<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1995
REGISTRATION NO. 33-60931
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
AMERICAN ANNUITY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-1356481
(State or other
jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
</TABLE>
250 EAST FIFTH STREET
CINCINNATI, OHIO 45202
(513) 333-5300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MARK F. MUETHING, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
250 EAST FIFTH STREET
CINCINNATI, OHIO 45202
(513) 333-5300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
ROBERT E. COLETTI, ESQ.
KEATING, MUETHING & KLEKAMP
1800 PROVIDENT TOWER
ONE EAST FOURTH STREET
CINCINNATI, OHIO 45202
(513) 579-6560
<PAGE> 2
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [___]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant
to Item 11(a)(1) of this form, check the following box. [___]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [___]
If this Form is a post-effective amendment filed pursuant to rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [___]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [___]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE> 3
AMERICAN ANNUITY GROUP, INC.
<TABLE>
CROSS-REFERENCING SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY FORM S-2
<CAPTION>
Item
Number in
Form S-2
- --------
<S> <C> <C>
1. Forepart of the Registration Statement and Facing Page; Outside Front Cover Page of
Outside Front Cover Page of Prospectus . Prospectus; Cross-Reference Sheet.
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus . . . . . . . . . . . . . Prospectus; Available Information; Documents
Incorporated by Reference; Table of Contents.
3. Summary Information, Risk Factors and Prospectus Summary; Investment Considerations.
Ratio of Earnings to Fixed Charges . . .
4. Use of Proceeds . . . . . . . . . . . . Use of Proceeds.
5. Determination of Offering Price . . . . Outside Front Cover Page; The Rights Offering.
6. Dilution . . . . . . . . . . . . . . . . Inapplicable.
7. Selling Security Holders . . . . . . . . Inapplicable.
8. Plan of Distribution . . . . . . . . . . Outside and Inside Front Cover Pages; The Rights
Offering.
9. Description of Securities to be Registered The Rights Offering; Description of the Capital
Stock.
10. Interests of Named Experts and Counsel . Legal Matters; Experts.
11. Information with Respect to the Registrant Front Cover Page; Information Regarding AAG;
Prospectus Summary; Use of Proceeds; Dividend
Policy; Capitalization; Acquisition of Laurentian;
Selected Historical Financial Information.
12. Incorporation of Certain Information by Documents Incorporated by Reference.
Reference . . . . . . . . . . . . . . .
13. Disclosure of Commission Position on Inapplicable.
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . .
</TABLE>
<PAGE> 4
3,950,000 SHARES OF
AMERICAN ANNUITY GROUP, INC.
COMMON STOCK ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES
American Annuity Group, Inc., a Delaware corporation ("AAG" or the
"Company"), is distributing at no charge to the record holders of its shares of
common stock, par value $1.00 per share (the "AAG Common Stock"), transferable
subscription rights (the "Rights") to subscribe for and purchase from AAG
shares of AAG Common Stock. Each AAG stockholder will receive one (1) Right
for each ten (10) shares of AAG Common Stock held by such holder as of the
close of business on July 31, 1995 (the "Record Date"). Each Right will
entitle its holder (a "Rights Holder" or "Holder") to purchase one share of AAG
Common Stock (the "Basic Subscription Privilege"), at an exercise price of
$9.50 per share (the "Exercise Price"). As soon as practicable after the
Record Date, certificates evidencing the Rights (the "Rights Certificates")
will be mailed to the Rights Holders. Each Rights Holder who exercises all of
the Rights held by such Holder may purchase at the Exercise Price additional
shares of AAG Common Stock that are not otherwise purchased pursuant to the
exercise of Rights (the "Oversubscription Privilege"). If an insufficient
number of shares of AAG Common Stock are available to satisfy fully all
subscriptions pursuant to the Oversubscription Privilege, then the available
shares will be prorated among those Holders who subscribe pursuant to the
Oversubscription Privilege, based upon the respective numbers of Rights
exercised by such Holders pursuant to the Basic Subscription Privilege. There
were 39,146,414 shares of AAG Common Stock issued and outstanding on the
Record Date and approximately 3,950,000 Rights will be issued. These Rights
will, in the aggregate, entitle the Rights Holders to purchase up to
3,950,000 shares of newly issued AAG Common Stock (the "Underlying Shares").
No fractional Rights or cash in lieu thereof will be distributed by AAG. The
number of Rights to be distributed to each holder of AAG Common Stock will be
rounded up to the nearest whole number. ACCORDINGLY, ALL STOCKHOLDERS WILL
RECEIVE AT LEAST ONE RIGHT AND BE ELIGIBLE TO PARTICIPATE IN THE
OVERSUBSCRIPTION PRIVILEGE. Payments received for Underlying Shares which are
not available for purchase will be promptly returned by the exchange agent,
Securities Transfer Company (the "Exchange Agent"), without interest. See "The
Rights Offering--Subscription Privileges--Oversubscription Privilege."
As of the Record Date, the only person known to the Company to own
more than 5% of AAG's Common Stock was American Financial Group, Inc. and its
subsidiaries (collectively "American Financial"), which on such date
beneficially owned 31,872,721 shares of Common Stock, representing
approximately 81.4% of the number of shares of AAG Common Stock. The Company
has been informed by American Financial that while it will exercise its Basic
Subscription Privilege in full, it does not intend to exercise its
Oversubscription Privilege. As a result, at the conclusion of the Rights
Offering, American Financial will continue to own at least 81.4% of AAG's
Common Stock. See "Business-Relationship With American Financial". For a
discussion of the exercise of Rights by certain employee benefit plans of AAG,
see "The Rights Offering-- Subscription Privileges--Oversubscription
Privilege."
The Rights will expire at 5:00 p.m., Eastern Time on August 23,
1995 unless extended by the Company (as extended, the "Expiration Date").
Rights Holders should consider carefully the exercise or sale of the Rights
prior to the Expiration Date. A Rights Holder may exercise Rights by
delivering a properly completed and executed Rights Certificate (or following
the procedures for guaranteed delivery set forth herein), together with payment
in full of the Exercise Price for each Underlying Share subscribed for pursuant
to the Basic Subscription Privilege and the Oversubscription Privilege to the
Exchange Agent by the Expiration Date.
<PAGE> 5
AAG's Common Stock is listed on the New York Stock Exchange. On July
18, 1995, the closing price of AAG Common Stock on the New York Stock Exchange
was $9.63. The Company anticipates that the Rights will also be listed on the
New York Stock Exchange under the symbol "AAGRT". The Exercise Price has been
determined by the Company's Board of Directors based upon a number of factors,
one of which was the market price of AAG Common Stock immediately preceding the
issuance of the Rights. See "The Rights Offering--Determination of
Subscription Price."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER "INVESTMENT CONSIDERATIONS" WHICH BEGIN ON PAGE 12 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
Proceeds to the
Exercise Price Underwriting Discounts Company (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $9.50 None $9.50
- -------------------------------------------------------------------------------------------------------------
Total $37,525,000 None $37,525,000
=============================================================================================================
<FN>
(1) Before deduction of estimated offering expenses of $150,000 payable by the Company.
</TABLE>
The date of this Prospectus is July 19, 1995.
<PAGE> 6
AVAILABLE INFORMATION
AAG has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 under the Securities Act of
1933 (the "Securities Act"), for the registration of the Rights and Underlying
Shares. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits and
schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company, the Rights and the Underlying Shares, reference is made to the
Registration Statement, including the exhibits thereto, and the financial
statements and notes filed as part thereof. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The Company is subject to the information requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement and the exhibits thereto as well as
reports, proxy statements and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W. Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, material filed by the Company can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005 (the "NYSE"), on which AAG's Common Stock is traded.
DOCUMENTS INCORPORATED BY REFERENCE
This Prospectus incorporates by reference certain documents relating
to the Company which are not delivered herewith. These documents (other than
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents) are available, without charge,
on oral or written request by any person to whom this Prospectus is delivered.
Written or telephone requests should be directed to Mark F. Muething, Senior
Vice President, General Counsel and Secretary, 250 East Fifth Street,
Cincinnati, Ohio 45202 (513) 333- 5300.
The following documents, which have been filed by the Company (File
No. 1-11632) with the Commission, are hereby incorporated by reference in this
Prospectus:
1. The Company's Annual Report on Form 10-K for the year
ended December 31, 1994, as amended (included herein);
2. The Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 (included herein); and
3. The Company's Current Report on Form 8-K dated June 5,
1995.
Any statement contained in a document incorporated or deemed to be
incorporated herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in
2
<PAGE> 7
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
________________________________
3
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus. Rights Holders
and prospective investors should carefully consider the information set forth
under the heading "Investment Considerations" prior to making an investment
decision with respect to the Rights.
THE COMPANY
American Annuity Group, Inc. ("AAG" or the "Company") is a holding
company whose primary asset is the capital stock of Great American Life
Insurance Company ("GALIC"). The Company's principal executive offices are
located at 250 East Fifth Street, Cincinnati, Ohio 45202, and its telephone
number is (513) 333-5300.
AAG is the successor to STI Group, Inc., formerly known as Sprague
Technologies, Inc. ("STI"). STI was formed in May 1987 by The Penn Central
Corporation, for the purpose of divesting its electronics components
businesses. STI subsequently sold substantially all of its assets and retired
its debt, netting approximately $100 million in cash and cash equivalents.
On December 31, 1992, STI purchased 100% of the capital stock of GALIC
from Great American Insurance Company ("GAI") for $468 million. American
Financial Group, Inc. ("American Financial"), the parent of GAI, beneficially
owned approximately 81.4% of AAG's Common Stock at June 1, 1995.
In 1994, AAG and GALIC formed or acquired several small subsidiaries
with combined total assets of approximately $40 million, including the
following: Lifestyle Financial Investments, Inc. and T'N'T Marketing, Inc.,
third-party marketers of annuities through financial institutions; Western
Pacific Life Insurance Company and Annuity Investors Life Insurance Company,
two companies acquired principally for their insurance licenses; and AAG
Securities, Inc., a broker-dealer licensed to sell mutual funds and variable
annuities. The total investment in these companies by AAG is approximately $15
million.
GALIC was incorporated in New Jersey in 1959 and redomiciled as an
Ohio corporation in 1982. GALIC entered the tax-deferred annuity business in
1976; prior to that time it wrote primarily whole-life, term-life, and accident
and health insurance policies. GALIC is currently rated "A" (Excellent) by
A.M. Best.
Annuities are long-term retirement savings plans that benefit from
interest accruing on a tax-deferred basis. The issuer of the annuity collects
contributions, credits interest on the policy and pays out a benefit upon
death, surrender or annuitization.
Annuity contracts can be either fixed rate or variable rate. With a
fixed rate annuity, an interest crediting rate is set by the issuer,
periodically reviewed by the issuer, and changed from time to time as
determined to be appropriate. With a variable rate annuity, the value of the
policy is tied to an underlying securities portfolio or other performance
index. GALIC has not issued variable annuities in the past. AAG expects that
in the fourth quarter of 1995 its wholly-owned subsidiary, Annuity Investors
Life Insurance Company, will begin to offer variable annuities.
GALIC sells annuities primarily to employees of qualified
not-for-profit organizations under Section 403(b) of the Internal Revenue Code.
These employees are eligible to save for retirement through contributions made
on a before-tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free "rollovers" of
funds. Federal income taxes are not payable on contributions or earnings until
amounts are withdrawn.
4
<PAGE> 9
RECENT DEVELOPMENTS
On May 25, 1995, AAG entered into an agreement to acquire Laurentian
Capital Corporation ("Laurentian" or "LCC"), a Philadelphia-based life
insurance holding company. Laurentian's principal insurance subsidiaries are
Loyal American Life Insurance Company ("Loyal") and Prairie States Life
Insurance Company ("Prairie").
Loyal, located in Mobile, Alabama, markets various forms of life,
accident and health insurance and annuities, principally with the sponsorship
of credit unions and banks that endorse Loyal's products to their members. It
also writes life and health insurance through independent brokers.
Prairie, located in Rapid City, South Dakota, markets individual life
insurance and annuity policies with the sponsorship of state associations of
funeral directors as well as individual funeral directors across the country.
AAG will pay approximately $106 million for the outstanding common
stock of Laurentian and will repay $45 million of Laurentian indebtedness
concurrently with the acquisition. Immediately following consummation of the
acquisition, AAG will sell Loyal and Prairie to GALIC for up to $90 million.
AAG will fund the balance of the cost of acquiring Laurentian with the proceeds
of this Rights Offering, borrowings under its line of credit and proceeds from
dividend payments received from GALIC. See "Use of Proceeds" and "Acquisition
of Laurentian."
Consummation of the acquisition of Laurentian is not conditioned upon
the completion of the Rights Offering, and completion of the Rights Offering is
not conditioned upon the consummation of the acquisition of Laurentian.
THE RIGHTS OFFERING
<TABLE>
<S> <C>
Background; Use of Proceeds . . . . . . . . . . . . The Board of Directors of the Company has determined to raise additional
capital to provide a portion of the funds needed to acquire Laurentian.
The Board of Directors has further determined that a rights offering to its
existing stockholders is a beneficial way of raising this capital. See
"Acquisition of Laurentian," "The Rights Offering--Background" and "Use of
Proceeds."
Rights . . . . . . . . . . . . . . . . . . . . . . AAG is distributing at no charge to holders of AAG Common Stock at the
close of business on July 31, 1995 (the "Record Date"), transferable
subscription rights (the "Rights") to subscribe for and purchase shares of
AAG Common Stock. Each holder of AAG Common Stock will receive one (1)
transferable Right for each ten (10) shares of AAG Common Stock held of
record on the Record Date. The number of Rights distributed by AAG to each
stockholder will be rounded up to the nearest whole number. Approximately
3,950,000 Rights will be distributed pursuant to the Rights Offering.
Each Right will be exercisable for one share of AAG Common Stock.
3,950,000 shares of AAG Common Stock have been reserved for issuance
upon exercise of the Rights (the "Underlying Shares"). The distribution of
the Rights by AAG and the sale of shares of AAG Common Stock upon the
exercise of the Rights or pursuant to the Oversubscription Privilege
described below are referred to
</TABLE>
5
<PAGE> 10
<TABLE>
<S> <C>
as the "Rights Offering". See "The Rights Offering--The Rights."
Record Date . . . . . . . . . . . . . . . . . . . . July 31, 1995
Expiration Date . . . . . . . . . . . . . . . . . . August 23, 1995, 5:00 p.m. Eastern Time, or such later date to which
the Company may extend the expiration of the Rights.
Basic Subscription Privilege . . . . . . . . . . . Rights Holders are entitled to purchase for the Exercise Price one share of
Common Stock for each Right held (the "Basic Subscription Privilege").
American Financial has notified the Company that it intends to exercise its
Basic Subscription Privilege in full. See "The Rights Offering--
Subscription Privileges--Basic Subscription Privilege."
Oversubscription Privilege . . . . . . . . . . . . Each Rights Holder who exercises all of the Rights held by such Holder may
also subscribe at the Exercise Price for additional Underlying Shares (the
"Oversubscription Privilege"). If an insufficient number of Underlying
Shares is available to satisfy fully all subscriptions pursuant to the
Oversubscription Privilege, the available Underlying Shares will be
prorated among all Rights Holders who subscribe pursuant to the
Oversubscription Privilege, based upon the respective numbers of Rights
exercised by such holders pursuant to the Basic Subscription Privilege.
American Financial has notified the Company that it does not intend to
exercise its Oversubscription Privilege. See "The Rights Offering--
Subscription Privileges--Oversubscription Privilege."
Exercise Price . . . . . . . . . . . . . . . . . . $9.50 per share of AAG Common Stock (the "Exercise Price").
Procedure for Exercising Rights . . . . . . . . . . The Basic Subscription Privilege may be exercised and the Oversubscription
Privilege may be subscribed for by properly completing the Rights
Certificate evidencing the Rights (a "Rights Certificate") and forwarding
such Rights Certificate (or following the Guaranteed Delivery Procedures
as described herein), with payment of the Exercise Price for each
Underlying Share purchased pursuant to the Basic Subscription Privilege and
subscribed for pursuant to the Oversubscription Privilege, to Securities
Transfer Company, the Exchange Agent, for receipt by the Exchange Agent on
or prior to the Expiration Date.
</TABLE>
6
<PAGE> 11
<TABLE>
<S> <C>
If the aggregate Exercise Price paid by an exercising Rights Holder is
insufficient to purchase the number of Underlying Shares that such holder
indicates on the Rights Certificate are being purchased or subscribed for,
or if no number of Underlying Shares to be purchased or subscribed for is
specified, then the Rights Holder will be deemed to have exercised the
Basic Subscription Privilege to purchase Underlying Shares to the full
extent of the payment tendered. If the aggregate Exercise Price paid by
an exercising Rights Holder exceeds the amount necessary to purchase the
number of Underlying Shares for which the Rights Holder has indicated on
the Rights Certificate an intention to purchase, then the Rights Holder
will be deemed to have subscribed pursuant to the Oversubscription
Privilege to the full extent of the excess payment tendered. If any Rights
Holder is allocated a fewer number of shares than such Rights Holder
subscribed for pursuant to the Oversubscription Privilege, then the excess
funds paid by that Holder will be returned without interest or deduction.
See "The Rights Offering--Exercise of Rights."
Method of Payment . . . . . . . . . . . . . . . . . Payment in full for rights must be made by (a) check or bank draft drawn
upon a U.S. bank or postal, telegraphic or express money order payable to
Securities Transfer Company, or (b) wire transfer. See "The Rights
Offering -- Exercise of Rights."
No Revocation . . . . . . . . . . . . . . . . . . . Once a Rights Holder has exercised the Basic Subscription Privilege or
subscribed under the Oversubscription Privilege, such exercise or
subscription may not be revoked by such Rights Holder. See "The Rights
Offering--No Revocation."
Transferability of Rights and
AAG Common Stock . . . . . . . . . . . . . . . . It is anticipated that the rights will be listed on the NYSE and
transferable. AAG Common Stock is listed on the NYSE. See "The Rights
Offering--Method of Transferring Rights".
Amendment and Termination . . . . . . . . . . . . . The Company may amend or terminate the Rights Offering at any time prior to
delivery of the Underlying Shares. See "The Rights Offering--Amendments
and Termination."
</TABLE>
7
<PAGE> 12
<TABLE>
<S> <C>
Persons Holding Shares, or Wishing to
Exercise Rights, Through Others . . . . . . . . . Persons holding AAG Common Stock and receiving the Rights distributable
with respect thereto through a broker, dealer, commercial bank, trust
company or other nominee, as well as persons holding stock certificates
personally who would prefer to have such institutions effect transactions
relating to the Rights on their behalf, should contact the appropriate
institution or nominee and request it to effect the transactions for them.
See "The Rights Offering -- Exercise of Rights".
Certain Tax Consequences . . . . . . . . . . . . . Generally, neither AAG nor Holders will recognize any gain or loss upon
receipt or exercise of Rights. See "Federal Income Tax Considerations."
Shares Outstanding . . . . . . . . . . . . . . . . 39,146,414 at the Record Date; approximately 43,071,000, assuming that all
Rights are exercised; approximately 42,334,000, assuming that no holder
other than American Financial exercises Rights.
Issuance of AAG Common Stock . . . . . . . . . . . Certificates representing AAG Common Stock purchased pursuant to the
exercise of Rights will be distributed to subscribers as soon as
practicable.
Exchange Agent . . . . . . . . . . . . . . . . . . Securities Transfer Company, 12th Floor, One East Fourth Street,
Cincinnati, Ohio 45202, (800) 368-3417.
Symbols on New York Stock Exchange . . . . . . . . Common Stock - AAG;
Rights - AAGRT
</TABLE>
8
<PAGE> 13
INVESTMENT CONSIDERATIONS
For a discussion of some of the factors that should be considered in
evaluating an investment in the Common Stock through the Rights Offering, see
"Investment Considerations".
9
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following tables set forth certain data (in millions, except per share
data) of AAG and Laurentian and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial information contained in each respective
company's annual report and quarterly report. Results of interim periods are
not necessarily indicative of results to be expected for a full year. The
Company acquired GALIC effective December 31, 1992. Information for periods
prior to such date does not include the operations of GALIC.
<TABLE>
AMERICAN ANNUITY GROUP, INC.
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ---------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Total revenues $98.2 $92.9 $371.2 $387.2 $ 3.6 $ 1.9 $ 0.4
====== ====== ====== ====== ====== ====== ======
Income (loss) from continuing
operations $11.4 $10.8 $ 40.9 $ 53.0 ($9.0) ($4.7) ($6.0)
Loss from discontinued
operations - - (2.6) (9.6) (16.8) (47.8) (43.3)
Extraordinary items - (1.1) (1.7) (3.4) - - -
Changes in accounting principle - (0.5) (0.5) - (3.1) - -
------ ------ ------ ------ ------ ------ ------
Net income (loss) $11.4 $ 9.2 $ 36.1 $ 40.0 ($28.9) ($52.5) (49.3)
Earnings (loss) per common share:
Continuing operations $ 0.29 $ 0.28 $1.05 $1.41 ($0.50) ($0.26) ($0.33)
Discontinued operations - - (.07) (.27) (.94) (2.66) (2.37)
Extraordinary items - (0.03) (.05) (.10) - - -
Changes in accounting principle - (0.01) (.01) - (.17) - -
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 0.29 $0.24 $0.92 $1.04 ($1.61) ($2.92) ($2.70)
Cash dividends per common share - - $0.06 $0.05 $0.05 $0.05 $0.05
BALANCE SHEET DATA:
Total assets $5,257.3 $4,905.9 $5,089.9 $4,913.8 $4,480.4 $170.1 $294.8
Notes payable 174.2 221.8 183.3 225.9 230.9 27.9 30.6
Net unrealized gains (losses)
included in stockholders'
equity - 24.7 (29.0) 56.9 28.4 - -
Total stockholders' equity 244.8 233.5 204.4 250.3 186.6 108.5 171.8
LAURENTIAN CAPITAL CORPORATION
OPERATIONS STATEMENT DATA:
Total revenues $37.0 $32.8 $137.7 $134.3 $130.4 $131.0 $123.9
====== ====== ====== ====== ====== ====== ======
Income (loss) from continuing
operations $ 2.3 $ 2.2 $ 9.5 $ 7.8 $ 6.7 $ 5.4 ($ 15.7)
Changes in accounting principle - - - 0.4 - - -
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 2.3 $ 2.2 $ 9.5 $ 8.2 $ 6.7 $ 5.4 ($ 15.7)
Earnings (loss) per common share:
Continuing operations $ 0.30 $ 0.29 $1.22 $1.00 $0.80 $0.63 ($1.97)
Change in accounting principle - - - 0.05 - - -
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 0.30 $ 0.29 $1.22 $1.05 $0.80 $0.63 ($1.97)
BALANCE SHEET DATA:
Total assets $1,021.6 $976.4 $1,027.9 $972.7 $942.2 $952.4 $931.1
Debt 45.0 54.9 45.0 54.8 54.4 54.2 53.4
Net unrealized gains (losses)
included in stockholders' equity (4.7) 0.5 (10.9) 1.3 (0.2) (0.7) ( 1.8)
Stockholders' equity 107.4 103.0 98.8 101.5 92.0 87.9 81.6
</TABLE>
10
<PAGE> 15
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following is a summary of certain unaudited pro forma financial
information of AAG and Laurentian, which gives effect to the Rights Offering
and the acquisition of Laurentian (the "Transactions") and is based on the
estimates and assumptions set forth in the notes to the unaudited pro forma
financial statements. The unaudited pro forma financial statements assume the
Transactions had occurred on (i) January 1, 1994 for the purposes of the pro
forma statement of operations for the year ended December 31, 1994, and for the
three months ended March 31, 1995, and (ii) March 31, 1995 for the purposes of
the pro forma balance sheet.
The summary unaudited pro forma financial information is derived from the
unaudited pro forma financial statements included elsewhere in this Prospectus
and should be read in conjunction with such pro forma statements and the notes
thereto. Results of interim periods are not necessarily indicative of results
to be expected for the year. The unaudited pro forma financial information is
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the
Transactions had been consummated as of the assumed dates identified above, nor
is it necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1995 December 31, 1994
------------------ -----------------
(In millions except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . $104.8 $406.1
Life, accident and health premiums . . . . . . . . . . . . . . . . . 23.5 85.8
Realized gains on sales of investments . . . . . . . . . . . . . . . 0.6 0.2
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.5 496.3
Benefits to policyholders . . . . . . . . . . . . . . . . . . . . . . 86.7 320.9
Interest on borrowings and other debt expenses . . . . . . . . . . . 4.9 22.3
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . 112.6 423.9
Income from continuing operations before income taxes . . . . . . . . 19.9 72.4
Net income from continuing operations . . . . . . . . . . . . . . . . 13.0 48.2
Net income from continuing operations applicable to common stock . . 13.0 47.3
Net income from continuing operations per share of common stock . . . 0.30 1.13
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . $5,509.5
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,175.0
Annuity and insurance liabilities . . . . . . . . . . . . . . . . . . 5,348.9
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188.1
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 278.5
</TABLE>
11
<PAGE> 16
INVESTMENT CONSIDERATIONS
Holders of the Rights should carefully consider the following factors in
addition to the other information in this Prospectus in making a decision
whether to exercise Rights to subscribe for AAG Common Stock or sell or
transfer the Rights.
MARKET CONSIDERATIONS. There can be no assurance that the market price of
the AAG Common Stock will not decline prior to the Expiration Date or that,
following the issuance of the Rights and the sale of the Underlying Shares upon
exercise of Rights, a subscribing Holder will be able to sell shares of AAG
Common Stock purchased in the Rights Offering at a price equal to or greater
than the Exercise Price. The election of a Holder to exercise Rights in the
Rights Offering is irrevocable. Moreover, until certificates are delivered,
subscribing Holders may not be able to sell the shares of AAG Common Stock that
they have purchased in the Rights Offering. Certificates representing shares
of AAG Common Stock purchased will be delivered as soon as practicable after
consummation of the Rights Offering. No interest will be paid to Holders on
funds delivered to the Exercise Agent pursuant to the exercise of Rights.
ABSENCE OF MARKET FOR RIGHTS. Although the Rights are expected to be
listed on the NYSE and transferable, an active trading market for the Rights
may not develop.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS. The Company is an
insurance holding company whose primary asset is the capital stock of GALIC.
AAG's cash flow is derived principally from dividends on the capital stock of
GALIC and tax allocation payments by GALIC. Accordingly, the ability of AAG to
generate cash flow is dependent primarily on such tax allocation payments and,
subject to regulation and limitations by the insurance laws and insurance
departments of Ohio and California, dividends from GALIC. The operations of
AAG are conducted through GALIC, its principal subsidiary. AAG's ability to
generate cash flow from Prairie and Loyal, which will become subsidiaries of
GALIC, will be based on the dividends distributed to GALIC and will also be
subject to the regulation and limitations of the insurance laws of South Dakota
and Alabama. Claims of creditors of AAG's subsidiaries, including
policyholders, will have priority with respect to the assets and earnings of
such subsidiaries over the claims of creditors of AAG, even though such
subsidiary obligations do not constitute senior indebtedness. In addition, in
the event of a default on AAG's debt or an insolvency, liquidation or other
reorganization of AAG, the creditors and stockholders of AAG will have no right
to proceed against the assets of GALIC or to cause it to be liquidated,
rehabilitated or placed in receivership or conservatorship. If GALIC were to
be liquidated, such liquidation would be conducted by or under the supervision
of the Ohio Insurance Commissioner as the receiver with respect to GALIC's
property and business.
REGULATION. The life insurance business is subject to extensive regulation
and supervision by state insurance departments. Such regulation is primarily
for the benefit and protection of policyholders and not investors. Such
regulations, among other things, limit the amount of dividends and other
payments that can be made by insurance companies without prior regulatory
approval and impose restrictions on the amount and type of investments that
such companies may have. In addition, AAG may be regulated in various states
as an insurance holding company. Generally, under insurance holding company
statutes, a state insurance authority must approve in advance the direct or
indirect acquisition of 10% or more of the voting securities of an insurance
company or its parent domiciled in its state.
The National Association of Insurance Commissioners has adopted the Risk
Based Capital ("RBC") For Insurers Model Act which applies to both life and
property and casualty companies. The Model Act provides for increasing levels
of regulatory intervention as the ratio of an insurer's total adjusted capital
and surplus decreases relative to risk-based capital, culminating with
mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called "mandatory control level". At March 31, 1995, the
risk-based capital ratios of GALIC, Loyal and Prairie significantly exceeded
RBC requirements.
It is not possible to predict the future impact of any of these regulations
on the operations of AAG's insurance subsidiaries.
12
<PAGE> 17
Recently, several legislative proposals have been advanced which, if
adopted, would result in substantial relaxation of the restrictions which have
limited the affiliation between banks and insurance companies. It is
impossible to predict whether any of these proposals will be adopted. It is
also impossible to predict the impact of the adoption of any of these proposals
on the insurance industry in general or individual insurance companies.
CERTAIN FACTORS AFFECTING THE INSURANCE BUSINESS. The operating results of
companies in the insurance industry have historically been subject to
significant fluctuations due to competition, economic conditions, interest
rates, maintenance of insurance ratings and other factors. GALIC competes with
other annuity companies in the sale of tax-deferred annuities based on a number
of factors, including the ratings assigned by A.M. Best Company, Inc. ("A.M.
Best") and other independent insurance industry rating organizations. A.M.
Best's ratings range from "A++" (Superior) to "F" (In Liquidation) and some
companies are not rated. GALIC is rated "A" (Excellent). Management of GALIC
believes that a rating in the "A" category is necessary to successfully market
tax-deferred annuities to public education employees and other not-for-profit
groups, the markets in which GALIC competes. Although management of AAG does
not believe that GALIC's rating will be downgraded by A.M. Best, those
companies' operations could be materially adversely affected by such
downgrading.
Prairie and Loyal, which will become subsidiaries of GALIC, compete in
markets other than the sale of tax-deferred annuities. Loyal markets various
forms of life, accident and health insurance and annuities, principally with
the sponsorship of credit unions and banks that endorse Loyal's products to
their members and customers. It also writes life and health insurance through
independent brokers. Prairie markets individual life insurance and annuity
policies with the sponsorship of state associations of funeral directors as
well as individual funeral directors across the country. Prairie and Loyal are
rated "B+" (Very Good) and "A-" (Excellent) by A.M. Best, respectively. While
ratings are an important factor in competition between insurers in Prairie's
and Loyal's markets, management of AAG believes that insurers can successfully
compete in these markets with ratings of "B+" (Very Good) or better. Although
management of AAG does not believe that Prairie's or Loyal's ratings will be
downgraded by A.M. Best, AAG's business could be materially adversely affected
by any such downgrading.
COMPETITION. The various markets in which life insurance companies compete
are highly competitive. GALIC, Prairie and Loyal compete with individual
insurers and insurance groups and other financial institutions of varying size,
many of which possess financial resources in excess of those available to these
companies.
AAG believes the ability to compete with other insurance companies is
dependent in part upon its ability to attract and retain agents to market its
products and its ability to develop competitive and profitable products. In
addition, in connection with the development and sale of its products, GALIC
encounters significant competition from other insurance companies, as well as
from other investment alternatives available to its customers.
AAG'S INVESTMENT PORTFOLIO. AAG's investment portfolio consists primarily
of fixed income securities such as investment grade, publicly traded debt
securities and mortgage-backed securities ("MBSs"). At March 31, 1995, fixed
income securities (including policy loans, mortgage loans and short-term
investments) comprised over 98% of AAG's investment portfolio. Approximately
28% was invested in MBSs. Certain risks are inherent in connection with fixed
income securities, including loss upon default and price volatility in reaction
to changes in interest rates and general market factors. Certain additional
risks are inherent in connection with MBSs, including the risks associated with
reinvestment of proceeds due to prepayment of such obligations. AAG has sought
to reduce the risks associated with MBSs by investing in tranches of
collateralized mortgage obligations which have a reduced risk of prepayment.
AAG's investment portfolio also contains certain non-investment grade bonds,
real estate and mortgage loans, with an aggregate carrying value of
approximately $350 million as of March 31, 1995, representing less than 7% of
its investment portfolio.
LAURENTIAN'S INVESTMENT PORTFOLIO. Laurentian's investment portfolio also
consists primarily of fixed income securities such as investment grade,
publicly traded debt securities and MBSs. At December 31, 1994, fixed income
securities (including policy loans, mortgage loans and short-term investments)
comprised over 97% of Laurentian's
13
<PAGE> 18
investment portfolio. Approximately 75% was invested in MBSs. Included in
Laurentian's investment portfolio are certain high-yield, non-investment grade
bonds, real estate and mortgage loans with an aggregate carrying value of
approximately $29 million as of December 31, 1994, representing approximately
5% of its investment portfolio.
SIGNIFICANT STOCKHOLDERS; TRADING MARKET RISKS. As the beneficial owner of
approximately 81.4% of the outstanding AAG Common Stock, American Financial is
a "controlling person" of AAG and has the ability to approve any corporate
action requiring stockholder approval, including the election of the entire
Board of Directors of AAG, amendments to the Certificate of Incorporation and
extraordinary corporate transactions such as mergers, consolidations and sale
of all or substantially all of AAG's assets. Accordingly, American Financial
controls AAG's policy decisions.
AAG has been informed by American Financial that it will exercise its Basic
Subscription Privilege in full. Further, American Financial has notified AAG
that it does not intend to exercise its Oversubscription Privilege. As a
result, at the conclusion of the Rights Offering, American Financial will
continue to beneficially own at least 81.4% of the outstanding AAG Common
Stock. Because less than 20% of AAG's Common Stock will be held by
stockholders other than American Financial, an investment in AAG Common Stock
may not be as liquid as investments in other equity securities.
FEDERAL INCOME TAX TREATMENT OF ANNUITY PRODUCTS. Current federal income
tax law generally permits the tax deferred accumulation of earnings on the
premiums paid by an annuitant. Taxes, if any, are payable on the accumulated
tax-deferred earnings when these earnings are paid to the annuitant. From time
to time, there have been proposed changes to the federal income tax laws that
would eliminate this tax deferral for certain types of annuity products,
although historically such proposals have not included the annuity products
marketed by GALIC. In the event that the federal income tax laws are changed
such that accumulated earnings on annuity products sold by GALIC no longer
enjoy the tax-deferral described above, demand for the affected annuity
products could decline substantially or be eliminated. The operations and
business prospects of GALIC would be materially and adversely affected by any
material decrease in the demand for its annuity products. No assurance can be
given that such a tax law change will not occur in the future.
ENVIRONMENTAL MATTERS INVOLVING AAG. AAG has certain continuing
obligations with respect to the investigation and cleanup of hazardous
substances resulting from former electronic component manufacturing facilities
still owned by AAG and facilities transferred in connection with sales of
certain operations, as well as at disposal sites operated by third parties. In
addition, AAG has indemnified certain purchasers of its former operations for
the cost of such activities. Based on the annual costs incurred by AAG over
the past several years and discussions with its independent environmental
consultants, management believes that reserves for such cleanup activities are
sufficient in all material respects to satisfy anticipated liabilities.
LIABILITIES RELATED TO FORMER OPERATIONS. In 1991, AAG identified possible
deficiencies in procedures for reporting quality assurance information to the
Defense Electronics Supply Center ("DESC") with respect to AAG's former
manufacturing operations. Over the last several years, AAG has been engaged in
negotiations with the United States Government with respect to settlement of
claims the Government might have arising out of the reporting deficiencies.
Based on these negotiations, AAG believed it has sufficient reserves to cover
the estimated settlement amount. In March 1995, AAG received notification from
the Government indicating additional reporting deficiencies. AAG is in the
process of evaluating this information and is unable to ascertain the validity
of these new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on AAG and its financial condition.
USE OF PROCEEDS
All of the net proceeds of the Rights Offering will be received by AAG.
AAG intends to use the net proceeds to provide a portion of the funds needed to
acquire Laurentian. The Company expects that the total cost of acquiring
Laurentian will be approximately $151 million. GALIC will provide up to $90
million of the purchase price in exchange
14
<PAGE> 19
for the Laurentian insurance subsidiaries. AAG will finance the balance of the
purchase price with the net proceeds of the Rights Offering, borrowings under
its line of credit and proceeds from dividend payments received from GALIC.
See "Acquisition of Laurentian."
The acquisition of Laurentian is expected to be consummated during AAG's
third quarter. Consummation of the Rights Offering is not conditioned on the
completion of the acquisition of Laurentian. If the acquisition of Laurentian
is not consummated, AAG will utilize the proceeds of the Rights Offering for
general corporate purposes, including increasing the capital of its insurance
subsidiaries and possible acquisitions of other entities, including insurance
companies. AAG will invest the proceeds in quality, liquid investments pending
the closing of the acquisition of Laurentian or the other use of such proceeds
if such purchase is not consummated.
PRICE RANGE OF COMMON STOCK
AAG Common Stock is listed and traded primarily on the NYSE. The
information presented in the table below represents the high and low sales
prices per share reported on the NYSE Composite Tape. For current price
information, AAG stockholders are urged to consult publicly available sources.
<TABLE>
<CAPTION>
Price Per Share of Common Stock
-------------------------------
Calendar Year High Low
------------- ---- ---
<S> <C> <C>
1993
----
First Quarter $11.38 $5.63
Second Quarter 11.38 8.75
Third Quarter 11.00 7.88
Fourth Quarter 10.38 8.25
1994
----
First Quarter 10.63 8.75
Second Quarter 10.00 8.38
Third Quarter 10.00 8.88
Fourth Quarter 9.63 8.88
1995
----
First Quarter 10.38 9.38
Second Quarter 10.13 9.13
Third Quarter (through July 18, 1995) 10.00 9.50
</TABLE>
On July 18, 1995, the closing price per share of AAG Common Stock was
$9.63. On May 25, 1995, the last full trading day prior to the announcement
of the agreement to acquire Laurentian, the closing price per share of AAG
Common Stock was $9.63.
DIVIDEND POLICY
The Company has no specific dividend policy. The payment of dividends and
the amount of dividends, if any, is determined annually by the Company's Board
of Directors and depends on, among other factors, the Company's earnings,
financial condition, capital requirements and legal restrictions. AAG's
dividend paying capability is limited by certain customary debt covenants to
amounts based on cumulative earnings and losses, debt repurchases, capital
transactions and other items. The Company paid annual dividends of $.06 per
share in 1994 and $.05 per share in 1993.
15
<PAGE> 20
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1995 and as adjusted to reflect the exercise of 50% (the "50%
Exercise") and 100% (the "100% Exercise") of the Rights issued to stockholders
of AAG other than American Financial pursuant to the Rights Offering. Because
AAG has been informed by American Financial that it will exercise its Basic
Subscription Privilege in full, both the 50% Exercise and the 100% Exercise
assume the exercise in full of the Basic Subscription Privilege by American
Financial. All information contained herein should be read in conjunction with
the Consolidated Financial Statements of the Company, the Notes thereto and the
unaudited combined pro forma financial information for AAG and Laurentian and
the notes thereto.
<TABLE>
<CAPTION>
As adjusted for
---------------------------
50% 100%
Historical Exercise Exercise
---------- -------- --------
Notes payable: (in millions)
<S> <C> <C> <C>
Direct obligations of AAG:
11-1/8% Senior Subordinated Notes due 2003 $103.9 $103.9 $103.9
9-1/2% Senior Notes due 2001 41.5 41.5 41.5
Bank Credit Line due 1998 23.5 37.4 33.9
Subsidiary debt 5.3 5.3 5.3
------ ------ ------
Total debt 174.2 188.1 184.6
------ ------ ------
Stockholders' Equity:
Common Stock, including paid-in capital 369.9 403.6 407.1
Retained earnings (deficit) (125.1) (125.1) (125.1)
Unrealized gains on marketable securities, net - - -
------ ------ ------
Total stockholders' equity 244.8 278.5 282.0
------ ------ ------
Total capitalization $419.0 $466.6 $466.6
====== ====== ======
</TABLE>
16
<PAGE> 21
ACQUISITION OF LAURENTIAN
On May 25, 1995, AAG entered into an Agreement and Plan of Merger (the
"Agreement") to acquire Laurentian Capital Corporation, a Philadelphia-based
life insurance holding company. The acquisition will be consummated by the
merger (the "Merger") of L.Q. Acquisition Corp., a wholly-owned subsidiary of
AAG, into Laurentian. In the Merger, AAG will pay (i) $13.875 per share for
the 6,177,093 shares of Laurentian common stock owned by subsidiaries of
Desjardins Laurentian Financial Corporation, and (ii) $14.125 for all other
shares of Laurentian common stock. The total cost of acquiring all outstanding
Laurentian common stock will be approximately $106 million. AAG will also
repay $45 million of Laurentian indebtedness concurrently with the consummation
of the Merger. Consummation of the Merger is subject to satisfaction of a
number of conditions, including the receipt of all required regulatory
approvals.
AAG will fund the cost of acquiring Laurentian with (i) up to $90 million
received from selling Laurentian's insurance subsidiaries to GALIC immediately
following consummation of the Merger, (ii) the net proceeds of this Rights
Offering, (iii) borrowings under AAG's line of credit, and (iv) proceeds from
dividend payments to be received by AAG from GALIC. If the Rights Offering is
not fully subscribed, AAG will borrow additional funds under its line of credit
to fund the balance of the purchase price.
BUSINESS OF LAURENTIAN
Laurentian's principal insurance subsidiaries are Loyal American Life
Insurance Company, headquartered in Mobile, Alabama ("Loyal") and Prairie
States Life Insurance Company, based in Rapid City, South Dakota ("Prairie").
Laurentian's principal non-insurance subsidiaries are International Funeral
Associates, Hurst, Texas ("IFA"), Laurentian Investment Securities, Inc.,
Houston, Texas ("LIS") and CSW Management Services, Inc., Houston, Texas
("CSW").
Loyal specializes in life and health insurance and annuities targeted to
the credit union and employee payroll deduction markets. Loyal has been
endorsed by 16 state credit union leagues and currently has access to over
three million credit union members and their families. In 1994, Loyal acquired
Purity Financial Corporation, a marketing organization that has developed a
proven selling technique at credit union locations focusing upon financial
planning for credit union members. Purity has selling relationships which
provide access to more than one million credit union members. An expanding
market segment for Loyal has been the employer/employee market where products
are sold on a payroll deduction basis. In 1994, and for the three months ended
March 31, 1995, Loyal collected $43 million and $10 million, respectively, in
life, health and annuity premiums. At March 31, 1995, Loyal had total
statutory assets of approximately $251 million, reserves for future policy
benefits of approximately $194 million, and capital and surplus of
approximately $35 million.
Prairie provides life and annuity products to fund pre-need funeral
contracts that have been received by a funeral director. At year-end 1994,
Prairie had relationships with more than 2,000 funeral homes nationwide. In
1994 and for the quarter ended March 31, 1995, Prairie collected $53.5 million
and $17.9 million, respectively, in life and annuity premiums. At March 31,
1995, Prairie had total statutory assets of approximately $333 million,
reserves for future policy benefits of approximately $293 million and capital
and surplus of approximately $25 million.
IFA, a co-operative buying service organization, has seen its independent
membership grow from 995 in 1992 to over 2,000 in early 1995. Including
corporate members, total membership is over 3,000 funeral homes nationwide.
IFA has negotiated discounts with 27 organizations that service the funeral
industry and members of IFA are able to take advantage of these discounts,
thereby enhancing their profitability through lower cost of goods.
LIS was established to provide financial services to the funeral director
in managing the substantial amount of funds held in trust. LIS offers a
variety of services, including state master trusts, investment advisory
services, administrative
17
<PAGE> 22
services, and combinations thereof. CSW was acquired in 1994 and currently
provides administration and accounting services for more than $100 million in
funeral trust assets.
FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL INFORMATION OF LAURENTIAN CAPITAL CORPORATION
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- ------ ------ -------- ------- ------- -------
OPERATIONS STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $37.0 $32.8 $137.7 $134.3 $130.4 $131.0 $123.9
======== ====== ====== ====== ====== ====== ======
Income (loss) from continuing
operations $ 2.3 $ 2.2 $ 9.5 $ 7.8 $ 6.7 $ 5.4 ($15.7)
Change in accounting principle - - - 0.4 - - -
-------- ------ ------- ------- ------ ------ -------
Net income (loss) $ 2.3 $ 2.2 $ 9.5 $ 8.2 $ 6.7 $ 5.4 ($ 15.7)
Earnings (loss) per common share:
Continuing operations $0.30 $0.29 $1.22 $1.00 $0.80 $0.63 ($1.97)
Change in accounting principle - - - .05 - - -
-------- ------ -------- ------- ------ ------ ------
Net income (loss) $0.30 $0.29 $1.22 $1.05 $0.80 $0.63 ($1.97)
BALANCE SHEET DATA:
Total assets $1,021.6 $976.4 $1,027.9 $972.7 $942.2 $952.4 $931.1
Debt 45.0 54.9 45.0 54.8 54.4 54.2 53.4
Net unrealized gains (losses)
included in stockholders' euity (4.7) 0.5 (10.9) 1.3 (0.2) (0.7) (1.8)
Stockholders' equity 107.4 103.0 98.8 101.5 92.0 87.9 81.6
</TABLE>
In approving the acquisition of Laurentian, the Board of Directors of AAG
noted that the acquisition would provide AAG with greater diversity with
respect to both insurance products and target markets. The Board also
recognized the opportunities created by the combination of AAG and Laurentian
in a number of areas including cross-selling of products, joint marketing
campaigns and increased market penetration.
Consummation of the acquisition is expected to occur in the third quarter
of 1995. Consummation of the Rights Offering is not conditioned on the
completion of the acquisition of Laurentian. If the acquisition of Laurentian
is not consummated, AAG will utilize the proceeds of this Rights Offering for
general corporate purposes, including increasing the capital of its insurance
subsidiaries and possible acquisitions of other entities, including other
insurance companies.
18
<PAGE> 23
SELECTED HISTORICAL FINANCIAL INFORMATION OF AAG
The following table sets forth certain data (in millions, except per share
data) of the Company and should be read in conjunction with "Management's
Discussion and Analysis and Results of Operations" and the financial
information contained in the Annual Report and the Quarterly Report. The
Company acquired GALIC effective December 31, 1992. Information for periods
prior to such date does not reflect the operations of GALIC.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ----------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------ ------- ------- ------- ------ -------
OPERATIONS STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $98.2 $92.9 $371.2 $387.2 $ 3.6 $ 1.9 $ 0.4
Income (loss) from continuing operations 11.4 10.8 40.9 53.0 (9.0) (4.7) (6.0)
Loss from discontinued operations - - (2.6) (9.6) (16.8) (47.8) (43.3)
Extraordinary items - ( 1.1) (1.7) (3.4) - - -
Changes in accounting principle - ( 0.5) (0.5) - (3.1) - -
-------- -------- -------- -------- ------- ------ ------
Net income (loss) $11.4 $ 9.2 $ 36.1 $ 40.0 ($28.9) ($52.5) ($49.3)
Earnings (loss) per common share:
Continuing operations $0.29 $0.28 $1.05 $1.41 ($0.50) ($0.26) ($0.33)
Discontinued operations - - (.07) (.27) (.94) (2.66) (2.37)
Extraordinary items - (0.03) (.05) (.10) - - -
Changes in accounting principle - (0.01) (.01) - (.17) - -
------ -------- -------- -------- ------ ------ ------
Net income (loss) $0.29 $0.24 $0.92 $1.04 ($1.61) ($2.92) ($2.70)
Cash dividends per common share - - $0.06 $0.05 $0.05 $0.05 $0.05
BALANCE SHEET DATA:
Total assets $5,257.3 $4,905.9 $5,089.9 $4,913.8 $4,480.4 $170.1 $294.8
Notes payable 174.2 221.8 183.3 225.9 230.9 27.9 30.6
Net unrealized gains (losses) included
stockholders' equity - 24.7 (29.0) 56.9 28.4 - -
Total stockholders' equity 244.8 233.5 204.4 250.3 186.6 108.5 171.8
</TABLE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Combined Financial Statements
illustrate the estimated effects of the acquisition of Laurentian and the Rights
Offering (the "Transactions") and are based on the estimates and assumptions set
forth herein and in the notes to such statements. This pro forma information
has been prepared utilizing the historical financial statements of AAG and
Laurentian. This information should be read in conjunction with the historical
financial statements of AAG and Laurentian and the notes thereto, which are
included elsewhere in this Prospectus. The pro forma financial data is provided
for comparative purposes only and do not purport to be indicative of the results
which actually would have been obtained if the Transactions had been effected on
the dates indicated or of those results which may be obtained in the future.
The acquisition will be accounted for as a purchase. The pro forma
adjustments are described in the accompanying notes to unaudited pro forma
combined financial statements. The unaudited pro forma combined financial
statements assume the Transactions had occurred on (i) March 31, 1995 for the
purposes of the pro forma combined balance sheet and (ii) January 1, 1994 for
the purposes of the pro forma combined statements of operations for the three
months ended March 31, 1995 and the year ended December 31, 1994.
19
<PAGE> 24
AMERICAN ANNUITY GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro AAG
AAG LCC Forma Pro
Historical Historical Adjustments(a)(b) Forma
---------- ---------- ----------- -----
ASSETS
------
<S> <C> <C> <C> <C>
Investments:
Bonds-held to maturity (@ cost) $3,352.4 $277.6 ($18.5) $3,611.5
Bonds-available for sale (@ market) 1,360.9 220.2 (100.0) 1,481.1
Equity securities 19.1 11.1 - 30.2
Investment in investees 22.2 - - 22.2
Mortgage loans 45.2 20.8 - 66.0
Investment in real estate, net 28.7 4.0 - 32.7
Policy loans 189.0 50.3 - 239.3
Short-term investments 14.2 12.3 - 26.5
-------- -------- ------- --------
5,031.7 596.3 (118.5) 5,509.5
Cash 14.4 13.5 (15.4) 12.5
Accrued investment income 82.8 6.0 - 88.8
Deferred policy acquisition costs 68.7 74.8 (74.8)(c) 68.7
Prepaids and other assets 54.0 99.7 (0.5) 153.2
Assets held in separate accounts - 224.0 - 224.0
Value of business acquired ("VOBA") - - 112.6 (c) 112.6
Intangibles 5.7 7.3 (7.3) 5.7
-------- -------- ------- --------
$5,257.3 $1,021.6 ($103.9) $6,175.0
======== ======== ======= ========
LIABILITIES
-----------
Annuity and insurance liabilities $4,733.5 $615.4 - $5,348.9
Notes payable 174.2 45.0 (31.1) 188.1
Other liabilities 104.8 26.5 4.2 135.5
Liabilities related to separate accounts - 224.0 - 224.0
-------- -------- ------- --------
5,012.5 910.9 (26.9) 5,896.5
Redeemable preferred stock - 3.3 (3.3) -
EQUITY
------
Common stock, including paid-in capital 369.9 56.8 (23.1) 403.6
Retained earnings (125.1) 55.2 (55.2) (125.1)
Unrealized gains (losses), net - (4.6) 4.6 -
-------- -------- ------- --------
Total stockholders' equity 244.8 107.4 (73.7) 278.5
-------- -------- ------- --------
$5,257.3 $1,021.6 ($103.9) $6,175.0
======== ======== ======= ========
Common shares outstanding 39.1 - 3.6 42.7
</TABLE>
20
<PAGE> 25
AMERICAN ANNUITY GROUP, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro AAG
AAG LCC Forma Pro
Historical Historical Adjustments Forma
---------- ---------- ----------- -----
REVENUES
--------
<S> <C> <C> <C> <C>
Life, accident and health premiums $ - $23.5 - $ 23.5
Net investment income 95.9 11.6 (2.7)(d) 104.8
Realized gains 0.1 0.5 - (e) 0.6
Equity in earnings of affiliate 1.6 - - 1.6
Other income 0.6 1.4 - 2.0
----- ------ ------ ------
98.2 37.0 (2.7) 132.5
EXPENSES
--------
Benefits to policyholders 64.3 22.4 - 86.7
Interest and debt expenses 4.6 0.9 (0.6)(f) 4.9
Amortization of deferred policy acquisition costs 1.8 3.8 (3.8)(g) 1.8
Amortization of VOBA - - 2.5(c) 2.5
Other operating and general expenses 10.0 6.4 0.3(h) 16.7
----- ---- ------ ------
80.7 33.5 (1.6) 112.6
----- ---- ------- ------
Income from continuing operations before income taxes 17.5 3.5 (1.1) 19.9
Provision for income taxes 6.1 1.2 (0.4) 6.9
----- ----- ------ -------
Net income from continuing operations $11.4 $2.3 ($0.7) $ 13.0
===== ===== ===== ======
Less preferred dividend requirements - (0.1) 0.1 -
----- ----- ----- ------
Income from continuing operations applicable to
common stock $11.4 $2.2 ($0.6) $ 13.0
===== ==== ===== ======
Net income from continuing operations per share
of common stock $0.29 $ 0.30
Average number of shares of common stock
outstanding 39.1 - 3.6 42.7
</TABLE>
21
<PAGE> 26
AMERICAN ANNUITY GROUP, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro AAG
AAG LCC Forma Pro
Historical Historical Adjustment Forma
---------- ---------- ---------- -----
REVENUES
--------
<S> <C> <C> <C> <C>
Life, accident and health premiums - $85.8 - $ 85.8
Net investment income $371.8 44.9 (10.6)(d) 406.1
Realized gains (0.1) 2.3 (2.0)(e) 0.2
Equity in earnings of affiliate (2.8) - - (2.8)
Other income 2.3 4.7 - 7.0
------ ------ ------- ------
371.2 137.7 (12.6) 496.3
EXPENSES
--------
Benefits to policyholders 241.9 79.0 - 320.9
Interest and debt expenses 21.4 3.6 (2.7)(f) 22.3
Amortization of deferred policy acquisition costs 7.1 14.6 (14.6)(g) 7.1
Amortization of VOBA - - 11.5(c) 11.5
Other operating and general expenses 37.6 27.9 (3.4)(h) 62.1
------ ------ ------- ------
308.0 125.1 (9.2) 423.9
------ ----- ------ ------
Income from continuing operations before
income taxes 63.2 12.6 (3.4) 72.4
Provision for income taxes 22.3 3.1 (1.2) 24.2
------ ----- ------ ------
Net income from continuing operations $40.9 $ 9.5 ($2.2) $48.2
====== ===== ====== ======
Less preferred dividend requirements (0.9) ( 0.2) 0.2 (0.9)
------ ----- ------ -----
Income from continuing operations applicable to
common stock $40.0 $ 9.3 ($2.0) $47.3
====== ===== ====== =====
Net income from continuing operations per share
of common stock $1.05 $1.13
Average number of shares of common stock
outstanding 38.1 - 3.6 41.7
</TABLE>
22
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The pro forma combined financial statements reflect the Merger of AAG
with LCC. The pro forma combined financial statements have been prepared under
the purchase method of accounting for the acquisition of LCC. The pro forma
combined statements of operations are presented as if the Merger had occurred
on (i) January 1, 1994 for purposes of the pro forma combined statements of
operations for the year ended December 31, 1994 and for the three months ended
March 31, 1995 and (ii) as of March 31, 1995 for purposes of the pro forma
combined balance sheet. The pro forma combined financial statements have not
been compiled, reviewed or audited by independent accountants.
The historical financial information has been derived from the financial
statements included herein or incorporated herein by reference. The pro forma
combined financial statements should be read in conjunction with the historical
financial statements of AAG and LCC.
The unaudited pro forma combined financial statements will change due to
the results of operations and varying market conditions from March 31, 1995
through the actual acquisition date. Therefore, changes to the purchase
accounting adjustments included in the unaudited pro forma combined financial
statements are anticipated as the valuations of acquired assets and assumed
liabilities at the date of acquisition. Accordingly, the actual combined
financial statements of AAG reflecting the LCC acquisition will likely differ
from the pro forma financial statements included herein. The unaudited pro
forma combined financial statements are intended for informational purposes only
and may not necessarily be indicative of AAG's future financial position or
future results of operations.
The pro forma financial statements assume AAG will pay (i) $13.875 per
share for the 6.2 million shares of Laurentian common stock owned by
subsidiaries of Desjardins Laurentian Financial Corporation, and (ii) $14.125
for the remaining 1.4 million shares of Laurentian common stock. The total
cost of acquiring all outstanding Laurentian common stock will be approximately
$106 million. AAG will also repay $45 million of Laurentian indebtedness
concurrently with the consummation of the Merger. Consummation of the Merger is
subject to satisfaction of a number of conditions, including the receipt of all
required regulatory approvals.
It is further assumed that AAG will fund the cost of acquiring
Laurentian with (i) up to $90 million received from selling Laurentian's
insurance subsidiaries to GALIC immediately following consummation of the
Merger, (ii) the net proceeds of this Rights Offering, (iii) borrowings under
AAG's line of credit and (iv) dividend payments to be received by AAG from
GALIC. If the Rights Offering is not fully subscribed, AAG will borrow
additional funds under its line of credit to fund the balance of the purchase
price.
The following describes the pro forma adjustments reflected in the
accompanying pro forma combined financial statements:
(a) For accounting purposes, the purchase price of Laurentian common stock
was allocated as follows:
<TABLE>
<S> <C> <C>
Historical stockholders' equity of LCC $107.4
Mark LCC Held to Maturity bonds to market (18.5)
Write off LCC historical deferred policy acquisition costs ("DAC") (74.8)
Write off LCC debt financing costs ( 0.5)
Write off LCC intangibles ( 7.3)
Additional SAR and stock option expense ( 5.3)
Record estimated value of business acquired ("VOBA") 112.6
Transaction fee ( 0.8)
-------
5.4
Deferred tax liabilities (7.2)
-------
Total purchase price adjustments ( 1.8)
------
Purchase price $105.6
======
</TABLE>
23
<PAGE> 28
(b) The pro forma balance sheet reflects the following assumptions
(in millions):
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------------------------------
Bonds Bonds Other
HTM AFS Cash DAC Assets VOBA Intangibles
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Record LCC bonds at market ($18.5) - - - - - $12.0
Sell GALIC bonds for cash - ($100.0) $100.0 - - - -
Write off LCC historical DAC - - - ($74.8) - - 48.6
Write off LCC debt financing
costs - - - - ($0.5) - 0.3
Retire LCC preferred stock - - (3.3) - - - -
Record deferred taxes related to
policyholders' surplus
account - - - - - - 3.0
Redeem LCC SAR's and options - - (8.3) - - - 3.4
AAG rights offering - - 33.7 - - - -
Borrow on AAG bank line - - 13.9 - - - -
Repay LCC bank line - - (45.0) - - - -
Record estimated value of
business acquired ("VOBA") - - - - - $112.6 (73.2)
Purchase of LCC Common Stock - - (105.6) - - - (1.8)
Transaction fee - - (0.8) - - - 0.4
------- ------- ------- ------- ------- ------- ------
($18.5) ($100.0) ($15.4) ($74.8) ($0.5) $112.6 ($7.3)
======= ======= ======= ======= ======= ====== ======
Increase (Decrease)
--------------------------------------------------------------------------
Notes Other Pfd Common Retained Unreal
Payable Liab Stock Stock Earnings Gains
------- ------- ------- ------- ------- -------
Record LCC bonds at market - ($6.5) - - - -
Write off LCC historical DAC - (26.2) - - - -
Write off LCC debt financing
costs - ( 0.2) - - - -
Retire LCC preferred stock - - ($3.3) - - -
Record deferred taxes related
to policyholders' surplus
account - 3.0 - - - -
Redeem LCC SAR's and options - (4.9) - - - -
AAG rights offering - - - $33.7 - -
Borrow on AAG bank line $13.9 - - - - -
Repay LCC bank line (45.0) - - - - -
Record estimated VOBA - 39.4 - - - -
Purchase LCC - - - (56.8) ($55.2) $4.6
Transaction fee - (0.4) - - - -
------- ------- ------- ------- ------- -------
($31.1) $4.2 ($3.3) ($23.1) ($55.2) $4.6
======= ======= ======= ======= ======= =======
</TABLE>
(c) To eliminate LCC's deferred policy acquisition costs and to record the
present value of future profits of the in force business acquired ("VOBA").
Present value of future profits reflects the estimated fair value of the
business in force and represents the portion of the cost to acquire LCC
that is allocated to the value of the right to receive future cash flows
from insurance contracts existing at the assumed date of acquisition. Such
value is the present value of the actuarially determined projected cash
flows from the acquired policies.
The 12% discount rate used to determine such value is the rate of return
sought by AAG to invest in the business being acquired. In determining
the rate of return used to value the policies purchased, AAG's management
considered the magnitude of the risk associated with each of the actuarial
assumptions used in determining expected future cash flows, cost of capital
available to fund the acquisition and the perceived likelihood of changes
in insurance regulations and tax laws.
The amount allocated to VOBA is based on a preliminary determination.
Assuming an acquisition date of March 31, 1995, expected gross amortization
using current assumptions and accretion of interest
24
<PAGE> 29
based on an interest rate equal to the liability or contract rates (ranging
from 4% to 7.6%) for the next five years was as follows (in millions):
<TABLE>
<CAPTION>
Year Ended Beginning Gross Accretion Net Ending
March 31 Balance Amortization of Interest Amortization Balance
---------- --------- ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
1996 $112.6 $19.6 $5.6 $14.0 $98.6
1997 98.6 16.9 4.9 12.0 86.6
1998 86.6 14.8 4.3 10.5 76.1
1999 76.1 12.9 3.8 9.1 67.0
2000 67.0 11.2 3.4 7.8 59.2
</TABLE>
(d) Investment income adjustments are calculated as follows:
<TABLE>
<S> <C> <C>
Cash required for the purchase of LCC:
Purchase price, including repayment of LCC debt $150.6
Retire LCC preferred stock 3.3
Repurchase SARs and options 8.3
Transaction fee 0.8
-----
Total cash required 163.0
Less amount borrowed ( 13.9)
Less amount from Rights Offering (assuming 50% Exercise other
than AFG) ( 33.7)
-------
Net cash used $115.4
======
<CAPTION>
Year Qtr.
---- ----
Investment income foregone on net cash used (@ 7.8%) ($9.0) ($2.3)
Amortization of bond premium resulting from restating investments
to market value at assumed date of acquisition ( 1.6) ( 0.4)
----- -----
Pro forma adjustment to investment income ($10.6) ($2.7)
====== =====
</TABLE>
(e) To adjust realized gains to include the effect of restating investments to
market value at the assumed date of acquisition.
(f) Interest expense adjustments consist of (i) the elimination of LCC interest
of $3.6 million in 1994 and $0.9 million in the first quarter of 1995, due
to the assumed repayment of LCC debt, offset by (ii) additional interest
expense of $0.9 million in 1994 and $0.3 million in the first quarter of
1995, based on AAG's assumed borrowing of $13.9 million at average interest
rates of 6.6% and 7.3%, respectively.
(g) Reverse LCC's amortization of deferred policy acquisition costs.
(h) Other operating and general expense adjustments consist of the following:
<TABLE>
<CAPTION>
Year Qtr.
---- ----
<S> <C> <C>
Reverse credit (expense) related to pre-acquisition contingencies ($1.0) $0.5
Reverse investment banking fees ( 0.3) ( 0.2)
Reverse SAR and stock option credit (expense) ( 1.3) 0.2
Estimated reduction in operating expenses ( 0.8) ( 0.2)
------ -----
Pro forma adjustments to operating and general expenses ($3.4) $ 0.3
===== =====
</TABLE>
25
<PAGE> 30
THE RIGHTS OFFERING
BACKGROUND
The Board of Directors of the Company has determined that raising
additional capital is an advantageous way to finance a portion of the purchase
price for Laurentian.
THE RIGHTS
AAG is issuing transferable Rights at no charge to holders of record of
outstanding shares of AAG Common Stock on the Record Date. AAG common
stockholders will receive one (1) Right for each ten (10) shares of AAG Common
Stock held by them on the Record Date. Each Right will be exercisable for one
share of AAG Common Stock.
No fractional Rights or cash in lieu thereof will be issued or paid by AAG.
The number of Rights distributed to each Holder will be rounded up to the
nearest whole number. No Rights Certificate may be divided in such a way as to
permit the holders of AAG Common Stock to receive a greater number of Rights
than the number to which such Rights Certificate entitles its holder, except
that a depository, bank, trust company and securities broker or dealer holding
shares of AAG Common Stock on the Record Date for more than one beneficial
owner may, upon proper showing to the Exchange Agent, exchange its Rights
Certificate to obtain Rights Certificates for the number of Rights to which
each such beneficial owner would have been entitled had each been a holder on
the Record Date. The Company reserves the right to refuse to issue any such
Rights Certificate if such issuance would be inconsistent with the principle
that each beneficial owner's holdings will be rounded up to the nearest whole
Right.
Because the number of Rights distributed to each record holder will be
rounded up to the nearest whole number, beneficial owners of AAG Common Stock
who are also the record holders of such shares might receive slightly more
Rights under certain circumstances than beneficial owners of AAG Common Stock
who are not the record holders of their shares and who do not obtain (or cause
the record owner of their shares of AAG Common Stock to obtain) a separate
Rights Certificate with respect to the shares beneficially owned by them,
including shares held in an investment advisory or similar account. To the
extent that record holders of AAG Common Stock or beneficial owners of AAG
Common Stock who obtain a separate Rights Certificate receive more Rights, they
will be able to subscribe for more shares pursuant to the Basic Subscription
Privilege and pursuant to the Oversubscription Privilege.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., Eastern Time, on August 23, 1995
unless extended by the Company. After the Expiration Date, unexercised Rights
will be null and void. The Company will not be obligated to honor any
purported exercise of Rights received by the Exercise Agent after the
Expiration Date, regardless of when the documents relating to such exercise
were sent, except pursuant to the Guaranteed Delivery Procedures described
below. Notice of any extension of the Expiration Date will be made through a
press release issued by the Company.
SUBSCRIPTION PRIVILEGES
BASIC SUBSCRIPTION PRIVILEGE. Each Right will entitle the holder thereof
to receive, upon payment of the Exercise Price, one share of AAG Common Stock
(the "Basic Subscription Privilege"). Certificates representing shares of AAG
Common Stock purchased pursuant to the Basic Subscription Privilege will be
delivered to subscribers as soon as practicable.
OVERSUBSCRIPTION PRIVILEGE. Subject to the allocation described below,
each Right also carries the right to subscribe, at the Exercise Price, for
additional shares of AAG Common Stock (the "Oversubscription Privilege"). Only
Rights Holders who exercise all of the Rights held by them pursuant to the
Basic Subscription Privilege will be entitled to subscribe pursuant to the
Oversubscription Privilege. AAG has been informed by American Financial that
while it intends to exercise its Basic Subscription Privilege in full, it does
not intend to exercise its Oversubscription Privilege or
26
<PAGE> 31
to purchase any of the Underlying Shares that it would be entitled to purchase
pursuant to the Oversubscription Privilege. The AAG Employee Stock Ownership
Retirement Plan, which owns approximately 81,000 shares of AAG Common Stock,
will exercise its Basic Subscription Rights in full and will contribute
approximately $225,000 to the Oversubscription Privilege. The AAG Employee
Stock Purchase Plan and Agent Stock Purchase Plan, which own approximately
21,000 shares of AAG Common Stock, will exercise their Basic Subscription
Rights in full and will utilize all available cash to exercise the
Oversubscription Privilege.
Underlying Shares will be available for subscription pursuant to the
Oversubscription Privilege only to the extent that any Underlying Shares are
not purchased through the Basic Subscription Privilege. If an insufficient
number of Underlying Shares not purchased through the Basic Subscription
Privilege (the "Remaining Shares") is available to satisfy fully all
subscription pursuant to the Oversubscription Privilege, the Remaining Shares
will be prorated (subject to the elimination of fractional shares) among all
Rights Holders who subscribe pursuant to the Oversubscription Privilege, in
proportion, not to the number of shares subscribed for pursuant to the
Oversubscription Privilege, but to the number of shares each beneficial holder
subscribing pursuant to the Oversubscription Privilege has purchased pursuant
to the Basic Subscription Privilege; provided, however, that if such pro rata
allocation results in any Rights Holder being allocated a greater number of
Remaining Shares than such holder subscribed for pursuant to such holder's
Oversubscription Privilege, then such holder will be allocated only such number
of Remaining Shares as such holder subscribed for. If a proration of the
Remaining Shares results in any Rights Holder being allocated a fewer number of
Remaining Shares than such holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that holder as the
Exercise Price for shares not issued will be returned without interest or
deduction. All beneficial holders who exercise the Basic Subscription Privilege
in full will be entitled to subscribe pursuant to the Oversubscription
Privilege. Certificates representing shares of Common Stock purchased pursuant
to the Oversubscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date and after all prorations have been
effected.
Banks, brokers and other nominee Rights Holders who exercise the Basic
Subscription Privilege and subscribe pursuant to the Oversubscription Privilege
on behalf of beneficial owners of Rights will be required to certify to the
Exchange Agent and the Company, in connection with the subscription pursuant to
the Oversubscription Privilege, as to the aggregate number of Rights that have
been exercised and the number of Underlying Shares that are being subscribed
for pursuant to the Oversubscription Privilege by each beneficial owner of
Rights on whose behalf such nominee holder is acting.
EXERCISE PRICE.
The Exercise Price is $9.50, payable in cash, per share of AAG Common Stock
purchased pursuant to the Basic Subscription Privilege or the Oversubscription
Privilege. See "The Rights Offering--Determination of Exercise Price."
EXERCISE OF RIGHTS
Rights may be exercised by delivering to Securities Transfer Company (the
"Exchange Agent"), prior to 5:00 p.m., Eastern Time, on the Expiration Date,
the properly completed and executed Rights Certificate evidencing such Rights
with any required signatures guaranteed, together with payment in full of the
Exercise Price for each AAG Common Share subscribed for pursuant to the
exercise of the Rights. Such payment in full must be by (a) check or bank
draft drawn upon a U.S. bank or postal, telegraphic or express money order
payable to Securities Transfer Company, as Exchange Agent, or (b) wire transfer
of funds to the account maintained by the Exchange Agent for such purpose at
The Provident Bank, One East Fourth Street, Cincinnati, Ohio 45202, Account No.
0267-577; ABA No. 042000424. Any wire transfer of funds should clearly
indicate the identity of the subscriber who is paying the Exercise Price by the
wire transfer. The Exercise Price will be deemed to have been received by the
Exchange Agent only upon (i) clearance of any uncertified check, (ii) receipt
by the Exchange Agent of any certified check or bank draft drawn upon a U.S.
bank or of any postal, telegraphic or express money order or (iii) receipt of
good funds in the Exchange Agent's account designated above. IF PAYING BY
UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE UP
TO FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF RIGHTS WHO WISH TO PAY
THE EXERCISE PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED
27
<PAGE> 32
AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED
OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
The address to which the Rights Certificates and payment of the Exercise
Price should be delivered is:
Securities Transfer Company
12th Floor
One East Fourth Street
Cincinnati, Ohio 45202
If a Rights Holder wishes to exercise Rights, but time will not permit such
holder to cause the Rights Certificate or Rights Certificates evidencing such
Rights to reach the Exchange Agent on or prior to the Expiration Date, such
Rights may nevertheless be exercised if all of the following conditions (the
"Guaranteed Delivery Procedures") are met:
(i) such holder has caused payment in full of the Exercise Price
for each Share being subscribed for pursuant to the exercise of the Rights
to be received (in the manner set forth above) by the Exchange Agent
within three NYSE trading days following the Expiration Date;
(ii) the Exchange Agent receives, on or prior to the Expiration
Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially
in the form provided with the Instructions as to Use of AAG Rights
Certificates (the "Instructions") distributed with the Rights Certificates,
from a member firm of a registered national securities exchange or a member
of the National Association of Securities Dealers, Inc. (the "NASD"), or
from a commercial bank or trust company having an office or correspondent
in the United States (each, an "Eligible Institution"), stating the name of
the exercising Rights Holder, the number of Rights represented by the
Rights Certificate or Rights Certificates held by such exercising Rights
Holder, the number of Shares being subscribed for and guaranteeing the
delivery to the Exchange Agent of any Rights Certificate evidencing such
Rights within three NYSE trading days following the date of the Notice of
Guaranteed Delivery; and
(iii) the properly completed Rights Certificate evidencing the
Rights being exercised, with any required signatures guaranteed, is
received by the Exchange Agent within three NYSE trading days following the
date of the Notice of Guaranteed Delivery relating thereto. The Notice of
Guaranteed Delivery may be delivered to the Exchange Agent in the same
manner as Rights Certificates at the address set forth above, or may be
transmitted to the Exchange Agent by telegram or facsimile transmission
(facsimile no. (513) 287-8270). Additional copies of the form of Notice of
Guaranteed Delivery are available upon request from the Exchange Agent, at
the address set forth above.
If an exercising Rights Holder does not indicate the number of Rights being
exercised, or does not forward full payment of the aggregate Exercise Price for
the number of Rights that the Rights Holder indicates are being exercised, then
the Rights Holder will be deemed to have exercised the Basic Subscription
Privilege with respect to the maximum number of Rights that may be exercised
for the aggregate Exercise Price payment delivered by the Rights Holder, and to
the extent that the aggregate Exercise Price payment delivered by the Rights
Holder exceeds the product of the Exercise Price multiplied by the number of
Rights evidenced by the Rights Certificates delivered by the Rights Holder
(such excess being the "Subscription Excess"), the Rights Holder will be deemed
to have subscribed pursuant to the Oversubscription Privilege to purchase, to
the extent available, that number of whole Remaining Shares equal to the
quotient obtained by dividing the Subscription Excess by the Exercise Price.
Funds received in payment of the Exercise Price for Remaining Shares
subscribed for pursuant to the Oversubscription Privilege will be held in a
segregated account pending issuance of such Remaining Shares. If a Rights
Holder subscribing pursuant to the Oversubscription Privilege is allocated less
than all of the shares of AAG Common Stock which such holder wished to
subscribe for pursuant to the Oversubscription Privilege, the excess funds paid
by such holder in respect of the Exercise Price for shares not issued will be
returned by mail without interest or deduction as soon as practicable after the
Expiration Date.
28
<PAGE> 33
Unless a Rights Certificate (i) provides that the shares of AAG Common
Stock to be issued pursuant to the exercise of Rights represented thereby are
to be delivered to the record holder of such Rights or (ii) is submitted for
the account of an Eligible Institution, signatures on such Rights Certificate
must be guaranteed by an Eligible Institution.
Persons who hold shares of AAG Common Stock for the account of others, such
as brokers, trustees or depositaries for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the record holder of such
Rights should complete Rights Certificates and submit them to the Exchange
Agent with the proper payment. In addition, beneficial owners of AAG Common
Stock or Rights held through such a holder should contact the holder and
request the holder to effect transactions in accordance with the beneficial
owner's instructions.
The instructions accompanying the Rights Certificates should be read
carefully and followed in detail. DO NOT SEND RIGHTS CERTIFICATES TO AAG.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE EXCHANGE
PRICE TO THE EXCHANGE AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS. IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS
BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED,
AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE
EXCHANGE AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN TIME, ON
THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE UP TO FIVE
BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT,
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights or subscriptions pursuant to the Oversubscription
Privilege will be determined by the Company, whose determinations will be final
and binding. The Company in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right or
subscriptions pursuant to the Oversubscription Privilege. Subscriptions will
not be deemed to have been received or accepted until all irregularities have
been waived or cured within such time as the Company determines in its sole
discretion. Neither the Company nor the Exchange Agent will be under any duty
to give notification of any defect or irregularity in connection with the
submission of Rights Certificates or will incur any liability for failure to
give such notification.
Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus, the
Instructions or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE SUBSCRIPTION PRIVILEGE GRANTED BY
THE RIGHTS, SUCH EXERCISE MAY NOT BE REVOKED EXCEPT UPON AMENDMENT OR
TERMINATION OF THE RIGHTS OFFERING.
METHOD OF TRANSFERRING RIGHTS
Rights may be purchased or sold through usual investment channels,
including banks and brokers. The Rights are expected to be listed on the NYSE.
The newly issued AAG Common Stock is also listed on the NYSE with all currently
issued and outstanding shares of AAG Common Stock.
The Rights evidenced by a single Rights Certificate may be transferred in
whole by endorsing the Rights Certificate for transfer in accordance with the
accompanying instructions. A portion of the Rights evidenced by a single
Rights Certificate (but not fractional Rights) may be transferred by delivering
to the Exchange Agent a Rights Certificate properly endorsed for transfer, with
instructions to register such portion of the Rights evidenced thereby in the
name of the transferee (and to issue a new Rights Certificate to the transferee
evidencing such transferred Rights). In such event, a new Rights Certificate
evidencing the balance of the Rights will be issued to the Rights Holder or, if
the Rights Holder
29
<PAGE> 34
so instructs, to one or more additional transferees. To transfer rights to any
person other than a bank or broker, signatures on the Rights Certificate must
be guaranteed by an Eligible Institution.
Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow a sufficient amount of time prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Exchange Agent, (ii) a new Rights Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred
Rights, and to the transferor with respect to retained Rights, if any, and
(iii) the Rights evidenced by such new Rights Certificates to be exercised or
sold by the recipients thereof. Neither the Company nor the Exchange Agent
will have any liability to a transferee or transferor of Rights if Rights
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
Except for the fees charged by the Exchange Agent (which will be paid by
the Company), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase, sale
or exercise of Rights will be for the account of the transferor of the Rights,
and none of such commissions, fees or expenses will be paid by the Company or
the Exchange Agent.
The Company anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Rights may be effected through, the
facilities of The Depository Trust Company.
AMENDMENTS AND TERMINATION
The Company reserves the right to extend the Expiration Date and to amend
the terms and conditions of the Rights Offering. If the Company amends the
terms of the Rights Offering, the Registration Statement of which this
Prospectus forms a part will be supplemented or amended, and either a
supplement to this Prospectus or a new definitive Prospectus will be
distributed to all Rights Holders who have theretofore exercised Rights and to
holders of record of unexercised Rights on the date the Company amends such
terms. In addition, all Rights Holders who have theretofore exercised rights,
or who exercise Rights within four (4) business days after the mailing of the
new definitive Prospectus, shall be provided with a form of Consent to Amended
Rights Offering Terms, on which they can confirm their exercise of Rights and
their subscriptions under the terms of the Rights Offering as amended by the
Company. A Rights Holder who has theretofore exercised any Rights, or who
exercises Rights within four (4) business days after the mailing of the new
definitive Prospectus, and who does not return such Consent within ten (10)
business days after the mailing of such Consent by the Company will be deemed
to have canceled his or her exercise of Rights, and the full amount of the
Subscription Price theretofore paid by such Rights Holder will be returned
promptly by mail, without interest or deduction. Any completed Rights
Certificate received by the Subscription Agent five (5) or more business days
after the date of the amendment will be deemed to constitute the consent of the
Rights Holder who completed such Rights Certificate to the amended terms.
The Company reserves the right at any time prior to the time the Underlying
Shares are purchased in the Rights Offering to terminate the Rights Offering.
Such termination would be effected by the Company by giving oral or written
notice of such termination to the Exchange Agent and making a public
announcement thereof. If the Rights Offering is so terminated, the Exercise
Price will be promptly returned by mail to exercising Rights Holders, without
interest or deduction. Neither the Company nor any selling Rights Holder will
have any obligation to a purchaser of Rights, whether such purchase was made
through the Exchange Agent or otherwise, in the event that the Rights Offering
is terminated.
DETERMINATION OF EXERCISE PRICE
The Exercise Price was determined by the Company's Board of Directors,
based on a number of factors. The Company believes that the Exercise Price
reflects the Company's objective of achieving the maximum net proceeds
obtainable from the Rights Offering while providing the holders of AAG Common
Stock with an opportunity to make an additional investment in the Company, and
thus avoid an excessive dilution of their ownership position in the Company.
In approving the Exercise Price, the Board of Directors considered such
factors as the alternatives available to the Company for financing the
acquisition of Laurentian, other alternatives for raising capital, the market
price of the AAG Common Stock, the business prospects for the Company and the
general condition of the securities markets at the time
30
<PAGE> 35
the Rights Offering was approved. There can be no assurance however, that the
market price of the AAG Common Stock will not decline during the subscription
period to a level equal to or below the Exercise Price, or that, following the
issuance of the Rights and of the AAG Common Stock upon exercise of Rights, a
subscribing Holder will be able to sell shares purchased in the Rights Offering
at a price equal to or greater than the Exercise Price.
EXCHANGE AGENT
The Company has appointed Securities Transfer Company as Exchange Agent for
the Rights Offering. The Exchange Agent's address, which is the address to
which the Rights Certificates and payment of the Exercise Price should be
delivered, as well as the address to which a Notice of Guaranteed Delivery must
be delivered, is:
Securities Transfer Company
12th Floor
One East Fourth Street
Cincinnati, Ohio 45202
The Exchange Agent's telephone number is (800) 368-3417.
The Company will pay the fees and expenses of the Exchange Agent and has
also agreed to indemnify the Exchange Agent from certain liabilities which it
may incur in connection with the Rights Offering.
NO BOARD OR FINANCIAL ADVISOR RECOMMENDATIONS TO STOCKHOLDERS
An investment in AAG Common Stock must be made pursuant to each Right
Holder's or prospective investor's evaluation of its, his or her best
interests. Accordingly, neither the Board of Directors of AAG nor any
financial advisor hired by the Company has made any recommendation to any
Rights Holder or prospective investor regarding the exercise of Rights.
MAINTENANCE OF AAG OWNERSHIP
Under current law, the Company is and will continue to be included in the
consolidated Federal income tax returns of American Financial as long as
American Financial owns at least 80% of the AAG Common Stock. Since American
Financial intends to exercise its Basic Subscription Privilege in full, at the
conclusion of this offering American Financial will continue to own at least
81.4% of AAG's Common Stock and AAG will continue to be included in the
consolidated federal income tax returns of American Financial.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the principal federal income tax
considerations relevant to holders of Common Shares upon the issuance
("Issuance") of Rights to Rights Holders and upon the exercise or disposition
of the Rights. This summary is qualified in its entirety by reference to, and
is based upon, laws, regulations, rulings and decisions in effect on the date
of this Prospectus and as those laws, regulations, rulings and decisions were
interpreted on such date. This summary does not discuss all aspects of federal
income taxation that may be relevant to a particular investor or to certain
types of investors subject to special treatment under the federal income tax
laws (for example, banks, dealers in securities, life insurance companies,
tax-exempt organizations and foreign taxpayers), or any aspect of state, local
or foreign tax laws. RIGHTS HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE TAX CONSEQUENCES OF THE OFFERING FOR THE HOLDER.
31
<PAGE> 36
ISSUANCE OF THE RIGHTS
Holders of AAG Common Stock on the Record Date ("Record Date Holders") will
not be required to recognize taxable income upon the receipt of the Rights
provided that no Record Date Holder of Common Shares is permitted to elect to
receive either a distribution in Rights or some other form of property, and
provided that the distribution does not have the result of causing some
stockholders to receive property and causing other stockholders to have an
increase in their proportionate interest in the assets or earnings and profits
of the Company. Since no Record Date Holder of Common Shares will be permitted
to receive a distribution other than in the form of Rights, and since the
distribution should not have the effect of causing some stockholders to receive
property and other stockholders to receive an increase in their proportionate
interest in the assets or earnings and profits of the Company, no income should
be recognized by any of the Record Date Holders of AAG Common Stock in
connection with the issuance of Rights.
BASIS AND HOLDING PERIOD OF THE RIGHTS
Except as provided in the following sentence, the basis of the Rights
received by a Record Date Rights Holder with respect to that Record Date Rights
Holder's Common Shares will be zero. If either (i) the fair market value of
the Rights on the date of Issuance is 15% or more of the fair market value (on
that same date) of the Common Shares with respect to which they are received
(which could occur in the case of an oversubscription), or (ii) the Record Date
Holder elects under Section 307 of the Code, on the Record Date Holder's
federal income tax return for the taxable year in which the Rights are
received, to allocate part of the basis of the Record Date Rights Holder's
Common Shares to the Rights, then, upon exercise or transfer of the Rights, the
Record Date Rights Holder's basis in those Common Shares will be allocated
between the Common Shares and the Rights in proportion to the fair market
values of each on the date of Issuance.
The holding period of a Record Date Rights Holder with respect to the
Rights received in respect of that stockholder's Common Shares will include the
stockholder's holding period for the Common Shares with respect to which the
Rights were issued.
In the case of a purchaser of Rights (a "Purchaser"), the basis of the
Purchaser's Rights will be equal to the purchase price paid therefor, and the
holding period for those Rights will commence on the date following the date of
purchase.
TRANSFER OF THE RIGHTS
A Record Date Rights Holder or a Purchaser who sells or exchanges Rights
will recognize gain or loss equal to the difference between the amount realized
and the basis, if any, of the Rights sold or exchanged. Such gain or loss will
be capital gain or loss if the Common Shares obtainable upon the exercise of
the Rights would be a capital asset in the hands of the Record Date Rights
Holder or Purchaser.
EXPIRATION OF THE RIGHTS
With respect to Rights that have a basis of zero, Record Date Rights
Holders who allow such Rights to expire unexercised will not recognize any gain
or loss, and no adjustment will be made to the basis of their Common Shares.
A Purchaser who allows Rights to expire unexercised will recognize a loss
equal to the basis of those Rights. Any loss recognized by a Purchaser on the
expiration of the Rights will be a capital loss if the Common Shares obtainable
upon the exercise of the Rights would be a capital asset in the hands of the
Purchaser.
EXERCISE OF THE RIGHTS; BASIS AND HOLDING PERIOD OF ACQUIRED SHARES
Rights Holders will not recognize any gain or loss upon the exercise of
their Rights. The basis of each Common Share acquired through exercise of the
Rights will be equal to the sum of the Subscription Price paid therefor and the
basis, if any, of the Rights. The holding period for the Common Shares
acquired through exercise of the Rights will begin on the date the Rights are
exercised.
32
<PAGE> 37
ABILITY OF THE COMPANY TO RECOGNIZE LOSSES
If the Company has net operating loss carryforwards or net built-in loss
(generally, an excess in the tax basis of assets over their fair market value)
on the date it undergoes an "ownership change," the carryforwards and any
built-in losses it recognizes in any taxable year that includes any day in the
five-year period beginning on the date of the "ownership change" will be
subject to limitation under Section 382.
An ownership change will occur if, during the applicable test period, there
has been a more than 50 percentage point increase in the ownership of a
corporation's stock by 5% stockholders (for this purpose, in general, all
holders of less than 5% are collectively treated as a single holder) arising
from owner shifts, and/or reorganizations, including any combination thereof.
IRS Regulations provide that, in some cases, a right, option, warrant or
similar agreement will be deemed to have been exercised on the date of the
grant. These Regulations provide that options would not be considered
exercised on the date of the grant, unless they were issued for abusive
purposes.
The Company does not expect that the Offering will result in an ownership
change, so that no limitation will be imposed on the Company's utilization, for
Federal income tax purposes of its net operating loss carryforwards or its net
built-in losses. However, the Company has not requested or received any ruling
from the IRS with respect to this issue. In the event the Company's
determination was ultimately determined to be incorrect, and if an "ownership
change" was determined to have occurred, the pertinent loss limitation
provisions would impose an annual limitation on the amount of the Company's net
operating loss carryforwards and built-in losses that could be utilized to
reduce the Company's taxable income. In general, this annual limitation would
be computed by multiplying the aggregate fair market value of the Company's
outstanding stock immediately prior to the ownership change by the then
applicable long-term tax-exempt interest rate published by the IRS for this
purpose. It is not expected that such a limitation would materially impact the
Company's ability to utilize its net operating loss carryforwards.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under the Company's Certificate of Incorporation, which is an exhibit to
the Registration Statement, the total number of shares of Common Stock that the
Company has authority to issue is 100,000,000, of which 39,146,414 shares were
issued and outstanding on as of the Record Date. The Company also has
25,000,000 shares of preferred stock authorized, none of which are issued and
outstanding (the "Preferred Stock"). Based on the number of shares of AAG
Common Stock outstanding at the Record Date, a maximum of approximately
3,950,000 shares of Company Common Stock could be subscribed for by the
stockholders of AAG in connection with the Rights Offering. The terms and
conditions of the Company's capital stock are governed by the laws of Delaware
as well as by the Company's Certificate of Incorporation and Bylaws.
COMMON STOCK
The holders of AAG Common Stock are entitled to one vote for each share on
all matters voted on by stockholders, and the holders of such shares will
possess all voting power, except as otherwise required by law or provided in
any resolution adopted by the Company's Board of Directors with respect to any
series of Preferred Stock. Stockholders do not have the right to cumulate
their votes for the election of directors.
Subject to any preferential rights of any outstanding series of Preferred
Stock that may be designated by the Board of Directors, the holders of AAG
Common Stock will be entitled to such dividends as may be declared from time to
time by the Board of Directors from funds available therefor, and upon
liquidation will be entitled to receive pro rata all assets of the Company
available for distribution to such holders.
The vote of a majority of the outstanding shares of the Common Stock is
generally required to amend the Certificate of Incorporation and to approve
certain mergers, reorganizations and similar transactions.
33
<PAGE> 38
PREFERRED STOCK
The Company has no Preferred Stock currently outstanding. The Board of
Directors of AAG is authorized to provide for the issuance of up to 25,000,000
shares of Preferred Stock, in one or more series, and to fix for each such
series such voting powers, designations, preferences and relative,
participating, optional and other special rights, and such qualifications,
limitations or restrictions, as are stated in the resolution adopted by the
Board of Directors providing for the issuance of such series and as are
permitted by the Delaware General Corporation Law.
NO PREEMPTIVE RIGHTS
No holder of any stock of the Company of any class authorized on the Record
Date will have any preemptive right to subscribe to any securities of the
Company of any kind or class.
RESTRICTIONS ON OWNERSHIP OF AAG COMMON STOCK
The acquisition of 5% or more of the stock of AAG by any person during the
three years following the GALIC acquisition (December 31, 1992) would likely
cause an ownership change to take place (unless American Financial reduces its
ownership percentage), which would cause the limitation or disallowance of Net
Operating Losses and any built-in deductions to take effect. In order to
minimize the likelihood of such an ownership change occurring, the Company's
Certificate of Incorporation has restrictions providing that no person in
general will be able to acquire in excess of 4-3/4% of the stock of AAG during
such period. The determination as to whether an ownership change has occurred
is predominantly factual, and therefore no private letter ruling from the IRS
or an opinion of counsel will be or has been requested with respect to this
issue.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company Common Stock is Securities
Transfer Company, One East Fourth Street, Cincinnati, Ohio 45202.
LEGAL MATTERS
The validity of the Rights and AAG Common Stock will be passed upon for the
Company by Mark F. Muething, Esq., Senior Vice President, General Counsel and
Secretary of AAG. Mr. Muething is a full-time employee of AAG and as of June
30, 1995 owned 3,925 shares of AAG Common Stock.
EXPERTS
The consolidated financial statements of AAG appearing in AAG's annual
report (Form 10-K), as amended, for the year ended December 31, 1994, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon, included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Laurentian included in this
Prospectus have been so included in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of said firm as experts
in auditing and accounting.
___________________________
34
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
LAURENTIAN CAPITAL CORPORATION
<S> <C>
YEAR ENDED DECEMBER 31, 1994
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of December 31, 1994, and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
THREE MONTHS ENDED MARCH 31, 1995
Consolidated Balance Sheet as of March 31, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Consolidated Statement of Operations for the three
months ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Consolidated Statement of Cash Flows for the three
months ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Laurentian Capital Corporation
We have audited the consolidated financial statements and the
financial statement schedules of Laurentian Capital Corporation and
Subsidiaries listed in the index on page F-1 of this Form 10-K. These
financial statements and financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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 consolidated financial position of
Laurentian Capital Corporation and Subsidiaries as of December 31, 1994 and
1993 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
As discussed in Notes 1 and 5 to the consolidated financial
statements, the Company changed its method of accounting for certain
investments in debt and equity securities in 1994 and changed its method of
accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 17, 1995
<PAGE> 41
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
Investments: ASSETS
<S> <C> <C>
Fixed maturities held to maturity, at
amortized cost (market, 1994 - $243,191). $ 273,418 $ 0
Fixed maturities, at amortized cost
(market, 1993 - $468,497)................ 0 458,668
Fixed maturities available for sale, at market
(amortized cost, 1994 - $234,537)........ 218,645 0
Equity securities, at market (cost,
1994 - $11,313; 1993 - $28,481).......... 10,638 30,379
Mortgage loans on real estate.............. 21,420 29,438
Investment real estate, net of
accumulated depreciation (1994 - $862;
1993 - $816)............................. 4,489 4,643
Policy loans............................... 50,600 51,677
Short-term investments..................... 1,616 10,479
---------- --------
Total investments.................... 580,826 585,284
Cash......................................... 20,250 8,722
Accounts, notes and premiums
receivable, net of allowance for
uncollectible amounts (1994 - $1,072;
1993 - $935).............................. 5,379 5,011
Reinsurance receivables...................... 92,170 38,982
Accrued investment income.................... 6,190 5,855
Deferred policy acquisition costs............ 74,085 71,745
Costs in excess of net assets of business
acquired, net of accumulated amortization
(1994 - $5,507; 1993 - $5,219)............. 7,362 7,130
Property and equipment, net of accumulated
depreciation (1994 - $11,806; 1993 - $10,542) 11,738 11,972
Other assets................................. 3,535 1,780
Assets held in separate accounts............. 226,351 236,251
---------- --------
Total assets $1,027,886 $972,732
============ ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 42
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
---------- --------
LIABILITIES
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits..................... $ 436,318 $ 411,951
Unearned premiums.......................... 1,710 1,804
Other policy claims and benefits payable... 12,033 12,629
---------- --------
450,061 426,384
Other policyholders' funds................... 179,143 122,409
Debt......................................... 45,000 54,822
Other liabilities............................ 17,289 15,257
Current income taxes......................... 241 145
Deferred income taxes........................ 7,711 11,827
Liabilities related to separate accounts..... 226,351 236,251
---------- --------
Total liabilities....................... 925,796 867,095
---------- --------
Commitments and contingent liabilities
Redeemable preferred stock, Series A Convertible,
$.01 par value, at redemption value
Shares authorized: 5 million
Shares issued: 57,767
Outstanding: 1994 - 32,939; 1993 - 41,528 3,294 4,153
---------- --------
STOCKHOLDERS' EQUITY
Common stock, $.05 par value
Shares authorized: 20 million
Shares issued: 8,111,496................... 406 406
Capital in excess of par value............... 59,127 59,071
Net unrealized investment gains (losses),
net of tax: 1994 - $5,633; 1993 - $645..... (10,934) 1,253
Treasury stock, at cost (shares:
1994 - 524,098; 1993 - 562,739)............ (2,656) (2,818)
Retained earnings............................ 52,853 43,572
---------- --------
Total stockholders' equity.............. 98,796 101,484
---------- --------
Total liabilities, preferred stock
and stockholders' equity $1,027,886 $972,732
========== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 43
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
Revenues:
<S> <C> <C> <C>
Premiums................................. $ 85,751 $ 81,443 $ 80,186
Net investment income.................... 44,876 46,820 46,927
Realized investment gains ............... 2,323 2,773 53
Other income............................. 4,735 3,218 3,232
-------- -------- --------
137,685 134,254 130,398
-------- -------- --------
Benefits and expenses:
Benefits and settlement expenses......... 79,013 77,115 72,491
Amortization of deferred policy
acquisition costs...................... 14,568 13,226 13,489
Insurance and other expenses............. 31,538 32,535 34,241
-------- -------- --------
125,119 122,876 120,221
-------- -------- --------
Income before income taxes and cumulative
effect of accounting change.............. 12,566 11,378 10,177
Income tax expense:
Current.................................. 1,145 250 361
Deferred................................. 1,913 3,334 3,102
-------- -------- --------
3,058 3,584 3,463
-------- -------- --------
Income before cumulative effect
of accounting change ..................... 9,508 7,794 6,714
Cumulative effect of accounting change:
Adoption of SFAS 109 ..................... 0 400 0
-------- -------- --------
Net income ................................ $ 9,508 $ 8,194 $ 6,714
======== ======== ========
Net income available to common
shareholders:
Net income .............................. $ 9,508 $ 8,194 $ 6,714
Less: dividends on preferred stock....... 227 271 290
-------- -------- --------
$ 9,281 $ 7,923 $ 6,424
======== ======== ========
Earnings per share:
Income before cumulative effect
of accounting change...................... $ 1.22 $ 1.00 $ 0.80
Cumulative effect of accounting change:
Adoption of SFAS 109...................... 0 .05 0
-------- -------- --------
Net income ................................ $ 1.22 $ 1.05 $ 0.80
======== ======== ========
Weighted average shares outstanding
(in thousands)............................ 7,580 7,549 7,984
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 44
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- --------- ---------
Common Stock
<S> <C> <C> <C>
Balance at beginning and end of year..... $ 406 $ 406 $ 406
-------- -------- ---------
Capital in Excess of Par Value
Balance at beginning of year............. 59,071 59,010 58,892
Issuance of treasury stock............... 56 0 0
Redemption of preferred stock............ 0 61 118
-------- -------- ---------
Balance at end of year................... 59,127 59,071 59,010
-------- -------- ---------
Net Unrealized Gains (Losses), net of tax
Balance at beginning of year............. 1,253 (198) (653)
Adoption of SFAS 115 on January 1, 1994.. 4,328 0 0
Change during the year................... (16,515) 1,451 455
-------- -------- ---------
Balance at end of year................... (10,934) 1,253 (198)
-------- -------- ---------
Treasury Stock
Balance at beginning of year............. (2,818) (2,837) 0
Treasury shares purchased................ (63) 0 (2,877)
Shares issued from treasury.............. 225 19 40
-------- -------- ---------
Balance at end of year................... (2,656) (2,818) (2,837)
-------- -------- ---------
Retained Earnings
Balance at beginning of year............. 43,572 35,649 29,273
Net income .............................. 9,508 8,194 6,714
Dividends on preferred stock............. (227) (271) (338)
-------- -------- ---------
Balance at end of year................... 52,853 43,572 35,649
-------- -------- ---------
Total Stockholders' Equity................. $ 98,796 $101,484 $ 92,030
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 45
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- --------- ----------
Cash flow from operations:
<S> <C> <C> <C>
Net income .................................. $ 9,508 $ 8,194 $ 6,714
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of adoption of SFAS 109.. 0 (400) 0
Deferred income taxes...................... 1,913 3,334 3,102
Increase in policy liabilities and accruals,
policyholders' funds and current income taxes 24,678 12,498 7,455
Decrease (increase) in accrued investment
income and accounts and notes receivable.. (702) 270 (188)
Increase (decrease) in other liabilities... 251 1,334 (4,252)
Amortization of deferred policy
acquisition costs......................... 14,568 13,226 13,489
Policy acquisition costs deferred.......... (16,908) (10,996) (9,974)
Depreciation expense....................... 1,517 1,535 1,324
Amortization of goodwill................... 288 290 268
Realized investment (gains)................ (2,323) (2,773) (53)
Other, net................................. (2,705) (3,172) (1,633)
-------- --------- ---------
Net cash provided by
operating activities.................. 30,085 23,340 16,252
-------- --------- ---------
Cash flow from investing activities:
Sales of:
Fixed maturities available for sale........ 7,230 0 0
Fixed maturities held to maturity.......... 0 0 0
Fixed maturities........................... 0 7,070 40,703
Equities and other investments............. 20,936 8,814 6,072
Maturity or repayment of:
Fixed maturities available for sale........ 25,755 0 0
Fixed maturities held to maturity.......... 46,601 0 0
Fixed maturities........................... 0 185,108 127,549
Other investments.......................... 10,519 9,973 12,805
Purchases of:
Fixed maturities available for sale........ (79,856) 0 0
Fixed maturities held to maturity.......... (36,185) 0 0
Fixed maturities........................... 0 (244,376) (181,273)
Subsidiaries............................... (6,435) (738) 0
Other investments.......................... (3,945) (12,100) (3,126)
Property and equipment, net................ (1,323) (1,440) (2,717)
Short-term investments, net.................. 8,862 12,993 (12,996)
Other net.................................... 0 65 2
-------- -------- --------
Net cash (used in)
investing activities.................. (7,841) (34,631) (12,981)
-------- --------- ---------
Cash flow from financing activities:
Proceeds from borrowing...................... 45,000 368 257
Repayment of debt............................ (54,822) 0 (52)
Net (purchases) sales of treasury
shares, at cost............................. 218 19 (2,837)
Dividends paid on preferred stock............ (253) (271) (303)
Redemption of preferred stock................ (859) (395) (351)
-------- --------- ---------
Net cash (used in)
financing activities.................. (10,716) (279) (3,286)
-------- --------- ---------
Net increase (decrease) in cash................ 11,528 (11,570) (15)
Cash at beginning of year...................... 8,722 20,292 20,307
-------- --------- ---------
Cash at end of year............................ $ 20,250 $ 8,722 $ 20,292
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 46
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization And Principles Of Consolidation - The consolidated
financial statements include, after intercompany eliminations, Laurentian
Capital Corporation (individually or collectively with its subsidiaries, the
Company), and its wholly-owned subsidiaries, principally Loyal American Life
Insurance Company (Loyal), and Prairie National Life Insurance Company (Prairie
National), a life insurance holding company, which owns Prairie States Life
Insurance Company (Prairie States). Prairie States owns Rushmore National Life
Insurance Company (Rushmore) and Assured Security Life Insurance Company
(Assured). Prairie States acquired Assured during 1994 for $6.7 million in a
transaction accounted for as a purchase.
The Imperial Life Assurance Company of Canada (Imperial) directly
owned approximately 72% of the Company and Imperial's parent, Laurentian
Financial, Inc., directly owned approximately 10% of the Company at December
31, 1994. Laurentian Financial, Inc. is a wholly-owned subsidiary of The
Laurentian Group Corporation (Group). Effective January 1, 1994, Group became
a subsidiary of Desjardins Laurentian Financial Corporation (Desjardins
Laurentian). The ultimate owner of Desjardins Laurentian is La Confederation
des caisses popularies et d'economie Desjardins du Quebec.
Basis of Presentation - The accompanying financial statements have
been prepared on the basis of generally accepted accounting principles (GAAP),
which vary from accounting principles used by its subsidiaries to prepare
financial statements filed with state insurance departments.
Investments - Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards Number 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that debt securities are to be classified as either held to
maturity (carried at amortized cost), available for sale (carried at market
value with net unrealized gains or losses reported in stockholders' equity), or
trading (carried at market value with unrealized gains or losses reported in
net income).
The Company believes that it has the ability and intent to hold to
maturity its debt security investments that are classified as held to maturity.
The Company also recognizes that there may be circumstances where it may be
appropriate to sell a security prior to maturity in response to changes in a
variety of circumstances. In recognizing the need for the flexibility to
respond to such changes, the Company has designated a portion of its fixed
maturity portfolio as available for sale. The Company has not classified
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
any of its fixed maturity securities as trading.
SFAS 115 does not permit a retroactive application to prior years'
financial statements. The effect of adopting SFAS 115 was to increase the
carrying amount of fixed maturity securities classified as available for sale
by $6.5 million, increase deferred income taxes payable by $2.2 million, and
increase stockholders' equity by $4.3 million (or $0.57 per share), as of
January 1, 1994. Due to the general decline in the bond market experienced
during 1994, the carrying amount of fixed maturities available for sale,
deferred income taxes payable and stockholders' equity decreased by $15.9
million, $5.4 million and $10.5 million (or $1.38 per share), respectively, at
December 31, 1994.
Investments are reported as follows:
. Fixed maturities held to maturity (bonds, notes and redeemable
preferred stocks) - at cost, adjusted for amortization of
premium or discount and other than temporary impairments in
market value. The Company has the ability and intent to hold
such investments to maturity and accordingly, reports these
investments at amortized cost.
. Fixed maturities available for sale (bonds, notes and
redeemable preferred stocks) - at current market value,
adjusted for other than temporary impairments in market value.
. Equity securities (common and nonredeemable preferred stocks)
- at current market value, adjusted for other than temporary
impairments in market value.
. Mortgage loans on real estate - at unpaid balances, net of
valuation allowances and adjusted for amortization of premium
or discount.
. Investment real estate - at cost, net of valuation allowances
and less allowances for depreciation computed on the
straight-line method.
. Policy loans - at unpaid balances.
. Short-term investments - at cost, which approximates market.
Realized gains and losses on sales of investments are recognized in
net income. The cost of investments sold is determined on a specific
identification basis. Temporary market value changes in equity securities and
fixed maturities available
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
for sale are reflected as unrealized gains or losses directly in stockholders'
equity net of related income taxes and, accordingly, have no effect on net
income. The rate of amortization of discount or premium on mortgage-backed
securities is adjusted to reflect the current rate of prepayments on the
related securities. The amortization adjustments are recorded as net
investment income in the period that the rate of prepayment changed.
Deferred Policy Acquisition Costs - The costs of acquiring new
business, which vary with and are directly related to the production of new
business, have been deferred to the extent that such costs are deemed
recoverable. Such costs include commissions, certain costs of policy issuance
and underwriting, and certain variable marketing expenses.
Costs deferred related to traditional life and health insurance are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues were estimated using the same assumptions
used for computing liabilities for future policy benefits.
Costs deferred related to universal life insurance and deferred
annuity products are being amortized over the lives of the policies, in
relation to the present value of estimated gross profits.
Included in deferred policy acquisition costs are amounts representing
the present value of future profits on business in force of acquired insurance
subsidiaries, which represents the portion of the cost to acquire such
subsidiaries that is allocated to the value of the right to receive future cash
flows from insurance contracts existing at the dates of acquisition. These
amounts are amortized with interest over the estimated remaining life of the
acquired policies.
Costs In Excess Of Net Assets Of Business Acquired - The costs in
excess of net assets of business acquired are being amortized to expense on a
straight-line basis over periods ranging from twenty-five to forty years.
Property And Equipment - Property and equipment is reported at cost.
Depreciation is charged to operations over the estimated useful lives of the
assets using the straight-line method.
Cash - For purposes of reporting cash flows, cash includes all cash
and short-term deposits available on demand, including certificates of deposit
with an initial term to maturity of three months or less.
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
Policy Liabilities - Liabilities for future policy benefits of
traditional ordinary life policies are computed using a net level premium
method including assumptions as to investment yields, mortality, withdrawals,
and other assumptions commensurate with the Company's past experience, modified
as necessary to reflect anticipated trends, including possible unfavorable
deviations. The liability for future policy benefits for universal life
policies and deferred annuities is equal to the accumulated fund balance
including interest credits at rates declared by the Company. Interest rate
assumptions range from 4.25% to 10%. Assumed mortality and withdrawals are
based on various industry published tables modified as appropriate for the
Company's actual experience. Morbidity and withdrawals are based on actual and
projected experience.
Life insurance in force, net of reinsurance, was approximately $2.6
billion as of December 31, 1994 and 1993.
Liabilities for other policy claims and benefits payable include
provisions for reported claims and an estimate based on ratios developed
through prior experience for claims incurred but not reported.
Assets Held In And Liabilities Related To Separate Accounts -
Investment annuity deposits and related liabilities represent deposits
maintained by several banks under a previously offered tax deferred annuity
program. The Company receives an annual fee from each bank for sponsoring the
program and depositors may elect to purchase an annuity from the Company at
which time funds are transferred to the Company.
Premium Revenue And Related Expenses - For traditional life and
accident and health products, premiums are recognized as revenue when legally
collectible from policyholders. Policy reserves have been established in a
manner which allocates policy benefits and expenses on a basis consistent with
the recognition of related premiums and generally results in the recognition of
profits over the premium-paying period of the policies.
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is classified as a liability. Revenue
is recognized as amounts are assessed against the policyholder account for
mortality coverage and contract expenses. Surrender benefits reduce the
account value. Death benefits are expensed when incurred, net of the account
value.
For investment type contracts, principally deferred annuity contracts,
premiums are treated as policyholder deposits and are recorded as liabilities.
Benefits paid reduce the policyholder liability. Revenues for investment
products consist of investment
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
income, with profits recognized as investment income earned in excess of the
amount credited to the contracts. Reserves for these contracts represent the
premiums received, plus accumulated interest. Contract benefits that are
charged to expense include benefit claims incurred in excess of related
contract values, and interest credited to contract values.
Income Taxes - Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). This statement requires the use of the asset and liability
method of accounting for deferred income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and their respective tax bases. Deferred tax assets
and liabilities are measured by applying enacted statutory tax rates expected
to apply to taxable income in the years in which those deferred tax assets and
liabilities are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that such change is enacted.
Prior years' financial statements have not been restated to reflect
the provisions of SFAS 109. The adoption of SFAS 109 resulted in a cumulative
benefit of $400,000 for the year ended December 31, 1993, or $0.05 per common
share.
Reinsurance - Insurance liabilities are reported gross of the effects
of reinsurance. Reinsurance receivables, including amounts related to
insurance liabilities, are reported as assets. Estimated reinsurance
receivables are recognized in a manner consistent with the liabilities related
to the underlying reinsured contracts.
Recently Issued Accounting Standards - In May 1993, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114), as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures" (SFAS 118), which establishes accounting
standards for creditors when a loan is deemed impaired. These statements are
primarily applicable to the Company's commercial loan portfolio, as residential
loans are excluded. The Company has determined that the adoption of these
statements will not have a material effect on the Company's financial position
or results of operations, as the Company's impaired loan portfolio is not
material. The Company will adopt these statements effective January 1, 1995.
Reclassifications - Certain reclassifications have been made in the
previously reported financial statements to make the prior year amounts
comparable to those of the current year.
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
2. INVESTMENTS
Major categories of net investment income for the years ended December
31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Fixed maturities........... $38,230 $39,243 $37,718
Equity securities.......... 572 485 656
Mortgage loans on
real estate.............. 2,376 3,331 4,721
Policy loans............... 3,006 3,082 3,301
Short-term investments..... 997 1,053 1,094
Investment real estate..... 1,819 1,820 2,215
Other investments.......... 288 583 823
------- ------- -------
47,288 49,597 50,528
Less investment expenses... 2,412 2,777 3,601
------- ------- -------
Net investment income...... $44,876 $46,820 $46,927
======= ======= =======
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
1994 1993 1992
------- ------- -------
Fixed maturities......... $ 624 $ 3,306 $ 2,799
Equity securities........ 1,750 310 658
Mortgage loans on real
estate.................. 139 (205) (311)
Investment real estate... (230) (671) (3,093)
Other investments........ 40 33 0
------- ------- -------
Total realized investment
gains.................. $ 2,323 $ 2,773 $ 53
======= ======= =======
Included in realized investment gains (losses) for the years ended
December 31 are adjustments for other than temporary impairments to
the carrying value of investments, as follows:
1994 1993 1992
------- ------- -------
Fixed maturities......... $ 0 $ (17) $ (199)
Equity securities........ 0 (100) (167)
Mortgage loans on real
estate.................. 0 (235) (350)
Investment real estate... 0 0 (3,937)
------- ------- -------
Total impairments........ $ 0 $ (352) $(4,653)
======= ======= =======
</TABLE>
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
The increase (decrease) in unrealized gains (losses) on fixed
maturities and equity securities for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities held to
maturity............... $(33,678) $ 0 $ 0
(not tax effected)
Fixed maturities......... $ 0 2,020 (6,792)
(not tax effected)
Fixed maturities available
for sale............... $(14,817) $ 0 $ 0
(net of applicable
deferred taxes)
Equity securities........ $ (1,698) $ 1,451 $ 455
(net of applicable
deferred taxes)
</TABLE>
Gross unrealized gains pertaining to equity securities were $0.1
million and $2.4 million and gross unrealized losses were $0.8 million and $0.5
million, before tax effect, at December 31, 1994 and 1993, respectively.
Certain investments, principally fixed maturities and mortgage loans
on which the accrual of interest has been discontinued, amounted to $0.2
million and $1.3 million at December 31, 1994 and 1993, respectively.
Certain investments totalling $358.7 million and $324.9 million,
principally fixed maturities and mortgage loans, were on deposit with insurance
departments of various states for the protection of policyholders at December
31, 1994 and 1993, respectively.
Of the fixed maturity investments, $3.4 million at amortized cost,
less other than temporary impairments, were rated as below investment grade as
of December 31, 1994. These investments have an associated market value of $3.1
million. As of December 31, 1993, $8.8 million at amortized cost, with an
associated market value of $9.1 million, were rated as below investment grade.
Most of these securities have been evaluated by the National Association of
Insurance Commissioners and found to be suitable for reporting at amortized
cost. The Company does not expect these investment holdings to result in a
material adverse effect on either the financial condition or results of
operations. The Company's investment strategy is to hold fixed income
instruments to maturity
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
and to recognize other than temporary impairments on those investments where
reduction in amounts to be received at maturity is likely.
The amortized cost and fair values of investments in fixed maturities
as of December 31, 1994 are as follows:
FIXED MATURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government or other U.S.
government corporations
or agencies............. $ 96,744 $ 68 $ 12,864 $ 83,948
Obligations of states and
political subdivisions.. 251 8 0 259
Debt securities issued by
foreign governments..... 22 0 3 19
Corporate securities..... 5,188 119 83 5,224
Private mortgage-backed
securities............. 171,213 793 18,265 153,741
-------- -------- -------- --------
Total..................... $273,418 $ 988 $ 31,215 $243,191
======== ======= ======== ========
</TABLE>
Included in U.S. government obligations are $94.0 million of
mortgage-backed securities at amortized cost, with an associated fair value of
$81.4 million, of which $67.0 million carry a U.S. government or
quasi-government guarantee.
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
FIXED MATURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government or other U.S.
government corporations
or agencies............. $ 80,413 $ 591 $ 2,555 $ 78,449
Obligations of states and
political subdivisions.. 3,650 2 355 3,297
Corporate securities..... 30,377 673 579 30,471
Private mortgage-backed
securities.............. 120,097 0 13,669 106,428
-------- -------- -------- --------
Total.................... $234,537 $ 1,266 $ 17,158 $218,645
======== ======== ======== ========
</TABLE>
Included in U.S. government obligations are $64.2 million of
mortgage-backed securities at amortized cost, with an associated fair value of
$62.5 million, of which $50.2 million carry a U.S. government or
quasi-government guarantee. Included in obligations of states and political
subdivisions are $3.2 million of mortgage-backed securities at amortized cost,
with an associated fair value of $2.8 million, which carry guarantees of
various states.
The amortized cost and fair value of fixed maturities as of December
31, 1994, 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.
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
FIXED MATURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less............ $ 466 $ 450
Due after one year through
five years.................... 5,454 5,278
Due after five years through
ten years..................... 833 871
Due after ten years................ 1,436 1,439
--------- ---------
8,189 8,038
Mortgage-backed securities......... 265,229 235,153
--------- ---------
$ 273,418 $ 243,191
========= =========
</TABLE>
FIXED MATURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less............ $ 726 $ 720
Due after one year through
five years.................... 20,564 20,655
Due after five years through
ten years..................... 9,267 9,109
Due after ten years................ 16,560 16,398
--------- ---------
47,117 46,882
Mortgage-backed securities......... 187,420 171,763
--------- ---------
$ 234,537 $ 218,645
========= =========
</TABLE>
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
The amortized cost and fair values of investments in fixed maturities
as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government or other U.S.
government corporations
or agencies.............. $135,816 $ 2,975 $ 1,038 $137,753
Obligations of states and
political subdivisions... 4,138 57 32 4,163
Debt securities issued by
foreign governments...... 1,027 42 0 1,069
Corporate securities..... 56,690 4,618 201 61,107
Private mortgage-backed
securities............. 260,997 4,916 1,508 264,405
-------- -------- -------- --------
Total.................... $458,668 $ 12,608 $ 2,779 $468,497
======== ======== ======== ========
</TABLE>
Included in U.S. government obligations are $128.5 million of
mortgage-backed securities, with an associated fair value of $130.3 million, of
which $91.0 million carry a U.S. government or quasi-government guarantee.
Included in obligations of states and political subdivisions are $3.3 million
of mortgage-backed securities, with an associated fair value of $3.3 million,
which carry guarantees of various states.
Proceeds from sales, maturities and repayments of investments in fixed
maturities for 1994, 1993 and 1992 totalled $79.6 million, $192.2 million, and
$168.3 million, respectively. Related gross investment gains and losses for
the period were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Gross gains............. $ 850 $ 3,710 $ 4,286
Gross losses............ (226) (387) (1,288)
</TABLE>
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
3. OTHER FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of the Company's financial instruments,
whether or not recognized in the balance sheet. 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
necessarily be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument. The
disclosures exclude certain financial instruments. Therefore, presentation of
the estimated fair value of assets based on the above methodology without a
corresponding revaluation of liabilities associated with insurance contracts
can be misinterpreted.
POLICY LOANS
Policy loans are issued with interest rates that range from 3 1/2% to
8%, depending on the terms of the insurance policy. Future cash flows of
policy loans are uncertain and difficult to predict. As a result, management
deems it impractical to calculate the fair value of policy loans.
MORTGAGE LOANS AND REAL ESTATE
Mortgage loans are valued at unpaid balances, net of valuation
allowances and adjusted for amortization of discount or premium. The Company
has not been active in mortgage lending for some time, and the carrying value
of the loan portfolio has decreased from $73.0 million at December 31, 1986 to
the current balance of $21.4 million. Approximately 75% of the portfolio
consists of commercial loans. After comparing the yield and maturity make-up
of the portfolio with current offerings of mortgage-backed securities (both
residential and commercial), the Company believes that the fair value of its
mortgage loans approximates its current carrying value. Real estate is valued
at cost less accumulated depreciation. Appraisals are obtained on a periodic
basis and adjustments are made when necessary to ensure carrying values are
not in excess of the underlying market values of the property.
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
4. DEBT
Debt as of December 31 is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Amounts due..................... $45,000 $54,822
======= =======
</TABLE>
On April 25, 1994, the Company entered into a revolving credit
facility in the amount of $45 million which matures on April 25, 1999 to
refinance part of its previously outstanding Revolving Underwriting Facility
("RUF") which matured at that date. The new credit facility, together with the
payment of $10 million by the Company, satisfied the repayment of the RUF.
Pursuant to the terms of the new credit facility, the Company will pay interest
at a variable rate equal to 1.125% above the London Interbank Offered Rate
(LIBOR). The debt is collateralized by the Company's stock in one of its
insurance subsidiaries. There are covenants relating to the Company's
activities and financial condition, including a requirement that the Company
maintain a minimum net worth, as defined under the new credit facility, of $75
million.
As of December 31, 1993, the Company's indebtedness under the RUF
amounted to $54.8 million. Pursuant to the terms of the RUF, the Company paid
interest at a variable rate, with a maximum rate equal to 0.30% above LIBOR.
On March 6, 1991, the Company had entered into an Interest Rate Swap Agreement
which fixed the LIBOR component of the RUF at 7.94% beginning April 29, 1991
through April 25, 1994.
Interest expense included in the consolidated statements of operations
was $3.6 million, $4.9 million, and $5.0 million for 1994, 1993 and 1992,
respectively.
Cash paid for interest was $4.0 million, $4.9 million, and $5.3
million for 1994, 1993 and 1992, respectively.
Repayment of the revolving credit facility is scheduled as follows:
<TABLE>
<S> <C>
1995........................... $ 0
1996........................... 0
1997........................... 4,583
1998........................... 9,167
1999........................... 31,250
-------
Total $45,000
=======
</TABLE>
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
5. FEDERAL INCOME TAXES
Deferred tax assets and liabilities computed at the statutory rate
related to temporary differences as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
Deferred Tax Assets:
<S> <C> <C>
Fixed maturities.......................... $ 0 $ 340
Fixed maturities available for sale....... 5,403 0
Equity securities......................... 1,041 0
Value of business in force................ 2,850 2,966
Policyholder liabilities.................. 3,233 1,056
Net operating loss and credit carryforwards 8,274 12,363
Other assets and liabilities.............. 3,054 3,423
------- --------
Total deferred tax assets.................. 23,855 20,148
Valuation allowance....................... (7,193) (8,735)
------- --------
Deferred tax assets - net
of valuation allowance.................. 16,662 11,413
------- --------
Deferred Tax Liabilities:
Deferred policy acquisition costs......... (19,352) (19,833)
Fixed maturities.......................... (447) 0
Equity securities......................... 0 (1,008)
Mortgage loans and real estate............ (3,888) (1,850)
Property, plant and equipment............. (686) (549)
------- --------
Deferred tax liabilities................... (24,373) (23,240)
------- --------
Total deferred taxes - net $ (7,711) $(11,827)
======== ========
</TABLE>
A valuation allowance of $7.2 million and $8.7 million has been
established as of December 31, 1994 and 1993, respectively, for certain capital
and operating loss carryforwards and temporary differences due to the
uncertainty of their eventual realization. The valuation allowance was reduced
by $1.5 million during 1994 for the realization of benefits associated with the
deferred tax assets related to certain real estate sold during 1994, net
operating losses utilized in 1994, and temporary differences of the non-life
companies. The valuation allowance was reduced by $0.6 million during 1993 for
the realization of benefits associated with the sale of certain real estate
assets. The valuation allowance against deferred tax assets will be
continually evaluated and adjustments will be reflected in the Statement of
Operations as an increase or decrease in income tax expense.
For 1992, under previously enacted GAAP, the total provision for
federal income tax differed from amounts currently payable due to providing
deferred taxes on certain items reported for financial statement purposes in
periods which differed from those in which they were reported for tax purposes.
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
Details of the deferred tax provision for the year ended December 31,
1992 are as follows:
<TABLE>
<S> <C>
Deferred policy acquisition
costs............................. $(1,301)
Benefit and other policy liability
changes........................... 4,403
-------
$ 3,102
=======
</TABLE>
The Company's effective income tax rates, which varied from the
statutory federal income tax rate for the years ended December 31, summarized
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate
applied to pre-tax income ........ $ 4,270 $ 3,869 $ 3,460
Dividends received and tax-exempt
interest deduction................ (53) (36) (44)
Reduction in valuation allowance... (1,542) (588) 0
Distribution from Policyholders'
Surplus Account................... 340 0 0
Operating losses for which no
benefit has been recognized....... 0 0 739
Permanent differences related to
sales of subsidiaries............. 0 194 0
Net effects of purchase
accounting adjustments............ 0 0 (888)
Other items, net................... 43 145 196
------- ------- -------
Income tax expense on
income ........................... $ 3,058 $ 3,584 $ 3,463
======= ======= =======
</TABLE>
Under previous life insurance company tax laws, a portion of the
Company's gain from operations which was not subject to current income taxation
was accumulated for tax purposes in memoranda accounts designated as the
Policyholders' Surplus Accounts. The aggregate accumulation in these accounts
at December 31, 1994 was approximately $8.6 million. The unrecognized deferred
tax liability related to this temporary difference is $3.0 million. During
1994, the Company recognized a tax liability of $0.3 million on Prairie States'
Policyholders' Surplus Account due to distributions in excess of its
Shareholders' Surplus Account balance. With respect to the other
Policyholders' Surplus Accounts, should the accumulation in the Policyholders'
Surplus Accounts exceed certain stated maximums, or if certain other events
occur, all or a portion of the Policyholders' Surplus Accounts may be subject
to federal income taxes at rates then in effect. Deferred taxes have not been
established for such amounts since the Company does not anticipate paying taxes
on the Policyholders' Surplus Accounts.
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
For federal income tax return purposes, the Company has total
estimated unused tax loss carryforwards at December 31, 1994 as follows:
<TABLE>
<CAPTION>
Generated Amount Expiration
--------- ------- -----------------
<S> <C> <C>
1986....... $ 205 2001
1987....... 2,748 2002
1988....... 6,027 2003
1989....... 7,791 2004
1990....... 3,751 2005
1991....... 3,816 2006
1992....... 2,419 2007
1993....... 276 2008
-------
$27,033
=======
</TABLE>
For federal income tax purposes, the Company has total estimated
investment tax credit carryforwards of $0.2 million which expire in years 1997
through 1999. The Company has a total estimated alternative minimum tax (AMT)
carryforwards of $1.8 million which can be utilized in future tax years to
reduce current taxes payable. Utilization of this AMT credit is limited to the
excess, if any, of the Company's regular tax liability over its AMT liability.
However, this credit can be carried forward indefinitely into future tax years.
Included in the tax loss and credit carryforwards are certain amounts that may
only be utilized by the company that generated the loss.
The Company recognized tax benefits of $2.7 million in 1992 associated
with certain tax loss carryforwards related to previous acquisitions. For
1992, under the then enacted GAAP pronouncements, these benefits were recorded
as an adjustment to the purchase price allocation and were reflected as
decreases in Deferred Income Taxes, Costs In Excess of Net Assets Acquired, and
Deferred Policy Acquisition Costs in the consolidated balance sheets. For 1994
and 1993, under SFAS 109, deferred tax assets have been established for the
benefits arising from net loss and credit carryforwards of the Company and its
subsidiaries. Future utilization of the net loss and credit carryforwards of
the life insurance companies will not affect the Company's effective tax rate
in those years because the full tax benefit for these items has been reflected
in the financial statements. A portion of the benefit realized from the future
utilization of the net losses of the non-life companies will affect the
Company's effective tax rates in those years because a valuation allowance has
been established against some of these deferred tax assets.
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
Cash paid for federal income taxes was $1.0 million, $0.3 million, and
$0.4 million for 1994, 1993 and 1992, respectively.
6. REDEEMABLE PREFERRED STOCK
The Company has authorized 5 million shares of preferred stock of
which approximately 58,000 shares were issued on July 7, 1987. Each share of
Series A Redeemable Preferred Stock is entitled to receive cumulative annual
dividends of $6 per share. Each share of the Series A Redeemable Preferred
Stock was convertible into 3.75 shares of the Company's common stock until July
7, 1994, and is convertible into 2.75 shares until July 7, 1997, subject to
adjustment in certain events. The stock has a liquidation preference of $100
per share plus accrued dividends and is subject to mandatory redemption
provisions which provide that no more than 80% of the original issue will be
outstanding at the end of the sixth year after the issuance, with further
reductions of 20% of the original issue being required in each of the following
four years. During 1993, the Company completed a tender offer wherein 4,534
shares of the redeemable preferred stock were purchased for $87 per share and
subsequently retired. During 1994, the Company redeemed 8,524 shares of the
preferred stock at $100 per share, in accordance with the mandatory redemption
provision, and subsequently retired the stock. In order to satisfy the 1995
mandatory redemption provision, the Company must redeem 9,832 additional shares
by July 7, 1995.
The remaining 4.97 million unissued shares of preferred stock may be
divided into series with rights and preferences established at the discretion
of the Board of Directors.
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividend payments to the Company from its insurance subsidiaries are
restricted by state insurance law as to the amount that may be paid without
prior notice or approval by insurance regulatory authorities. The maximum
dividend distribution which can be made to the Company by Loyal during 1995
without prior notice or approval is $3.4 million. Upon prior notice to state
regulatory authorities, the maximum dividend distribution which can be made by
Prairie States to Prairie National during 1995 under current insurance law is
$5.6 million. This distribution would then be available to Prairie National to
remit interest and principal payments due under its surplus debenture to the
Company, subject to prior approval of the state regulatory authorities. The
unpaid balance of the surplus debenture is $24 million at December 31, 1994.
Dividend payments of $4.3 million and $2.1 million were made to the
Company by its insurance subsidiaries during the years ended December 31, 1993
and 1992, respectively. Surplus debenture interest and principal payments were
$8.4 million, $6.8 million and $1.2 million for the years ended December 31,
1994, 1993 and 1992, respectively.
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
In connection with the 1989 acquisition of Rushmore, the policyholders
of Rushmore are entitled to 90% of the statutory accounting earnings arising
from the existing participating business during the ten years after the
acquisition. In addition, the statutory surplus which was in existence at the
date of acquisition has been distributed to the policyholders.
Approximately 14% of the Company's insurance in force is related to
participating insurance policies. A portion of the Company's earnings is
allocated to these policies based on excess interest earnings, mortality
savings and premium loading experience. Premium income and dividends allocated
to participating policies during the past three years were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Premium income $11,761 $12,924 $15,131
Dividends allocated 2,129 2,540 3,894
</TABLE>
8. STOCK OPTION AND OTHER INCENTIVE PLANS
STOCK OPTION PLAN
Under the terms of the Company's Amended and Restated Executive Stock
Option Plan (Plan), options to purchase up to the greater of 800,000 shares or
10.3% of the Company's outstanding common stock may be granted to officers and
key employees. Options are granted at not less than market value on the date of
grant and are exercisable during the term fixed by the Company, but not earlier
than six months, nor later than ten years after the date of the grant.
Transactions for 1994, 1993, and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(Amounts in thousands
except dollar amounts)
<S> <C> <C> <C>
Options outstanding, January 1......... 455 351 266
Granted................................ 126 190 139
Exercised.............................. 79 37 8
Cancelled.............................. 5 49 46
------ ------ ------
Options outstanding, December 31....... 497 455 351
====== ====== ======
Option price range at December 31...... $2.125 $2.125 $2.125
to to to
$8.50 $6.875 $5.25
Options exercisable at December 31..... 298 236 129
Options available for grant at
December 31.......................... 303 345 449
</TABLE>
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
The Plan allows the Company to grant up to 800,000 Rights to officers
and key employees. Rights entitle the grantee to receive the appreciation in
value of the shares (the difference between market price of a common share at
the time of exercise of the Rights and the base price) in cash. The Rights are
exercisable during the term fixed by the Company, but in no case sooner than
six months or later than ten years after the date of grant.
No Rights were exercised or cancelled during 1994. There are
currently 349,044 rights granted at exercise prices ranging from $2.125 to
$5.50 per share. Compensation expense recorded in 1994, 1993 and 1992 with
respect to these Rights was approximately $1.3 million, $0.7 million and $1.0
million, respectively.
DEFERRED AND INCENTIVE COMPENSATION PLANS
The Company has various incentive and deferred compensation plans
administered by the Human Resources Committee of the Board of Directors. In
1994, 1993 and 1992, the Company recognized associated expenses of
approximately $680,000, $698,000, and $532,000, respectively.
9. RELATED PARTY MATTERS
The Company paid or accrued approximately $152,000, $209,000, and
$214,000, to Desjardins Laurentian and its affiliates for various services in
1994, 1993, and 1992, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit sharing savings plan for
employees who meet certain eligibility requirements. This plan provides for a
Company matching contribution of 25-50% of eligible employee contributions up
to 6% of salary. Supplemental Company contributions are provided based on
consolidated earnings. The Company contributed approximately $152,000,
$148,000 and $98,000 to the 401(k) profit sharing savings plan during 1994,
1993 and 1992, respectively, for employee matching. Effective January 1, 1993,
the Company instituted a profit sharing element which provides for
contributions by the Company ranging from 2-6% of the annual salary of eligible
employees. Additionally, $437,000 and $425,000 were accrued in 1994 and 1993
for the plan's profit sharing element.
In January 1993, the Company filed a standard termination notice with
the Pension Benefit Guaranty Corporation (PBGC) for the purpose of terminating
the Company's former defined benefit pension plan. The Company ceased to
accrue benefits for service cost as of December 31, 1992, and all participants
in the plan became fully vested at that date. On March 22, 1993 a favorable
determination was issued by the Internal Revenue Service on the plan
termination. The Company then distributed plan assets to vested participants
in accordance with PBGC established formulas. The Company made funding
contributions of $1.1 million during 1993 to satisfy all
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
plan obligations. Distributions were in the form of either a rollover to the
Company 401(k) profit sharing savings plan, a purchase of a non- participating
annuity contract, or a lump sum cash payment.
11. REINSURANCE
The Company is contingently liable with respect to reinsurance ceded
in that the liability for such reinsurance would become that of the Company
upon the failure of any reinsurer to meet its obligations under a particular
reinsurance agreement. The maximum liability which the Company retains on any
one life is $125,000 under ordinary and group policies.
The Company had reinsured approximately $0.8 billion of life insurance
in force at December 31, 1994 and 1993. Total premium income ceded during the
years ended December 31, 1994, 1993, and 1992 was $5.8 million, $6.8 million,
and $6.4 million, respectively. Reinsurance recoveries for the years ended
December 31, 1994, 1993 and 1992 were $7.6 million, $6.8 million and $5.7
million, respectively.
Included in reinsurance receivables are $1.1 million and $1.7 million
representing amounts recoverable for claims ceded to reinsurers as of December
31, 1994 and 1993, respectively. Included in other liabilities are $0.9 million
and $0.4 million representing amounts payable for premiums ceded to reinsurers
as of December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, reinsurance receivables amounted to
$92.2 million and $39.0 million, respectively. Of the 1994 amount, $50.0
million is applicable to reinsurance activities at Assured (which was acquired
by Prairie States during 1994) and is associated with two reinsurers.
Excluding the amount applicable to Assured, reinsurance receivables with
carrying values of $23.8 million and $25.1 million were associated with two
additional reinsurers at December 31, 1994 and 1993, respectively.
12. COMMITMENTS AND CONTINGENCIES
LEASES
Other liabilities include a capitalized lease obligation associated
with the financing and leasing of Prairie States' home office. In addition,
the Company leases office space, data processing equipment and certain other
equipment under operating leases.
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
Aggregate maturities of the capitalized lease obligation and future
minimum aggregate rental payments required under non-cancelable operating
leases as of December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Lease Lease
Year ending December 31, Obligation Obligations
- ------------------------ ----------- -----------
<S> <C> <C>
1995.............................. $ 314 $ 201
1996.............................. 201 111
1997.............................. 0 69
------ ------
515 $ 381
Less amount representing interest. 39 ======
------
$ 476
======
</TABLE>
Rental expense for operating leases was approximately $0.6 million in
1994, $0.7 million in 1993, and $1.7 million in 1992.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company had been a party to financial instruments with
off-balance-sheet risk in the normal course of business to reduce its own
exposure to fluctuations in interest rates. At December 31, 1993, the Company
was a party to a five year Revolving Underwriting Facility (RUF) for maximum
unsecured borrowings of $54.8 million maturing in April of 1994. Pursuant to
the RUF, the Company paid interest at a variable rate, with a maximum rate
equal to 0.30% above the London Interbank Offered Rate (LIBOR). On March 6,
1991, the Company entered into an Interest Rate Swap Agreement (Swap
Agreement) to reduce the impact of changes in interest rates on its floating
long-term debt. The Swap Agreement was with a commercial bank for a notional
amount of $55 million. This agreement effectively changed the Company's
interest rate exposure on the RUF from a floating LIBOR rate to a fixed LIBOR
rate of 7.94%. The Company had been exposed to interest rate risk in the event
of nonperformance by the commercial bank. The Swap Agreement matured at the
time of the RUF maturity. The Company has not entered into a Swap Agreement or
any other agreement which would effectively fix the interest rate on the
Company's refinanced debt.
INVESTMENT PORTFOLIO CREDIT RISK
BONDS:
The Company's bond investment portfolio is predominantly comprised of
investment grade securities. At December 31, 1994, approximately $3.4 million
in debt securities, at amortized cost (0.7% of debt securities) are considered
"below investment grade". Securities are classified as "below investment
grade" by utilizing rating criteria employed by independent bond rating
agencies.
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
The Company has approximately 88% of its $508 million fixed maturity
portfolio (amortized cost basis) invested in assets of either U.S. government
agency pass-through mortgages (GNMA, FNMA, or FHLMC) or "private-label"
mortgage-backed securities as of December 31, 1994.
MORTGAGE LOANS:
Mortgage loans are primarily related to underlying real property
investments in office and apartment buildings and retail/commercial and
industrial facilities.
At December 31, 1994, delinquent mortgage loans (i.e., loans where
payments on principal and/or interest are over 60 days past due) amounted to
$0.4 million, or 1.9% of the loan portfolio. The Company had loans outstanding
in the states of Colorado and Florida, with combined principal balances in the
aggregate approximating $9.8 million.
LITIGATION
The Company is involved in certain litigation arising in the ordinary
course of business. Management does not anticipate any judgments against the
Company in excess of liabilities already established which would have a
material impact, individually or in the aggregate, on the financial position or
results of operations of the Company.
13. STATUTORY FINANCIAL STATEMENTS
Insurance subsidiaries of the Company are required to file statutory
financial statements with state insurance regulatory authorities. Accounting
principles used to prepare these financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance companies for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net income........................ $ 11,702 $ 7,625 $ 6,298
Capital and surplus............... 60,012 59,167 55,240
</TABLE>
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
14. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1994
----
REVENUES:
<S> <C> <C> <C> <C>
Premiums................... $19,276 $21,377 $22,802 $22,296
Net investment income...... 10,996 10,963 11,439 11,478
Realized investment
gains (losses)........... 1,622 758 87 (144)
Other income............... 866 790 1,447 1,632
------- ------- ------- -------
32,760 33,888 35,775 35,262
------- ------- ------- -------
BENEFITS AND EXPENSES:
Benefits and settlement
expenses................ 18,348 19,751 21,222 19,692
Amortization of deferred..
policy acquisition costs 3,468 3,217 4,144 3,739
Insurance and other.......
expenses................ 7,806 7,749 7,255 8,728
------- ------- ------- -------
29,622 30,717 32,621 32,159
------- ------- ------- -------
Income before income taxes. 3,138 3,171 3,154 3,103
INCOME TAX EXPENSE (BENEFIT):
Current................... 100 100 300 645
Deferred.................. 810 693 457 (47)
------- ------- ------- -------
910 793 757 598
------- ------- ------- -------
NET INCOME................ $ 2,228 $ 2,378 $ 2,397 $ 2,505
======= ======= ======= =======
EARNINGS
PER SHARE............... $ 0.29 $ 0.30 $ 0.31 $ 0.32
======= ======= ======= =======
</TABLE>
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(All Dollar Amounts In Tables Are In Thousands,
Except Per Share Amounts)
14. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED).
(CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1993
----
REVENUES:
<S> <C> <C> <C> <C>
Premiums.................. $19,664 $20,650 $21,078 $20,051
Net investment income..... 11,353 12,030 12,468 10,969
Realized investment gains. 236 1,028 851 658
Other income.............. 906 952 1,120 240
------- ------- ------- -------
32,159 34,660 35,517 31,918
------- ------- ------- -------
BENEFITS AND EXPENSES:
Benefits and settlement
expenses................ 19,442 19,753 20,759 17,161
Amortization of deferred
policy acquisition costs 3,164 3,164 2,857 4,041
Insurance and other
expenses................ 7,156 8,778 8,849 7,752
------- ------- ------- -------
29,762 31,695 32,465 28,954
------- ------- ------- -------
Income before income taxes
and cumulative effect of
accounting change........ 2,397 2,965 3,052 2,964
INCOME TAX EXPENSE (BENEFIT):
Current................... 50 160 190 (150)
Deferred.................. 645 756 765 1,168
------- ------- ------- -------
695 916 955 1,018
------- ------- ------- -------
Income before cumulative
effect of accounting change 1,702 2,049 2,097 1,946
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE:
Adoption of SFAS 109..... 400 0 0 0
------- ------- -------- -------
NET INCOME $ 2,102 $ 2,049 $ 2,097 $ 1,946
======= ======= ======= =======
EARNINGS PER SHARE:
Income before cumulative
effect of accounting
change................... $ 0.22 $ 0.26 $ 0.27 $ 0.25
Cumulative effect of
accounting change:
Adoption of SFAS 109..... 0.05 0.00 0.00 0.00
------- ------- ------- -------
NET INCOME................ $ 0.27 $ 0.26 $ 0.27 $ 0.25
======= ======= ======= =======
</TABLE>
<PAGE> 70
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities held to maturity, at
amortized cost (market, 1995 - $259,136;
1994 - $243,191) . . . . . . . . . . . . . . . $ 277,624 $ 273,418
Fixed maturities available for sale, at
market (amortized cost, 1995 - $227,092;
1994 - $234,537) . . . . . . . . . . . . . . . 220,138 218,645
Equity securities, at market (cost,
1995 - $11,226; 1994 - $11,313) . . . . . . . . 11,124 10,638
Mortgage loans on real estate . . . . . . . . . . 20,826 21,420
Investment real estate . . . . . . . . . . . . . 3,997 4,489
Policy loans . . . . . . . . . . . . . . . . . . 50,290 50,600
Short-term investments . . . . . . . . . . . . . 12,330 1,616
--------- ---------
TOTAL INVESTMENTS . . . . . . . . . . . . . 596,329 580,826
Cash . . . . . . . . . . . . . . . . . . . . . . . 13,528 20,250
Accounts, notes and premiums receivable . . . . . . 13,788 5,379
Reinsurance receivables . . . . . . . . . . . . . . 70,982 92,170
Accrued investment income . . . . . . . . . . . . . 6,016 6,190
Deferred policy acquisition costs . . . . . . . . . 74,830 74,085
Costs in excess of net assets of business
acquired . . . . . . . . . . . . . . . . . . . . 7,287 7,362
Property and equipment, net . . . . . . . . . . . . 11,350 11,738
Other assets . . . . . . . . . . . . . . . . . . . 3,558 3,535
Assets held in separate accounts . . . . . . . . . 223,969 226,351
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . $1,021,637 $1,027,886
========== ==========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 71
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future policy benefits . . . . . . . . . . . . . . . . . . . . $ 437,185 $ 436,318
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . 1,643 1,710
Other policy claims and benefits payable . . . . . . . . . . . 11,911 12,033
---------- ----------
Total policy liabilities and accruals . . . . . . . . . . . . . . 450,739 450,061
Other policyholders' funds . . . . . . . . . . . . . . . . . . . . . . . . 164,755 179,143
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 45,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,449 17,289
Current income taxes . . . . . . . . . . . . . . . . . . . . . . 241 241
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,826 7,711
Liabilities related to separate accounts . . . . . . . . . . . . 223,969 226,351
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 910,979 925,796
---------- ----------
Commitments and contingent liabilities
Redeemable preferred stock, Series A Convertible,
$.01 par value, at redemption value
Shares authorized: 5 million
Shares issued: 57,767
Outstanding: 32,939 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,294 3,294
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $.05 par value
Shares authorized: 20 million
Shares issued: 8,111,496 . . . . . . . . . . . . . . . . . . . . . . . . 406 406
Capital in excess of par value . . . . . . . . . . . . . . . . . 59,127 59,127
Net unrealized investment (losses),
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,657) (10,934)
Treasury stock, at cost (shares
outstanding: 524,098) . . . . . . . . . . . . . . . . . . . . . . . . . . (2,656) (2,656)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,144 52,853
---------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 107,364 98,796
---------- ----------
TOTAL LIABILITIES, PREFERRED STOCK
AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . $1,021,637 $1,027,886
========== ==========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 72
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
-------- --------
Revenues:
<S> <C> <C>
Premiums . . . . . . . . . . . . . . . . . . . . . . . $ 23,529 $ 19,276
Net investment income . . . . . . . . . . . . . . . . . 11,583 10,996
Realized investment gains . . . . . . . . . . . . . . . 510 1,622
Other income . . . . . . . . . . . . . . . . . . . . . 1,405 866
-------- --------
Total revenues . . . . . . . . . . . . . . . . . . . 37,027 32,760
-------- --------
Benefits and expenses:
Benefits and settlement expenses . . . . . . . . . . . 22,388 18,348
Amortization of deferred
policy acquisition costs . . . . . . . . . . . . . . 3,801 3,468
Insurance and other expenses . . . . . . . . . . . . . 7,367 7,806
-------- --------
Total benefits and expenses . . . . . . . . . . . . . 33,556 29,622
-------- --------
Income before income taxes . . . . . . . . . . . . . . . 3,471 3,138
Income tax expense:
Current . . . . . . . . . . . . . . . . . . . . . . . . 300 100
Deferred . . . . . . . . . . . . . . . . . . . . . . . 880 810
-------- --------
1,180 910
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 2,291 $ 2,228
======== ========
Net income available to common
shareholders:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 2,291 $ 2,228
Less: accrued dividends on
preferred stock . . . . . . . . . . . . . . . . . . . 51 63
-------- --------
$ 2,240 $ 2,165
======== ========
Earnings per share . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.29
======== ========
Weighted average shares
outstanding (in thousands) . . . . . . . . . . . . . . 7,587 7,549
======== ========
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 73
LAURENTIAN CAPITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The Interim Consolidated Financial Statements should be read in conjunction
with the following notes and with the Notes to the Consolidated Financial
Statements included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994. In the opinion of management, the financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position as of March 31,
1995 and the results of operations and statements of cash flows for the three
month periods ended March 31, 1995 and 1994.
The consolidated financial statements include, after intercompany eliminations,
Laurentian Capital Corporation (individually or collectively with its
subsidiaries, the "Company"), and its principal wholly-owned subsidiaries Loyal
American Life Insurance Company ("Loyal"), Prairie States Life Insurance
Company ("Prairie"), and Rushmore National Life Insurance Company ("Rushmore"),
as well as its other subsidiaries as disclosed on Exhibit 22 of the Company's
1994 Form 10-K filing.
The results of operations for the three month period ended March 31, 1995 are
not necessarily indicative of the results to be expected for the full year.
Certain prior year information has been reclassified to conform with the
current year's presentation.
NOTE 2 - INVESTMENTS:
Of the fixed maturity investments, $3.3 million at amortized cost, less
permanent impairments, were rated as below investment grade as of March 31,
1995. These investments had an associated market value of $3.4 million. As of
December 31, 1994, $3.4 million at amortized cost, less permanent impairments,
with an associated market value of $3.1 million were rated as below investment
grade. Most of these securities have been evaluated by the National
Association of Insurance Commissioners and found to be suitable for reporting
at book value for statutory reporting purposes. No material effect is expected
from these holdings on the Company's financial condition or the results of
operations. The Company's investment strategy is to hold fixed income
instruments to maturity and to recognize permanent impairments on those
investments where reduction in amounts to be received at maturity is likely.
.
<PAGE> 74
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operations:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,291 $ 2,228
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes . . . . . . . . . . . . 880 810
Increase in policy liabilities and accruals,
policyholders' funds and current income taxes 6,457 2,915
Decrease (increase) in accrued investment income
and accounts and notes receivable . . . . . . (61) 37
Decrease in other liabilities . . . . . . . . . . . (2,969) (1,433)
Amortization of deferred policy acquisition costs 3,801 3,468
Policy acquisition costs deferred . . . . . . . . . . . (4,886) (2,637)
Depreciation expense . . . . . . . . . . . . . . . . . 342 373
Amortization of goodwill . . . . . . . . . . . . . . . . . . . 75 66
Realized investment gains . . . . . . . . . . . . . . . (510) (1,622)
Other reconciling adjustments, net . . . . . . . . . . (923) (1,789)
-------- --------
Net cash provided by operating activities . . 4,497 2,416
-------- --------
Cash flows from investing activities:
Sale of fixed maturities available for sale . . 30,972 0
Sale of fixed maturities held to maturity . . . . . . . 0 0
Sale of other investments . . . . . . . . . . . . . . . . . . . 5,536 0
Maturity or repayment of investments . . . . . 6,079 36,517
Purchases of investments . . . . . . . . . . . . . . . . . . . (43,279) (49,146)
Purchases of property and equipment . . . . . . (127) (430)
Net (increase) decrease in short-term investments (10,714) 9,667
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 314 0
-------- --------
Net cash (used in) investing activities . . . (11,219) (3,392)
--------- --------
Cash flow from financing activities:
Proceeds from borrowing . . . . . . . . . . . . . . . . 0 26
--------- --------
Net cash provided by financing activities . . 0 26
--------- --------
Net decrease in cash . . . . . . . . . . . . . . . . . . (6,722) (950)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 20,250 8,722
--------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . $ 13,528 $ 7,772
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest expense . . . . . . . . $ 862 $ 1,165
Cash paid for federal income taxes . . . . . . 300 30
</TABLE>
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 75
ANNEX A
Annex A will contain American Annuity Group, Inc.'s Form 10-K for the
fiscal year ended December 31, 1994, as amended, which is incorporated herein
by reference.
<PAGE> 76
ANNEX B
Annex B will contain American Annuity Group, Inc.'s Form 10-Q for the
quarter ended March 31, 1995, which is incorporated herein by reference.
<PAGE> 77
No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or solicitation of an offer to buy Securities to any person in
any jurisdiction or in any circumstances in which such offer would be unlawful.
Neither delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus or that the
information contained herein is correct as of any time subsequent to its date.
-------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Available Information . . . . . . . . . . . . . .
Documents Incorporated by Reference . . . . . . .
Prospectus Summary . . . . . . . . . . . . . . .
Investment Considerations . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . .
Price Range of Common Stock . . . . . . . . . . .
Dividend Policy . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . .
Acquisition of Laurentian . . . . . . . . . . . .
Selected Historical Financial
Information of AAG . . . . . . . . . . . . . .
Unaudited Pro Forma Financial
Information . . . . . . . . . . . . . . . . .
The Rights Offering . . . . . . . . . . . . . . .
Federal Income Tax Considerations . . . . . . . .
Description of Capital Stock . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . F-1
</TABLE>
AMERICAN ANNUITY
GROUP, INC.
3,950,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS TO
SUBSCRIBE FOR THOSE SHARES
__________
PROSPECTUS
July 19, 1995
__________
SECURITIES TRANSFER COMPANY
EXCHANGE AGENT
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . . . . . . . . . . . . . . $13,451
NYSE Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Fees and expenses of the Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Legal Fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounting Fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Blue Sky Fees and expenses (including fees and expenses of counsel) . . . . . . . . . . . . 1,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,451
========
- ---------------------
<FN>
* All fees are estimated except for the Securities and Exchange Commission
registration fee.
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify and advance expenses to its currently acting and its
former directors, officers, employees or agents to the fullest extent permitted
by the Delaware General Corporation Law (the "DGCL"), whenever they are
defendants or threatened to be made defendants in any legal or administrative
proceeding by reason of their relationship with the Company. Section 145 of
the DGCL provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceedings whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if such
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe was
unlawful. A similar standard of care is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with defense or settlement of such an
action and then, where the person is adjudged to be liable to the Company, only
if and to the extent that the Court of Chancery of the State of Delaware or the
court in which such action was brought determines that such person is fairly
and reasonably entitled to such indemnity and then only for such expenses as
the court shall deem proper.
The Company is empowered by Section 102(b)(7) of the DGCL to include a
provision in its Certificate of Incorporation that limits a director's
liability to the Company or its stockholders for monetary damages for breaches
of his or her fiduciary duty as a director. The Certificate of Incorporation
states that directors shall not be liable for monetary damages for breaches of
their fiduciary duty to the fullest extent permitted by the DGCL.
The Company maintains insurance policies under which directors and officers
are insured, within the limits and subject to the limitations of the policies,
against expenses in connection with the defense of actions, suits or
proceedings and
II-1
<PAGE> 79
certain liabilities that might be imposed as a result of such actions, suits or
proceedings, to which they are parties by reason of being or having been
directors or officers of the Company.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------
<S> <C>
4.1* Indenture dated as of February 2, 1993, between the Registrant and Star Bank, National Association, as Trustee,
relating to the Registrant's 11-1/8% Senior Subordinated Notes due 2003, incorporated herein by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated February 5, 1993.
4.2* Indenture dated as of August 18, 1993, between the Registrant and NationsBank, National Association, as Trustee,
relating to the Registrant's 9-1/2% Senior Notes due 2001, incorporated herein by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-2 dated August 11, 1993.
5* Opinion of Mark F. Muething, Esq., Senior Vice President, General Counsel and Secretary of the Company regarding
the legality of the Underlying Shares.
10.1* Agreement of Allocation of Payment of Federal Income Taxes, dated December 31, 1992, between American Financial
Corporation and the Registrant incorporated herein by reference to Exhibit 10.12 to the Registrant's
Registration on Form S-2 dated January 7, 1993.
10.2* Assignment of Tax Allocation Payments dated December 31, 1992, between American Financial Corporation and the
Registrant incorporated herein by reference to Exhibit 10.15 to the Registrant's Registration Statement on
Form S-2 dated January 7, 1993.
10.3* Agreement for the Allocation of Federal Income Taxes dated May 13, 1974, between American Financial Corporation
and Great American Life Insurance Company, as supplemented on January 1, 1987 incorporated herein by reference to
Exhibit 10.16 to the Registrant's Registration Statement on Form S-2 dated January 7, 1993.
10.4* Investment Services Agreement, dated December 31, 1992, between Great American Life Insurance Company and
American Money Management Corporation incorporated herein by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-2 dated January 7, 1993.
10.5* Common Stock Registration Agreement, dated December 31, 1992, between the Registrant and American Financial
Corporation and its wholly owned subsidiary Great American Insurance Company incorporated herein by reference to
Exhibit 10.22 to the Registrant's Registration Statement on Form S-2 dated January 7, 1993.
10.6* Common Stock Registration Agreement, dated December 31, 1992, between the Registrant and Chiquita Brands
International, Inc. and Great American Life Insurance Company incorporated herein by reference to Exhibit 10.24
to the Registrant's Registration Statement on Form S-2 dated January 7, 1993.
10.7* American Annuity Group's 1993 Stock Appreciation Rights Plan, incorporated herein by reference to Exhibit 10.8
to the Registrant's Form 10-K for 1993.
10.8* Credit Agreement dated as of January 31, 1994 amended and restated as of December 7, 1994 incorporated herein by
reference to Exhibit 99.1 to the Registrant's Form 10-K for 1994.
13* Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
23.1* Consent of Mark F. Muething (included as part of Exhibit 5).
23.2* Consent of Ernst & Young, L.L.P.
23.3 Consent of Coopers & Lybrand L.L.P.
24* Powers of Attorney pursuant to which amendments to the Registration Statement may be filed (included on
signature page of the Registration Statement).
99.1* Form of Subscription Rights Certificate
99.2* Form of Instructions as to Use of Subscription Rights Certificate
99.3* Form of Letter to Stockholders
99.4* Form of Letter to Stockholders with Addresses Outside the United States and Canada or APO or FPO Addresses
</TABLE>
II-2
<PAGE> 80
<TABLE>
<S> <C>
99.5* Form of Letter to Nominee Holders
99.6* Form of Certification and Request for Additional Rights
99.7* Form of Nominee Holder Oversubscription Certification
99.8* Form of Letter from Nominee Holders to Beneficial Owners
99.9* Form of Notice of Guaranteed Delivery
99.10* Form of DTC Participant Oversubscription Exercise Form
<FN>
______
* Previously filed or incorporated by reference as indicated.
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer, or controlling person of the company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cincinnati, State of Ohio, on July 18, 1995.
AMERICAN ANNUITY GROUP, INC.
By:_____________________________________
Robert A. Adams
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C> <C>
*
________________________________________
Carl H. Lindner Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) July __, 1995
*
________________________________________
S. Craig Lindner Director and President July __, 1995
*
________________________________________
Robert A. Adams Director, Executive Vice
President and Chief Operating
Officer July __, 1995
*
________________________________________
A. Leon Fergenson Director July __, 1995
*
________________________________________
Ronald G. Joseph Director July __, 1995
*
________________________________________
John T. Lawrence III Director July __, 1995
*
________________________________________
William R. Martin Director July __, 1995
</TABLE>
II-4
<PAGE> 82
<TABLE>
<S> <C> <C>
*
_____________________________________________
Alfred W. Martinelli Director July __, 1995
*
_____________________________________________
Ronald F. Walker Director July __, 1995
_____________________________________________
William J. Maney Senior Vice President
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer) July 18, 1995
<FN>
*By: ________________________________________ Attorney-in-Fact July 18, 1995
Mark F. Muething
</TABLE>
256870.5
II-5
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in the registration statement of American Annuity
Group, Inc. on Form S-2 of our report dated February 17, 1995, on our audits of
the consolidated financial statements of Laurentian Capital Corporation as of
December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993,
and 1992.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
July 6, 1995
