<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1993 0-8403
------------------------
LAURENTIAN CAPITAL CORPORATION
-------------
DELAWARE 59-1611314
(State of Incorporation) (IRS Employer ID #)
640 Lee Road
Wayne, Pennsylvania 19087
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (610) 889-7400
------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- --------------------------------------- ---------------------------------------
Common Stock, $.05 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Aggregate market value of voting shares held by nonaffiliates of the
Registrant as of March 18, 1994: $10,784,265
Number of shares outstanding of the Registrant's Common Stock as of March 18,
1994:
Common Stock, $.05 Par Value -- 7,548,757 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1994 Annual Meeting of
Stockholders are incorporated by reference into Part III.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Laurentian Capital Corporation (the "Company") is a Delaware holding company
engaged through its subsidiaries in providing life and health insurance. As the
context requires, references herein to the Company refer to the Company
individually or to the Company together with its insurance subsidiaries.
The Company's principal insurance subsidiaries are Loyal American Life
Insurance Company, Mobile, Alabama ("Loyal") and Prairie States Life Insurance
Company, Rapid City, South Dakota ("Prairie").
Approximately 72% of the outstanding common stock of the Company is owned by
The Imperial Life Assurance Company of Canada ("Imperial") and an additional
9.8% is owned by Imperial's direct parent, Laurentian Financial, Inc.
("Financial"), which in turn is a wholly-owned subsidiary of The Laurentian
Group Corporation ("Group"). Prior to January 1, 1994, Group was an indirect
subsidiary of The Laurentian Mutual Management Corporation. On that date, La
Confederation des caisses popularies et d'economie Desjardins du Quebec, a
cooperative association constituted under the laws of the province of Quebec,
Canada (the "Confederation"), through its subsidiaries, Desjardins Laurentian
Financial, Inc. ("DLFC") and La Societe financiere des caisses Desjardins, Inc.
("SFCD"), acquired substantially all of the outstanding voting shares of Group,
thereby becoming beneficial owner of the approximately 81.8% of the outstanding
common stock of the Company beneficially owned by Group.
INSURANCE OPERATIONS
The Company's life and health insurance products are directed primarily
towards the middle and lower income markets and are generally sold utilizing
third party sponsorship to facilitate solicitation.
Loyal is a life insurance company incorporated under the laws of Alabama. It
writes various forms of life insurance and accident and health insurance,
principally with the sponsorship of credit unions and banks, which endorse its
products to their members. It also writes life and health insurance through
independent brokers.
Prairie is a life insurance company incorporated under the laws of South
Dakota. It markets individual life insurance policies with the sponsorship of
state associations of funeral directors as well as individual funeral directors
in various locations.
MARKETING
The Company's marketing emphasizes third party sponsorship and focuses on
the middle income and lower income markets, the so-called gray collar and blue
collar markets. The Company continues to develop and market products and
services designed to serve the needs of the senior life market. Company
subsidiaries are licensed in 49 states, the District of Columbia, Puerto Rico
and the Virgin Islands. The subsidiaries utilize a variety of distribution
channels, including both independent and controlled agency sales forces, brokers
and independent Personal Producing General Agents where their specialized
product/market niche requires it. In addition, the companies use direct mail
solicitation to specific markets.
2
<PAGE>
ACQUISITIONS/DIVESTITURES
The Company's growth and expansion philosophy has placed an emphasis on
internal sales expansion with some reliance upon selective acquisition of
insurance operations. The Company believes that under appropriate circumstances,
it can acquire established life and health insurance companies or compatible
blocks of business that complement its existing operations. While the Company
was active in acquisitions prior to 1988, limited expansion activities have
occurred since 1988.
GEOGRAPHIC DISTRIBUTION OF PREMIUM INCOME
The Company received premium income from all states in 1993. Based on the
premium income of the various subsidiaries in 1993, the Company's premium
revenue was distributed approximately as follows:
<TABLE>
<CAPTION>
PERCENT OF
STATE TOTAL PREMIUM
- -------------------------------------------------- -------------
<S> <C>
Washington........................................ 10.09%
California........................................ 9.10
Minnesota......................................... 8.49
Alabama........................................... 6.90
Tennessee......................................... 6.31
Florida........................................... 5.39
Texas............................................. 4.24
Mississippi....................................... 3.82
Missouri.......................................... 3.34
South Dakota...................................... 2.92
North Carolina.................................... 2.49
Arkansas.......................................... 2.35
Georgia........................................... 2.28
Oklahoma.......................................... 2.16
All Other......................................... 30.12*
-------------
100.00%
-------------
-------------
<FN>
- ------------------------
* No other state produced as much as 2% of premium income.
</TABLE>
The Company operates primarily in the life and health insurance industry
and, therefore, does not present separate segment information with respect to
industry segments.
STATISTICAL INFORMATION CONCERNING OPERATIONS
The following table indicates terminations of individual life insurance in
force attributable to death, lapse, expiry, and surrender. Lapse ratios are also
indicated, which compare lapses plus surrenders to the average insurance in
force.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Life Insurance Terminations
(Individual only)
Death................................. $ 30,994 $ 28,047 $ 29,732 $ 26,679 $ 23,791
Lapse................................. $307,907 $426,220 $647,448 $671,909 $875,860
Expiry................................ $ 38,934 $ 20,427 $ 19,620 $ 22,628 $ 95,075
Surrender............................. $129,870 $103,815 $136,327 $143,676 $177,002
Lapse Ratio........................... 12.7% 15.1% 19.6% 16.6% 14.1%
</TABLE>
3
<PAGE>
INVESTMENTS
The laws under which each insurance subsidiary of the Company operates
prescribe the nature and quality of and set limits on the various types of
investments which may be made by insurance companies. These laws generally
permit investments in qualified state, municipal and federal government
obligations, corporate bonds, preferred and common stock, real estate, and real
estate mortgages where the value of the underlying real estate exceeds the
amount of the mortgage loan. The following table shows the Company's investments
as of December 31, 1993 valued in accordance with generally accepted accounting
principles:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
ASSET VALUE INVESTMENTS
---------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
Bonds --
United States Government and government agencies
and authorities............................................................ $ 135,816 23.2%
States, municipalities, political subdivisions and foreign governments...... 5,165 0.9
Public utilities............................................................ 19,549 3.3
All other corporate bonds................................................... 298,138 51.0
---------------- -----
Total fixed maturities.................................................... 458,668 78.4
---------------- -----
Equity securities:
Common stocks................................................................. 26,141 4.5
Preferred stocks.............................................................. 4,238 0.7
---------------- -----
Total equity securities................................................... 30,379 5.2
---------------- -----
Mortgage loans on real estate................................................... 29,438 5.0
Investment real estate.......................................................... 4,643 0.8
Policy loans.................................................................... 51,677 8.8
Short-term investments.......................................................... 10,479 1.8
---------------- -----
Total investments......................................................... $ 585,284 100.0%
---------------- -----
---------------- -----
</TABLE>
In accordance with generally accepted accounting principles, all investments
other than equity securities are valued at either original or amortized cost.
The equity securities are valued at market with any unrealized investment gains
or losses reflected in stockholders' equity, net of applicable deferred taxes.
Investments are periodically adjusted for other than temporary declines in
carrying value. See Note 2 to Consolidated Financial Statements for certain
information relating to the market value of the Company's investments.
Consistent with the long-term nature of life insurance contracts, the Company
expects to hold the fixed maturity investments to maturity, earlier prepayment
or redemption.
4
<PAGE>
The quality of the Company's fixed maturity investments as of December 31,
1993, according to the rating assigned by nationally recognized statistical
rating organizations, is as follows:
<TABLE>
<CAPTION>
% OF ESTIMATED
NAIC BOOK % OF FIXED INVESTED MARKET
INVESTMENT QUALITY (1) RATING (2) VALUE (3) MATURITIES ASSETS VALUE
- ---------------------------------------- ---------- --------- ---------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AAA..................................... 1 $ 229,361 50.0 39.2 $ 233,773
AA...................................... 1 83,130 18.1 14.2 84,007
A....................................... 1 114,794 25.0 19.6 117,262
BBB+.................................... 2 6,632 1.5 1.1 7,338
BBB..................................... 2 10,954 2.4 1.9 11,619
BBB-.................................... 2 4,978 1.1 0.9 5,430
--------- ----- --- ---------
Total investment grade.............. 449,849 98.1 76.9 459,429
--------- ----- --- ---------
BB+..................................... 3 2,248 0.5 0.4 2,385
BB...................................... 3 164 0.0 0.0 174
BB-..................................... 3 2,178 0.5 0.4 2,204
B and below............................. 4-6 4,229 0.9 0.7 4,305
--------- ----- --- ---------
Total below investment grade........ 8,819 1.9 1.5 9,068
--------- ----- --- ---------
Total fixed maturities.............. $ 458,668 100.0 78.4 $ 468,497
--------- ----- --- ---------
--------- ----- --- ---------
<FN>
- ------------------------
(1) Bonds are classified according to the highest rating by a nationally
recognized statistical rating organization. Bonds not rated by any such
organization are classified according to the rating assigned to them by
the Securities Valuation Office of the National Association of Insurance
Commissioners ("NAIC") as follows: for the purposes of the table, NAIC
Class 1 is included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-";
and Classes 4-6, "B and below".
(2) The NAIC assigns security quality ratings and uniform book values called
"NAIC Designations" which are used by insurers when preparing their
statutory annual statements. The NAIC assigns ratings to publicly traded
as well as privately placed securities. The ratings assigned by the NAIC
range from Class 1 to Class 6, with a rating in Class 1 being of the
highest quality. The NAIC ratings above are as of December 31, 1993, the
latest date for which such ratings are available.
(3) Principally at amortized cost. See Notes 1 and 2 to the Company's
consolidated financial statements for the year ended December 31, 1993.
</TABLE>
The following table shows the investment results of the Company for the
years 1989 through 1993:
<TABLE>
<CAPTION>
CASH, ACCRUED NET INVESTMENT PERCENTAGE
INVESTMENT INCOME INCOME EXCLUDING EARNED ON
YEAR ENDED AND INVESTMENTS GAIN OR LOSS FROM AVERAGE OF CASH
DECEMBER 31, AT DECEMBER 31 SALE OF INVESTMENTS AND INVESTMENTS
--------------- ----------------- ------------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
1989 $ 509,691 $ 42,890 9.0%
1990 520,552 43,436 8.4
1991 555,572 45,307 8.4
1992 569,216 46,927 8.3
1993 599,861 46,820 8.0
</TABLE>
5
<PAGE>
REINSURANCE
In keeping with industry practice, the Company's insurance subsidiaries
reinsure portions of the life and health insurance and annuities underwritten by
them. Under most of the subsidiaries' reinsurance arrangements, new insurance
sales are reinsured automatically rather than on a basis that would require the
reinsurer's prior approval. Generally, each subsidiary enters into indemnity
reinsurance arrangements to assist in diversifying its risks and to limit its
maximum loss on large or unusually hazardous risks, including risks that exceed
the subsidiary's policy-retention limits, currently ranging from $50,000 to
$125,000 per life.
In recent years, the Company's amount of ceded reinsurance has declined.
Expressed as a percentage of direct premiums written, ceded reinsurance has
decreased from approximately 33% in 1987 to 7.7% in 1993. This has been due
primarily to the run-off (i.e., non-renewal) of policies subject to certain
older reinsurance treaties as well as the continued emphasis on premium growth
in the pre-need life insurance market, where face amounts on most policies are
within current Company retention limits.
Indemnity reinsurance does not fully discharge the ceding insurer's
liability to meet policy claims on the reinsured business. The ceding insurer
remains responsible for policy claims to the extent the reinsurer fails to pay
such claims, as a result, for example, of the insolvency of the reinsurer. No
reinsurer of business ceded by a Company subsidiary has failed to pay any
material policy claim due to the insolvency of the reinsurer.
RESERVES
The applicable insurance laws under which the Company's insurance
subsidiaries operate require that each subsidiary report policy reserves as
liabilities to meet future obligations on the outstanding policies. These
reserves are amounts which, with the additional premiums to be received and
interest thereon compounded annually at certain assumed rates, are calculated to
be sufficient to meet the various policy and contract obligations as they
mature. These laws specify that the reserves shall not be less than reserves
calculated using certain specified mortality tables and interest rates. The
policy liabilities carried in the Company's financial statements differ from the
policy reserves specified by the laws of the various states which are carried in
the insurance subsidiaries' statutory financial statements. These differences
arise from the use of mortality and morbidity tables and interest assumptions
that are believed to be more appropriate for financial reporting purposes than
those required for statutory accounting purposes, from the introduction of lapse
assumptions into the reserve calculations and from the use of the net level
premium reserve method. For a more complete discussion of policy liabilities,
see Note 1 to Consolidated Financial Statements.
FEDERAL INCOME TAX MATTERS
The Company's life insurance subsidiaries are taxed under the Internal
Revenue Code ("Code") as revised by the Tax Reform Act of 1984 ("TRA 84"), the
Tax Reform Act of 1986 ("TRA 86"), the Revenue Reconciliation Act of 1990 ("RRA
90"), and the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93"). Under TRA
84, many of the special features relating to the taxation of life insurance
companies under the prior law were eliminated, such that the Company's life
insurance subsidiaries are taxed in a manner similar to that of companies in
other industries. Under TRA 86, the statutory tax rate was reduced to 34% and
the alternative minimum tax was established. RRA 90 requires capitalization, for
tax purposes, of specified percentages of net premiums on certain insurance
contracts, as defined by Section 848 of the Code. The capitalized amount is then
amortized into expense over a maximum period of 120 months; however, the
insurance subsidiaries have generally qualified to amortize amounts capitalized
in 1993 and prior years over a 60 month period. OBRA 93 increased the top
marginal tax rate to 35% on taxable income over $10 million. This increase did
not affect the Company's 1993 income tax expense.
6
<PAGE>
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 as
of December 31, 1993 was approximately $9.6 million. The unrecognized deferred
tax liability related to this temporary difference is $3.3 million. 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.
COMPETITION
The insurance market is highly competitive and occupied by a large number of
companies, many of which have substantially greater capital and surplus, larger
and more diversified portfolios of life and health insurance products and larger
agency sales operations than the Company. The Company's subsidiaries are also
encountering increased competition from banks, securities brokerage firms and
other financial intermediaries marketing insurance products and other
investments such as savings accounts and securities. The Company's subsidiaries
compete primarily on the basis of the experience, number, accessibility and
claims response of their agent representatives, the suitability and variety of
their policy portfolios, and premium rates. The Company believes that its
subsidiaries generally have good relationships with their agents, and have an
adequate variety of policies approved for issuance which are generally
competitive based on premium rates and service in the markets served.
REGULATION
The Company's subsidiaries, like other insurers, are subject to
comprehensive regulation in the various states in which they are authorized to
conduct business. The laws of such states establish supervisory agencies with
broad administrative powers, among other things, to grant and revoke licenses
for transacting business, to regulate the form and content of policies, to set
reserve requirements, the type and amount of investments and to review premium
rates for fairness and adequacy. These supervisory agencies periodically examine
the business and accounts of the Company's subsidiaries and require such
subsidiaries to file detailed annual convention statements prepared in
accordance with statutory requirements.
Insurance companies also can be required, under the solvency or guaranty
laws of most states in which they do business, to pay assessments (up to
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. The
frequency and amount of such assessments have increased in recent years and are
generally expected to increase further in future years. Loyal and Prairie were
assessed, and paid, $338,000 in 1993 to various state guaranty funds. The amount
of any material future assessments under these laws cannot reasonably be
estimated.
Although there are no direct restrictions regarding the payment of dividends
by the Company, its life insurance subsidiaries may not, under applicable state
law, pay a cash dividend to the Company, except out of that part of their
available and accumulated surplus funds which is derived from net gains from
operations, calculated according to statutory accounting principles. In
addition, the payment of principal and interest under surplus debentures, which
are debt securities issued by insurance companies and payable solely out of the
issuer's unrestricted surplus, require the prior approval of insurance
regulatory authorities. The Company derives substantial portions of its
operating funds from management fees, dividends and surplus debenture payments
by its insurance subsidiaries.
7
<PAGE>
Generally, under the insurance statutes of most states, state insurance
authorities must approve in advance the direct or indirect acquisition of 10% or
more of the voting securities of any insurance company chartered in that state.
In addition, because the Company owns voting securities of certain life
insurance companies, any acquisition of a substantial block of its outstanding
voting securities is subject to certain regulatory requirements of the various
subsidiaries' domiciliary states.
The National Association of Insurance Commissioners ("NAIC") is an
association made up of the officials of each state responsible for the
administration of that state's insurance laws. The NAIC and state insurance
regulators have become involved in the process of reexamining certain existing
insurance laws and regulations and their application to insurance companies.
This reexamination has addressed a number of areas, including insurance company
investment and solvency issues, risk-based capital ("RBC") guidelines,
assumption reinsurance, interpretation of existing laws, the development of new
laws, and the circumstances under which dividends may be paid. The NAIC has
encouraged states to adopt model NAIC laws on specific topics such as holding
company regulations and the definition of extraordinary dividends. It is not
possible to predict the future impact of changing state regulation on the
operations of the Company.
In 1992, the NAIC adopted RBC rules that attempt to measure statutory
capital and surplus needs based upon the risks in an insurance company's mix of
products and investment portfolio. A risk-based capital analysis evaluates the
adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with: (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
According to the NAIC, the risk-based capital rules are not intended to be used
by state insurance regulators as an absolute minimum or ideal level of required
surplus. Rather, they are designed to serve as a tool to assist state insurance
regulators in identifying potentially impaired insurance companies on a timely
basis. The risk-based capital rules will prompt different levels of regulatory
action depending upon the result of RBC analysis for each company. The
risk-based capital rules have been enacted during the 1993 calendar year by many
states.
In states which have adopted the NAIC regulations, the new RBC requirements
provide for four different levels of regulatory attention depending on an
insurance company's RBC ratio (Adjusted Capital compared to Authorized Control
Level). The "Company Action Level" is triggered if a company's RBC ratio is less
than 200% but greater than or equal to 150%, or if a negative trend has occurred
(as defined by the regulations) and the company's RBC ratio is less than 250%.
At the Company Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions to improve its
capital position. The "Regulatory Action Level" is triggered if a company's RBC
ratio is less than 150% but greater than or equal to 100%. At the Regulatory
Action Level, the regulatory authority will perform a special examination of the
company and issue an order specifying corrective actions that must be followed.
The "Authorized Control Level" is triggered if a company's RBC ratio is less
than 100% but greater than or equal to 70%, and the regulatory authority may
take any action it deems necessary, including placing the company under
regulatory control. The "Mandatory Control Level" is triggered if a company's
RBC ratio is less than 70%, and the regulatory authority is mandated to place
the company under its control.
Based upon the enacted RBC rules, both Loyal and Prairie have strong RBC
ratios (in excess of 500%) as of December 31, 1993.
The Company is registered under the Securities Exchange Act of 1934 and is
subject to rules and regulations of the Securities and Exchange Commission. As a
company with securities listed on the American Stock Exchange ("AMEX"), the
Company is also subject to the rules and policies of the AMEX.
8
<PAGE>
EMPLOYEES
The Company had approximately 298 full-time employees and 2,052 full and
part-time agents as of December 31, 1993. The various subsidiaries have separate
benefit programs for their employees but in general they are covered by
contributory major medical insurance and group life insurance plans. In
addition, the Company maintains a 401(k) profit sharing savings plan for its
employees and the employees of the Company's subsidiaries. As of December 31,
1992, the Company terminated its defined benefit pension plan and, following
receipt of all required regulatory approvals, distributed all the pension plan's
assets during 1993. See Note 10 to Consolidated Financial Statements. The costs
for all these benefits, except profit sharing plans, amounted to approximately
$1.5 million in 1993.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Wayne,
Pennsylvania. It leases approximately 4,100 square feet of office space at 640
Lee Road, Suite 303, Wayne, Pennsylvania. The aggregate monthly rental is
approximately $8,600.
Loyal's Home Office building is located at 2800 Dauphin Street, Mobile,
Alabama. This building contains approximately 89,000 square feet, of which
approximately 62,000 square feet are utilized for Company purposes. The
remainder of the building is leased to outside tenants. The book value of the
property as of December 31, 1993 is approximately $3.7 million.
Prairie's Home Office building is located at 440 Mount Rushmore Road, Rapid
City, South Dakota. The building contains approximately 44,000 square feet, of
which approximately 34,000 square feet are utilized for Company purposes, while
the remainder of the building is leased to outside tenants. This six-story
building and the underlying real property are subject to mortgage indebtedness
(capitalized lease) of approximately $741,000 as of December 31, 1993. The book
value of the property as of December 31, 1993 is approximately $3.5 million.
Prairie leases marketing and administrative space in several other
locations. The aggregate monthly rental for these locations is approximately
$14,000.
In addition, Prairie is obligated on leases for space previously used for
administrative purposes. This space is currently being sub-leased. The net
monthly rental is approximately $4,000.
ITEM 3. LEGAL PROCEEDINGS.
The Company is routinely engaged in litigation incidental to its business.
In the judgment of management, no individual case or group of similar cases, net
of loss reserves established therefore and giving effect to reinsurance, is
likely to result in judgments for amounts material to the financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the year ended December 31, 1993.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the American Stock Exchange ("AMEX")
under the symbol "LQ".
The transfer agent for the Company's common stock is Chemical Bank, Security
Holder Relations, P.O. Box 24935, Church Street Station, New York, New York
10249.
The table below presents the high and low sales prices of the Company's
common stock on the AMEX during the time periods indicated.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------------------------------------------------------------- ------ ------
<S> <C> <C>
1993:
First quarter.............................................. $7 3/8 $6
Second quarter............................................. 7 1/2 6 3/4
Third quarter.............................................. 8 7/8 7 1/2
Fourth quarter............................................. 8 5/8 8
1992:
First quarter.............................................. 4 7/8 3
Second quarter............................................. 4 3/8 3 3/4
Third quarter.............................................. 5 3 3/4
Fourth quarter............................................. 7 1/4 4 3/4
</TABLE>
The closing market price of the Company's common stock on March 18, 1994,
was $8.50 per share.
As of March 18, 1994, there were approximately 10,000 holders of record of
the Company's common stock.
The Company has paid no common stock dividends during the two years ended
December 31, 1993. It is the policy of the Company to retain its earnings to
finance expansion and growth. While the payment of future dividends will rest
with the discretion of the Board of Directors and will depend, among other
things, upon the Company's earnings, capital requirements and financial
condition, the Company presently expects to retain its earnings to facilitate
growth, both internally and by acquisition. The Company has no present plans to
pay common stock dividends.
The Company's ability to pay common stock dividends may be limited by
regulations affecting its insurance subsidiaries. Under applicable insurance
laws, the Company's insurance subsidiaries may generally only pay cash dividends
out of that part of available surplus which is derived from statutory net gains
from operations, unless regulatory approval is obtained. In addition, payments
of interest and principal relating to a surplus debenture at one of the
Company's insurance subsidiaries also requires prior regulatory approval. See
Note 7 to Consolidated Financial Statements and "LIQUIDITY AND CAPITAL
RESOURCES" under Item 7.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company has been
derived from the Consolidated Financial Statements of the Company. Certain
reclassifications have been made to prior year amounts for comparative purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums........................................ $ 81,443 $ 80,186 $ 79,551 $ 79,889 $ 90,748
Realized investment gains (losses).............. 2,773 53 3,696 (2,548) 3,032
Net investment and other income................. 50,038 50,159 47,774 46,557 47,626
----------- ----------- ----------- ----------- -----------
Total revenues................................ $ 134,254 $ 130,398 $ 131,021 $ 123,898 $ 141,406
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Benefits and expenses........................... $ 122,876 $ 120,221 $ 122,798 $ 139,973 $ 138,606
Income tax expense (benefit).................... 3,584 3,463 2,777 (410) 564
Income (loss) before cumulative effect of
accounting change and extraordinary item....... 7,794 6,714 5,446 (15,665) 2,236
Cumulative effect of accounting change and
extraordinary item:
Effect of implementation of SFAS 109.......... 400 0 0 0 0
Tax effect of utilization of tax loss
carryforwards................................ 0 0 0 0 1,200
Net income (loss)............................... $ 8,194 $ 6,714 $ 5,446 $ (15,665) $ 3,436
PER SHARE DATA
Income (loss) before cumulative effect of
accounting change and extraordinary item....... $ 1.00 $ 0.80 $ 0.63 $ (1.97) $ 0.24
Cumulative effect of accounting change and
extraordinary item:
Effect of implementation of SFAS 109.......... .05 0 0 0 0
Tax effect of utilization of tax loss
carryforwards................................ 0 0 0 0 0.15
----------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ 1.05 $ 0.80 $ 0.63 $ (1.97) $ 0.39
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of shares outstanding... 7,549 7,984 8,111 8,111 8,111
Stockholders' equity............................ $ 13.44 $ 12.20 $ 10.84 $ 10.06 $ 12.25
BALANCE SHEET DATA
Invested assets................................. $ 585,284 $ 542,984 $ 528,013 $ 501,122 $ 491,279
Total assets.................................... 972,732 942,180 952,398 931,059 940,064
Debt............................................ 54,822 54,454 54,249 53,377 51,222
Stockholders' equity............................ 101,484 92,030 87,918 81,641 99,330
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is an analysis of the results of operations and financial
condition of Laurentian Capital and its consolidated subsidiaries. The
consolidated financial statements and related notes and schedules included
elsewhere in the Form 10-K should be read in conjunction with this analysis.
Certain reclassifications have been made to prior year amounts for comparative
purposes.
OVERVIEW
Laurentian Capital's net income for 1993 was $8.2 million, or $1.05 per
share, as compared to net income of $6.7 million, or $0.80 per share, in 1992
and a net income of $5.4 million, or $0.63 per share, in 1991. Excluding the
cumulative effect of the adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), which contributed $0.4
million to net income, the Company's net income for 1993 was $7.8 million, or
$1.00 per share.
The 1993 net income of $8.2 million, or $1.05 per share, compares favorably
to 1992 net income of $6.7 million, or $0.80 per share. The improvement in net
income was due primarily to increased realized capital gains on investments, as
well as the Company's successful implementation of expense reduction programs.
The 1992 net income of $6.7 million, or $0.80 per share, compares favorably
to 1991 net income of $5.4 million, or $0.63 per share. The improvement in net
income was due primarily to increased investment income and lower death and
health claim benefits. In addition, substantially lower levels of realized
investment gains were included in 1992 net income than in the prior year.
RESULTS OF OPERATIONS
PREMIUM INCOME
The following table sets forth for the periods shown the amount of premium
income and the percentage change in each from the prior period:
<TABLE>
<CAPTION>
PREMIUM INCOME
-------------------------
PERCENTAGE
YEAR ENDED INCREASE
DECEMBER 31, AMOUNT (DECREASE)
------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C>
1993........................ $ 81,443 1.6%
1992........................ 80,186 0.8
1991........................ 79,551 (0.4)
</TABLE>
Premium income improved in 1993 as compared to 1992 due to improvements in
new sales and inforce persistency at Prairie and Loyal. Loyal's accident and
health premium, primarily related to a cancer indemnity product, accounted for
most of the increase. The cancer indemnity product is subject to premium rate
adjustments, following regulatory approval. Loyal has been actively managing the
premium rate adjustment approval process with positive results.
Premium income improved marginally in 1992 as compared to 1991.
Improvements in both new sales and inforce persistency at Prairie and Loyal more
than offset a decline in renewal premium due to a substantial block of inforce
business at Prairie attaining paid-up premium status during the year. A former
subsidiary of Loyal, American Defender Life Insurance Company ("Defender"), had
ceased writing new business and was in a run-off position which also resulted in
lower premium income.
Premium income was fairly stable in 1991 as compared to 1990. Increases in
new life insurance sales at Prairie were offset by declines in renewals at Loyal
and Defender.
12
<PAGE>
NET INVESTMENT INCOME, REALIZED INVESTMENT GAINS AND OTHER INCOME
The following table sets forth for the periods shown the amount of net
investment income, realized investment gains and other income and the percentage
increase (decrease) from the corresponding prior periods.
<TABLE>
<CAPTION>
NET INVESTMENT INCOME, REALIZED
INVESTMENT GAINS AND OTHER INCOME
-------------------------------------
YEAR ENDED PERCENTAGE
DECEMBER 31, AMOUNT INCREASE/(DECREASE)
------------- -------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
1993................... $ 52,811 5.2%
1992................... 50,212 (2.4)
1991................... 51,470 17.0
</TABLE>
During 1993, there was an increase of 5.2% in net investmest income,
realized investment gains and other income as compared to 1992. This increase
resulted primarily from a $2.7 million increase in realized investment gains.
During 1993, the Company experienced substantial prepayments on its fixed
maturity investments as individuals and corporations refinanced their debt
obligations. Corporate refinancings occurred through call provisions, whereby
corporations usually pay a premium over par value to recall their obligations.
The Company's increased level of realized investment gains resulted primarily
from the exercise of call provisions, usually at a premium. The significant
prepayments received in 1993 were reinvested at lower interest rates and are
expected to lower the portfolio yield in the future. Net investment income
remained stable as the lower portfolio yield was offset by increased invested
assets. During 1993, two inactive subsidiaries were sold for $587,000, which is
reflected in other income.
During 1992, there was a decrease of 2.4% in net investment income,
realized investment gains and other income as compared to 1991. This decrease
resulted primarily from a $3.6 million decline in realized investment gains.
During 1992, $4.7 million in other than temporary impairments were recorded, as
compared to $0.9 million in 1991. The impairments were primarily related to
adjustments in the carrying value of certain real estate investments to
appraised values due to depressed market conditions. Net investment income
increased $1.6 million when compared to 1991, as growth in the Company's
invested asset base combined with the accelerated recognition of income from
discount amortization on mortgage-backed securities due to increases in
prepayment activity more than offset the decline in overall portfolio yield. In
addition, a former subsidiary was sold in the fourth quarter of 1992, resulting
in an increase to other income of $570,000.
During 1991, an increase of 17.0% was recorded in net investment income,
realized investment gains (losses) and other income as compared to 1990. This
increase resulted primarily from an increase in realized investment gains which
accounted for 14.2% of the increase. Net investment income accounted for 4.3% of
the increase, primarily as a result of an investment portfolio restructuring
that emphasized the conversion of non-income producing assets into investment
grade debt securities.
BENEFITS AND EXPENSES
The following table sets forth for the periods shown the benefits and
expenses incurred by the Company as a percentage of premium income:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
PREMIUM INCOME
YEAR ENDED --------------------------
DECEMBER 31, BENEFITS EXPENSES
------------- ------------ ------------
<S> <C> <C>
1993................... 94.7% 56.2%
1992................... 90.4 59.5
1991................... 95.9 58.4
</TABLE>
13
<PAGE>
BENEFITS
Benefits for 1993 increased as a percentage of premium to 94.7% from 90.4%
in 1992. The increase in benefits was due primarily to higher levels of death
and health claims in 1993 as compared to 1992. During 1993, the Company achieved
sales improvement in single premium funeral related life insurance and cancer
indemnity products. Both products have a higher initial benefit to premium ratio
than the existing inforce insurance business and substantially account for the
increase in benefit ratio. As a result of the continued emphasis on these
specialty lines, this trend of increasing ratio is expected to continue.
Benefits for 1992 decreased as a percentage of premium from 95.9% in 1991
to 90.4% in 1992. The decrease in benefits was due primarily to lower levels of
death and health claims in 1992 as compared to 1991. During 1992, Loyal filed
and received approval for premium rate increases associated with its cancer
indemnity product. These premium increases had a positive impact in lowering the
benefits as a percentage of premium ratio. This improvement was partially offset
due to a substantial block of inforce business at Prairie reaching paid-up
premium status during the year. As additional benefits were being paid or
accrued on this block with no corresponding premium income, the ratio of
benefits to premium income was negatively impacted.
Benefits for 1991 increased as a percentage of premium from 87.0% in 1990
to 95.9% in 1991. Benefits increased $6.8 million while premium income decreased
$0.3 million in 1991 as compared to 1990. Adverse health claims experience was
incurred by Loyal during 1991 which resulted in premium rate increases being
submitted and approved during the second half of 1991. In addition, higher
levels of death claims and surrender benefits were incurred during 1991 as
compared to 1990 at both Loyal and Prairie.
EXPENSES
Expenses as a percentage of premium income in 1993 decreased to 56.2% as
compared to 59.5% in 1992. The decrease is due primarily to continued emphasis
on cost containment and reduction as indicated by a $1.7 million decline in
selling and administrative expenses. The Company is continuing to invest in its
pre-need life insurance segment with improved efficiency.
Expenses as a percentage of premium income in 1992 remained fairly stable
when compared to 1991. Following a period of administrative consolidation,
operational efficiencies stabilized during the year. Selling expenses associated
with the Company's growth in the pre-need life insurance segment at Prairie were
higher than in the prior year reflecting the Company's continued investment in
this market.
Expenses as a percentage of premium income decreased from 65.4% in 1990 to
58.4% in 1991. The decrease was attributable to lower levels of administrative
and selling expenses achieved through cost reduction initiatives.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities applying enacted tax rates. Deferred income tax expenses or benefits
are based on the changes in the deferred tax assets or liabilities from period
to period. Prior to January 1, 1993, deferred income tax expenses or benefits
were recorded to reflect the tax consequences of timing differences between the
recording of income and expenses for financial reporting purposes and for
purposes of filing federal income tax returns at income tax rates in effect when
the differences arose. The cumulative benefit of $400,000 of adopting this
change as of January 1, 1993 has been reflected in the statement of operations
included herein. Prior year financial statements have not been restated to
reflect the new accounting method.
14
<PAGE>
The Company's effective tax rate for the year ended December 31, 1993 was
31.5%, as compared to 34% for the year ended December 31, 1992. The primary
reason the effective tax rate for the year ended December 31, 1993 was lower
than the enacted statutory tax rate of 34% was due to the elimination of
valuation allowances associated with the deferred tax asset related to certain
real estate assets sold in 1993. Excluding the effect of these real estate
transactions, the effective rate for 1993 would have been marginally higher than
the effective rate for 1992.
The Company's effective tax rate has varied considerably in past years.
Prior to 1992, one of the primary reasons for these variances was the difference
in reporting groups. For financial statement purposes, the profits and losses of
all subsidiaries were reported on a consolidated basis; for tax purposes,
Laurentian Capital Corporation filed a separate return, while Loyal and a former
subsidiary, Defender, filed a consolidated return, as did Prairie and its
subsidiary, Rushmore National Life Insurance Company ("Rushmore"). Filing
separate tax group returns caused various effective tax rates to apply to the
profits and losses of the financial statement filing group. Beginning in 1992,
the Company qualified to file a consolidated life/non-life federal tax return,
except for Rushmore, which does not qualify to join in the filing of the
consolidated Company return until 1995. The Company elected to file one
consolidated return and, therefore, the financial reporting and federal tax
reporting groups were primarily the same. However, variations in effective tax
rates may persist as a result of limitations imposed by the Code on the
utilization of non-life insurance tax losses against life insurance taxable
income. For 1992 and prior tax years, under then existing GAAP, effective tax
rates also varied as a result of the differences between the tax bases of assets
and liabilities and those assigned under purchase accounting ("Purchase
Accounting Adjustments"). Pursuant to then existing GAAP, these Purchase
Accounting Adjustments were treated as permanent differences. Accordingly, as
these differences reversed, they increased or decreased the Company's effective
tax rate. For 1993 and subsequent years under SFAS 109, Purchase Accounting
Adjustments are treated as temporary differences and changes in these
differences will not affect the Company's effective tax rate.
NET INCOME
The following table sets forth for the periods shown the net income and the
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT PER SHARE
- ------------------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C>
1993................... $ 8,194 $ 1.05
1992................... 6,714 0.80
1991................... 5,446 0.63
</TABLE>
The increase in net income for 1993 as compared to 1992 of $1.5 million is
due to higher realized investment gains, lower operating expenses, recognition
of a benefit from the adoption of SFAS 109 and a lower effective tax rate.
Continued emphasis on cost containment and cost reduction has improved
efficiency in the operations during a period of increased selling activity.
Premium rate adjustments on the cancer indemnity product and lower amounts of
interest credited to policyholders have provided enhanced profitability.
The increase in net income for 1992 as compared to 1991 of $1.3 million was
due to higher investment income and lower death and health claims experience
which offset the lower levels of realized investment gains. General and
administrative expenses were stable in 1992 as compared to 1991 with increased
net selling expenses due primarily to the continued investment in the Company's
pre-need life insurance market.
The increase in earnings for 1991 as compared to 1990 of $21.1 million was
due primarily to the Special Charges of $18.2 million ($17.7 million after-tax)
recorded in 1990. Excluding these Special Charges, net income increased $3.4
million in 1991 as compared to 1990. This increase was due primarily to a $6.2
million ($4.1 million after-tax) increase in realized investment gains.
Improvements in net investment income and lower operating expenses were offset
by higher levels of benefits and reserve expenses. An increase in the effective
tax rate, primarily due to operating losses for which no tax benefit was
recognized, also affected 1991 earnings as compared to 1990.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The life insurance industry normally produces a positive cash flow from
operations and scheduled principal repayments from portfolios of fixed maturity
investments (bonds and redeemable preferred stocks) and mortgage loans. This
cash flow is used to fund an investment portfolio to finance future benefit
payments, which represent long-term obligations reserved for using certain
assumed interest rates. Since future benefit payments are primarily long-term
obligations, the Company's investments are predominately long-term fixed rate
instruments such as bonds and mortgage loans which are expected to provide a
sufficient return to cover these obligations. The nature and quality of the
various types of investments made by a life insurance company must comply with
the statutes and regulations imposed by the states in which that company is
licensed. These statutes and regulations generally require that securities
acquired be investment grade and provide protection for policyholders.
In accordance with generally accepted accounting principles, substantially
all of the Company's investments are reported in the financial statements at
their original or amortized cost as opposed to market value. At December 31,
1993, the fixed maturity investments had an amortized cost of $458.7 million
with a market value of $468.5 million, $9.8 million above amortized cost. The
Company had $29.4 million in mortgage loans at December 31, 1993, which could
reflect a small premium or discount if those mortgage loans had quoted market
prices. The basis used for carrying these long-term fixed rate investments is
consistent with the basis used in determining the liability for future policy
benefits. Since these assets are invested for terms corresponding to anticipated
future benefit payments and carry interest rates in excess of the assumed
reserve interest rates, and because they produce predictable cash flows
independent of premium income, they should be sufficient to fund the Company's
future benefit payments in the ordinary course of business without any need for
liquidation prior to maturity.
In May 1993, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). This statement
addresses the accounting and reporting on the ownership of investment
securities. SFAS 115 specifically applies to the accounting for fixed income
securities, which have historically been reported at amortized cost. SFAS 115
allows for the continued use of amortized cost reporting only for those
securities that the Company has the positive intent and ability to hold to
maturity. Any held securities not qualifying for amortized cost treatment must
be reported at fair value. SFAS 115 is required to be adopted on January 1, 1994
and the effects of this statement on the Company have not been quantified.
The Company holds a substantial component of its investment portfolio in
mortgage-backed securities and collateralized mortgage obligations (collectively
"MBS"). At the end of 1993, the total investment in MBS amounted to $392.8
million, or 67% of total investments. These are instruments collateralized by
pools of residential and commercial mortgages, which return interest and
principal payments to the investor. Approximately 23% of the Company's MBS
holdings are U.S. government agency securities (GNMA, FNMA and FHLMC), which
carry either a direct government or a quasi-government guarantee and are rated
AAA in terms of quality. The Company also owns non-agency MBS, issued by major
U.S. financial institutions, which are rated AAA, AA or A. Non-agency MBS are
credit-enhanced in order to achieve a high rating. The form of the credit
enhancement is generally a senior/subordinated structure, a limited corporate
guarantee from a large financial institution or a letter of credit from a major
commercial bank. Historically, residential mortgages in the U.S. have had a very
low default rate and the Company's non-agency MBS are well-diversified
geographically. Thus, the Company is protected against adverse regional economic
conditions. Mortgage-backed securities typically yield more than corporate bonds
of similar maturity. MBS also are not subject to so-called event risk, which can
cause investment grade bonds of a corporation to become "junk", as a result, for
example, of a leveraged acquisition. In addition, MBS are generally very liquid
issues with major brokerage houses providing ready markets. However, MBS are
subject to prepayment and extension risk which can adversely affect their yield
and expected maturity.
16
<PAGE>
With the significant decline in interest rates during the second half of
1992 and the first three quarters of 1993, the Company experienced a substantial
increase in the level of prepayments associated with its investments in MBS.
Amounts received associated with these prepayments were accounted for as
adjustments to investment yield. The Company has experienced a decline in
portfolio yield as a result of reinvesting these proceeds into similar
investments at lower interest rates. The Company's investment strategy for MBS
is to emphasize certain types of MBS that have a more predictable pattern of
repayment and avoid risk of a loss of a portion of the original principal due to
changes in interest rates. A substantial portion of the MBS portfolio consists
of Planned Amortization Class ("PAC") and Target Amortization Class ("TAC")
instruments. These investments are designed to amortize in a more predictable
manner by shifting the primary risk for prepayment of the underlying collateral
to investors in other tranches (support classes) of the MBS. During this period
of high levels of prepayment, no loss of principal occurred on the MBS
portfolio.
Policy loans as of December 31, 1993 were $51.7 million. Policy loan rates
for the Company's policies are generally in the 3 1/2% to 8% range, at least
equal to the assumed interest rates used for future policy benefits;
accordingly, policy loans should not result in negative cash flow.
In addition to the cash flow necessary to fund benefit payments, the
Company requires cash flows for operating and administrative expenses, which are
normally funded from premium income. The level of expenses generally fluctuates
in direct proportion to the amount of premium produced, and the Company's
subsidiaries generate sufficient cash flow to meet such expenses. However, the
Company's cash disbursements have from time to time exceeded its cash receipts,
principally due to its former acquisitions program and commitments made in
connection with the acquisitions. Funding of interest on debt incurred in
connection with this program of acquisitions as well as the subsequent
consolidation of operations, required an expenditure of approximately $4.9
million in 1993, $5.0 million in 1992, and $5.0 million in 1991.
As a holding company, Laurentian Capital's ability to meet debt service
obligations and pay operating expenses depends upon receipt of sufficient funds,
primarily through dividends, receipt of interest and principal payments on a
surplus debenture, and management fees from its subsidiaries. The Company's
subsidiaries are currently producing earnings and net cash flow sufficient to
cover debt service and preferred stock payment requirements at the parent.
However, under the insurance laws of the states in which the Company's insurance
subsidiaries are domiciled, certain restrictions are imposed on dividends from
the subsidiaries to the parent. The insurance laws and regulations generally
limit the amount of dividends to the greater of net statutory gain from
operations or 10% of statutory surplus, and dividends in excess of these amounts
can be paid only with the prior approval of the insurance regulators. Based upon
the 1993 statutory annual statements of the Company's insurance subsidiaries,
approximately $7.0 million of dividends can be paid to the parent from its
direct insurance subsidiaries without prior approval of insurance regulators.
During 1992, the Company restructured its holding in Prairie. Following
approval by the Division of Insurance for the State of South Dakota ("Division
of Insurance"), Prairie was sold to a wholly-owned life insurance subsidiary of
the Company, Prairie National Life Insurance Company, of Rapid City, South
Dakota ("Prairie National"). As part of the consideration for Prairie National
purchasing Prairie, Prairie National issued capital stock and a $35 million
surplus debenture to the Company. Interest and repayment of principal on the
debenture is subject to prior approval by the Division of Insurance. The surplus
debenture is payable in scheduled installments through 2001. Payments of
principal and interest require prior approval by the South Dakota insurance
commissioner and cannot reduce Prairie National's surplus below a certain
required level. As of December 31, 1993, Prairie National exceeded its required
level of surplus by $11.6 million. Since April 4, 1992, the date of the
restructuring, the Division of Insurance has approved $4.0 million in interest
payments associated with the surplus debenture, of which $2.2 million was
approved during 1993. Principal payments of $4.5 million were approved for
payment by the Division of Insurance during 1993. The effects of these
transactions are eliminated in consolidation.
17
<PAGE>
MATURITY OF REVOLVING UNDERWRITING FACILITY ON APRIL 25, 1994
On April 25, 1989 an agreement was signed which provided the Company with a
five year Revolving Underwriting Facility ("RUF") for a total commitment of $55
million. Pursuant to the terms of the RUF, the Company pays interest at a
variable rate, with a maximum rate equal to 0.30% above the London Interbank
Offered Rate ("LIBOR"). The agreement contains certain covenants relating to the
Company's activities and financial condition. With respect to the financial
condition covenants, the Company must maintain a minimum net worth, as defined,
and not permit a ratio of outstanding indebtedness, as defined, to net worth of
greater than 1.0 to 1.0. On March 6, 1991, the Company entered into an interest
rate swap agreement that has the effect of fixing the LIBOR component of the RUF
at 7.94% until maturity of the RUF on April 25, 1994. The Company has been
actively pursuing refinancing of its presently outstanding debt obligations.
While there can be no assurances that the Company will be able to accomplish a
refinancing of its presently outstanding debt, management believes that the
Company has the ability to execute a plan which will accomplish the desired
objectives before the RUF becomes due.
IMPACT OF INFLATION
Inflation increases the need for insurance. Many policyholders who once had
adequate insurance programs increase their life insurance coverage to provide
the same relative financial benefit and protection. The effect of inflation on
medical costs leads to accident and health policies with higher benefits. Thus,
inflation has increased the need for life and health products.
Inflation has significantly increased the cost of health care. The adequacy
of premium rates in relation to the level of health claims is constantly
monitored and, where appropriate, premium rates on such policies are increased
as policy benefits increase. Failure to make such increases commensurate with
health care cost increases may result in a loss from health insurance
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data filed with this Report are
as set forth in the "Laurentian Capital Corporation and Subsidiaries Index to
Financial Statements" following Part IV hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not had a disagreement with its accountants on any matters
of accounting principles or practices or financial statement disclosure which is
required to be reported in response to this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the
Company is incorporated by reference from the sections captioned "ELECTION OF
DIRECTORS", "ABOUT THE BOARD OF DIRECTORS" and "EXECUTIVE OFFICERS" in the
Company's definitive proxy statement relating to the Company's 1994 Annual
Meeting of Stockholders. The proxy statement will be filed with the Securities
and Exchange Commission by the Company within the time contemplated by General
Instruction G(3) of this Form 10-K or the information required by this Item 10
will be filed within such time under cover of Form 8.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to the executive officers of the Company is
incorporated by reference from the sections captioned "EXECUTIVE COMPENSATION"
and "OTHER COMPENSATION" in the Company's definitive proxy statement relating to
the Company's 1994 Annual Meeting of Stockholders. The proxy statement will be
filed with the Securities and Exchange Commission by the Company within the time
contemplated by General Instruction G(3) of this Form 10-K or the information
required by this Item 11 will be filed within such time under cover of Form 8.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to ownership of the Company's stock by certain
beneficial owners and by the Company's management is incorporated by reference
from the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement relating to the
Company's 1994 Annual Meeting of Stockholders. The proxy statement will be filed
with the Securities and Exchange Commission by the Company within the time
contemplated by the General Instruction G(3) of this Form 10-K, or the
information required by this Item 12 will be filed within such time under cover
of Form 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is incorporated by reference from the sections captioned "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement relating to the
Company's 1994 Annual Meeting of Stockholders. The proxy statement will be filed
with the Securities and Exchange Commission by the Company within the time
contemplated by General Instruction G(3) of this Form 10-K, or the information
required by this Item 13 will be filed within such time under cover of Form 8.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a), (d) Financial Statements and Financial Statement Schedules:
A listing of financial statements and financial statement schedules
filed as a part of this report is set forth in the "Laurentian Capital
Corporation and Subsidiaries Index to Financial Statements and Schedules"
following Part IV hereof.
(b) Reports on Form 8-K:
The Company filed a Form 8-K Current Report dated October 20, 1993,
reporting the intent of Mouvement des caisses Desjardins to make an
exchange bid to shareholders of The Laurentian Group Corporation,
beneficial owner of approximately 82% of the outstanding stock of
the Company.
(c) Listing of Exhibits:
<TABLE>
<S> <C>
Exhibit 3. The Certificate of Incorporation of the Company is
incorporated by reference herein from Exhibit II to the
Current Report of the Company filed on Form 8-K dated
December 27, 1990. The Bylaws of the Company, as amended,
are incorporated by reference herein from Exhibit C to the
Current Report of the Company filed on Form 8-K dated March
12, 1993.
Exhibit 4. Form of Certificate for common stock, $.05 par value,
incorporated by reference herein from Exhibit III to the
Current Report of the Company filed on Form 8-K dated
December 27, 1990.
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
Exhibit 10. Material contracts:
Executive Stock Option Plan of the Company, effective as of
10.1 July 25, 1986, amended as of May 5, 1992, incorporated by
reference herein from Exhibit A to the Company's definitive
Proxy Statement dated April 10, 1992.*
Management Services Agreement for the 1993 fiscal year by
10.2 and between the Company and The Laurentian Group
Corporation, adopted by the Board of Directors of the
Company on February 12, 1993, incorporated by reference
herein from Exhibit B to the Current Report of the Company
filed on Form 8-K dated February 12, 1993.
Agreement for the 1993 fiscal year between Laurentian
10.3 Technology (1990) Inc. and the Company, adopted by the
Board of Directors of the Company on February 12, 1993,
incorporated by reference herein from Exhibit A to the
Current Report of the Company filed on Form 8-K dated
February 12, 1993.
Revolving Underwriting Facility Agreement providing a five
10.4 year $55,000,000 credit facility dated April 25, 1989,
incorporated by reference herein from the Form 8-K Current
Report of the Company dated April 25, 1989.
Deferred Compensation Agreement and Amendment thereto
10.5 between the Company and Robert T. Rakich, President and
Chief Executive Officer of the Company, incorporated by
reference herein from the Form 8-K Current Report of the
Company dated March 12, 1993.*
Interest Rate and Currency Exchange Agreement between Banque
10.6 Indosuez and the Company dated March 6, 1991, incorporated
by reference herein from Exhibit A to the Current Report of
the Company filed on Form 8-K dated March 6, 1991.
Retirement and Consulting Agreement between a subsidiary of
10.7 the Company and Arnold M. Snortland, a director of the
Company, incorporated by reference herein from the Form 8-K
Current Report of the Company dated March 12, 1993.*
Change of Control Agreement between the Company and Robert
10.8 T. Rakich, President and Chief Executive Officer of the
Company, incorporated by reference herein from the Form 8-K
Current Report of the Company dated December 13, 1993.*
Change of Control Agreement between the Company and Bernhard
10.9 M. Koch, Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company, incorporated by
reference herein from the Form 8-K Current Report of the
Company dated December 13, 1993.*
<FN>
- ------------------------------
* Compensatory plan, contract or arrangement.
</TABLE>
<TABLE>
<S> <C>
Exhibit 11. Statement regarding computation of per share earnings. See
Exhibit Index.
Exhibit 22. Subsidiaries of the Registrant. See Exhibit Index.
Exhibit 24. Consent of Coopers & Lybrand. See Exhibit Index.
</TABLE>
20
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAURENTIAN CAPITAL CORPORATION
By: /s/ BERNHARD M. KOCH
--------------------------------------
Bernhard M. Koch
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, TREASURER AND
SECRETARY
Date: March 25, 1994
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<C> <S> <C>
/s/ Claude Castonguay
- ------------------------------------------- Chairman of the Board and March 25, 1994
Claude Castonguay Director
/s/ Robert T. Rakich
- ------------------------------------------- President, Chief Executive March 25, 1994
Robert T. Rakich Officer and Director
/s/ Bernhard M. Koch Senior Vice President, Chief
- ------------------------------------------- Financial Officer, Treasurer March 25, 1994
Bernhard M. Koch and Secretary
Assistant Vice President and
/s/ Thomas W. Alesi Controller
- ------------------------------------------- (Principal Accounting March 25, 1994
Thomas W. Alesi Officer)
/s/ Jared M. Billings
- ------------------------------------------- Director March 25, 1994
Jared M. Billings
/s/ Jack Kinder, Jr.
- ------------------------------------------- Director March 25, 1994
Jack Kinder, Jr.
/s/ Robert D. Larrabee
- ------------------------------------------- Director March 25, 1994
Robert D. Larrabee
/s/ Curtis L. Meeks
- ------------------------------------------- Director March 25, 1994
Curtis L. Meeks
/s/ Guy Rivard
- ------------------------------------------- Director March 25, 1994
Guy Rivard
/s/ Arnold M. Snortland
- ------------------------------------------- Director March 25, 1994
Arnold M. Snortland
/s/ Anthony B. Walsh
- ------------------------------------------- Director March 25, 1994
Anthony B. Walsh
/s/ Alan J. Zakon
- ------------------------------------------- Director March 25, 1994
Alan J. Zakon
</TABLE>
22
<PAGE>
LAURENTIAN CAPITAL CORPORATION
AND SUBSIDIARIES
FORM 10-K, PART II, ITEM 8
YEAR ENDED DECEMBER 31, 1993
<PAGE>
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992............................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1992 and 1991.......................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992 and
1991...................................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991.......................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S> <C>
III Condensed Financial Information of Registrant....................................................... S-1
VI Reinsurance......................................................................................... S-5
</TABLE>
All other schedules are omitted as the required information is not
applicable or the information is presented in the financial statements or
related notes.
F-1
<PAGE>
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, 1993 and 1992 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 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 income taxes in 1993.
COOPERS & LYBRAND
Philadelphia, Pennsylvania
February 11, 1994
F-2
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at amortized cost (market, 1993 - $468,497; 1992 - $406,821)............ $ 458,668 $ 399,012
Equity securities, at market (cost, 1993 - $28,481; 1992 - $19,636)....................... 30,379 19,438
Mortgage loans on real estate............................................................. 29,438 39,579
Investment real estate, net of accumulated depreciation (1993 - $816; 1992 - $828)........ 4,643 7,293
Policy loans.............................................................................. 51,677 54,190
Short-term investments.................................................................... 10,479 23,472
--------- ---------
Total investments..................................................................... 585,284 542,984
Cash........................................................................................ 8,722 20,292
Accounts, notes and premiums receivable, net of allowance for uncollectible amounts
(1993 - $935; 1992 - $1,656)............................................................... 5,011 4,606
Reinsurance receivables..................................................................... 38,982 38,855
Accrued investment income................................................................... 5,855 5,940
Deferred policy acquisition costs........................................................... 71,745 73,976
Costs in excess of net assets of business acquired, net of accumulated amortization
(1993 - $5,219; 1992 - $4,929)............................................................. 7,130 8,335
Property and equipment, net of accumulated depreciation (1993 - $10,542; 1992 - $8,158)..... 11,972 12,782
Other assets................................................................................ 1,780 12,130
Assets held in separate accounts............................................................ 236,251 232,280
--------- ---------
$ 972,732 $ 942,180
--------- ---------
--------- ---------
<CAPTION>
LIABILITIES
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits.................................................................... $ 411,951 $ 402,104
Unearned premiums......................................................................... 1,804 1,861
Other policy claims and benefits payable.................................................. 12,629 9,321
--------- ---------
426,384 413,286
Other policyholders' funds.................................................................. 122,409 123,867
Debt........................................................................................ 54,822 54,454
Other liabilities........................................................................... 15,257 15,347
Current income taxes........................................................................ 145 170
Deferred income taxes....................................................................... 11,827 6,140
Liabilities related to separate accounts.................................................... 236,251 232,280
--------- ---------
Total liabilities..................................................................... 867,095 845,544
--------- ---------
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: 1993 - 41,528; 1992 - 46,062................................................. 4,153 4,606
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.05 par value
Shares authorized: 20 million
Shares issued: 8,111,496.................................................................. 406 406
Capital in excess of par value.............................................................. 59,071 59,010
Net unrealized gains (losses) on equity securities, net of tax: 1993 - $645; 1992 - $0...... 1,253 (198)
Treasury stock, at cost (shares outstanding: 1993 - 562,739; 1992 - 566,831)................ (2,818) (2,837)
Retained earnings........................................................................... 43,572 35,649
--------- ---------
Total stockholders' equity............................................................ 101,484 92,030
--------- ---------
$ 972,732 $ 942,180
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums................................................................. $ 81,443 $ 80,186 $ 79,551
Net investment income.................................................... 46,820 46,927 45,307
Realized investment gains................................................ 2,773 53 3,696
Other income............................................................. 3,218 3,232 2,467
----------- ----------- -----------
134,254 130,398 131,021
----------- ----------- -----------
Benefits and expenses:
Benefits and settlement expenses......................................... 77,115 72,491 76,304
Amortization of deferred policy acquisition costs........................ 13,226 13,489 12,928
Insurance and other expenses............................................. 32,535 34,241 33,566
----------- ----------- -----------
122,876 120,221 122,798
----------- ----------- -----------
Income before income taxes and cumulative effect
of accounting change...................................................... 11,378 10,177 8,223
Income tax expense:
Current.................................................................. 250 361 451
Deferred................................................................. 3,334 3,102 2,326
----------- ----------- -----------
3,584 3,463 2,777
----------- ----------- -----------
Income before cumulative effect of accounting change....................... 7,794 6,714 5,446
Cumulative effect of accounting change:
Adoption of SFAS 109..................................................... 400 0 0
----------- ----------- -----------
Net income................................................................. $ 8,194 $ 6,714 $ 5,446
----------- ----------- -----------
----------- ----------- -----------
Net income available to common shareholders:
Net income............................................................... $ 8,194 $ 6,714 $ 5,446
Less: dividends on preferred stock....................................... 271 290 305
----------- ----------- -----------
$ 7,923 $ 6,424 $ 5,141
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Income before cumulative effect of accounting change..................... $ 1.00 $ 0.80 $ 0.63
Cumulative effect of accounting change:
Adoption of SFAS 109................................................... .05 0 0
----------- ----------- -----------
Net income............................................................... $ 1.05 $ 0.80 $ 0.63
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding (in thousands)......................... 7,549 7,984 8,111
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
Common Stock
Balance at beginning and end of year........................................ $ 406 $ 406 $ 406
----------- --------- ---------
Capital in Excess of Par Value
Balance at beginning of year................................................ 59,010 58,892 58,892
Elimination of fractional shares resulting from
reverse stock split........................................................ 0 0 (8)
Conversion of preferred stock to common stock............................... 0 0 8
Redemption of preferred stock............................................... 61 118 0
----------- --------- ---------
Balance at end of year...................................................... 59,071 59,010 58,892
----------- --------- ---------
Net Unrealized Gains (Losses)
Balance at beginning of year................................................ (198) (653) (1,789)
Change during the year...................................................... 1,451 455 1,136
----------- --------- ---------
Balance at end of year...................................................... 1,253 (198) (653)
----------- --------- ---------
Treasury Stock
Balance at beginning of year................................................ (2,837) 0 0
Treasury shares purchased................................................... 0 (2,877) 0
Shares issued from treasury................................................. 19 40 0
----------- --------- ---------
Balance at end of year...................................................... (2,818) (2,837) 0
----------- --------- ---------
Retained Earnings
Balance at beginning of year................................................ 35,649 29,273 24,132
Net income.................................................................. 8,194 6,714 5,446
Dividends on preferred stock................................................ (271) (338) (305)
----------- --------- ---------
Balance at end of year...................................................... 43,572 35,649 29,273
----------- --------- ---------
Total Stockholders' Equity.................................................... $ 101,484 $ 92,030 $ 87,918
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operations:
Net income............................................................ $ 8,194 $ 6,714 $ 5,446
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of adoption of SFAS 109........................... (400) 0 0
Increase in policy liabilities and accruals, policyholders' funds
and income taxes................................................... 15,832 10,557 23,598
Decrease (increase) in accrued investment income and accounts and
notes receivable................................................... 270 (188) 3,874
Increase (decrease) in other liabilities............................ 1,334 (4,252) (1,084)
Amortization of deferred policy acquisition costs................... 13,226 13,489 12,928
Policy acquisition costs deferred................................... (10,996) (9,974) (9,983)
Depreciation expense................................................ 1,535 1,324 1,051
Amortization of goodwill............................................ 290 268 339
Realized investment (gains)......................................... (2,773) (53) (3,696)
Other, net.......................................................... (3,172) (1,633) (2,339)
------------ ------------ ------------
Net cash provided by operating activities......................... 23,340 16,252 30,134
------------ ------------ ------------
Cash flow from investing activities:
Sale of investments................................................... 15,884 45,324 43,130
Maturity or repayment of investments.................................. 195,081 141,805 39,214
Disposal of property and equipment.................................... 37 36 169
Purchase of investments............................................... (257,214) (184,399) (102,356)
Purchase of property and equipment.................................... (1,477) (2,753) (1,550)
Short-term investments, net........................................... 12,993 (12,996) (766)
Other, net............................................................ 65 2 341
------------ ------------ ------------
Net cash used in investing activities............................. (34,631) (12,981) (21,818)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from borrowing............................................... 368 257 878
Repayment of debt..................................................... 0 (52) (6)
Net (purchases) sales of treasury shares, at cost..................... 19 (2,837) 0
Dividends paid on preferred stock..................................... (271) (303) (297)
Redemption of preferred stock......................................... (395) (351) 0
Other, net............................................................ 0 0 (9)
------------ ------------ ------------
Net cash provided by (used in) financing activities............... (279) (3,286) 566
------------ ------------ ------------
Net increase (decrease) in cash......................................... (11,570) (15) 8,882
Cash at beginning of year............................................... 20,292 20,307 11,425
------------ ------------ ------------
Cash at end of year..................................................... $ 8,722 $ 20,292 $ 20,307
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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 States Life Insurance Company (Prairie). Prairie
owns Rushmore National Life Insurance Company (Rushmore).
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 as of December 31, 1993.
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 -- Investments are reported as follows:
- Fixed maturities (bonds, notes and redeemable preferred stocks)
-- at cost, adjusted for amortization of premium or discount
and other than temporary market value declines. The Company has
the ability and intent to hold such investments to maturity and
accordingly, reports these investments at amortized cost.
- Equity securities (common and nonredeemable preferred stocks)
-- at current market value, net of 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 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 premiums 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 agency expenses.
F-7
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 less than three months.
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
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, as of December 31, 1993 and
1992 was $2.6 billion and $2.9 billion, respectively.
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.
F-8
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 -- In 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
and income tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. 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 or
$0.05 per common share.
REINSURANCE -- In 1993, the Company adopted Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" (SFAS 113). In accordance with SFAS
113, insurance liabilities are reported before 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.
Except for financial statement presentation, SFAS 113 had no impact on the
Company's results.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In May 1993, the Financial
Accounting Standards Board (FASB), issued Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). This statement addresses the accounting and reporting on
the ownership of investment securities. The statement specifically applies to
the accounting for fixed income securities, which have historically been
reported at amortized cost. SFAS 115 allows for the continued use of amortized
cost reporting only for those securities that the Company has the positive
intent and ability to hold to maturity. Any held securities not qualifying for
amortized cost treatment must be reported at fair value. SFAS 115 is required to
be adopted on January 1, 1994 and the effects of this statement on the Company
have not been quantified.
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.
F-9
<PAGE>
LAURENTIAN CAPITAL CORPORATION
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>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities..................................................... $ 39,243 $ 37,718 $ 33,740
Equity securities.................................................... 485 656 933
Mortgage loans on real estate........................................ 3,331 4,721 5,249
Policy loans......................................................... 3,082 3,301 3,197
Short-term investments............................................... 1,053 1,094 1,571
Investment real estate............................................... 1,820 2,215 2,338
Other investments.................................................... 583 823 1,804
--------- --------- ---------
49,597 50,528 48,832
Less investment expenses............................................. 2,777 3,601 3,525
--------- --------- ---------
Net investment income................................................ $ 46,820 $ 46,927 $ 45,307
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities..................................................... $ 3,306 $ 2,799 $ 1,954
Equity securities.................................................... 310 658 807
Mortgage loans on real estate........................................ (205) (311) (26)
Investment real estate............................................... (671) (3,093) 1,131
Other investments.................................................... 33 0 (170)
--------- --------- ---------
Total realized investment gains...................................... $ 2,773 $ 53 $ 3,696
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in realized investment gains for the years ended December 31 are
adjustments for other than temporary impairments to the carrying value of
investments, as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities..................................................... $ (17) $ (199) $ (319)
Equity securities.................................................... (100) (167) (356)
Mortgage loans on real estate........................................ (235) (350) (150)
Investment real estate............................................... 0 (3,937) (57)
--------- --------- ---------
Total impairments.................................................... $ (352) $ (4,653) $ (882)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities (not tax effected).................................. $ 2,020 $ (6,792) $ 18,018
Equity securities (net of applicable deferred taxes)................. $ 1,451 $ 455 $ 1,136
</TABLE>
Gross unrealized gains pertaining to equity securities were $2.4 million and
$0.6 million and gross unrealized losses were $0.5 million and $0.8 million,
before tax effect, at December 31, 1993 and 1992, respectively.
F-10
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. INVESTMENTS (CONTINUED)
Certain investments, principally fixed maturities and mortgage loans on
which the accrual of interest has been discontinued, amounted to $1.3 million
and $2.2 million at December 31, 1993 and 1992, respectively.
Certain investments totalling $324.9 million and $313.1 million, principally
fixed maturities and mortgages, were on deposit with insurance departments of
various states for the protection of policyholders at December 31, 1993 and
1992, respectively.
Of the fixed maturity investments, $8.8 million at amortized cost, less
other than temporary impairments, were rated as below investment grade as of
December 31, 1993. These investments have an associated market value of $9.1
million. As of December 31, 1992, $12.7 million at amortized cost, with an
associated market value of $12.7 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 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 estimated market values of investments in debt
securities are as follows as of December 31, 1993:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
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, 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 which carry
guarantees of various states.
F-11
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated market value of debt securities as of
December 31, 1993, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less....................................................... $ 5,248 $ 5,348
Due after one year through five years......................................... 32,288 34,589
Due after five years through ten years........................................ 18,347 19,758
Due after ten years........................................................... 9,938 10,864
----------- -----------
65,821 70,559
Mortgage-backed securities.................................................... 392,847 397,938
----------- -----------
$ 458,668 $ 468,497
----------- -----------
----------- -----------
</TABLE>
The amortized cost and estimated market values of investments in debt
securities are as follows as of December 31, 1992:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
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............................................ $ 133,350 $ 1,571 $ 604 $ 134,317
Obligations of states and political subdivisions..... 1,956 116 0 2,072
Debt securities issued by foreign governments........ 3,289 157 0 3,446
Corporate securities................................. 92,660 6,660 904 98,416
Private mortgage-backed securities................... 167,757 1,663 850 168,570
----------- ----------- ----------- -----------
Total................................................ $ 399,012 $ 10,167 $ 2,358 $ 406,821
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Included in U.S. government obligations as of December 31, 1992 are $126.3
million of mortgage-backed securities, of which $107.8 million carry a U.S.
government or quasi-government guarantee.
Proceeds from sales, maturities and repayments of investments in fixed
maturities for 1993, 1992 and 1991 totalled $128.5 million, $166.2 million, and
$65.4 million, respectively. Related gross investment gains and losses for the
period were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Gross gains.................................... $ 3,710 $ 4,286 $ 2,804
Gross losses................................... (387) (1,288) (531)
</TABLE>
F-12
<PAGE>
LAURENTIAN CAPITAL CORPORATION
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 and all nonfinancial 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 as of December 31, 1986 to the
current balance of $29.4 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.
4. DEBT
Debt as of December 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Amounts due under Revolving Underwriting Facility....... $ 54,822 $ 54,454
--------- ---------
--------- ---------
</TABLE>
Repayment of the outstanding indebtedness under the Revolving Underwriting
Facility (RUF) is due on April 25, 1994. The Company has been actively pursuing
refinancing of its presently outstanding debt obligations. While there can be no
assurances that the Company will be able to accomplish a refinancing of its
presently outstanding debt, management believes that the Company has the ability
to execute a plan which will accomplish the desired objectives before the RUF
becomes due.
The Company restructured its finances through the implementation of a five
year RUF for maximum unsecured borrowings of $55 million on April 25, 1989.
Pursuant to the terms of the RUF, the Company pays 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 which fixes the LIBOR component of the RUF at 7.94% beginning April
29, 1991 and continuing through April 25, 1994. There are covenants relating to
the Company's activities and
F-13
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. DEBT (CONTINUED)
financial condition. With respect to the financial condition covenants, the
Company must maintain a minimum net worth, as defined, and not permit a ratio of
outstanding indebtedness, as defined, to net worth to be greater than 1.0 to
1.0.
Interest expense included in the consolidated statements of operations was
$4.9 million, $5.0 million, and $5.0 million for 1993, 1992 and 1991,
respectively.
Cash paid for interest was $4.9 million, $5.3 million, and $5.2 million for
1993, 1992 and 1991, respectively.
5. FEDERAL INCOME TAXES
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences as of December 31, 1993 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Fixed maturities....................................................... $ 340
Net operating loss and credit carryforwards............................ 12,363
Value of business in force............................................. 2,966
Policyholder liabilities............................................... 1,056
Other assets and liabilities........................................... 3,423
---------
Total deferred tax assets................................................ 20,148
Valuation allowance.................................................... (8,735)
---------
Deferred tax assets -- net of valuation allowance........................ 11,413
---------
Deferred Tax Liabilities:
Deferred policy acquisition costs...................................... (19,833)
Equity securities...................................................... (1,008)
Mortgage loans and real estate......................................... (1,850)
Property, plant and equipment.......................................... (549)
---------
Deferred tax liabilities................................................. (23,240)
---------
Total deferred taxes -- net.............................................. $ (11,827)
---------
---------
</TABLE>
A valuation allowance of $8.7 million has been established as of December
31, 1993 for certain capital and operating loss carryforwards due to the
uncertainty of their eventual realization. The valuation allowance was reduced
by $588,000 during 1993 for the realization of benefits associated with the sale
of certain real estate assets. During 1994 and in later years 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 and 1991, 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.
F-14
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. FEDERAL INCOME TAXES (CONTINUED)
Details of the deferred tax provision for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1992 1991
--------- ---------
<S> <C> <C>
Deferred policy acquisition costs.................................................. $ (1,301) $ 223
Benefit and other policy liability changes......................................... 4,403 2,103
--------- ---------
$ 3,102 $ 2,326
--------- ---------
--------- ---------
</TABLE>
The Company's effective income tax rate varied from the statutory federal
income tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pre-tax income.............. $ 3,869 $ 3,460 $ 2,796
Dividends received and tax-exempt interest deduction..................... (36) (44) (125)
Reduction in valuation allowance......................................... (588) 0 0
Operating losses for which no benefit has been recognized................ 0 739 812
Permanent differences related to sales of subsidiaries................... 194 0 0
Net effects of purchase accounting adjustments........................... 0 (888) (728)
Other items, net......................................................... 145 196 22
--------- --------- ---------
Income tax expense on income............................................. $ 3,584 $ 3,463 $ 2,777
--------- --------- ---------
--------- --------- ---------
</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, 1993 was approximately $9.6 million. The unrecognized deferred tax
liability related to this temporary difference is $3.3 million. 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.
For federal income tax return purposes, the Company has total estimated
unused tax loss carryforwards as of December 31, 1993 as follows:
<TABLE>
<CAPTION>
GENERATED AMOUNT EXPIRATION
- ------------------------------------------------ --------- ----------------------
<S> <C> <C>
Pre-1984........................................ $ 164 1994 through 1998
1984............................................ 41 1999
1985............................................ 0 2000
1986............................................ 5,694 2001
1987............................................ 10,768 2002
1988............................................ 4,855 2003
1989............................................ 10,801 2004
1990............................................ 3,751 2005
1991............................................ 3,816 2006
1992............................................ 2,347 2007
1993............................................ 310 2008
---------
$ 42,547
---------
---------
</TABLE>
F-15
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. FEDERAL INCOME TAXES (CONTINUED)
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 $1.0 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 and $2.2 million, in
1992 and 1991, respectively, associated with certain tax loss carryforwards
related to previous acquisitions. For 1992 and 1991, 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 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 is reflected in the current year's 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.
Cash paid for federal income taxes, principally alternative minimum taxes,
was $0.3 million, $0.4 million, and $0.3 million for 1993, 1992 and 1991,
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 is
convertible into 3.75 shares of the Company's common stock until July 7, 1994,
and 2.75 shares from July 8, 1994 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
and 1992, the Company completed tender offers wherein 4,534 and 4,697 shares,
respectively, of the redeemable preferred stock were purchased for $87 and $75
per share, respectively, and subsequently retired. The mandatory redemption
provision for 1994 has not been satisfied as a result of the 1993 tender offer.
In order to satisfy the 1994 mandatory redemption provision, the Company must
redeem 6,868 additional shares.
The remaining 4.9 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 by the Company's insurance subsidiaries
during 1994 without prior notice or approval is $7.0 million. Dividend payments
of $4.3 million, $2.1 million, and $4.0 million were made to the Company by its
insurance subsidiaries during the years ended December 31, 1993, 1992 and 1991,
respectively.
F-16
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
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 17% 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>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Premium income............................................. $ 12,924 $ 15,131 $ 16,877
Dividends allocated........................................ 2,540 3,894 3,695
</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 1993, 1992, and 1991 are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT
DOLLAR AMOUNTS)
<S> <C> <C> <C>
Options outstanding, January 1................................. 351 266 279
Granted........................................................ 190 139 98
Exercised...................................................... 37 8 0
Cancelled...................................................... 49 46 111
--------- --------- ---------
Options outstanding, December 31............................... 455 351 266
--------- --------- ---------
--------- --------- ---------
Option price range at December 31.............................. $2.125 $2.125 $2.125
to to to
$6.875 $ 5.25 $ 5.25
Options exercisable at December 31 236 129 118
Options available for grant at December 31 345 449 302
</TABLE>
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 1993. There are currently
349,044 rights granted at exercise prices ranging from $2.125 to $5.50 per
share. Compensation expense recorded in 1993, 1992 and 1991 with respect to
these Rights was approximately $720,000, $966,000, and $262,000, respectively.
F-17
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCK OPTION AND OTHER INCENTIVE PLANS (CONTINUED)
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
1993, 1992 and 1991, the Company recognized associated expenses of approximately
$698,000, $532,000, and $382,000, respectively.
9. RELATED PARTY MATTERS
The Company paid or accrued approximately $209,000, $214,000, and $431,000,
to Group and its affiliates for various services in 1993, 1992, and 1991,
respectively.
During the fourth quarter of 1991, the Company obtained regulatory approval
for the acquisition of a block of insurance policies from Imperial. The effect
of this acquisition increased total revenues by $1.2 million.
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 $148,000, $98,000 and $58,000 to the
401(k) profit sharing savings plan during 1993, 1992 and 1991, 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. An additional $425,000 was
accrued in 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 to satisfy all plan obligations. Distribution was
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.
Net pension cost associated with the former defined benefit pension plan for
1992 and 1991 included the following components:
<TABLE>
<CAPTION>
1992 1991
------ ------
<S> <C> <C>
Service cost-benefits earned during the year................ $ 387 $ 401
Interest cost on projected benefit obligation............... 465 437
Actual return on plan assets................................ (350) (672)
Net amortization and deferral............................... (86) 349
------ ------
Net pension cost............................................ $ 416 $ 515
------ ------
------ ------
</TABLE>
The pension cost for 1992 includes a charge of $182,000 relating to a
partial settlement of the plan's liabilities resulting from the purchase of
certain annuities, and a credit of $262,000 relating to the cessation of service
cost accruals as of December 31, 1992 as a result of the Company's decision to
terminate the plan.
F-18
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions used in determining pension cost for the former defined benefit
plan in 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Weighted average discount rate.............................. 8% 8%
Rates of increase in compensation level..................... 6% 6%
Expected long-term rate of return on assets................. 8% 8%
</TABLE>
The funded status of the pension plan as of December 31, 1992 was as
follows:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation........................................... $ 3,699
---------
---------
Projected benefit obligation for service rendered to date.................. $ 3,699
Plan assets at fair value.................................................. 2,671
---------
Projected benefit obligation in excess of plan assets...................... 1,028
Unrecognized net (gain) and unrecognized prior service cost................ 0
Unrecognized net transition obligation..................................... 0
---------
Accrued pension costs...................................................... $ 1,028
---------
---------
</TABLE>
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 as of December 31, 1993 and 1992. Total premium income ceded during the
years ended December 31, 1993, 1992, and 1991 was $6.8 million, $6.4 million,
and $12.9 million, respectively. Reinsurance recoveries for the years ended
December 31, 1993, 1992 and 1991 were $6.8 million, $5.7 million and $10.7
million, respectively.
Included in reinsurance receivables are $1.7 million and $2.6 million
representing amounts recoverable for claims ceded to reinsurers as of December
31, 1993 and 1992, respectively. Included in other liabilities are $0.4 million
and $1.0 million representing amounts payable for premiums ceded to reinsurers
as of December 31, 1993 and 1992, respectively.
As of December 31, 1993, reinsurance receivables with carrying values of
$25.1 million were associated with two reinsurers.
12. COMMITMENTS AND CONTINGENCIES
LEASES
Other liabilities include a capitalized lease obligation associated with the
financing and leasing of Prairie's home office. In addition, the Company leases
office space, data processing equipment and certain other equipment under
operating leases expiring on various dates during 1994.
F-19
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Aggregate maturities of the capitalized lease obligation and future minimum
aggregate rental payments required under non-cancelable operating leases as of
December 31, 1993, are as follows:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASE LEASE
YEAR ENDING DECEMBER 31, OBLIGATION OBLIGATIONS
- ------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
1994.............................................................. $ 314 $ 566
1995.............................................................. 314 0
1996.............................................................. 201 0
1997.............................................................. 0 0
1998.............................................................. 0 0
----- -----
829 $ 566
-----
-----
Less amount representing interest................................. 88
-----
$ 741
-----
-----
</TABLE>
Rental expense for operating leases was approximately $0.7 million in 1993,
$1.7 million in 1992, and $1.6 million in 1991.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is 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. As of December 31, 1993, the Company was a party to a five year
Revolving Underwriting Facility (RUF) for maximum unsecured borrowings of $55
million maturing in April of 1994. Pursuant to the RUF, the Company pays
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 debt. The SWAP AGREEMENT is with a commercial
bank for a notional amount of $55 million. This agreement has 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 SWAP AGREEMENT matures at the time of
the RUF maturity. The Company is exposed to interest rate risk in the event of
nonperformance by the commercial bank.
INVESTMENT PORTFOLIO CREDIT RISK
BONDS:
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1993, approximately $8.8 million in
debt securities (1.9% 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.
The Company has approximately 87% of its $459 million fixed maturity
portfolio 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, 1993.
MORTGAGE LOANS:
Mortgage loans are primarily related to underlying real property investments
in office and apartment buildings and retail/commercial and industrial
facilities.
F-20
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1993, delinquent mortgage loans (i.e., loans where
payments on principal and/ or interest are over 60 days past due) amounted to
$1.3 million, or 4.4% of the loan portfolio. The Company had loans outstanding
in the states of Colorado and Florida, with principal balances in the aggregate
exceeding $4 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>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Net income................................................. $ 7,625 $ 6,298 $ 6,982
Capital and surplus........................................ 59,167 55,240 48,024
</TABLE>
F-21
<PAGE>
LAURENTIAN CAPITAL CORPORATION
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
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1993
REVENUES:
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>
F-22
<PAGE>
LAURENTIAN CAPITAL CORPORATION
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
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1992
REVENUES:
Premiums........................................................... $ 19,014 $ 19,999 $ 19,720 $ 21,453
Net investment income.............................................. 11,665 11,029 11,605 12,628
Realized investment gains (losses)................................. 700 813 (506) (954)
Other income....................................................... 707 593 721 1,211
--------- --------- --------- ---------
32,086 32,434 31,540 34,338
--------- --------- --------- ---------
BENEFITS AND EXPENSES:
Benefits and settlement expenses................................... 17,547 18,264 18,014 18,666
Amortization of deferred policy acquisition costs.................. 3,413 2,957 3,163 3,956
Insurance and other expenses....................................... 8,367 8,399 7,990 9,485
--------- --------- --------- ---------
29,327 29,620 29,167 32,107
--------- --------- --------- ---------
Income before income taxes......................................... 2,759 2,814 2,373 2,231
INCOME TAX EXPENSE (BENEFIT):
Current............................................................ 148 150 162 (99)
Deferred........................................................... 1,088 961 473 580
--------- --------- --------- ---------
1,236 1,111 635 481
--------- --------- --------- ---------
NET INCOME......................................................... $ 1,523 $ 1,703 $ 1,738 $ 1,750
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE................................................. $ 0.18 $ 0.20 $ 0.21 $ 0.21
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-23
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
Fixed maturities, at cost............................................................ $ 2,727 $ 3,238
Equity securities, at market......................................................... 10,372 1,403
Investment in real estate............................................................ 450 436
Cash................................................................................. 183 1,774
Investments in and advances to subsidiaries:
Investments in subsidiaries*....................................................... 112,802 107,223
Surplus debenture*................................................................. 30,500 35,000
Due from subsidiaries*............................................................. 826 820
Other................................................................................ 1,608 1,108
----------- -----------
$ 159,468 $ 151,002
----------- -----------
----------- -----------
LIABILITIES
Accrued expenses and other liabilities............................................... $ 2,800 $ 2,912
Deferred income tax (benefit)........................................................ (3,791) (3,000)
Debt................................................................................. 54,822 54,454
----------- -----------
Total liabilities.............................................................. 53,831 54,366
----------- -----------
Redeemable preferred stock........................................................... 4,153 4,606
----------- -----------
STOCKHOLDERS' EQUITY
Common stock......................................................................... 406 406
Capital in excess of par value....................................................... 59,071 59,010
Net unrealized gains (losses) on equity securities (substantially
all from subsidiaries).............................................................. 1,253 (198)
Treasury stock, at cost.............................................................. (2,818) (2,837)
Retained earnings (including undistributed income of subsidiaries)................... 43,572 35,649
----------- -----------
Total stockholders' equity..................................................... 101,484 92,030
----------- -----------
$ 159,468 $ 151,002
----------- -----------
----------- -----------
<FN>
- ------------------------
* Eliminated in consolidation.
</TABLE>
S-1
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Income from subsidiaries:
Management and service fees*................................................. $ 6,232 $ 6,496 $ 6,550
Dividends*................................................................... 4,332 2,133 4,000
Interest income*............................................................. 2,182 1,791 0
Realized investment loss*.................................................... 0 (1,452) 0
Net investment income.......................................................... 524 541 936
Realized investment gains (losses)............................................. 99 0 (41)
Other income................................................................... 8 14 7
--------- --------- ---------
13,377 9,523 11,452
--------- --------- ---------
EXPENSES
Operating and administrative................................................... 5,041 5,986 5,612
Depreciation and amortization.................................................. 180 246 268
Interest....................................................................... 4,838 4,961 4,884
--------- --------- ---------
10,059 11,193 10,764
--------- --------- ---------
Income (loss) before federal income taxes, cumulative effect of accounting
change and equity in income of subsidiaries................................... 3,318 (1,670) 688
Income tax benefit............................................................. (347) (500) (161)
--------- --------- ---------
Income (loss) before cumulative effect of accounting change and equity in
income of subsidiaries........................................................ 3,665 (1,170) 849
--------- --------- ---------
Cumulative effect of accounting change:
Adoption of SFAS 109......................................................... 400 0 0
--------- --------- ---------
Income (loss) before equity in income of subsidiaries.......................... 4,065 (1,170) 849
Equity in income of subsidiaries, less dividends received...................... 4,129 7,884 4,597
--------- --------- ---------
Net income..................................................................... $ 8,194 $ 6,714 $ 5,446
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
* Eliminated in consolidation.
</TABLE>
S-2
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operations:
Net income.................................................................... $ 8,194 $ 6,714 $ 5,446
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of adoption of SFAS 109................................... (400) 0 0
Realized investment losses (gains).......................................... (99) 1,452 41
Depreciation and amortization............................................... 180 246 268
Equity in subsidiaries' earnings*........................................... (8,461) (10,017) (8,597)
Dividends from subsidiaries*................................................ 4,332 2,133 4,000
Increase (decrease) in accrued expenses and liabilities..................... (111) 361 87
Increase (decrease) in deferred income taxes................................ (347) (439) (161)
Other items, net............................................................ 75 (953) (202)
--------- --------- ---------
Net cash provided by (used in) operations................................. 3,363 (503) (882)
--------- --------- ---------
Cash flow from investing activities:
Sale of investments to subsidiaries*........................................ 0 4,621 0
Repayments of surplus debenture*............................................ 4,500 0 0
Purchase of real estate..................................................... (13) (12) 0
Purchase of property and equipment.......................................... (172) (129) (96)
Purchases of investments.................................................... (8,987) (739) (104)
--------- --------- ---------
Net cash provided by (used in) investing activities....................... (4,672) 3,741 (200)
--------- --------- ---------
Cash flow from financing activities:
Proceeds from borrowing..................................................... 368 257 878
Net (purchases) sales of treasury shares, at cost........................... 19 (2,837) 0
Redemption of preferred stock............................................... (395) (351) 0
Dividends paid on preferred stock........................................... (271) (303) (297)
Other....................................................................... (3) 0 (9)
--------- --------- ---------
Net cash provided by (used in) financing activities....................... (282) (3,234) 572
--------- --------- ---------
Net increase (decrease) in cash................................................. (1,591) 4 1,254
Cash at beginning of year....................................................... 1,774 1,770 516
--------- --------- ---------
Cash at end of year............................................................. $ 183 $ 1,774 $ 1,770
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
* Eliminated in consolidation.
</TABLE>
S-3
<PAGE>
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Laurentian Capital Corporation (the
parent company) should be read in conjunction with the Laurentian Capital
Corporation and Subsidiaries consolidated financial statements and notes
thereto.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying parent company financial statements reflect only the
accounts of Laurentian Capital Corporation. The parent company's investment in
its subsidiaries is reflected on the equity basis. Intercompany accounts and
transactions have not been eliminated since consolidated financial statements
are not presented.
2. RELATED PARTY TRANSACTIONS
During 1992, the Company restructured its holding in Prairie States Life
Insurance Company (Prairie). Following approval by the Division of Insurance for
the State of South Dakota, Prairie was sold to a wholly-owned life insurance
subsidiary of the Company, Prairie National Life Insurance Company, of Rapid
City, South Dakota (Prairie National). As part of the consideration for Prairie
National purchasing Prairie, Prairie National issued capital stock and a $35
million surplus debenture to the parent company. Interest and repayment of
principal on the debenture is subject to prior approval by the South Dakota
Division of Insurance. Since April 4, 1992, the date of the restructuring, the
Division of Insurance has approved $2.2 million and $1.8 million in interest
payments associated with the surplus debenture for the years ended December 31,
1993 and 1992, respectively. Principal payments of $4.5 million were approved by
the Division of Insurance during 1993.
During 1992, the parent company sold equity securities to its insurance
subsidiaries at fair market value at the dates of sale. Total proceeds, which
consisted of cash and marketable securities, amounted to $7.9 million and
resulted in a loss on transfer of $1.5 million.
S-4
<PAGE>
SCHEDULE VI -- REINSURANCE
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------- ---------- ---------- --------- ---------- ---------------
ASSUMED
CEDED TO FROM PERCENTAGE OF
GROSS OTHER OTHER AMOUNT ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
---------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Life insurance in force........ $3,426,591 $ 817,980 $ 32,206 $2,640,817
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Premium:
Life insurance............... $ 68,845 $ 6,685 $ 297 $ 62,457 0.5%
Accident/health insurance.... 19,091 105 0 18,986 0
---------- ---------- --------- ----------
Total...................... $ 87,936 $ 6,790 $ 297 $ 81,443 0.4%
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year ended December 31, 1992:
Life insurance in force........ $3,733,568 $ 851,252 $ 13,484 $2,895,800
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Premium:
Life insurance............... $ 68,621 $ 6,289 $ 370 $ 62,702 0.6%
Accident/health insurance.... 17,619 135 0 17,484 0
---------- ---------- --------- ----------
Total...................... $ 86,240 $ 6,424 $ 370 $ 80,186 0.5%
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Year ended December 31, 1991:
Life insurance in force........ $4,094,329 $1,059,678 $ 37,838 $3,072,489
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Premium:
Life insurance............... $ 74,842 $ 12,714 $ 1,275 $ 63,403 2.0%
Accident/health insurance.... 16,290 142 0 16,148 0
---------- ---------- --------- ----------
Total...................... $ 91,132 $ 12,856 $ 1,275 $ 79,551 1.6%
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
S-5
<PAGE>
INDEX OF
EXHIBITS TO
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1993
LAURENTIAN CAPITAL CORPORATION
EXHIBIT
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
11. Statement re: computation of per share earnings............. E-2
22. Subsidiaries of the Company................................. E-3
24. Consent of Coopers & Lybrand................................ E-4
</TABLE>
E-1
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
<C> <S> <C> <C> <C>
(a) Shares outstanding............................................ 7,544,665 8,111,496 8,111,196
Number of days................................................ 6 90 204
(b) Shares outstanding............................................ 7,548,757 8,087,175 8,111,496
Number of days................................................ 359 30 161
(c) Shares outstanding............................................ 8,078,059
Number of days................................................ 31
(d) Shares outstanding............................................ 8,051,280
Number of days................................................ 30
(e) Shares outstanding............................................ 8,050,513
Number of days................................................ 31
(f) Shares outstanding............................................ 8,049,656
Number of days................................................ 92
(g) Shares outstanding............................................ 7,536,305
Number of days................................................ 61
(h) Shares outstanding............................................ 7,544,665
Number of days................................................ 1
------------- ------------- -------------
Average shares outstanding.................................... 7,548,690 7,983,611 8,111,329
------------- ------------- -------------
------------- ------------- -------------
Net income.................................................... $ 8,194,123 $ 6,713,680 $ 5,446,099
Less: Dividends on preferred stock............................ 271,460 290,460 304,962
------------- ------------- -------------
Net income available to common stockholders................... $ 7,922,663 $ 6,423,220 $ 5,141,137
------------- ------------- -------------
------------- ------------- -------------
Per share amount.............................................. $ 1.05 $ 0.80 $ 0.63
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company's Series A redeemable preferred stock are considered common
stock equivalents. These shares were not included in the computation of earnings
per share because their effect was antidilutive. Options granted to purchase the
Company's common stock are also considered common stock equivalents. These
options were not included in the computation of earnings per share because their
maximum possible dilution was not material.
E-2
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
The following table shows name and place of incorporation of each subsidiary
of the Company as of March 18, 1994. All subsidiaries conduct business in their
respective corporate names.
<TABLE>
<CAPTION>
PLACE OF
NAME INCORPORATION
- ---------------------------------------------------------- --------------------
<S> <C>
Loyal American Life Insurance Company Alabama
ADL Financial Services, Inc. North Carolina
Prairie National Life Insurance Company South Dakota
Prairie States Life Insurance Company South Dakota
Rushmore National Life Insurance Company South Dakota
Great Western Life Insurance Company Montana
Loyal Marketing Services, Inc. Alabama
Prairie States Marketing Services, Inc. Washington
Purple Cross Insurance Agency, Inc. Delaware
Laurentian American Corporation Delaware
Laurentian Marketing Services, Inc. Delaware
Laurentian Investment Services, Inc. Delaware
International Funeral Associates, Inc. Delaware
</TABLE>
E-3
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Laurentian Capital Corporation on Form S-8 (File No. 33-13881) of our report
dated February 11, 1994, on our audits of the consolidated financial statements
and financial statement schedules of Laurentian Capital Corporation as of
December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992, and
1991, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
Philadelphia, Pennsylvania
March 25, 1994
E-4
