<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
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1994 0-8403
</TABLE>
------------------------------
LAURENTIAN CAPITAL CORPORATION
------------------------------
<TABLE>
<S> <C>
DELAWARE 59-1611314
(State of Incorporation) (IRS Employer ID #)
</TABLE>
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:
<TABLE>
<S> <C>
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------------------------------------------- -----------------------------------------------
Common Stock, $.05 par value American Stock Exchange
</TABLE>
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 21, 1995: $14,876,136
Number of shares outstanding of the Registrant's Common Stock as of March 21,
1995:
Common Stock, $.05 Par Value -- 7,587,398 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 1995 Annual Meeting of
Stockholders
are incorporated by reference into Part III.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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
and related services. As the context requires, references herein to the Company
refer to the Company individually or to the Company together with its
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'). The Company's principal
non-insurance subsidiaries are International Funeral Associates, Inc., Hurst,
Texas ('IFA'), Laurentian Investment Services, Inc., Houston, Texas ('LIS'), and
CSW Management Services, Inc., Houston, Texas ('CSW').
Approximately 71.6% 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 Corporation ('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 81.4% of the
outstanding common stock of the Company beneficially owned by Group.
In November 1994, the Company engaged Oppenheimer & Co., Inc.
('Oppenheimer') as financial advisor to evaluate various strategies for
maximizing shareholder value, including possible business combinations or other
transactions. Oppenheimer is in the process of evaluating a variety of
alternatives and has contacted third parties in that connection. There can be no
assurances that the engagement will result in any transaction.
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.
2
<PAGE>
Of all the prefunded funerals in the United States, approximately 35% are
funded through pre-need life insurance and annuity products purchased from life
insurance companies, with the balance funded through various state and local
master funeral trusts. Prairie's operations are conducted in conjunction with
relationships with a variety of non-insurance companies connected with pre-need
products and services, including subsidiaries of the Company.
IFA is an association whose membership consists of funeral directors
throughout the United States. IFA members receive a variety of benefits (such as
discounts on casket purchases) as a result of their membership.
LIS provides trust management and investment advisory services for various
state and local master funeral trusts. CSW specializes in providing
administrative services, including accounting, tax reporting, commission
accounting and income and expense allocations, to various funeral trusts.
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.
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 and non-insurance operations. The Company believes that under
appropriate circumstances, it can acquire established life and health insurance
companies, compatible blocks of business or other companies that complement its
existing operations. The Company was active in acquisitions prior to 1988, but
limited its expansion activities from 1988 through 1993.
During 1994, the Company completed three acquisitions which it anticipates
will enhance the operations of its two principal insurance subsidiaries. Prairie
acquired Assured Security Life Insurance Company ('Assured') in July 1994, which
has resulted in expanded penetration into the pre-need life insurance and
annuity marketplace. In September 1994, the Company acquired CSW, which
specializes in pre-need trust administration services. In August 1994, Loyal
acquired Purity Financial Corporation ('Purity'), a marketing agency based in
Jacksonville, Florida which is anticipated to enhance Loyal's business within
the credit union market.
3
<PAGE>
GEOGRAPHIC DISTRIBUTION OF PREMIUM INCOME
The Company received premium income from all states in 1994. Based on the
premium income of the various subsidiaries in 1994, the Company's premium
revenue was distributed approximately as follows:
<TABLE>
<CAPTION>
PERCENT OF
STATE TOTAL PREMIUM
-------------------------------------------------------------------------- --------------
<S> <C>
Washington................................................................ 9.19%
Minnesota................................................................. 9.06
Tennessee................................................................. 8.26
California................................................................ 8.14
North Carolina............................................................ 5.99
Alabama................................................................... 5.35
Florida................................................................... 4.34
Texas..................................................................... 3.77
Mississippi............................................................... 3.54
South Dakota.............................................................. 3.35
Missouri.................................................................. 3.10
Arkansas.................................................................. 2.41
Georgia................................................................... 2.02
All Other................................................................. 31.48*
--------------
100.00%
--------------
--------------
</TABLE>
------------------
* No other state produced as much as 2% of premium income.
The Company operates primarily in the life and health insurance industry
and, therefore, does not present separate segment information with respect to
industry segments. Operations of non-life companies are not material to be
isolated for segment reporting purposes.
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,
---------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Life Insurance Terminations
(Individual only)
Death...................................... $ 32,089 $ 30,994 $ 28,047 $ 29,732 $ 26,679
Lapse...................................... $ 234,253 $ 307,907 $ 426,220 $ 647,448 $ 671,909
Expiry..................................... $ 40,693 $ 38,934 $ 20,427 $ 19,620 $ 22,628
Surrender.................................. $ 144,691 $ 129,870 $ 103,815 $ 136,327 $ 143,676
Lapse Ratio................................ 11.8% 12.7% 15.1% 19.6% 16.6%
</TABLE>
4
<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
at December 31, 1994:
<TABLE>
<CAPTION>
PERCENT
BOOK VALUE OF TOTAL
------------- INVESTMENTS
(IN -------------
THOUSANDS)
<S> <C> <C>
Fixed maturities:
Bonds --
United States Government and government agencies
and authorities............................................................... $ 175,193 30.2%
States, municipalities, political subdivisions and
foreign governments........................................................... 3,570 0.6
Public utilities................................................................. 13,241 2.3
All other corporate bonds........................................................ 300,059 51.6
------------- -------------
Total fixed maturities........................................................ 492,063 84.7
------------- -------------
Equity securities:
Common stocks....................................................................... 6,955 1.2
Preferred stocks.................................................................... 3,683 0.6
------------- -------------
Total equity securities....................................................... 10,638 1.8
------------- -------------
Mortgage loans on real estate......................................................... 21,420 3.7
Investment real estate................................................................ 4,489 0.8
Policy loans.......................................................................... 50,600 8.7
Short-term investments................................................................ 1,616 0.3
------------- -------------
Total investments............................................................. $ 580,826 100.0%
------------- -------------
------------- -------------
</TABLE>
In accordance with generally accepted accounting principles, all
investments other than equity securities and the portion of fixed maturities
which the Company has designated as available for sale are valued at either
original or amortized cost. The equity securities and fixed maturities available
for sale are valued at market with any unrealized investment gains or losses
reflected in stockholders' equity, net of applicable deferred taxes. Investments
are adjusted for other than temporary declines in carrying value when deemed
appropriate. 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.
The investment strategy of the Company emphasizes investment quality fixed
income securities. Over the past several years the Company has reduced its
percentage of investments held in equity securities, mortgage loans, investment
real estate, and policy loans from 40% in 1988 to 15% at the end of 1994. As of
December 31, 1994, 84.7% of investments were in fixed income securities, and of
that total, over 99% of such securities are classified as investment grade.
5
<PAGE>
The quality of the Company's fixed maturity investments at December 31,
1994, according to the rating assigned by nationally recognized statistical
rating organizations, is as follows:
<TABLE>
<CAPTION>
% OF % OF ESTIMATED
NAIC BOOK 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 $ 265,229 53.9 45.7 $ 246,704
AA................................................ 1 106,389 21.6 18.3 100,046
A................................................. 1 105,033 21.4 18.1 99,689
BBB+.............................................. 2 4,043 0.8 0.7 4,046
BBB............................................... 2 6,427 1.3 1.1 6,421
BBB-.............................................. 2 1,806 0.4 0.3 1,813
------------- ----------- ----- -------------
Total investment grade.......................... 488,927 99.4 84.2 458,719
------------- ----------- ----- -------------
BB+............................................... 3 775 0.2 0.1 775
BB................................................ 3 1,145 0.2 0.2 1,147
B and below....................................... 4-6 1,216 0.2 0.2 1,195
------------- ----------- ----- -------------
Total below investment grade.................... 3,136 0.6 0.5 3,117
------------- ----------- ----- -------------
Total fixed maturities.......................... $ 492,063 100.0 84.7 $ 461,836
------------- ----------- ----- -------------
------------- ----------- ----- -------------
</TABLE>
------------------
(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, 1994, the latest date
for which such ratings are available.
(3) At amortized cost for fixed maturities held to maturity, and at market value
for fixed maturities available for sale. See Notes 1 and 2 to the Company's
consolidated financial statements for the year ended December 31, 1994.
The following table shows the investment results of the Company for the
years 1990 through 1994:
<TABLE>
<CAPTION>
NET INVESTMENT
CASH, ACCRUED INCOME EXCLUDING PERCENTAGE EARNED
INVESTMENT INCOME GAIN OR LOSS FROM ON AVERAGE OF
YEAR ENDED AND INVESTMENTS SALE OF CASH AND
DECEMBER 31, AT DECEMBER 31 INVESTMENTS INVESTMENTS
--------------- ----------------- ----------------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
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
1994 607,266 44,876 7.5
</TABLE>
6
<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 premium has
declined. The reduction was 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. Expressed
as a percentage of direct premiums written, ceded reinsurance has decreased from
approximately 33% in 1987 to 6.3% in 1994.
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 by the federal
government in a manner similar to companies in other industries. However,
certain restrictions on consolidating life insurance company income with
non-insurance income are applicable to the Company; thus, the Company is not
able to fully consolidate the operating results of its subsidiaries for federal
income tax purposes.
7
<PAGE>
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, to specify 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, $376,000 in 1994 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.
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.
8
<PAGE>
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.
The RBC rules currently in effect attempt to measure statutory capital and
surplus needs based upon the risks in an insurance company's mix of products and
investment portfolio. An RBC 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 RBC 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 RBC rules will prompt different
levels of regulatory action depending upon the result of RBC analysis for each
company.
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 (its Adjusted Capital compared to its Authorized
Control Level, as defined in the regulations). 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 in 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, 1994.
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.
9
<PAGE>
EMPLOYEES
The Company had approximately 327 full-time employees and 2,617 full and
part-time agents at December 31, 1994. 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. See Note 10 to
Consolidated Financial Statements. The costs for all these benefits, except
profit sharing plans, amounted to approximately $1.7 million in 1994.
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 $8,800.
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 at December 31, 1994 is approximately $3.5 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 $476,000 as of December 31, 1994. The book
value of the property at December 31, 1994 is approximately $3.4 million.
Prairie leases marketing and administrative space in several other
locations. The aggregate monthly rental for these locations is approximately
$4,000.
CSW and IFA lease marketing and administrative space in their respective
offices. The aggregate monthly rental for these locations is approximately
$6,000.
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 $5,500.
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, 1994.
10
<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>
1994:
First quarter....................................................... $ 9 $ 8 1/4
Second quarter...................................................... 9 5/8 8 1/4
Third quarter....................................................... 11 5/8 10
Fourth quarter...................................................... 12 10
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
</TABLE>
The closing market price of the Company's common stock on March 21, 1995,
was $12.00 per share.
At March 21, 1995, 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, 1994. 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.
11
<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,
-----------------------------------------------------------------
1994 1993 1992 1991 1990
------------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums...................................... $ 85,751 $ 81,443 $ 80,186 $ 79,551 $ 79,889
Realized investment gains (losses)............ 2,323 2,773 53 3,696 (2,548)
Net investment and other income............... 49,611 50,038 50,159 47,774 46,557
------------- ----------- ----------- ----------- -----------
Total revenues.............................. $ 137,685 $ 134,254 $ 130,398 $ 131,021 $ 123,898
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Benefits and expenses......................... $ 125,119 $ 122,876 $ 120,221 $ 122,798 $ 139,973
Income tax expense (benefit).................. 3,058 3,584 3,463 2,777 (410)
Income (loss) before cumulative effect of
accounting change........................... 9,508 7,794 6,714 5,446 (15,665)
Cumulative effect of accounting change:
Effect of implementation of SFAS 109........ 0 400 0 0 0
Net income (loss)............................. $ 9,508 $ 8,194 $ 6,714 $ 5,446 $ (15,665)
PER SHARE DATA
Income (loss) before cumulative effect of
accounting change........................... $ 1.22 $ 1.00 $ 0.80 $ 0.63 $ (1.97)
Cumulative effect of accounting change:
Effect of implementation of SFAS 109........ 0 .05 0 0 0
------------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ 1.22 $ 1.05 $ 0.80 $ 0.63 $ (1.97)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
Weighted average number of shares
outstanding................................. 7,580 7,549 7,984 8,111 8,111
Stockholders' equity.......................... $ 13.02 $ 13.44 $ 12.20 $ 10.84 $ 10.06
BALANCE SHEET DATA
Invested assets............................... $ 580,826 $ 585,284 $ 542,984 $ 528,013 $ 501,122
Total assets.................................. 1,027,886 972,732 942,180 952,398 931,059
Debt.......................................... 45,000 54,822 54,454 54,249 53,377
Stockholders' equity.......................... 98,796 101,484 92,030 87,918 81,641
</TABLE>
12
<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 1994 was $9.5 million, or $1.22 per
share, as compared to net income of $8.2 million, or $1.05 per share, in 1993
and a net income of $6.7 million, or $0.80 per share, in 1992. 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 in 1993, the Company's net income for 1993 was $7.8
million, or $1.00 per share.
The 1994 net income of $9.5 million, or $1.22 per share, compares favorably
to 1993 net income of $8.2 million, or $1.05 per share. The improvement in net
income was due primarily to increased life sales, a lower effective tax rate,
and reduced interest expense on the Company's debt. During 1994, the Company
refinanced its debt at a lower interest rate and used internal funds to repay
$10 million of the debt.
The 1993 net income of $8.2 million, or $1.05 per share, compared 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, compared 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
------------------------------
YEAR ENDED PERCENTAGE
DECEMBER 31, AMOUNT INCREASE
----------------------------------------------------------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
1994........................................................... $ 85,751 5.3%
1993........................................................... 81,443 1.6
1992........................................................... 80,186 0.8
</TABLE>
Premium income improved in 1994 as compared to 1993 due principally to
increased life insurance sales at Prairie. This increase is primarily applicable
to the pre-need life insurance line of business, where Prairie has benefitted
from expanded relationships with funeral directors. In addition, Loyal's cancer
indemnity product sales improved over the prior year.
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.
13
<PAGE>
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.
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>
1994................................................... $ 51,934 (1.7)%
1993................................................... 52,811 5.2
1992................................................... 50,212 (2.4)
</TABLE>
During 1994, there was a decrease of 1.7% in net investment income,
realized investment gains and other income as compared to 1993. During 1993 and
early 1994, the Company experienced substantial prepayments on its fixed
maturity investments as individuals and corporations took advantage of low
interest rates and refinanced their debt obligations. These significant
prepayments were reinvested at lower interest rates and, as expected, lowered
the overall portfolio yield during the year. This decrease during 1994 was
partially offset by the Company's sale of its investment in North American
National Corporation ('NANC') in the first quarter for a gross realized gain of
$1.7 million. Also, partially offsetting the decline in portfolio yield has been
an increase in invested assets. The increase in invested assets was partially
offset by the Company's payment of $10 million in conjunction with its debt
refinancing during 1994.
During 1993, there was an increase of 5.2% in net investment 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. The significant prepayments received in 1993 were reinvested at
lower interest rates. The Company's increased level of realized investment gains
resulted primarily from the exercise of call provisions on these debt
obligations, usually at a premium. Net investment income remained stable as a
lower portfolio yield was offset by increased invested assets.
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,
principally to reduce real estate to appraised values, as compared to $0.9
million in 1991. Net investment income in 1992 increased $1.6 million when
compared to 1991, due to growth in the Company's invested asset base combined
with the accelerated recognition of income on mortgage-backed securities due to
increases in prepayment activity.
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>
1994.................................................................. 92.1% 53.8%
1993.................................................................. 94.7 56.2
1992.................................................................. 90.4 59.5
</TABLE>
14
<PAGE>
BENEFITS
Benefits for 1994 decreased as a percentage of premium to 92.1% from 94.7%
in 1993. The decrease in benefits was due to a decrease in accident and health
insurance benefits incurred by Loyal of approximately $0.9 million. In addition,
life insurance benefits at Loyal decreased by approximately $0.7 million due to
improved claims experience.
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.
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.
EXPENSES
Expenses as a percentage of premium income in 1994 decreased to 53.8% as
compared to 56.2% in 1993. Interest expense during 1994 was $1.3 million lower
than during 1993 due to the refinancing of the Company's debt. The refinanced
principal was $10 million less than the debt at December 31, 1993, and the
effective interest rate was also lower on the refinanced amount due to the
maturity of an Interest Rate Swap Agreement.
Expenses as a percentage of premium income in 1993 decreased to 56.2% as
compared to 59.5% in 1992. The decrease was due primarily to continued emphasis
on cost containment and reduction as indicated by a $1.7 million decline in
selling and administrative expenses.
Expenses as a percentage of premium income in 1992 remained fairly stable
when compared to 1991. Following a period of administrative consolidation,
operational efficiencies continued during the year.
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.
The Company's effective tax rate for the year ended December 31, 1994 was
24.3%, as compared to 31.5% for the year ended December 31, 1993. The effective
tax rate for the year ended December 31, 1994 was lower than the enacted
statutory tax rate of 34% due primarily to the reduction in valuation allowances
associated with the deferred tax asset related to certain real estate assets
sold in 1994, net operating losses utilized in 1994, and temporary differences
of the non-life companies. Excluding the effect of these real estate
transactions, the effective rate for 1994 would have been marginally higher than
the effective rate for 1993.
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 financial statement and tax 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 that Rushmore and Assured
do not qualify to join in the filing of the consolidated Company return until
15
<PAGE>
1995 and 2000, respectively. 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 Internal Revenue 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 NET INCOME EARNINGS
DECEMBER 31, AMOUNT PER SHARE
----------------------------------------------------------------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1994........................................................... $ 9,508 $ 1.22
1993........................................................... 8,194 1.05
1992........................................................... 6,714 0.80
</TABLE>
The increase in net income for 1994 as compared to 1993 of $1.3 million is
due to increased life sales (offset by a decrease in the yield of the investment
portfolio), lower benefits and expenses, 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.
Expenses were further reduced by $1.3 million as a result of the refinancing of
the Company's debt at a lower interest rate which occurred during 1994. The
Company also repaid $10 million of debt at the date of refinancing using
internal funds.
The increase in net income for 1993 as compared to 1992 of $1.5 million was
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.
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.
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 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.
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 115, 'Accounting for Certain Investments in
Debt and Equity Securities' ('SFAS 115'). 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 designated as fixed
maturities held to
16
<PAGE>
maturity. The balance of the Company's fixed maturity portfolio has been
designated as available for sale, and must be reported at fair value. The
initial effect of the adoption of SFAS 115 on the Company was an increase in
stockholders' equity of $4.3 million (or $0.57 per share) as of the adoption
date of January 1, 1994. Due to the general decline in the bond market
experienced during 1994, the effect of SFAS 115 was to decrease stockholders'
equity by $10.5 million (or $1.38 per share), at December 31, 1994.
In accordance with generally accepted accounting principles, all of the
Company's investments are reported in the financial statements at either their
original or amortized cost or their market value. At December 31, 1994, the
fixed maturity investments had an amortized cost of $508.0 million with a market
value of $461.8 million, $46.2 million below amortized cost. The Company's
investment strategy is to hold its investments to maturity, and accordingly, the
Company does not intend to realize the losses on its portfolio which have been
generated as a result of increases in interest rates. The Company had $21.4
million in mortgage loans at December 31, 1994, 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.
The Company holds a substantial component of its investment portfolio in
mortgage-backed securities and collateralized mortgage obligations (collectively
'MBS'). At the end of 1994, the book value of the total investment in MBS
amounted to $437 million, or 75% of total investments. These are instruments
collateralized by pools of residential and commercial mortgages, which return
interest and principal payments to the investor. Approximately 27% 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 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.
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
during 1993 and early 1994. The total prepayments received on the MBS portfolio
amounted to $52.7 million during 1994, compared to $137.3 million during 1993.
Amounts received associated with these prepayments were accounted for as
adjustments to investment yield. The Company 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
therefore reduce 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'), Target Amortization Class ('TAC') and
subordinate 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 of the MBS. No loss of principal has
occurred on the Company's MBS portfolio in recent years. The Company's
investment policy has been to avoid investments in highly leveraged
17
<PAGE>
derivative instruments. For instance, the Company has not owned such
mortgage-backed instruments as interest only, principal only, or inverse
floaters.
Policy loans at December 31, 1994 were $50.6 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 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 $3.6 million in 1994, $4.9 million in
1993, and $5.0 million in 1992.
As of December 31, 1993, the Company's indebtedness under its then
outstanding Revolving Underwriting Facility ('RUF') amounted to $54.8 million,
which was due on April 25, 1994. On April 25, 1994, the Company entered into a
five year revolving credit facility in the amount of $45 million to refinance
part of the RUF. The new credit facility, together with the payment of $10
million by the Company, satisfied the repayment of the RUF. Pursuant to the
terms of the new credit facility, the Company will pay interest at a variable
rate equal to 1.125% above the London Interbank Offered Rate. There are
covenants relating to the Company's activities and financial condition,
including a requirement that the Company maintain a minimum net worth, as
defined under the new credit facility, of $75 million. In connection with the
new credit facility, DLFC has agreed, for the benefit of the lenders, to
maintain the minimum net worth at the greater of $75 million and the amount of
debt outstanding.
The Company issued approximately 58,000 shares of its Series A Preferred
Stock on July 7, 1987. The preferred stock 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 issuance, with additional
reductions of 20% of the original issue being required in each of the following
four years. During 1994, the Company redeemed 8,524 shares of the preferred
stock at $100 per share, in accordance with the mandatory redemption provision,
and subsequently retired the stock. In order to satisfy the 1995 mandatory
redemption provision, the Company must redeem 9,832 additional shares.
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, 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. The maximum dividend
distribution which can be made to the Company by Loyal during 1995 without prior
notice or approval is $3.4 million. Upon prior notice to the Division of
Insurance of the State of South Dakota ('Division of Insurance'), the maximum
dividend distribution which can be made by Prairie States to Prairie National
Life Insurance Company ('Prairie National'), a wholly-owned life insurance
subsidiary of the Company, during 1995 under current insurance law is $5.6
million. This would then be available to Prairie National to remit interest and
principal payments due under its surplus debenture to the Company, subject to
prior approval of the state regulatory authorities.
During 1992, the Company restructured its holding in Prairie States.
Following approval by the Division of Insurance, Prairie States was sold to
Prairie National. As part of the consideration for
18
<PAGE>
Prairie National purchasing Prairie States, 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, 1994, Prairie National exceeded its
required level of surplus by $8.1 million. Since April 4, 1992, the date of the
restructuring, and through the end of 1994 the Division of Insurance has
approved $5.9 million in interest payments associated with the surplus
debenture, of which $1.9 million was approved during 1994. Principal payments of
$6.5 million were approved by the Division of Insurance during 1994. The effects
of these transactions are eliminated in consolidation.
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 1995 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 by amendment of this Form 10-K.
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 1995 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 by amendment of this
Form 10-K.
19
<PAGE>
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 1995 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 by amendment
of this Form 10-K.
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 1995 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 by amendment of this
Form 10-K.
20
<PAGE>
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 November 9, 1994,
reporting its issuance of a press release announcing that it had engaged
Oppenheimer & Co., Inc. as a financial advisor to evaluate various
strategies for maximizing shareholder value, including possible business
combinations or other transactions.
(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.
Exhibit Material contracts:
10.
10.1 Executive Stock Option Plan of the Company, effective as of 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.*
10.2 Management Services Agreement for the 1994 fiscal year by and between the Company and
Desjardins Laurentian Financial Corporation, adopted by the Board of Directors of the
Company on May 3, 1994, incorporated by reference herein from Exhibit 10.2.1 to the Form
8-K Current Report of the Company dated May 3, 1994.
10.3 Credit Agreement dated as of April 25, 1994 among the Company, the Lenders named therein,
and National Bank of Canada, New York Branch, as Agent, incorporated by reference herein
from Exhibit B to the Form 8-K Current Report of the Company dated April 25, 1994.
10.4 Stock Pledge Agreement made as of April 25, 1994 by the Company, the Banks named therein,
and National Bank of Canada as Collateral Custody Agent, incorporated by reference herein
from Exhibit C to the Form 8-K Current Report of the Company dated April 25, 1994.
10.5 Long-Term Financing Support Agreement dated as of April 25, 1994 between the Company and
Desjardins Laurentian Financial Corporation, incorporated by reference herein from
Exhibit D to the Form 8-K Current Report of the Company dated April 25, 1994.
</TABLE>
------------------
* Compensatory plan, contract or arrangement.
21
<PAGE>
<TABLE>
<S> <C>
10.6 Agreement dated as of April 25, 1994 among Desjardins Laurentian Financial Corporation,
the Company, and National Bank of Canada in its capacity as Agent, incorporated by
reference herein from Exhibit E to the Form 8-K Current Report of the Company dated April
25, 1994.
10.7 Deferred Compensation Agreement and Amendment thereto 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.*
10.8 Retirement and Consulting Agreement between a subsidiary of the Company and Arnold M.
Snortland, a former director of the Company, incorporated by reference herein from the
Form 8-K Current Report of the Company dated March 12, 1993.*
10.9 Change of Control Agreement between the Company and Robert T. Rakich, President and Chief
Executive Officer of the Company, incorporated by reference herein from Exhibit 10.9 to
Form 8-K Current Report of the Company dated December 22, 1994, which amended and
restated a prior agreement between such parties dated December 13, 1993.*
10.10 Change of Control Agreement between the Company and Bernhard M. Koch, Senior Vice
President, Chief Financial Officer, Treasurer and Secretary of the Company, incorporated
by reference herein from Exhibit 10.10 to Form 8-K Current Report of the Company dated
December 22, 1994, which amended and restated a prior agreement between such parties
dated December 13, 1993.*
10.11 Change of Control Agreement between the Company and David L. Wilson, Jr., Senior Vice
President, Chief Investment Officer of the Company, incorporated by reference herein from
Exhibit 10.11 to Form 8-K Current Report of the Company dated December 22, 1994, which
amended and restated a prior agreement between such parties dated August 31, 1994.*
</TABLE>
------------------
* Compensatory plan, contract or arrangement.
<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 L.L.P. See Exhibit Index.
Exhibit 27. Financial Data Schedule. See Exhibit Index.
</TABLE>
22
<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 27, 1995
23
<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>
<S> <C> <C>
/s/Claude Castonguay Chairman of the Board and March 27, 1995
Claude Castonguay Director
/s/Robert T. Rakich President, Chief Executive Officer March 27, 1995
Robert T. Rakich and Director
/s/Bernhard M. Koch Senior Vice President, Chief March 27, 1995
Bernhard M. Koch Financial Officer, Treasurer and
Secretary
/s/Thomas W. Alesi Assistant Vice President and March 27, 1995
Thomas W. Alesi Chief Accounting Officer
/s/Thomas E. Beach Director March 27, 1995
Thomas E. Beach
/s/Jared M. Billings Director March 27, 1995
Jared M. Billings
/s/Stephen B. Bonner Director March 27, 1995
Stephen B. Bonner
/s/Robert J. Ferguson Director March 27, 1995
Robert J. Ferguson
/s/Jack Kinder, Jr. Director March 27, 1995
Jack Kinder, Jr.
/s/Robert D. Larrabee Director March 27, 1995
Robert D. Larrabee
/s/Guy Rivard Director March 27, 1995
Guy Rivard
/s/Humberto Santos Director March 27, 1995
Humberto Santos
/s/Alan J. Zakon Director March 27, 1995
Alan J. Zakon
</TABLE>
24
<PAGE>
LAURENTIAN CAPITAL CORPORATION
AND SUBSIDIARIES
FORM 10-K, PART II, ITEM 8
YEAR ENDED DECEMBER 31, 1994
<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, 1994 and 1993............................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
FINANCIAL STATEMENT SCHEDULES
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, 1994 and 1993 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt and
equity securities in 1994 and changed its method of accounting for income taxes
in 1993.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 17, 1995
F-2
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
----------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost (market, 1994 -- $243,191)...... $ 273,418 $ 0
Fixed maturities, at amortized cost (market, 1993 -- $468,497)....................... 0 458,668
Fixed maturities available for sale, at market (amortized cost, 1994 -- $234,537).... 218,645 0
Equity securities, at market (cost, 1994 -- $11,313; 1993 -- $28,481)................ 10,638 30,379
Mortgage loans on real estate........................................................ 21,420 29,438
Investment real estate, net of accumulated depreciation (1994 -- $862; 1993 --
$816).............................................................................. 4,489 4,643
Policy loans......................................................................... 50,600 51,677
Short-term investments............................................................... 1,616 10,479
----------- ---------
Total investments................................................................ 580,826 585,284
Cash................................................................................... 20,250 8,722
Accounts, notes and premiums receivable, net of allowance for uncollectible amounts
(1994 -- $1,072; 1993 -- $935)....................................................... 5,379 5,011
Reinsurance receivables................................................................ 92,170 38,982
Accrued investment income.............................................................. 6,190 5,855
Deferred policy acquisition costs...................................................... 74,085 71,745
Costs in excess of net assets of business acquired, net of accumulated amortization
(1994 -- $5,507; 1993 -- $5,219)..................................................... 7,362 7,130
Property and equipment, net of accumulated depreciation (1994 -- $11,806;
1993 -- $10,542)..................................................................... 11,738 11,972
Other assets........................................................................... 3,535 1,780
Assets held in separate accounts....................................................... 226,351 236,251
----------- ---------
Total assets..................................................................... $ 1,027,886 $ 972,732
----------- ---------
----------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits............................................................... $ 436,318 $ 411,951
Unearned premiums.................................................................... 1,710 1,804
Other policy claims and benefits payable............................................. 12,033 12,629
----------- ---------
450,061 426,384
Other policyholders' funds............................................................. 179,143 122,409
Debt................................................................................... 45,000 54,822
Other liabilities...................................................................... 17,289 15,257
Current income taxes................................................................... 241 145
Deferred income taxes.................................................................. 7,711 11,827
Liabilities related to separate accounts............................................... 226,351 236,251
----------- ---------
Total liabilities................................................................ 925,796 867,095
----------- ---------
Commitments and contingent liabilities
Redeemable preferred stock, Series A Convertible, $.01 par value,
at redemption value
Shares authorized: 5 million
Shares issued: 57,767
Outstanding: 1994 -- 32,939; 1993 -- 41,528........................................ 3,294 4,153
----------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.05 par value
Shares authorized: 20 million
Shares issued: 8,111,496............................................................. 406 406
Capital in excess of par value......................................................... 59,127 59,071
Net unrealized investment gains (losses), net of tax: 1994 -- $5,633; 1993 -- $645..... (10,934) 1,253
Treasury stock, at cost (shares: 1994 -- 524,098; 1993 -- 562,739)..................... (2,656) (2,818)
Retained earnings...................................................................... 52,853 43,572
----------- ---------
Total stockholders' equity....................................................... 98,796 101,484
----------- ---------
Total liabilities, preferred stock and stockholders' equity...................... $ 1,027,886 $ 972,732
----------- ---------
----------- ---------
</TABLE>
See notes to consolidated financial statements.
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,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums................................................................. $ 85,751 $ 81,443 $ 80,186
Net investment income.................................................... 44,876 46,820 46,927
Realized investment gains................................................ 2,323 2,773 53
Other income............................................................. 4,735 3,218 3,232
----------- ----------- -----------
137,685 134,254 130,398
----------- ----------- -----------
Benefits and expenses:
Benefits and settlement expenses......................................... 79,013 77,115 72,491
Amortization of deferred policy acquisition costs........................ 14,568 13,226 13,489
Insurance and other expenses............................................. 31,538 32,535 34,241
----------- ----------- -----------
125,119 122,876 120,221
----------- ----------- -----------
Income before income taxes and cumulative effect of
accounting change........................................................ 12,566 11,378 10,177
Income tax expense:
Current.................................................................. 1,145 250 361
Deferred................................................................. 1,913 3,334 3,102
----------- ----------- -----------
3,058 3,584 3,463
----------- ----------- -----------
Income before cumulative effect of accounting change....................... 9,508 7,794 6,714
Cumulative effect of accounting change:
Adoption of SFAS 109..................................................... 0 400 0
----------- ----------- -----------
Net income................................................................. $ 9,508 $ 8,194 $ 6,714
----------- ----------- -----------
----------- ----------- -----------
Net income available to common shareholders:
Net income............................................................... $ 9,508 $ 8,194 $ 6,714
Less: dividends on preferred stock....................................... 227 271 290
----------- ----------- -----------
$ 9,281 $ 7,923 $ 6,424
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Income before cumulative effect of accounting change..................... $ 1.22 $ 1.00 $ 0.80
Cumulative effect of accounting change:
Adoption of SFAS 109.................................................. 0 .05 0
----------- ----------- -----------
Net income............................................................... $ 1.22 $ 1.05 $ 0.80
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding (in thousands)......................... 7,580 7,549 7,984
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- ----------- ---------
<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............................................... 59,071 59,010 58,892
Issuance of treasury stock................................................. 56 0 0
Redemption of preferred stock.............................................. 0 61 118
--------- ----------- ---------
Balance at end of year..................................................... 59,127 59,071 59,010
--------- ----------- ---------
Net Unrealized Gains (Losses), net of tax
Balance at beginning of year............................................... 1,253 (198) (653)
Adoption of SFAS 115 on January 1, 1994.................................... 4,328 0 0
Change during the year..................................................... (16,515) 1,451 455
--------- ----------- ---------
Balance at end of year..................................................... (10,934) 1,253 (198)
--------- ----------- ---------
Treasury Stock
Balance at beginning of year............................................... (2,818) (2,837) 0
Treasury shares purchased.................................................. (63) 0 (2,877)
Shares issued from treasury................................................ 225 19 40
--------- ----------- ---------
Balance at end of year..................................................... (2,656) (2,818) (2,837)
--------- ----------- ---------
Retained Earnings
Balance at beginning of year............................................... 43,572 35,649 29,273
Net income................................................................. 9,508 8,194 6,714
Dividends on preferred stock............................................... (227) (271) (338)
--------- ----------- ---------
Balance at end of year..................................................... 52,853 43,572 35,649
--------- ----------- ---------
Total Stockholders' Equity................................................... $ 98,796 $ 101,484 $ 92,030
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operations:
Net income.................................................................... $ 9,508 $ 8,194 $ 6,714
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of adoption of SFAS 109................................... 0 (400) 0
Deferred income taxes....................................................... 1,913 3,334 3,102
Increase in policy liabilities and accruals, policyholders' funds and
current income taxes...................................................... 24,678 12,498 7,455
Decrease (increase) in accrued investment income and accounts and notes
receivable................................................................ (702) 270 (188)
Increase (decrease) in other liabilities.................................... 251 1,334 (4,252)
Amortization of deferred policy acquisition costs........................... 14,568 13,226 13,489
Policy acquisition costs deferred........................................... (16,908) (10,996) (9,974)
Depreciation expense........................................................ 1,517 1,535 1,324
Amortization of goodwill.................................................... 288 290 268
Realized investment (gains)................................................. (2,323) (2,773) (53)
Other, net.................................................................. (2,705) (3,172) (1,633)
--------- --------- ---------
Net cash provided by operating activities................................. 30,085 23,340 16,252
--------- --------- ---------
Cash flow from investing activities:
Sales of:
Fixed maturities available for sale......................................... 7,230 0 0
Fixed maturities held to maturity........................................... 0 0 0
Fixed maturities............................................................ 0 7,070 40,703
Equities and other investments.............................................. 20,936 8,814 6,072
Maturity or repayment of:
Fixed maturities available for sale......................................... 25,755 0 0
Fixed maturities held to maturity........................................... 46,601 0 0
Fixed maturities............................................................ 0 185,108 127,549
Other investments........................................................... 10,519 9,973 12,805
Purchases of:
Fixed maturities available for sale......................................... (79,856) 0 0
Fixed maturities held to maturity........................................... (36,185) 0 0
Fixed maturities............................................................ 0 (244,376) (181,273)
Subsidiaries................................................................ (6,435) (738) 0
Other investments........................................................... (3,945) (12,100) (3,126)
Property and equipment, net................................................. (1,323) (1,440) (2,717)
Short-term investments, net................................................... 8,862 12,993 (12,996)
Other, net.................................................................... 0 65 2
--------- --------- ---------
Net cash (used in) investing activities................................... (7,841) (34,631) (12,981)
--------- --------- ---------
Cash flow from financing activities:
Proceeds from borrowing....................................................... 45,000 368 257
Repayment of debt............................................................. (54,822) 0 (52)
Net (purchases) sales of treasury shares, at cost............................. 218 19 (2,837)
Dividends paid on preferred stock............................................. (253) (271) (303)
Redemption of preferred stock................................................. (859) (395) (351)
--------- --------- ---------
Net cash (used in) financing activities................................... (10,716) (279) (3,286)
--------- --------- ---------
Net increase (decrease) in cash................................................. 11,528 (11,570) (15)
Cash at beginning of year....................................................... 8,722 20,292 20,307
--------- --------- ---------
Cash at end of year............................................................. $ 20,250 $ 8,722 $ 20,292
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<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
Organization And Principles Of Consolidation -- The consolidated financial
statements include, after intercompany eliminations, Laurentian Capital
Corporation (individually or collectively with its subsidiaries, the Company),
and its wholly-owned subsidiaries, principally Loyal American Life Insurance
Company (Loyal), and Prairie National Life Insurance Company (Prairie National),
a life insurance holding company, which owns Prairie States Life Insurance
Company (Prairie States). Prairie States owns Rushmore National Life Insurance
Company (Rushmore) and Assured Security Life Insurance Company (Assured).
Prairie States acquired Assured during 1994 for $6.7 million in a transaction
accounted for as a purchase.
The Imperial Life Assurance Company of Canada (Imperial) directly owned
approximately 72% of the Company and Imperial's parent, Laurentian Financial,
Inc., directly owned approximately 10% of the Company at December 31, 1994.
Laurentian Financial, Inc. is a wholly-owned subsidiary of The Laurentian Group
Corporation (Group). Effective January 1, 1994, Group became a subsidiary of
Desjardins Laurentian Financial Corporation (Desjardins Laurentian). The
ultimate owner of Desjardins Laurentian is La Confederation des caisses
popularies et d'economie Desjardins du Quebec.
Basis of Presentation -- The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP), which
vary from accounting principles used by its subsidiaries to prepare financial
statements filed with state insurance departments.
Investments -- Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards Number 115,
'Accounting for Certain Investments in Debt and Equity Securities' (SFAS 115).
SFAS 115 requires that debt securities are to be classified as either held to
maturity (carried at amortized cost), available for sale (carried at market
value with net unrealized gains or losses reported in stockholders' equity), or
trading (carried at market value with unrealized gains or losses reported in net
income).
The Company believes that it has the ability and intent to hold to maturity
its debt security investments that are classified as held to maturity. The
Company also recognizes that there may be circumstances where it may be
appropriate to sell a security prior to maturity in response to changes in a
variety of circumstances. In recognizing the need for the flexibility to respond
to such changes, the Company has designated a portion of its fixed maturity
portfolio as available for sale. The Company has not classified any of its fixed
maturity securities as trading.
SFAS 115 does not permit a retroactive application to prior years'
financial statements. The effect of adopting SFAS 115 was to increase the
carrying amount of fixed maturity securities classified as available for sale by
$6.5 million, increase deferred income taxes payable by $2.2 million, and
increase stockholders' equity by $4.3 million (or $0.57 per share), as of
January 1, 1994. Due to the general decline in the bond market experienced
during 1994, the carrying amount of fixed maturities available for sale,
deferred income taxes payable and stockholders' equity decreased by $15.9
million, $5.4 million and $10.5 million (or $1.38 per share), respectively, at
December 31, 1994.
Investments are reported as follows:
- Fixed maturities held to maturity (bonds, notes and redeemable
preferred stocks) -- at cost, adjusted for amortization of premium
or discount and other than temporary impairments in market value.
The Company has the ability and intent to hold such investments to
maturity and accordingly, reports these investments at amortized
cost.
- Fixed maturities available for sale (bonds, notes and redeemable
preferred stocks) -- at current market value, adjusted for other
than temporary impairments in market value.
- Equity securities (common and nonredeemable preferred stocks) -- at
current market value, adjusted for other than temporary impairments
in market value.
- Mortgage loans on real estate -- at unpaid balances, net of
valuation allowances and adjusted for amortization of premium or
discount.
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)
- Investment real estate -- at cost, net of valuation allowances and
less allowances for depreciation computed on the straight-line
method.
- Policy loans -- at unpaid balances.
- Short-term investments -- at cost, which approximates market.
Realized gains and losses on sales of investments are recognized in net
income. The cost of investments sold is determined on a specific identification
basis. Temporary market value changes in equity securities and fixed maturities
available for sale are reflected as unrealized gains or losses directly in
stockholders' equity net of related income taxes and, accordingly, have no
effect on net income. The rate of amortization of discount or premium on
mortgage-backed securities is adjusted to reflect the current rate of
prepayments on the related securities. The amortization adjustments are recorded
as net investment income in the period that the rate of prepayment changed.
Deferred Policy Acquisition Costs -- The costs of acquiring new business,
which vary with and are directly related to the production of new business, have
been deferred to the extent that such costs are deemed recoverable. Such costs
include commissions, certain costs of policy issuance and underwriting, and
certain variable marketing expenses.
Costs deferred related to traditional life and health insurance are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues were estimated using the same assumptions used
for computing liabilities for future policy benefits.
Costs deferred related to universal life insurance and deferred annuity
products are being amortized over the lives of the policies, in relation to the
present value of estimated gross profits.
Included in deferred policy acquisition costs are amounts representing the
present value of future profits on business in force of acquired insurance
subsidiaries, which represents the portion of the cost to acquire such
subsidiaries that is allocated to the value of the right to receive future cash
flows from insurance contracts existing at the dates of acquisition. These
amounts are amortized with interest over the estimated remaining life of the
acquired policies.
Costs In Excess Of Net Assets Of Business Acquired -- The costs in excess
of net assets of business acquired are being amortized to expense on a
straight-line basis over periods ranging from twenty-five to forty years.
Property And Equipment -- Property and equipment is reported at cost.
Depreciation is charged to operations over the estimated useful lives of the
assets using the straight-line method.
Cash -- For purposes of reporting cash flows, cash includes all cash and
short-term deposits available on demand, including certificates of deposit with
an initial term to maturity of three months or less.
Policy Liabilities -- Liabilities for future policy benefits of traditional
ordinary life policies are computed using a net level premium method including
assumptions as to investment yields, mortality, withdrawals, and other
assumptions commensurate with the Company's past experience, modified as
necessary to reflect anticipated trends, including possible unfavorable
deviations. The liability for future policy benefits for universal life policies
and deferred annuities is equal to the accumulated fund balance including
interest credits at rates declared by the Company. Interest rate assumptions
range from 4.25% to 10%. Assumed mortality and withdrawals are based on various
industry published tables modified as appropriate for the Company's actual
experience. Morbidity and withdrawals are based on actual and projected
experience.
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)
Life insurance in force, net of reinsurance, was approximately $2.6 billion
as of December 31, 1994 and 1993.
Liabilities for other policy claims and benefits payable include provisions
for reported claims and an estimate based on ratios developed through prior
experience for claims incurred but not reported.
Assets Held In And Liabilities Related To Separate Accounts -- Investment
annuity deposits and related liabilities represent deposits maintained by
several banks under a previously offered tax deferred annuity program. The
Company receives an annual fee from each bank for sponsoring the program and
depositors may elect to purchase an annuity from the Company at which time funds
are transferred to the Company.
Premium Revenue And Related Expenses -- For traditional life and accident
and health products, premiums are recognized as revenue when legally collectible
from policyholders. Policy reserves have been established in a manner which
allocates policy benefits and expenses on a basis consistent with the
recognition of related premiums and generally results in the recognition of
profits over the premium-paying period of the policies.
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is classified as a liability. Revenue
is recognized as amounts are assessed against the policyholder account for
mortality coverage and contract expenses. Surrender benefits reduce the account
value. Death benefits are expensed when incurred, net of the account value.
For investment type contracts, principally deferred annuity contracts,
premiums are treated as policyholder deposits and are recorded as liabilities.
Benefits paid reduce the policyholder liability. Revenues for investment
products consist of investment income, with profits recognized as investment
income earned in excess of the amount credited to the contracts. Reserves for
these contracts represent the premiums received, plus accumulated interest.
Contract benefits that are charged to expense include benefit claims incurred in
excess of related contract values, and interest credited to contract values.
Income Taxes -- Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes' (SFAS
109). This statement requires the use of the asset and liability method of
accounting for deferred income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and their respective tax bases. Deferred tax assets
and liabilities are measured by applying enacted statutory tax rates expected to
apply to taxable income in the years in which those deferred tax assets and
liabilities are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that such change is enacted.
Prior years' financial statements have not been restated to reflect the
provisions of SFAS 109. The adoption of SFAS 109 resulted in a cumulative
benefit of $400,000 for the year ended December 31, 1993, or $0.05 per common
share.
Reinsurance -- Insurance liabilities are reported gross of the effects of
reinsurance. Reinsurance receivables, including amounts related to insurance
liabilities, are reported as assets. Estimated reinsurance receivables are
recognized in a manner consistent with the liabilities related to the underlying
reinsured contracts.
Recently Issued Accounting Standards -- In May 1993, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 114, 'Accounting by Creditors for Impairment of a Loan' (SFAS
114), as amended by SFAS 118, 'Accounting by Creditors for Impairment of a Loan
-- Income Recognition and Disclosures' (SFAS 118), which
F-9
<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)
establishes accounting standards for creditors when a loan is deemed impaired.
These statements are primarily applicable to the Company's commercial loan
portfolio, as residential loans are excluded. The Company has determined that
the adoption of these statements will not have a material effect on the
Company's financial position or results of operations, as the Company's impaired
loan portfolio is not material. The Company will adopt these statements
effective January 1, 1995.
Reclassifications -- Certain reclassifications have been made in the
previously reported financial statements to make the prior year amounts
comparable to those of the current year.
2. INVESTMENTS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 38,230 $ 39,243 $ 37,718
Equity securities................................................... 572 485 656
Mortgage loans on real estate....................................... 2,376 3,331 4,721
Policy loans........................................................ 3,006 3,082 3,301
Short-term investments.............................................. 997 1,053 1,094
Investment real estate.............................................. 1,819 1,820 2,215
Other investments................................................... 288 583 823
--------- --------- ---------
47,288 49,597 50,528
Less investment expenses............................................ 2,412 2,777 3,601
--------- --------- ---------
Net investment income............................................... $ 44,876 $ 46,820 $ 46,927
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 624 $ 3,306 $ 2,799
Equity securities................................................... 1,750 310 658
Mortgage loans on real estate....................................... 139 (205) (311)
Investment real estate.............................................. (230) (671) (3,093)
Other investments................................................... 40 33 0
--------- --------- ---------
Total realized investment gains..................................... $ 2,323 $ 2,773 $ 53
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in realized investment gains (losses) for the years ended December
31 are adjustments for other than temporary impairments to the carrying value of
investments, as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 0 $ (17) $ (199)
Equity securities................................................... 0 (100) (167)
Mortgage loans on real estate....................................... 0 (235) (350)
Investment real estate.............................................. 0 0 (3,937)
--------- --------- ---------
Total impairments................................................... $ 0 $ (352) $ (4,653)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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)
The increase (decrease) in unrealized gains (losses) on fixed maturities
and equity securities for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Fixed maturities held to maturity (not tax effected)................. $ (33,678) $ 0 $ 0
Fixed maturities (not tax effected).................................. $ 0 $ 2,020 $ (6,792)
Fixed maturities available for sale (net of applicable deferred
taxes)............................................................. $ (14,817) $ 0 $ 0
Equity securities (net of applicable deferred taxes)................. $ (1,698) $ 1,451 $ 455
</TABLE>
Gross unrealized gains pertaining to equity securities were $0.1 million
and $2.4 million and gross unrealized losses were $0.8 million and $0.5 million,
before tax effect, at December 31, 1994 and 1993, respectively.
Certain investments, principally fixed maturities and mortgage loans on
which the accrual of interest has been discontinued, amounted to $0.2 million
and $1.3 million at December 31, 1994 and 1993, respectively.
Certain investments totalling $358.7 million and $324.9 million,
principally fixed maturities and mortgage loans, were on deposit with insurance
departments of various states for the protection of policyholders at December
31, 1994 and 1993, respectively.
Of the fixed maturity investments, $3.4 million at amortized cost, less
other than temporary impairments, were rated as below investment grade as of
December 31, 1994. These investments have an associated market value of $3.1
million. As of December 31, 1993, $8.8 million at amortized cost, with an
associated market value of $9.1 million, were rated as below investment grade.
Most of these securities have been evaluated by the National Association of
Insurance Commissioners and found to be suitable for reporting at amortized
cost. The Company does not expect these investment holdings to result in a
material adverse effect on either the financial condition or results of
operations. The Company's investment strategy is to hold fixed income
instruments to maturity and to recognize other than temporary impairments on
those investments where reduction in amounts to be received at maturity is
likely.
The amortized cost and fair values of investments in fixed maturities as of
December 31, 1994 are as follows:
Fixed Maturities Held to Maturity
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government or other U.S. government corporations
or agencies....................................... $ 96,744 $ 68 $ 12,864 $ 83,948
Obligations of states and political subdivisions.... 251 8 0 259
Debt securities issued by foreign governments....... 22 0 3 19
Corporate securities................................ 5,188 119 83 5,224
Private mortgage-backed securities.................. 171,213 793 18,265 153,741
----------- ----------- ----------- -----------
Total............................................... $ 273,418 $ 988 $ 31,215 $ 243,191
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
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)
Included in U.S. government obligations are $94.0 million of
mortgage-backed securities at amortized cost, with an associated fair value of
$81.4 million, of which $67.0 million carry a U.S. government or
quasi-government guarantee.
Fixed Maturities Available for Sale
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government or other U.S. government corporations
or agencies....................................... $ 80,413 $ 591 $ 2,555 $ 78,449
Obligations of states and political subdivisions.... 3,650 2 355 3,297
Corporate securities................................ 30,377 673 579 30,471
Private mortgage-backed securities.................. 120,097 0 13,669 106,428
----------- ----------- ----------- -----------
Total............................................... $ 234,537 $ 1,266 $ 17,158 $ 218,645
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Included in U.S. government obligations are $64.2 million of
mortgage-backed securities at amortized cost, with an associated fair value of
$62.5 million, of which $50.2 million carry a U.S. government or
quasi-government guarantee. Included in obligations of states and political
subdivisions are $3.2 million of mortgage-backed securities at amortized cost,
with an associated fair value of $2.8 million, which carry guarantees of various
states.
The amortized cost and fair value of fixed maturities as of December 31,
1994, by contractual maturity, are as follows. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held to Maturity
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less...................................................... $ 466 $ 450
Due after one year through five years........................................ 5,454 5,278
Due after five years through ten years....................................... 833 871
Due after ten years.......................................................... 1,436 1,439
----------- -----------
8,189 8,038
Mortgage-backed securities................................................... 265,229 235,153
----------- -----------
$ 273,418 $ 243,191
----------- -----------
----------- -----------
</TABLE>
F-12
<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)
Fixed Maturities Available for Sale
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less...................................................... $ 726 $ 720
Due after one year through five years........................................ 20,564 20,655
Due after five years through ten years....................................... 9,267 9,109
Due after ten years.......................................................... 16,560 16,398
----------- -----------
47,117 46,882
Mortgage-backed securities................................................... 187,420 171,763
----------- -----------
$ 234,537 $ 218,645
----------- -----------
----------- -----------
</TABLE>
The amortized cost and fair values of investments in fixed maturities as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government or other U.S. government corporations
or agencies....................................... $ 135,816 $ 2,975 $ 1,038 $ 137,753
Obligations of states and political subdivisions.... 4,138 57 32 4,163
Debt securities issued by foreign governments....... 1,027 42 0 1,069
Corporate securities................................ 56,690 4,618 201 61,107
Private mortgage-backed securities.................. 260,997 4,916 1,508 264,405
----------- ----------- ----------- -----------
Total............................................... $ 458,668 $ 12,608 $ 2,779 $ 468,497
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Included in U.S. government obligations are $128.5 million of
mortgage-backed securities, with an associated fair value of $130.3 million, of
which $91.0 million carry a U.S. government or quasi-government guarantee.
Included in obligations of states and political subdivisions are $3.3 million of
mortgage-backed securities, with an associated fair value of $3.3 million, which
carry guarantees of various states.
Proceeds from sales, maturities and repayments of investments in fixed
maturities for 1994, 1993 and 1992 totalled $79.6 million, $192.2 million, and
$168.3 million, respectively. Related gross investment gains and losses for the
period were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Gross gains.............................................................. $ 850 $ 3,710 $ 4,286
Gross losses............................................................. (226) (387) (1,288)
</TABLE>
F-13
<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 instruments. Therefore, presentation of the estimated fair
value of assets based on the above methodology without a corresponding
revaluation of liabilities associated with insurance contracts can be
misinterpreted.
Policy Loans
Policy loans are issued with interest rates that range from 3 1/2% to 8%,
depending on the terms of the insurance policy. Future cash flows of policy
loans are uncertain and difficult to predict. As a result, management deems it
impractical to calculate the fair value of policy loans.
Mortgage Loans and Real Estate
Mortgage loans are valued at unpaid balances, net of valuation allowances
and adjusted for amortization of discount or premium. The Company has not been
active in mortgage lending for some time, and the carrying value of the loan
portfolio has decreased from $73.0 million at December 31, 1986 to the current
balance of $21.4 million. Approximately 75% of the portfolio consists of
commercial loans. After comparing the yield and maturity make-up of the
portfolio with current offerings of mortgage-backed securities (both residential
and commercial), the Company believes that the fair value of its mortgage loans
approximates its current carrying value. Real estate is valued at cost less
accumulated depreciation. Appraisals are obtained on a periodic basis and
adjustments are made when necessary to ensure carrying values are not in excess
of the underlying market values of the property.
4. DEBT
Debt as of December 31 is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Amounts due..................................................... $ 45,000 $ 54,822
--------- ---------
--------- ---------
</TABLE>
On April 25, 1994, the Company entered into a revolving credit facility in
the amount of $45 million which matures on April 25, 1999 to refinance part of
its previously outstanding Revolving Underwriting Facility ('RUF') which matured
at that date. The new credit facility, together with the payment of $10 million
by the Company, satisfied the repayment of the RUF. Pursuant to the terms of the
new credit facility, the Company will pay interest at a variable rate equal to
1.125% above the London Interbank Offered Rate (LIBOR). The debt is
collateralized by the Company's stock in one of its insurance subsidiaries.
There are covenants relating to the Company's activities and financial
condition, including a requirement that the Company maintain a minimum net
worth, as defined under the new credit facility, of $75 million.
As of December 31, 1993, the Company's indebtedness under the RUF amounted
to $54.8 million. Pursuant to the terms of the RUF, the Company paid interest at
a variable rate, with a maximum rate equal to 0.30% above LIBOR. On March 6,
1991, the Company had entered into an Interest Rate Swap Agreement which fixed
the LIBOR component of the RUF at 7.94% beginning April 29, 1991 through April
25, 1994.
F-14
<PAGE>
4. DEBT (CONTINUED)
Interest expense included in the consolidated statements of operations was
$3.6 million, $4.9 million, and $5.0 million for 1994, 1993 and 1992,
respectively.
Cash paid for interest was $4.0 million, $4.9 million, and $5.3 million for
1994, 1993 and 1992, respectively.
Repayment of the revolving credit facility is scheduled as follows:
<TABLE>
<S> <C>
1995......................................................................... $ 0
1996......................................................................... 0
1997......................................................................... 4,583
1998......................................................................... 9,167
1999......................................................................... 31,250
---------
Total................................................................... $ 45,000
---------
---------
</TABLE>
5. FEDERAL INCOME TAXES
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ----------
<S> <C> <C>
Deferred Tax Assets:
Fixed maturities......................................................... $ 0 $ 340
Fixed maturities available for sale...................................... 5,403 0
Equity securities........................................................ 1,041 0
Value of business in force............................................... 2,850 2,966
Policyholder liabilities................................................. 3,233 1,056
Net operating loss and credit carryforwards.............................. 8,274 12,363
Other assets and liabilities............................................. 3,054 3,423
--------- ----------
Total deferred tax assets.................................................. 23,855 20,148
Valuation allowance...................................................... (7,193) (8,735)
--------- ----------
Deferred tax assets -- net of valuation allowance.......................... 16,662 11,413
--------- ----------
Deferred Tax Liabilities:
Deferred policy acquisition costs........................................ (19,352) (19,833)
Fixed maturities......................................................... (447) 0
Equity securities........................................................ 0 (1,008)
Mortgage loans and real estate........................................... (3,888) (1,850)
Property, plant and equipment............................................ (686) (549)
--------- ----------
Deferred tax liabilities................................................... (24,373) (23,240)
--------- ----------
Total deferred taxes -- net................................................ $ (7,711) $ (11,827)
--------- ----------
--------- ----------
</TABLE>
A valuation allowance of $7.2 million and $8.7 million has been established
as of December 31, 1994 and 1993, respectively, for certain capital and
operating loss carryforwards and temporary differences due to the uncertainty of
their eventual realization. The valuation allowance was reduced by $1.5 million
during 1994 for the realization of benefits associated with the deferred tax
assets related to certain real estate sold during 1994, net operating losses
utilized in 1994, and temporary differences of the non-life companies. The
valuation allowance was reduced by $0.6 million during 1993 for the realization
of benefits associated with the sale of certain real estate assets. The
valuation
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)
allowance against deferred tax assets will be continually evaluated
and adjustments will be reflected in the Statement of Operations as an increase
or decrease in income tax expense.
For 1992, under previously enacted GAAP, the total provision for federal
income tax differed from amounts currently payable due to providing deferred
taxes on certain items reported for financial statement purposes in periods
which differed from those in which they were reported for tax purposes.
Details of the deferred tax provision for the year ended December 31, 1992
are as follows:
<TABLE>
<S> <C>
Deferred policy acquisition costs.............................................. $ (1,301)
Benefit and other policy liability changes..................................... 4,403
---------
$ 3,102
---------
---------
</TABLE>
The Company's effective income tax rate varied from the statutory federal
income tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pre-tax
income............................................................... $ 4,270 $ 3,869 $ 3,460
Dividends received and tax-exempt interest deduction................... (53) (36) (44)
Reduction in valuation allowance....................................... (1,542) (588) 0
Distribution from Policyholders' Surplus Account....................... 340 0 0
Operating losses for which no benefit has been
recognized........................................................... 0 0 739
Permanent differences related to sales of subsidiaries................. 0 194 0
Net effects of purchase accounting adjustments......................... 0 0 (888)
Other items, net....................................................... 43 145 196
--------- --------- ---------
Income tax expense on income........................................... $ 3,058 $ 3,584 $ 3,463
--------- --------- ---------
--------- --------- ---------
</TABLE>
Under previous life insurance company tax laws, a portion of the Company's
gain from operations which was not subject to current income taxation was
accumulated for tax purposes in memoranda accounts designated as the
Policyholders' Surplus Accounts. The aggregate accumulation in these accounts at
December 31, 1994 was approximately $8.6 million. The unrecognized deferred tax
liability related to this temporary difference is $3.0 million. During 1994, the
Company recognized a tax liability of $0.3 million on Prairie States'
Policyholders' Surplus Account due to distributions in excess of its
Shareholders' Surplus Account balance. With respect to the other Policyholders'
Surplus Accounts, should the accumulation in the Policyholders' Surplus Accounts
exceed certain stated maximums, or if certain other events occur, all or a
portion of the Policyholders' Surplus Accounts may be subject to federal income
taxes at rates then in effect. Deferred taxes have not been established for such
amounts since the Company does not anticipate paying taxes on the Policyholders'
Surplus Accounts.
F-16
<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 return purposes, the Company has total estimated
unused tax loss carryforwards at December 31, 1994 as follows:
<TABLE>
<CAPTION>
GENERATED AMOUNT EXPIRATION
--------------------------------------------------------------- --------- -----------
<S> <C> <C>
1986........................................................... $ 205 2001
1987........................................................... 2,748 2002
1988........................................................... 6,027 2003
1989........................................................... 7,791 2004
1990........................................................... 3,751 2005
1991........................................................... 3,816 2006
1992........................................................... 2,419 2007
1993........................................................... 276 2008
---------
$ 27,033
---------
---------
</TABLE>
For federal income tax purposes, the Company has total estimated investment
tax credit carryforwards of $0.2 million which expire in years 1997 through
1999. The Company has a total estimated alternative minimum tax (AMT)
carryforwards of $1.8 million which can be utilized in future tax years to
reduce current taxes payable. Utilization of this AMT credit is limited to the
excess, if any, of the Company's regular tax liability over its AMT liability.
However, this credit can be carried forward indefinitely into future tax years.
Included in the tax loss and credit carryforwards are certain amounts that may
only be utilized by the company that generated the loss.
The Company recognized tax benefits of $2.7 million in 1992 associated with
certain tax loss carryforwards related to previous acquisitions. For 1992, under
the then enacted GAAP pronouncements, these benefits were recorded as an
adjustment to the purchase price allocation and were reflected as decreases in
Deferred Income Taxes, Costs In Excess of Net Assets Acquired, and Deferred
Policy Acquisition Costs in the consolidated balance sheets. For 1994 and 1993,
under SFAS 109, deferred tax assets have been established for the benefits
arising from net loss and credit carryforwards of the Company and its
subsidiaries. Future utilization of the net loss and credit carryforwards of the
life insurance companies will not affect the Company's effective tax rate in
those years because the full tax benefit for these items has been reflected in
the financial statements. A portion of the benefit realized from the future
utilization of the net losses of the non-life companies will affect the
Company's effective tax rates in those years because a valuation allowance has
been established against some of these deferred tax assets.
Cash paid for federal income taxes was $1.0 million, $0.3 million, and $0.4
million for 1994, 1993 and 1992, respectively.
6. REDEEMABLE PREFERRED STOCK
The Company has authorized 5 million shares of preferred stock of which
approximately 58,000 shares were issued on July 7, 1987. Each share of Series A
Redeemable Preferred Stock is entitled to receive cumulative annual dividends of
$6 per share. Each share of the Series A Redeemable Preferred Stock was
convertible into 3.75 shares of the Company's common stock until July 7, 1994,
and is convertible into 2.75 shares until July 7, 1997, subject to adjustment in
certain events. The stock has a liquidation preference of $100 per share plus
accrued dividends and is subject to mandatory redemption provisions which
provide that no more than 80% of the original issue will be outstanding at the
end of the sixth year after the issuance, with further reductions of 20% of the
original issue being required in each of the following four years. During 1993,
the Company completed a tender offer
F-17
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. REDEEMABLE PREFERRED STOCK (CONTINUED)
wherein 4,534 shares of the redeemable
preferred stock were purchased for $87 per share and subsequently retired.
During 1994, the Company redeemed 8,524 shares of the preferred stock at $100
per share, in accordance with the mandatory redemption provision, and
subsequently retired the stock. In order to satisfy the 1995 mandatory
redemption provision, the Company must redeem 9,832 additional shares by July 7,
1995.
The remaining 4.97 million unissued shares of preferred stock may be
divided into series with rights and preferences established at the discretion of
the Board of Directors.
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividend payments to the Company from its insurance subsidiaries are
restricted by state insurance law as to the amount that may be paid without
prior notice or approval by insurance regulatory authorities. The maximum
dividend distribution which can be made to the Company by Loyal during 1995
without prior notice or approval is $3.4 million. Upon prior notice to state
regulatory authorities, the maximum dividend distribution which can be made by
Prairie States to Prairie National during 1995 under current insurance law is
$5.6 million. This distribution would then be available to Prairie National to
remit interest and principal payments due under its surplus debenture to the
Company, subject to prior approval of the state regulatory authorities. The
unpaid balance of the surplus debenture is $24 million at December 31, 1994.
Dividend payments of $4.3 million and $2.1 million were made to the Company
by its insurance subsidiaries during the years ended December 31, 1993 and 1992,
respectively. Surplus debenture interest and principal payments were $8.4
million, $6.8 million and $1.2 million for the years ended December 31, 1994,
1993 and 1992, respectively.
In connection with the 1989 acquisition of Rushmore, the policyholders of
Rushmore are entitled to 90% of the statutory accounting earnings arising from
the existing participating business during the ten years after the acquisition.
In addition, the statutory surplus which was in existence at the date of
acquisition has been distributed to the policyholders.
Approximately 14% of the Company's insurance in force is related to
participating insurance policies. A portion of the Company's earnings is
allocated to these policies based on excess interest earnings, mortality savings
and premium loading experience. Premium income and dividends allocated to
participating policies during the past three years were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Premium income.................................... $ 11,761 $ 12,924 $ 15,131
Dividends allocated............................... 2,129 2,540 3,894
</TABLE>
F-18
<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
STOCK OPTION PLAN
Under the terms of the Company's Amended and Restated Executive Stock
Option Plan (Plan), options to purchase up to the greater of 800,000 shares or
10.3% of the Company's outstanding common stock may be granted to officers and
key employees. Options are granted at not less than market value on the date of
grant and are exercisable during the term fixed by the Company, but not earlier
than six months, nor later than ten years after the date of the grant.
Transactions for 1994, 1993, and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(AMOUNTS IN THOUSANDS
EXCEPT DOLLAR AMOUNTS)
<S> <C> <C> <C>
Options outstanding, January 1.................................... 455 351 266
Granted........................................................... 126 190 139
Exercised......................................................... 79 37 8
Cancelled......................................................... 5 49 46
--------- --------- ---------
Options outstanding, December 31.................................. 497 455 351
--------- --------- ---------
--------- --------- ---------
Option price range at December 31................................. $ 2.125 $ 2.125 $ 2.125
to to to
$ 8.50 $ 6.875 $ 5.25
Options exercisable at December 31................................ 298 236 129
Options available for grant at December 31........................ 303 345 449
</TABLE>
The Plan allows the Company to grant up to 800,000 Rights to officers and
key employees. Rights entitle the grantee to receive the appreciation in value
of the shares (the difference between market price of a common share at the time
of exercise of the Rights and the base price) in cash. The Rights are
exercisable during the term fixed by the Company, but in no case sooner than six
months or later than ten years after the date of grant.
No Rights were exercised or cancelled during 1994. There are currently
349,044 rights granted at exercise prices ranging from $2.125 to $5.50 per
share. Compensation expense recorded in 1994, 1993 and 1992 with respect to
these Rights was approximately $1.3 million, $0.7 million and $1.0 million,
respectively.
DEFERRED AND INCENTIVE COMPENSATION PLANS
The Company has various incentive and deferred compensation plans
administered by the Human Resources Committee of the Board of Directors. In
1994, 1993 and 1992, the Company recognized associated expenses of approximately
$680,000, $698,000, and $532,000, respectively.
F-19
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. RELATED PARTY MATTERS
The Company paid or accrued approximately $152,000, $209,000, and $214,000,
to Desjardins Laurentian and its affiliates for various services in 1994, 1993,
and 1992, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit sharing savings plan for employees
who meet certain eligibility requirements. This plan provides for a Company
matching contribution of 25-50% of eligible employee contributions up to 6% of
salary. Supplemental Company contributions are provided based on consolidated
earnings. The Company contributed approximately $152,000, $148,000 and $98,000
to the 401(k) profit sharing savings plan during 1994, 1993 and 1992,
respectively, for employee matching. Effective January 1, 1993, the Company
instituted a profit sharing element which provides for contributions by the
Company ranging from 2-6% of the annual salary of eligible employees.
Additionally, $437,000 and $425,000 were accrued in 1994 and 1993 for the plan's
profit sharing element.
In January 1993, the Company filed a standard termination notice with the
Pension Benefit Guaranty Corporation (PBGC) for the purpose of terminating the
Company's former defined benefit pension plan. The Company ceased to accrue
benefits for service cost as of December 31, 1992, and all participants in the
plan became fully vested at that date. On March 22, 1993 a favorable
determination was issued by the Internal Revenue Service on the plan
termination. The Company then distributed plan assets to vested participants in
accordance with PBGC established formulas. The Company made funding
contributions of $1.1 million during 1993 to satisfy all plan obligations.
Distributions were in the form of either a rollover to the Company 401(k) profit
sharing savings plan, a purchase of a non-participating annuity contract, or a
lump sum cash payment.
11. REINSURANCE
The Company is contingently liable with respect to reinsurance ceded in
that the liability for such reinsurance would become that of the Company upon
the failure of any reinsurer to meet its obligations under a particular
reinsurance agreement. The maximum liability which the Company retains on any
one life is $125,000 under ordinary and group policies.
The Company had reinsured approximately $0.8 billion of life insurance in
force at December 31, 1994 and 1993. Total premium income ceded during the years
ended December 31, 1994, 1993, and 1992 was $5.8 million, $6.8 million, and $6.4
million, respectively. Reinsurance recoveries for the years ended December 31,
1994, 1993 and 1992 were $7.6 million, $6.8 million and $5.7 million,
respectively.
Included in reinsurance receivables are $1.1 million and $1.7 million
representing amounts recoverable for claims ceded to reinsurers as of December
31, 1994 and 1993, respectively. Included in other liabilities are $0.9 million
and $0.4 million representing amounts payable for premiums ceded to reinsurers
as of December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, reinsurance receivables amounted to $92.2
million and $39.0 million, respectively. Of the 1994 amount, $50.0 million is
applicable to reinsurance activities at Assured (which was acquired by Prairie
States during 1994) and is associated with two reinsurers. Excluding the amount
applicable to Assured, reinsurance receivables with carrying values of $23.8
million and $25.1 million were associated with two additional reinsurers at
December 31, 1994 and 1993, respectively.
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
LEASES
Other liabilities include a capitalized lease obligation associated with
the financing and leasing of Prairie States' home office. In addition, the
Company leases office space, data processing equipment and certain other
equipment under operating leases.
Aggregate maturities of the capitalized lease obligation and future minimum
aggregate rental payments required under non-cancelable operating leases as of
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASE LEASE
YEAR ENDING DECEMBER 31, OBLIGATION OBLIGATIONS
-------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
1995................................................................ $ 314 $ 201
1996................................................................ 201 111
1997................................................................ 0 69
----------- ------
515 $ 381
------
------
Less amount representing interest................................... 39
-----------
$ 476
-----------
-----------
</TABLE>
Rental expense for operating leases was approximately $0.6 million in 1994,
$0.7 million in 1993, and $1.7 million in 1992.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company had been a party to financial instruments with
off-balance-sheet risk in the normal course of business to reduce its own
exposure to fluctuations in interest rates. At December 31, 1993, the Company
was a party to a five year Revolving Underwriting Facility (RUF) for maximum
unsecured borrowings of $54.8 million maturing in April of 1994. Pursuant to the
RUF, the Company paid interest at a variable rate, with a maximum rate equal to
0.30% above the London Interbank Offered Rate (LIBOR). On March 6, 1991, the
Company entered into an Interest Rate Swap Agreement (Swap Agreement) to reduce
the impact of changes in interest rates on its floating long-term debt. The Swap
Agreement was with a commercial bank for a notional amount of $55 million. This
agreement effectively changed the Company's interest rate exposure on the RUF
from a floating LIBOR rate to a fixed LIBOR rate of 7.94%. The Company had been
exposed to interest rate risk in the event of nonperformance by the commercial
bank. The Swap Agreement matured at the time of the RUF maturity. The Company
has not entered into a Swap Agreement or any other agreement which would
effectively fix the interest rate on the Company's refinanced debt.
INVESTMENT PORTFOLIO CREDIT RISK
Bonds:
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1994, approximately $3.4 million in
debt securities, at amortized cost (0.7% of debt securities) are considered
'below investment grade'. Securities are classified as 'below investment grade'
by utilizing rating criteria employed by independent bond rating agencies.
The Company has approximately 88% of its $508 million fixed maturity
portfolio (amortized cost basis) invested in assets of either U.S. government
agency pass-through mortgages (GNMA, FNMA, or FHLMC) or 'private-label'
mortgage-backed securities as of December 31, 1994.
F-21
<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)
Mortgage Loans:
Mortgage loans are primarily related to underlying real property
investments in office and apartment buildings and retail/commercial and
industrial facilities.
At December 31, 1994, delinquent mortgage loans (i.e., loans where payments
on principal and/or interest are over 60 days past due) amounted to $0.4
million, or 1.9% of the loan portfolio. The Company had loans outstanding in the
states of Colorado and Florida, with combined principal balances in the
aggregate approximating $9.8 million.
LITIGATION
The Company is involved in certain litigation arising in the ordinary
course of business. Management does not anticipate any judgments against the
Company in excess of liabilities already established which would have a material
impact, individually or in the aggregate, on the financial position or results
of operations of the Company.
13. STATUTORY FINANCIAL STATEMENTS
Insurance subsidiaries of the Company are required to file statutory
financial statements with state insurance regulatory authorities. Accounting
principles used to prepare these financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance companies for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net income.............................................. $ 11,702 $ 7,625 $ 6,298
Capital and surplus..................................... 60,012 59,167 55,240
</TABLE>
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)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994
REVENUES:
Premiums........................................................... $ 19,276 $ 21,377 $ 22,802 $ 22,296
Net investment income.............................................. 10,996 10,963 11,439 11,478
Realized investment gains (losses)................................. 1,622 758 87 (144)
Other income....................................................... 866 790 1,447 1,632
--------- --------- --------- ---------
32,760 33,888 35,775 35,262
--------- --------- --------- ---------
BENEFITS AND EXPENSES:
Benefits and settlement expenses................................... 18,348 19,751 21,222 19,692
Amortization of deferred policy acquisition costs.................. 3,468 3,217 4,144 3,739
Insurance and other expenses....................................... 7,806 7,749 7,255 8,728
--------- --------- --------- ---------
29,622 30,717 32,621 32,159
--------- --------- --------- ---------
Income before income taxes......................................... 3,138 3,171 3,154 3,103
INCOME TAX EXPENSE (BENEFIT):
Current............................................................ 100 100 300 645
Deferred........................................................... 810 693 457 (47)
--------- --------- --------- ---------
910 793 757 598
--------- --------- --------- ---------
NET INCOME......................................................... $ 2,228 $ 2,378 $ 2,397 $ 2,505
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE................................................. $ 0.29 $ 0.30 $ 0.31 $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-23
<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>
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-24
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, at amortized cost..................................................... $ 0 $ 2,727
Fixed maturities available for sale, at market.......................................... 526 0
Equity securities, at market............................................................ 6,100 10,372
Investment real estate.................................................................. 450 450
Cash.................................................................................... 1,091 183
Investments in and advances to subsidiaries:
Investments in subsidiaries*.......................................................... 112,048 112,802
Surplus debenture*.................................................................... 24,000 30,500
Due from subsidiaries*................................................................ 987 826
Other................................................................................... 1,363 1,608
----------- -----------
Total assets....................................................................... $ 146,565 $ 159,468
----------- -----------
----------- -----------
LIABILITIES
Accrued expenses and other liabilities.................................................. $ 4,633 $ 2,800
Due to affiliates....................................................................... 151 0
Current income tax...................................................................... (42) 0
Deferred income tax (benefit)........................................................... (5,267) (3,791)
Debt.................................................................................... 45,000 54,822
----------- -----------
Total liabilities.................................................................. 44,475 53,831
----------- -----------
Redeemable preferred stock.............................................................. 3,294 4,153
----------- -----------
STOCKHOLDERS' EQUITY
Common stock............................................................................ 406 406
Capital in excess of par value.......................................................... 59,127 59,071
Net unrealized investment gains (losses) (substantially all
from subsidiaries).................................................................... (10,934) 1,253
Treasury stock, at cost................................................................. (2,656) (2,818)
Retained earnings (including undistributed income of subsidiaries)...................... 52,853 43,572
----------- -----------
Total stockholders' equity......................................................... 98,796 101,484
----------- -----------
Total liabilities, preferred stock and stockholders' equity........................ $ 146,565 $ 159,468
----------- -----------
----------- -----------
</TABLE>
------------------
*Eliminated in consolidation.
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,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Income from subsidiaries:
Management and service fees*............................................... $ 5,968 $ 6,232 $ 6,496
Dividends*................................................................. 0 4,332 2,133
Interest income*........................................................... 1,857 2,182 1,791
Realized investment gains (losses)*........................................ 56 0 (1,452)
Net investment income........................................................ 488 524 541
Realized investment gains (losses)........................................... (345) 99 0
Other income................................................................. 7 8 14
--------- --------- ---------
8,031 13,377 9,523
--------- --------- ---------
EXPENSES
Operating and administrative................................................. 6,289 5,041 5,986
Depreciation and amortization................................................ 123 180 246
Interest..................................................................... 3,550 4,838 4,961
--------- --------- ---------
9,962 10,059 11,193
--------- --------- ---------
Income (loss) before federal income taxes, cumulative effect of accounting
change and equity in income of subsidiaries................................ (1,931) 3,318 (1,670)
Income tax benefit........................................................... (1,400) (347) (500)
--------- --------- ---------
Income (loss) before cumulative effect of accounting change and equity in
income of subsidiaries..................................................... (531) 3,665 (1,170)
Cumulative effect of accounting change: Adoption of SFAS 109................. 0 400 0
--------- --------- ---------
Income (loss) before equity in income of subsidiaries........................ (531) 4,065 (1,170)
Equity in income of subsidiaries, less dividends received.................... 10,039 4,129 7,884
--------- --------- ---------
Net income................................................................... $ 9,508 $ 8,194 $ 6,714
--------- --------- ---------
--------- --------- ---------
</TABLE>
------------------
*Eliminated in consolidation.
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,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operations:
Net income................................................................... $ 9,508 $ 8,194 $ 6,714
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of adoption of SFAS 109................................. 0 (400) 0
Realized investment losses (gains)........................................ 289 (99) 1,452
Depreciation and amortization............................................. 123 180 246
Equity in subsidiaries' earnings*......................................... (10,039) (8,461) (10,017)
Dividends from subsidiaries*.............................................. 0 4,332 2,133
Increase (decrease) in accrued expenses and other liabilities............. 1,833 (111) 361
Decrease in deferred income taxes......................................... (1,400) (347) (439)
Other items, net.......................................................... (34) 75 (953)
--------- --------- ---------
Net cash provided by (used in) operations.............................. 280 3,363 (503)
--------- --------- ---------
Cash flow from investing activities:
Sales of investments to subsidiaries*..................................... 2,384 0 4,621
Repayments of surplus debenture*.......................................... 6,500 4,500 0
Purchases of real estate.................................................. 0 (13) (12)
Purchases of property and equipment....................................... (259) (172) (129)
Purchases of subsidiaries................................................. (875) (738) 0
Purchases of investments.................................................. (3,828) (10,671) (739)
Sales of investments...................................................... 7,422 2,422 0
--------- --------- ---------
Net cash provided by (used in) investing activities.................... 11,344 (4,672) 3,741
--------- --------- ---------
Cash flow from financing activities:
Proceeds from borrowing................................................... 45,000 368 257
Repayment of debt......................................................... (54,822) 0 0
Net (purchases) sales of treasury shares, at cost......................... 218 19 (2,837)
Redemption of preferred stock............................................. (859) (395) (351)
Dividends paid on preferred stock......................................... (253) (271) (303)
Other..................................................................... 0 (3) 0
--------- --------- ---------
Net cash (used in) financing activities................................ (10,716) (282) (3,234)
--------- --------- ---------
Net increase (decrease) in cash................................................ 908 (1,591) 4
Cash at beginning of year...................................................... 183 1,774 1,770
--------- --------- ---------
Cash at end of year............................................................ $ 1,091 $ 183 $ 1,774
--------- --------- ---------
--------- --------- ---------
</TABLE>
------------------
*Eliminated in consolidation.
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. The Division of Insurance has approved $1.9 million and
$2.2 million in interest payments associated with the surplus debenture for the
years ended December 31, 1994 and 1993, respectively. Principal payments of $6.5
million and $4.5 million were approved by the Division of Insurance during 1994
and 1993, respectively.
During 1994 and 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 fixed maturities, amounted to $2.4 million
and $7.9 million, respectively and resulted in a gain on transfer of $0.1
million in 1994 and a loss on transfer of $1.5 million in 1992. The effects of
these transactions were eliminated in consolidation.
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
--------------------------------------------- ------------- ----------- ----------- ------------- -------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force.................... $ 3,297,913 $ 762,424 $ 46,256 $ 2,581,745
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Premium:
Life insurance.......................... $ 71,671 $ 5,631 $ 442 $ 66,482 0.7%
Accident/health insurance............... 19,407 138 0 19,269 0
------------- ----------- ----------- -------------
Total................................ $ 91,078 $ 5,769 $ 442 $ 85,751 0.5%
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
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%
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
S-5
<PAGE>
INDEX OF
EXHIBITS TO
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1994
LAURENTIAN CAPITAL CORPORATION
EXHIBIT
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
11. Statement re: computation of per share earnings...................................................... E-2
22. Subsidiaries of the Company.......................................................................... E-3
24. Consent of Coopers & Lybrand L.L.P. ................................................................. E-3
27. Financial data schedule
</TABLE>
E-1
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C> <C>
(a) Shares outstanding........................................... 7,548,757 7,544,655 8,111,196
Number of days............................................... 96 6 90
(b) Shares outstanding........................................... 7,593,757 7,548,757 8,087,175
Number of days............................................... 179 359 30
(c) Shares outstanding........................................... 7,587,398 8,078,059
Number of days............................................... 90 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................................... 7,580,353 7,548,690 7,983,611
------------- ------------- -------------
------------- ------------- -------------
Net income................................................... $ 9,508,348 $ 8,194,123 $ 6,713,680
Less: Dividends on preferred stock........................... 226,948 271,460 290,460
------------- ------------- -------------
Net income available to common shareholders.................. $ 9,281,400 $ 7,922,663 $ 6,423,220
------------- ------------- -------------
------------- ------------- -------------
Per share amount............................................. $ 1.22 $ 1.05 $ 0.80
------------- ------------- -------------
------------- ------------- -------------
</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 21, 1995. All subsidiaries conduct
business in their respective corporate names.
<TABLE>
<CAPTION>
NAME PLACE OF INCORPORATION
------------------------------------------------------------ -----------------------------
<S> <C>
Loyal American Life Insurance Company Alabama
ADL Financial Services, Inc. North Carolina
Purity Financial Corporation Delaware
Prairie National Life Insurance Company South Dakota
Prairie States Life Insurance Company South Dakota
Assured Security Life Insurance Company Texas
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 Securities Corporation Delaware
Laurentian Marketing Services, Inc. Delaware
Laurentian Investment Services, Inc. Delaware
International Funeral Associates, Inc. Delaware
Laurentian Credit Services Corporation Delaware
CSW Management Services, Inc. Texas
</TABLE>
<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 17, 1995, on our audits of the consolidated financial statements
and financial statement schedules of Laurentian Capital Corporation as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and
1992, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 27, 1995
E-3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
ARTICLE 7 AS PART OF CONGLOMERATE SCHEDULE.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 218,645
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3,294
0
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85,751
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</TABLE>
