and withdrawals,
including provisions for adverse deviation. Interest rate assumptions range
from 7% to 8% depending on the year of issue. The provisions for future
policy benefits and the deferral and amortization of policy acquisition costs
are intended to result in benefits and expenses being associated with
premiums proportionately over the policy periods.
Deferred Policy Acquisition Costs
Costs that vary with, and are primarily related to, the production of new
business are deferred. For annuities and interest-sensitive life insurance
policies, deferred costs are amortized generally in proportion to expected
gross profits arising from the difference between investment and mortality
experience and amounts credited or charged to policies. That amortization is
adjusted retrospectively when estimates of current or future gross profit
(including the impact of realized investment gains and losses) to be realized
from a group of products are revised. For other life and accident and health
policies, costs are amortized over the premium-paying period of the policies,
using the same mortality or morbidity, interest, and withdrawal assumptions
that are used in calculating the liabilities for future policy benefits.
Reinsurance
In the normal course of its business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company generally retains a maximum
of $100,000 of coverage on an individual life.
All assets and liabilities related to reinsured insurance contracts are
reported on a gross basis. In addition, reinsurance premiums, commissions,
expense reimbursements, and receivables related to reinsured business are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts.
Premiums reinsured to other companies have been reported as reductions of
premium revenues. Amounts recoverable for reinsurance related to future
policy benefits, unearned premium reserves, and claim liabilities have been
reported as reinsurance receivables; expense allowances received in
connection with reinsurance have been accounted for as a reduction of the
related deferred policy acquisition costs and are deferred and amortized
accordingly.
General Insurance Expenses
General insurance expenses represent fees charged by GFC under an agreement,
whereby GFC provides marketing and management services to the Company. These
fees are equal to the actual expenses incurred by GFC (See Note 11).
Income Taxes
Income taxes are based on income or loss reported for financial statement
purposes and tax laws and rates in effect for the years presented. Deferred
income taxes have been provided using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using enacted tax rates (see Note 5).
Depreciation
The Company leases furniture and equipment from GFC. GFC's furniture and
equipment are recorded at cost and are depreciated using principally the
straight-line method over the expected lives of generally five to seven years
and charged to CNL under the marketing and management services agreement (See
Note 11).
Net Income Per Common Share
Net income per share of common stock is determined by dividing net income,
less dividends on preferred stock, by the weighted-average number of shares
of common stock outstanding. The Company has not issued options, warrants,
convertible securities or other dilutive instruments.
Fair Values of Financial Instruments
The following methods and assumptions were used by CNL in estimating the fair
values of its financial instruments:
Cash, short-term investments, and accrued investment income: The carrying
amounts reported for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) 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.
Mortgage loans and policy loans: The carrying amount of CNL's mortgage loan
and policy loan portfolio approximates their fair values, which are estimated
using interest rates currently being offered for similar loans to borrowers
with similar credit ratings.
3. Investments
Realized investment gains (losses), including provisions for losses on
investments held and unrealized appreciation (depreciation) on fixed
maturities available for sale, after giving effect to amounts guaranteed by
reinsurers (Note 6), for the years ended December 31, 1994 and 1993 are
summarized as follows:
Fixed Real
Maturities Estate Total
---------- ------- ------
(In Thousands)
1994
----
Realized $ 452 $(384) $ 68
Unrealized (10,032) - (10,032)
-------- ----- --------
$ (9,580) $(384) $ (9,964)
======== ===== ========
1993
----
Realized $ 1,320 $(150) $ 1,170
Unrealized 2,602 - 2,602
-------- ----- --------
$ 3,922 $(150) $ 3,772
======== ===== ========
Fixed maturities are considered available for sale at December 31, 1994 and
are carried at market. At December 31, 1993, fixed maturities are carried at
amortized cost.
Proceeds from sales of investment securities were approximately $5 million
and $91 million in 1994 and 1993, respectively. The Company realized gross
gains of $569,000 and $1,543,000 and gross losses of $117,000 and $223,000 on
those sales in 1994 and 1993, respectively. In addition, the Company
recorded impairment losses on real estate of $384,000 in 1994 and $150,000 in
1993.
Investments by category are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(In Thousands)
Available for sale
at December 31, 1994:
U.S. Treasury $27,987 $ 228 $ (939) $ 27,276
Foreign governments 13,684 - (1,229) 12,455
Corporate securities 132,679 783 (5,899) 127,563
Mortgage-backed securities 43,698 508 (467) 43,739
-------- -------- -------- --------
218,048 1,519 (8,534) 211,033
Unrealized loss guaranteed by
reinsurer (Note 6) - (930) 8,131 7,201
-------- ------- -------- --------
$218,048 $ 589 $ (403) $218,234
======== ======= ======== ========
Held to maturity
at December 31, 1993:
U.S. Treasury $16,167 $ 973 $ - $ 17,140
Foreign governments 10,140 252 - 10,392
Corporate Securities 86,856 6,031 (444) 92,443
Mortgage-backed securities 44,961 3,406 - 48,367
------- ------- -------- --------
$158,124 $10,662 $ (444) $168,342
======= ======= ======== ========
As discussed in Note 6, during 1994 and 1993 the Company entered into
reinsurance arrangements with the Lincoln National Life Insurance Company and
the Reassurance Company of Hannover and amended a reinsurance arrangement
with the Lincoln National Reassurance Company. Under the terms of the
related trust agreements, certain of the Company's fixed maturity and cash
equivalents have been guaranteed by reinsurers as to principle value. The
following summarizes the Company's bond and short-term investment holdings
under such arrangements at December 31, 1994 (in millions):
Amortized Cost Fair Value
-------------- ----------
Reassurance Company of Hannover $ 138.4 $ 131.2
Lincoln National Life Insurance Company 60.4 60.4
------- -------
Total amount guaranteed by reinsurers
as to principle value $ 198.8 $ 191.6
======= =======
The amortized cost and fair value of available for sale fixed maturities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
Amortized Fair
Cost Value
--------- -----
(In Thousands)
Due in 1995 $ 2,145 $ 2,153
Due 1996-1999 42,065 41,737
Due 2000-2004 52,343 50,728
Due after 2004 77,798 72,676
Mortgage-backed securities 43,697 43,739
--------- ---------
$ 218,048 $ 211,033
========= =========
Major categories of investment income are summarized as follows:
Years Ended
December 31
-------------------
1994 1993
---- ----
(In Thousands)
Fixed maturities $ 12,291 $12,870
Interest on policy loans 1,382 1,382
Mortgages 1,091 2,075
Short-term investments 512 249
Real estate income, net 94 81
-------- --------
Total investment income 15,370 16,657
Investment expenses (173) (230)
-------- --------
$ 15,197 $16,427
======== ========
At December 31, 1994 and 1993, securities with a carrying value of $3,792,000
and $5,546,000, respectively were on deposit with various government
authorities to meet regulatory requirements.
The Company's current investment strategy is to purchase only securities
which are rated "BAA" or better by nationally recognized rating agencies.
The Company invests primarily in publicly traded bonds and limits the total
investment in any one nongovernment issuer. At December 31, 1994, bond
investments, at amortized cost, in Bank of Nova Scotia of $8.1 million, Ford
Motor Company of $7.0 million and Hydro Quebec of $6.8 million represented
the largest holdings of any one issuer. At December 31, 1993, bond
investments, at amortized cost, in Hydro Quebec of $6.8 million, Bank of Nova
Scotia of $6.5 million and Ford Motor Company of $5.2 million represented the
largest holdings of any one issuer. No other issuer represented more than
3.2% and 3.3% of the securities portfolio at December 31, 1994 and 1993,
respectively.
The Company's mortgage loan portfolio consists of loans on commercial
properties geographically distributed throughout the United States. The
concentrations of such holdings by state are:
December 31
-------------------
1994 1993
---- ----
(In Thousands)
State
-----
Ohio $2,180 $ 3,682
Kansas 1,950 1,983
Texas 1,579 1,636
New York 1,449 3,204
Michigan - 2,043
Other 825 5,674
------- --------
$7,983 $18,222
======= ========
4. Credit Arrangements
During 1993, the Company established with an institution a $2.5 million
credit facility, including a committed line of $1 million and a stand-by
facility of $1.5 million. The credit lines, which expired in October 1994,
called for interest at the institution's prime rate. The Company did not
utilize the credit arrangements.
5. Income Taxes
For the years ended December 31, 1994 and 1993, the Company is in a net
operating loss (NOL) carryforward position for federal income tax purposes.
In 1994, the Company incurred alternative minimum federal and state income
taxes of $600,000. In 1993 the Company recovered previously incurred taxes
of $10,000. Tax loss carryforwards at December 31, 1994 amount to
approximately $24.1 million with expirations of $6.7 million in 2003, $11.2
million in 2004, $4.4 million in 2005, and $1.8 million in 2008. In addition,
the Company has alternative minimum tax credit carryforwards of $444,000.
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 CNL's deferred tax liabilities and assets are as follows:
December 31
-----------
1994 1993
---- ----
(In Thousands)
Deferred tax liabilities:
Deferred policy acquisition costs $ 3,553 $ 5,170
Other 860 266
--------- ---------
Total deferred tax liabilities 4,413 5,436
Deferred tax assets:
Policy liabilities 9,971 6,170
Operating loss carryover 8,533 15,601
Other 1,660 896
--------- ---------
Total deferred tax assets 20,164 22,667
Valuation allowance for deferred tax assets (15,751) (17,231)
--------- ---------
Net deferred taxes $ - $ -
========= =========
The nature of CNL's deferred tax assets and liabilities are such that CNL
establishes a valuation allowance for the deferred tax asset which management
believes may not be realized. The valuation allowance decreased by
$1,480,000 and $789,000 in the years ended December 31, 1994 and 1993,
respectively.
CNL federal income taxes computed at the effective federal rate varied from
the federal income taxes computed at the statutory tax rate as follows:
December 31
-----------
1994 1993
---- ----
Amount Amount
------ ------
(In Thousands)
Statutory federal income tax rate
applied to income before income taxes $1,070 $ 452
Reinsurance 7,072 (334)
Utilization of operating loss carryovers (6,933) -
Alternative minimum taxes 400 -
State income taxes 200 -
Change in valuation allowance (1,480) (789)
Policy liabilities and other 271 661
------ ------
Income taxes (benefit) $ 600 $ (10)
====== ======
The Company was not required to make tax payments during 1994 and received
refunds of $10,000 for 1993.
6. Reinsurance
The Company follows an accepted industry practice of reinsuring certain
portions of insurance risks with other insurance companies. The Company
remains primarily liable as the direct insurer on all risks reinsured. The
Company has a normal retention of $100,000 per life. In addition, the
Company has entered into various nonrecurring reinsurance arrangements
covering aggregate exposure on blocks of business which are described below.
A reconciliation of direct to net premiums follows:
December 31
-----------
1994 1993
---- ----
(In Thousands)
Direct premiums and amounts assessed against
policyholders $ 32,108 $ 32,234
Ceded premiums (13,356) (12,750)
Assumed premiums 1,671 1,086
--------- ---------
Net premiums $ 20,423 $ 20,570
========= =========
Lincoln National
The Company's reinsurance arrangements with the Lincoln National Life
Insurance Company and its affiliate, the Lincoln National Reassurance Company
covers the Company's single-premium-whole-life (SPWL) policies. These
agreements allowed the Company to terminate a previously existing arrangement
with its parent company, Empire, cede the related risks outside of the
corporate group and strengthen certain financial ratios. The following
describes the financial reporting of these transactions:
Effective January 1, 1993 the Company recaptured certain policies that were
100% coinsured with Empire Life. Included under the recapture policies were
$210 million of insurance in-force, investments and cash of $118 million and
an equal amount of future policy benefits. The Company concurrently entered
into a 100% quota share reinsurance agreement with Lincoln National
Reassurance Company, Fort Wayne, Indiana (LNRC), ceding the recaptured
policies, and $2.7 million of policy loans and policy benefit reserves
relating to this block of business previously retained by the Company. In
connection with the LNRC reinsurance agreement, insurance in-force of $238
million, reserves of $145 million and assets of $141 million were ceded. A
ceding commission of $3.4 million, net of recapture expenses, was received by
the Company. Included in unearned income is $2.7 million and $3.0 million at
December 31, 1994 and 1993, respectively related to the unamortized balance
of the ceding allowance. Income from the net ceding commission has been
deferred and will be recognized as earnings as expected profits emerge from
the underlying policies. Included in amounts assessed against policyholders
was amortization of the unearned income balance of $375,000 and $360,000 in
the years ended December 31, 1994 and 1993, respectively.
Effective December 1, 1994, through a series of agreements with LNRC and
Lincoln National Life Insurance Company (LNLIC), an affiliate of LNRC, the
Company recaptured $96.1 million of assets and related future policy benefits
that were coinsured with LNRC. The recapture was effected through an
amendment of a prior agreement with LNRC. Concurrently, the Company entered
into a modified coinsurance agreement with LNLIC, ceding approximately $60
million of the recaptured business. Under this modified coinsurance
agreement the Company retains the assets and liabilities, but not the related
risk associated with the business. The portion of the recaptured business
that is not subject to the modified coinsurance agreement with LNLIC is equal
to policy loans and an equal amount of policy benefit reserves under the
agreements with LNRC and LNLIC. The Company cessions will directly vary with
the amount of policy loans on these policies. The Company will have the
policy loans and an equal amount of reserves and at all times LNRC agrees to
indemnify and hold harmless CNL and GFC for any payments arising out of these
December 1, 1994 agreements.
At December 31, 1994 and 1993, insurance in-force of $221 and $267 million,
respectively, and future policy benefits of approximately $114 million and
$147 million, respectively, were ceded to LNLIC and LNRC. Included in the
Company's reinsurance recoverable balances were reinsured policyholder
benefit reserves of $52 million and $147 million at December 31, 1994 and
1993, respectively.
Empire Life
Effective January 1, 1993 the Company entered into a reinsurance agreement
with Empire, ceding its net retained mortality risk, which is up to $100,000
per life for most lives. The SPWL policies are not covered under this
agreement. Amounts paid to Empire are set at 115% of the Company's expected
net mortality level based on 1990 to 1992 experience and can be adjusted
after five years from the effective date based upon actual experience during
the preceding five years. Annually, up to 83% of the excess of reinsurance
considerations paid over those received are offset against cumulative losses
(as defined), if any, or refunded to the Company. Cumulative losses are
maintained in an experience refund account and accumulate interest at 8%.
The Company may terminate the arrangement by settling the experience refund
account. At December 31, 1994 and 1993 the ceded net mortality risk was
approximately $1.3 billion. Because a limited level of risk has transferred
to Empire, the agreement is reported as a deposit-type arrangement under FASB
Statement No. 113, Accounting for Reinsurance Contracts, which requires the
excess of reinsurance considerations received over those paid to be reflected
as an obligation to reinsurers. Accordingly, included in amounts due to
reinsurers were $357,000 and $935,000 at December 31, 1994 and 1993,
respectively.
Hannover
Effective December 31, 1994, the Company entered into a coinsurance/modified
coinsurance arrangement with the Reassurance Company of Hannover (RCH),
ceding 90% of all its retained business. The RCH contract will not cover new
business written after December 31, 1994. The Company received an initial
ceding allowance of $15 million which has been included in an experience
refund account and accumulates interest. The experience refund account will
be reduced by profits, as defined, from the reinsured business. Thereafter,
the Company will share profits on the reinsured policies on a 50-50 basis
with RCH. The Company is indemnified for losses on the business reinsured.
Results on the Empire mortality arrangement will be included in the
calculation of profit or loss on the RCH contract. The initial ceding
allowance is deferred and included in unearned income at December 31, 1994.
7. Redeemable Preferred Stock
Redeemable non voting preferred stock was issued to a former shareholder,
The New England Mutual Life Insurance Company. On December 29, 1993, the
Company called the 67,500 outstanding shares for redemption for a total call
price of $6,750,000. Accrued dividends, which were cumulative at the rate of
$10.50 per share per annum, were paid in full.
8. Stockholder's Equity
The Company has a minimum statutory capital and surplus requirement
determined by the State of Connecticut Insurance Department of $1,000,000 of
capital and $2,000,000 of contributed and unassigned surplus. At December
31, 1994, the Company has $2,520,000 of capital and $22,352,000 of
contributed and unassigned statutory surplus. Dividends from CNL are limited
to the lesser of the prior year statutory-basis net gain from operations or
10% of statutory-basis surplus. Currently, no dividends can be paid without
regulatory approval.
The NAIC implemented requirements for the calculation of risk-based capital
(RBC) by life insurance companies. RBC reflects an assessment of the
adequacy of a company's capital and surplus level in relation to the risk
characteristics of its investment holdings, insurance contracts, interest
rate sensitivity and premium volume. State insurance departments are
required to take certain enforcement actions when a company's RBC falls below
defined levels. At December 31, 1994 and 1993 the Company's RBC levels were
well in excess of all applicable regulatory requirements.
9. Commitments and Contingencies
CNL and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under
insurance policies, disputes with agents, and other matters. CNL's management
and its legal counsel are of the opinion that the disposition of these
actions will not have a material adverse effect on CNL' s financial position.
The number of insurance companies that are under regulatory supervision is
expected to result in the continuation of assessments by state guarantee
funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in certain states. During the years ended
1994 and 1993 the Company was assessed guarantee fund amounts of $309,000 and
$317,000, respectively.
10. Benefit Plans
CNL has maintained a defined benefit pension plan (the Plan) for employees.
The Plan is noncontributory and benefits are based upon an employee's years
of service and final average pay. Vesting occurs after 5 years of service.
The Company's funding policy for the Plan is to contribute, at a minimum, the
equivalent of the amount required under the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code.
Reconciliation of the funded status of the Plan follows:
December 31
----------
1994 1993
---- ----
(In Thousands)
Vested benefit obligation $ (3,753) $ (3,838)
Accumulated benefit obligation (3,787) (3,862)
Projected benefit obligation $ (4,130) $ (4,094)
Plan assets at fair value 3,007 3,494
-------- --------
Projected benefit obligation in excess of assets (1,123) (600)
Unrecognized net loss from actuarial experience 1,332 980
Unrecognized prior service (413) (455)
-------- --------
Accrued pension expense $ (204) $ (75)
======== ========
Components of pension expense are:
December 31
-----------
1994 1993
---- ----
(In Thousands)
Service cost $ 112 $ 84
Interest cost 315 309
Actual return on assets (297) (195)
Net amortization and deferral:
Unrecognized prior service cost (43) (42)
Unrecognized loss 40 -
Net asset loss deferred - (119)
-------- --------
Net pension expense $ 127 $ 37
======== ========
The expected long-term rate of return on plan assets was 8.5% for 1994 and
1993. The discount rate and rate of increase in future compensation levels
used in determining the projected benefit obligation for 1994 and 1993 were
7.5% and 4.5%, respectively. Plan assets are held primarily in various
separate accounts and the general account of The New England Mutual Life
Insurance Company. These accounts invest in stocks, bonds, mortgage loans
and real estate of entities unrelated to CNL.
Employees who have attained age 21 and completed one year of service have a
defined contribution employee benefit plan and a group insurance trust plan.
The defined contribution plan participants may contribute from 1% to 15% of
their total compensation subject to an annual maximum. The plan also provides
for CNL to match 50% of participants contributions up to the annual Internal
Revenue Service limit. In addition, CNL makes a 3.5% profit sharing
contribution to the plan at the discretion of CNL' Board of Directors. CNL's
contributions charged to operations for these plans were $455,000 in 1994 and
$508,000 in 1993.
11. Related Party Transactions
The Company participates in a marketing and management agreement with its
parent, GFC, which is described in Note 1. During 1994 and 1993 fees of
approximately $7.9 million and $8.3 million, respectively, were charged by
GFC to the Company. Amounts due from (to) GFC at December 31, 1994 and 1993
were approximately $235,000 and $(302,000), respectively, which are normally
settled in subsequent periods.
Empire Life provided investment management and advisory services to the
Company. Charges for these services amounted to approximately $220,000 in
1994 and 1993.
12. Subsequent Events
As discussed in Note 1, on January 31, 1995, GFC sold all of the outstanding
common shares of the Company to PFS. In connection with the sale, the
Company assumed responsibility for certain costs of GFC's employee severance
and pension plan approximating $2,500,000 and certain operating lease
obligations. Minimum future rental commitments in connection with these
noncancelable operating leases are $752,000 for 1995 and $24,000 for 1996.
In addition, GFC will transfer to PFS title to its office equipment,
furniture, fixtures, and software licenses.
Exhibit 99(b)
PIONEER FINANCIAL SERVICES, INC.
AND CONNECTICUT NATIONAL LIFE INSURANCE COMPANY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following pro forma combined condensed balance sheet as of December 31,
1994 and the pro forma combined condensed statement of income for the year
then ended give effect to the January 31, 1995 acquisition of all of the
outstanding shares of stock of Connecticut National Life Insurance Company
(CNL) by Manhattan National Life Insurance Company, a wholly-owned subsidiary
of Pioneer Financial Services, Inc. (PFS). The pro forma balance sheet was
prepared as if the acquisition had occurred on December 31, 1994 and the pro
forma income statement was prepared as if the acquisition had occurred as of
the beginning of the year then ended. The pro forma information is based on
the historical financial statements of CNL and PFS, giving effect to the
transaction under the purchase method of accounting and the assumptions and
adjustments as presented in accompanying notes to the pro forma financial
statements.
The pro forma financial statements have been prepared by PFS management based
upon the historical financial statements of CNL included elsewhere herein.
These pro forma statements may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the financial statements and
notes of CNL contained elsewhere herein and PFS's Annual Report on Form 10-K
for the year ended December 31, 1994.
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1994
AS REPORTED PRO FORMA PRO FORMA
PFS CNL ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
ASSETS (In Thousands)
Investments $723,837 $274,075 ($15,000)(1) $982,912
Cash 8,612 16,371 (7,340)(1) 16,643
(1,000)(3)
Premiums receivable,
less allowance for
doubtful accounts 20,102 2,069 - 22,171
Amounts on deposit and
due from reinsurers 41,426 87,099 1,000 (3) 129,525
Accrued investment income 8,873 4,366 - 13,239
Deferred acquisition costs 225,618 16,015 (16,015)(2) 226,837
1,219 (2)
Land, building and equipment 20,314 - - 20,314
Deferred federal income taxes 7,262 - - 7,262
Other assets 19,656 469 - 20,125
---------- -------- -------- ----------
$1,075,700 $400,464 ($37,136) $1,439,028
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities:
Future policy benefits $620,562 $351,848 $ - $972,410
Unearned premiums and income 76,266 23,639 (23,123)(2) 76,782
Claims and other 171,780 1,291 - 173,071
---------- -------- -------- ----------
868,608 376,778 (23,123) 1,222,263
General and other liabilities 37,042 4,870 3,500 (2) 45,055
(357)(3)
Short-term notes payable 20,093 - (13,393)(1) 6,700
Convertible subordinated debt
and long-term notes payable 59,947 - 13,393 (1) 75,000
---------- -------- -------- ----------
Total Liabilities 985,690 381,648 (18,320) 1,349,018
Redeemable Preferred Stock 21,682 - - 21,682
Stockholders' Equity
Common stock, par value 6,996 2,520 (2,520)(4) 6,996
Additional paid-in capital 29,299 72,407 (72,407)(4) 29,299
Unrealized gain (loss) of
equity securities and debt
securities available for sale,
less deferred federal income
taxes and amounts reinsured (7,193) 186 (186)(4) (7,193)
Retained earnings (deficit) 48,960 (56,297) 56,297 (4) 48,960
Less treasury stock at cost (9,734) - - (9,734)
Total Stockholders' Equity 68,328 18,816 (18,816) 68,328
---------- -------- -------- ----------
$1,095,700 $400,464 $(37,136) $1,439,028
========== ======== ======== ==========
PRO FORMA COMBINED CONDENSED INCOME STATEMENT (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1994
AS REPORTED PRO FORMA PRO FORMA
PFS CNL ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(In Thousands except share and per share amounts)
INCOME
Premiums policy charges $ 704,109 $ 20,423 $ - $ 724,532
Net investment income 42,786 15,197 (630)(5) 57,059
(294)(5)
Realized gains and other 27,260 68 - 27,328
---------- -------- -------- ----------
Total income 774,155 35,688 (924) 808,919
BENEFITS AND EXPENSES
Benefits 450,196 20,833 - 471,029
Insurance and general expenses 192,810 8,503 - 201,313
Interest expense 5,054 - 750 (5) 5,937
133 (5)
Amortization of deferred
acquisition costs 100,073 3,080 - 103,153
---------- -------- -------- ----------
Total Benefits and Expenses 748,133 32,416 883 781,432
---------- -------- -------- ----------
INCOME BEFORE INCOME TAXES 26,022 3,272 (1,807) 27,487
Federal Income Taxes 8,873 600 (633)(5) 8,840
---------- -------- -------- ----------
NET INCOME 17,149 2,672 (1,174) 18,647
Preferred Stock Dividends 1,904 - - 1,904
---------- -------- -------- ----------
Net Income applicable to common
stockholders $15,245 $2,672 ($1,174) $16,743
========== ======== ======== ==========
NET INCOME PER SHARE
Primary $2.36 $2.58
Fully Diluted 1.58 1.70
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 6,459,063 6,459,063
Fully Diluted 12,734,147 12,734,147
NOTES TO PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
(1) PFS acquired all of the outstanding shares of CNL for approximately $24
million. This consideration took the form of a $1.66 million note (the "GFC
Note") issued to CNL's former parent company, GRENEL Financial Corporation
("GFC"), cash of $21.971 million and acquisition costs paid for out of
operating funds totalling $369,000.
To finance the cash portion of the purchase price, PFS borrowed $15 million
pursuant to a bank credit facility (the "Acquisition Note") and used
corporate funds of $7.34 million for the balance. The Acquisition Note was
issued in December 1994 in anticipation of the acquisition and the proceeds
were invested in short term investments. Accordingly, pro forma adjustments
have been made to reduce short term investments by $15 million and cash by
$7.34 million. In addition, pro forma adjustments have been made to
reclassify the long term portion of the Acquisition Note ($13.393 million).
The Acquisition Note matures five years after the closing of the acquisition
and requires quarterly principal payments of $536,000, beginning April 30,
1995.
(2) Under purchase accounting, CNL's assets and liabilities are required to
be adjusted to their estimated fair value. The estimated fair value
adjustments have been determined by PFS based on available information, and
may change as additional information becomes available. The following are
the pro forma adjustments made:
Increase (Decrease) in Net Assets December 31, 1994
--------------------------------- -----------------
(In Thousands)
Shareholder's Equity as reported by CNL $18,816
Adjustments:
A. Eliminate unearned income on
reinsurance contracts and unearned front
end fees on life insurance contracts 23,123
B. Eliminate deferred policy
acquisition costs. (16,015)
C. Record present value of future
profits of business acquired 1,219
D. Record assumption of employee
severance and lease and pension plan (3,500)
disposition costs
E. Elimination of Empire mortality
reinsurance liability (Note 3) 357
-------
Total Purchase Price $24,000
=======
(3) PFS modified a previously existing automatic reinsurance arrangement
between CNL and one of GFC's parent companies, The Empire Life Insurance
Company (Empire). Under the terms of the modified agreement (Modification),
PFS deposited $1 million (Deposit) with Empire and will pay Empire premiums
to limit mortality losses, as defined. To the extent cumulative mortality
losses exceed premiums by an amount up to $1 million, the Deposit will be
used to fund the losses; Empire will fund the excess of cumulative losses
over premiums greater than $1 million. The modification eliminated any
previously accumulated gains or losses through the date immediately prior to
the closing. Therefore, pro forma adjustments have been made to reflect the
Deposit and to give effect to the elimination of the liability of $357,000 to
Empire previously reported by CNL.
CNL also entered into a reinsurance agreement with Reassurance Company
of Hanover (see footnote 6 to CNL's financial statements attached hereto as
Exhibit 99(a)).
(4) Reflects the elimination of CNL's historical stockholder's equity
amounts.
(5) For purposes of determining the pro forma effect of the CNL acquisition
on the PFS consolidated statement of income, the following pro forma
adjustments have been made:
December 31,1994
----------------
Increase (Decrease) in Income (In Thousands)
-----------------------------
A. Interest expense on the Acquisition
Note at 5% $(750)
B. Decrease in investment income due to (630)
maintaining certificates of deposit
pursuant to the Acquisition Note
C. Interest expense on the GFC Note at 8% (133)
D. Decrease in investment income due to
utilization of cash and equivalents to
fund the acquisition (assumed return on (294)
short term investments of 4.0%)
E. Change in tax provision due to A
through D above 633
-------
$(1,174)
=======
Pursuant to the terms of the credit facility providing for the Acquisition
Note, so long as PFS maintains an investment in certificates of deposit of at
least $15.0 million with the lender under the Acquisition Note, the
Acquisition Note will bear interest at 2% above the certificate of deposit
interest rate. At December 31, 1994, the rate on the Acquisition Note was 5%
(see Item A above). Item B reflects the decrease in investment income
resulting from maintaining this certificate of deposit. PFS has assumed a
rate of return on its other investments of 7.2% and a 3% return on the
certificate of deposit. Therefore, the decrease in investment income
resulting from maintaining $15.0 million in certificates of deposit is
$630,000.
The GFC Note bears interest at a rate related to the average earnings on a
mortgage loan and real estate portfolio acquired by PFS as part of the
acquisition. This rate was 8% for the fiscal year ended December 31, 1994.
