SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
Laurentian Capital Corporation
(Name of Registrant as Specified In Its Charter)
Laurentian Capital Corporation [Board of Directors]
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $.05 par value per share
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2) Aggregate number of securities to which transaction applies:
7,587,398
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
1,410,305 shares at $14.125; 6,177,093 shares at $13.875
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4) Proposed maximum aggregate value of transaction:
$105,627,724
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[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$21,126
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2) Form, Schedule or Registration Statement No.:
Preliminary Proxy Statement
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3) Filing Party:
Laurentian Capital Corporation [Board of Directors]
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4) Date Filed:
June 29, 1995
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<PAGE>
[ Laurentian Capital Corporation logo ]
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of
Laurentian Capital Corporation (the 'Company'), to be held at 9:00 a.m., local
time, on September 26, 1995 at the Four Seasons Hotel, One Logan Square,
Philadelphia, Pennsylvania. At the Special Meeting, you will be asked to approve
and adopt an Agreement and Plan of Merger (the 'Merger Agreement'), dated as of
May 25, 1995, by and among American Annuity Group, Inc. ('AAG'), L.Q.
Acquisition Corp. ('Acquisition'), a wholly-owned subsidiary of AAG, and the
Company, which provides for a merger ('Merger') of Acquisition with and into the
Company, by which the Company will become a subsidiary of AAG. If the Merger is
consummated, each share of the Company's common stock, par value $.05 per share
(the 'Common Stock') (other than shares as to which dissenters' rights have been
properly exercised and perfected under Delaware law, certain shares held by the
Company or AAG or by the subsidiaries of either of them, and shares held by The
Imperial Life Assurance Company of Canada ('Imperial') and Desjardins-Laurentian
Life Group Inc. ('DLLG')), will be converted into the right to receive $14.125,
in cash, without interest, and shares of Common Stock held by Imperial and DLLG
will be converted into the right to receive $13.875, in cash, without interest.
Enclosed with this letter is a Notice of Special Meeting, Proxy Statement,
Proxy Card and return envelope. I urge you to read the enclosed material
carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER, AND RECOMMENDS THAT YOU VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
Your vote is important. Whether or not you plan to attend the Special
Meeting, please complete, sign and date the accompanying Proxy Card and return
it in the enclosed prepaid envelope as soon as possible.
Your continued support of and interest in Laurentian Capital Corporation is
greatly appreciated.
Sincerely,
[ SIG CUT ]
Robert T. Rakich,
President and Chief Executive Officer
<PAGE>
[ Laurentian Capital Corporation logo ]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 1995
AUGUST 21, 1995
To the Stockholders of
LAURENTIAN CAPITAL CORPORATION:
Notice is hereby given that a special meeting of stockholders (the 'Special
Meeting') of Laurentian Capital Corporation (the 'Company') will be held on
September 26, 1995 at 9:00 a.m., local time, at the Four Seasons Hotel, Logan
Square, Philadelphia, Pennsylvania, for the following purposes:
1. To consider and vote upon a proposal (the 'Proposal'): (a) to approve
and adopt the Agreement and Plan of Merger dated as of May 25, 1995 (the 'Merger
Agreement'), among the Company, American Annuity Group, Inc. ('AAG') and L.Q.
Acquisition Corp., a wholly-owned subsidiary of AAG ('Acquisition'), providing
for the merger (the 'Merger') of Acquisition with and into the Company, pursuant
to which the Company will become a wholly-owned subsidiary of AAG and as a
result of which each outstanding share of Common Stock, par value $.05 per
share, of the Company (the 'Common Stock') (other than certain shares held by
the Company or AAG or by subsidiaries of either of them, shares owned by
stockholders who properly exercise and perfect their dissenters' rights under
Delaware law, and shares held by The Imperial Life Assurance Company of Canada
('Imperial') and Desjardins-Laurentian Life Group Inc. ('DLLG')) will be
converted into the right to receive $14.125, in cash, without interest, and
shares of Common Stock held by Imperial and DLLG will be converted into the
right to receive $13.875, in cash, without interest; and (b) to approve and
adopt the Merger.
2. To transact such other business as may properly be brought before the
Special Meeting or at any adjournment thereof.
Information regarding the Proposal to be considered at the Special Meeting
is set forth in the accompanying Proxy Statement.
Only those stockholders of record of the Company at the close of business
on August 14, 1995, are entitled to notice of, and to vote at, the Special
Meeting and any adjournments thereof.
By Order of the Board of Directors
[ SIG CUT ]
Bernhard M. Koch, Secretary
IMPORTANT
IF YOU DO NOT PLAN TO ATTEND THIS MEETING, PLEASE FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD USING THE ENCLOSED SELF-ADDRESSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY ................................................................................................... 2
The Special Meeting .................................................................................. 2
Parties to the Merger ................................................................................ 2
Recommendation of Board of Directors ................................................................. 2
The Merger Agreement ................................................................................. 2
Option Agreement ..................................................................................... 3
Opinion of Financial Advisor ......................................................................... 3
Redemption of Series A Cumulative Convertible Preferred Stock ........................................ 3
Effects of the Merger on Certain Persons ............................................................. 3
Regulatory Approvals ................................................................................. 3
Payment for Common Stock After the Merger ............................................................ 4
Payment for Employee Stock Options and Stock Appreciation Rights ..................................... 4
Certain Federal Income Tax Consequences to Holders of Common Stock ................................... 4
Dissenters' Rights ................................................................................... 4
Price Range of the Common Stock ...................................................................... 4
THE SPECIAL MEETING ....................................................................................... 5
Matters to be Considered at the Special Meeting ...................................................... 5
Record Date; Shares Outstanding and Entitled to Vote ................................................. 5
Votes Required ....................................................................................... 5
Voting, Solicitation and Revocation of Proxies ....................................................... 5
THE MERGER ................................................................................................ 6
The Parties .......................................................................................... 6
Background of Merger ................................................................................. 6
Opinion of Financial Advisor ......................................................................... 10
Update of Fairness Opinion ........................................................................... 13
Recommendation of the Board of Directors ............................................................. 13
THE MERGER AGREEMENT ...................................................................................... 13
Effective Time ....................................................................................... 13
The Merger ........................................................................................... 13
Payment for Common Stock After the Merger ............................................................ 13
Payment for Employee Stock Options and Stock Appreciation Rights ..................................... 14
Redemption of Series A Cumulative Convertible Preferred Stock ........................................ 14
Representations and Warranties ....................................................................... 14
Conduct of Business Pending the Merger ............................................................... 15
Conditions to the Merger ............................................................................. 15
Termination .......................................................................................... 16
Payments upon Termination ............................................................................ 16
Amendment and Waiver ................................................................................. 16
OPTION AGREEMENT .......................................................................................... 16
EFFECTS OF THE MERGER ON CERTAIN PERSONS .................................................................. 17
Share Ownership ...................................................................................... 17
Agreements with Certain Officers ..................................................................... 17
Directors and Officers Indemnification ............................................................... 18
Payment for Options and SARs ......................................................................... 18
REGULATORY APPROVALS ...................................................................................... 18
Insurance Approvals .................................................................................. 18
Antitrust Matters .................................................................................... 18
</TABLE>
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<PAGE>
<TABLE>
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PAGE
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<S> <C>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF COMMON STOCK ........................................ 18
ACCOUNTING TREATMENT ...................................................................................... 19
DISSENTERS' RIGHTS ........................................................................................ 19
FINANCIAL INFORMATION ..................................................................................... 21
SELECTED FINANCIAL DATA ................................................................................... 22
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS ................................................... 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............................................ 24
Security Ownership of Directors and Executive Officers ............................................... 24
Security Ownership of Certain Beneficial Owners ...................................................... 25
INFORMATION ABOUT THE COMPANY ............................................................................. 26
General .............................................................................................. 26
Insurance Operations ................................................................................. 26
Marketing ............................................................................................ 27
Acquisitions/Divestitures ............................................................................ 27
Geographic Distribution of Premium Income ............................................................ 27
Statistical Information Concerning Operations ........................................................ 28
Investments .......................................................................................... 28
Reinsurance .......................................................................................... 30
Reserves ............................................................................................. 30
Federal Income Tax Matters ........................................................................... 30
Regulation ........................................................................................... 30
AVAILABLE INFORMATION ..................................................................................... 32
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ........................................................... 32
INDEPENDENT PUBLIC ACCOUNTANTS ............................................................................ 32
OTHER MATTERS ............................................................................................. 32
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS ............................. F-1
ANNEX A Agreement and Plan of Merger ...................................................................... A-1
ANNEX B Fairness Opinion .................................................................................. B-1
ANNEX C Section 262 of the Delaware Law ................................................................... C-1
</TABLE>
ii
<PAGE>
PROXY STATEMENT
LAURENTIAN CAPITAL CORPORATION
640 LEE ROAD, SUITE 303
WAYNE, PENNSYLVANIA 19087
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 1995
This Proxy Statement is being furnished to the stockholders of Laurentian
Capital Corporation, a Delaware corporation (the 'Company'), in connection with
the solicitation of proxies by the Board of Directors of the Company (the 'Board
of Directors') from holders of outstanding shares of common stock, par value
$.05 per share, of the Company (the 'Common Stock') for use at the Special
Meeting of Stockholders to be held on September 26, 1995 at 9:00 a.m., local
time, at the Four Seasons Hotel, One Logan Square, Philadelphia, Pennsylvania
(the 'Special Meeting'). This Proxy Statement and the related proxy card are
first being mailed to stockholders on or about August 21, 1995.
At the Special Meeting, holders of shares of Common Stock (the
'Stockholders') at the close of business on August 14, 1995 will consider and
vote upon a proposal (the 'Proposal') to approve and adopt the Agreement and
Plan of Merger dated as of May 25, 1995 (the 'Merger Agreement') among American
Annuity Group, Inc., a Delaware corporation ('AAG'), L. Q. Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of AAG ('Acquisition'), and
the Company pursuant to which: (a) the Merger (the 'Merger') of Acquisition with
and into the Company will be effected, and the Company, as the surviving
corporation in the Merger, will become a wholly-owned subsidiary of AAG; and (b)
each share of Common Stock that is issued and outstanding at the effective time
of the Merger (other than (i) shares held by The Imperial Life Assurance Company
of Canada ('Imperial') and by Desjardins-Laurentian Life Group Inc. ('DLLG'),
(ii) shares owned by, or held in the treasury of, the Company or AAG or any
direct or indirect subsidiary of the Company or AAG, and (iii) shares in respect
of which dissenters' rights have been properly exercised and are perfected) will
be converted into the right to receive $14.125 in cash, without interest, and
each of the 6,177,093 shares held in the aggregate by Imperial and DLLG will be
converted into the right to receive $13.875 in cash, without interest.
Consummation of the Merger is conditioned upon, among other things,
approval and adoption of the Merger Agreement by the affirmative vote of at
least a majority of the Stockholders and the receipt of all necessary regulatory
approvals and consents. There can be no assurance that the conditions to the
Merger will be satisfied or, where permissible, waived, or that the Merger will
be consummated. The Company has been advised that Imperial and DLLG, which hold
in the aggregate approximately 81.4% of the outstanding Common Stock, intend to
vote the shares of Common Stock held by them FOR approval of the Merger
Agreement and the Merger, which would assure the requisite affirmative vote of
Stockholders. For further information concerning the terms and conditions of the
Merger, see 'THE MERGER' and 'THE MERGER AGREEMENT.'
The date of this Proxy Statement is August 21, 1995.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary does not purport to be complete and is
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement, the Annexes hereto and the
documents incorporated by reference herein. Capitalized terms used but not
defined in this Summary shall have the meanings ascribed to them elsewhere in
this Proxy Statement. Stockholders are urged to read this Proxy Statement and
the Annexes attached hereto in their entirety.
The Special Meeting. The Special Meeting will be held on September 26,
1995 at 9:00 a.m., local time, at the Four Seasons Hotel, One Logan Square,
Philadelphia, Pennsylvania. At the Special Meeting, Stockholders will be asked
to consider and vote on a proposal to approve and adopt the Merger Agreement and
the Merger. Only holders of record of Common Stock at the close of business on
August 14, 1995 (the 'Record Date'), are entitled to notice of, and to vote at,
the Special Meeting and any adjournment thereof. On the Record Date, there were
issued and outstanding 7,587,398 shares of Common Stock entitled to vote on the
matters brought before the Special Meeting, held of record by approximately
9,500 stockholders.
Under the Delaware General Corporation Law (the 'Delaware Law'), the
affirmative vote of the holders of at least a majority of the outstanding Common
Stock is required to approve and adopt the Merger Agreement and the Merger. The
Company has been informed that Imperial and DLLG, which hold in the aggregate
6,177,093 shares, or approximately 81.4%, of the outstanding Common Stock,
intend to vote the shares of Common Stock held by them FOR approval of the
Merger Agreement and the Merger, in which case such approval would be assured.
See 'THE SPECIAL MEETING -- Votes Required.'
A proxy card is enclosed for use at the Special Meeting. The proxy may be
revoked at any time prior to its exercise at the Special Meeting.
STOCKHOLDERS SHOULD NOT FORWARD THEIR SHARE CERTIFICATES WITH THE ENCLOSED
PROXY CARD. IF THE MERGER AGREEMENT IS APPROVED AND ADOPTED AND THE MERGER IS
CONSUMMATED, TRANSMITTAL MATERIALS AND INSTRUCTIONS RELATING TO CERTIFICATES
WILL BE MAILED TO STOCKHOLDERS PROMPTLY AFTER CONSUMMATION OF THE MERGER.
Parties to the Merger. The parties to the Merger Agreement are the
Company; AAG, a holding company organized under Delaware Law whose primary asset
is the capital stock of Great American Life Insurance Company ('GALIC'), which
is engaged principally in the sale of tax-deferred annuities; and Acquisition, a
direct, wholly-owned subsidiary of AAG which was recently formed by AAG solely
to facilitate AAG's acquisition of the Company.
Recommendation of Board of Directors. The Board or Directors of the
Company believes that the proposed transaction is fair to Stockholders, and has
determined that the Merger Agreement and the Merger are advisable and in the
best interests of the Company and its stockholders and has approved the Merger
Agreement. Accordingly, the Board of Directors recommends that Stockholders vote
FOR approval of the Merger Agreement and the Merger. In determining to approve
the Merger Agreement and the Merger and to recommend that Stockholders approve
the Merger Agreement and the Merger, the Board of Directors considered a number
of factors, as more fully described under 'THE MERGER--Background of the Merger'
and 'THE MERGER -- Opinion of Financial Advisor.' The Board of Directors acted
by the unanimous vote of all directors present (being all but one of the
directors) at the meeting at which the determination to so approve and recommend
the Merger Agreement and the Merger was made.
The Merger Agreement. The Merger Agreement provides that the Merger shall
become effective at the time and on the date that a Certificate of Merger is
filed with the Secretary of State of the State of Delaware (the 'Effective
Time'). See 'THE MERGER AGREEMENT -- Effective Time.' At the Effective Time, (i)
each share of Common Stock that is issued and outstanding immediately prior to
the Effective Time (other than Common Stock held by Imperial and DLLG, as
described in (ii) below,
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Common Stock to be cancelled as described in (iii) below, and Common Stock owned
by Stockholders who have properly exercised and perfected their dissenter's
rights under Delaware law) will be converted into the right to receive $14.125
in cash, without interest, upon the surrender of the certificate formerly
representing such share, (ii) each share of Common Stock owned by Imperial or
DLLG shall be converted into the right to receive $13.875 in cash, without
interest, upon the surrender of the certificate formerly representing such
share, and (iii) each share of Common Stock owned by, or held in the treasury
of, the Company, AAG or any direct or indirect subsidiary of the Company or AAG
immediately prior to the Effective Time shall be cancelled. The consideration to
be paid to holders of Common Stock as described in (i) and (ii) above is
referred to herein as the 'Merger Consideration.'
The Merger Agreement contains various covenants of the Company regarding
the conduct of the business of the Company between May 25, 1995 (the date of
execution of the Merger Agreement) and the Effective Time. In this regard, the
Company generally is required to maintain its business and the business of the
subsidiaries of the Company in the ordinary course and consistent with prior
practices. The Company is also obligated to refrain from taking certain actions.
See 'THE MERGER AGREEMENT -- Conduct of Business Pending Merger.'
Consummation of the Merger is subject to various conditions, including,
among others, (i) approval and adoption of the Merger Agreement and the Merger
by the requisite vote of the Stockholders, (ii) there being no order in effect
in any action or proceeding before any court, governmental agency, or regulatory
or administrative agency or commission that would prevent or make illegal the
consummation of the Merger, and (iii) the procurement of necessary governmental
approvals, including without limitation receipt of required approvals from
insurance regulatory authorities.
The Merger Agreement may be terminated before or after approval of
Stockholders by mutual written consent of the Company and AAG and by either the
Company or AAG under certain other circumstances. See 'THE MERGER AGREEMENT --
Termination.'
Option Agreement. Concurrently with the execution of the Merger Agreement
by the parties thereto, AAG, Imperial and DLLG entered into an option agreement
(the 'Option Agreement') pursuant to which Imperial and DLLG granted AAG an
option to purchase an aggregate of 6,177,093 shares of Common Stock of the
Company, subject to the terms and conditions specified in the Option Agreement.
See 'THE MERGER AGREEMENT -- Option Agreement.'
Opinion of Financial Advisor. Oppenheimer & Co., Inc. ('Oppenheimer'),
financial advisor to the Company, delivered to the Board of Directors its
written opinion dated May 25, 1995 (the 'Fairness Opinion') to the effect that,
as of the date of such opinion, the $14.125 per share in cash to be received by
certain holders of Common Stock pursuant to the Merger Agreement is fair to such
holders from a financial point of view. On August 21, 1995, Oppenheimer provided
written confirmation to the Board of Directors that as of such date nothing had
come to its attention that would affect the conclusions presented in the
Fairness Opinion. The full text of the Fairness Opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken in
connection with the Fairness Opinion, is attached hereto as Annex B and is
incorporated herein by reference. Stockholders are encouraged to read such
opinion in its entirety.
Redemption of Series A Cumulative Convertible Preferred Stock. All
outstanding shares of the Company's Series A Cumulative Convertible Preferred
Stock (the 'Preferred Stock') were redeemed on August 14, 1995.
Effects of the Merger on Certain Persons. Executive officers and
directors of the Company will receive certain payments and have certain rights
and incur certain obligations as a result of the Merger. See 'THE MERGER --
Effects of the Merger on Certain Persons.'
Regulatory Approvals. The Company and its insurance subsidiaries are
subject to regulation by insurance regulatory authorities in the respective
states in which such insurance subsidiaries are domiciled and in certain states
in which such companies are licensed to conduct insurance business,
3
<PAGE>
and DLLG and Imperial are subject to regulation by certain Canadian regulatory
authorities. Certain approvals of such regulatory authorities are required in
connection with the Merger and applications for such approvals have been
submitted. It is a condition to the consummation of the Merger that such
approvals be obtained prior to such consummation. It is anticipated, although
there can be no assurance, that all such approvals will be obtained. See 'THE
MERGER -- Regulatory Approvals.'
Payment for Common Stock After the Merger. Pursuant to the Merger
Agreement, AAG or Acquiror shall deposit in trust with a payment agent (the
'Payment Agent'), and/or provide the Payment Agent with an unconditional
commitment to provide cash in the aggregate amount of, the Merger Consideration.
The Company has been informed that AAG intends to select Chemical Bank to act as
the Payment Agent for the payment of the Merger Consideration. Promptly after
the Effective Time, AAG will cause the Payment Agent to mail to each holder of
record of Common Stock for which Merger Consideration is to be paid a letter of
transmittal and instructions for use in effecting the surrender of certificates
representing such Common Stock in exchange for cash. Upon surrender of a
certificate representing such Common Stock to the Payment Agent, together with
such letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions, the holder of such certificate
will be entitled to receive, in exchange therefor, the Merger Consideration
payable to such holder in accordance with the Merger Agreement. See 'THE MERGER
AGREEMENT -- Payment for the Common Stock After the Merger.'
Payment for Employee Stock Options and Stock Appreciation Rights. The
Merger Agreement provides for all stock options ('Options') and stock
appreciation rights ('SARs') issued pursuant to the Company's Amended and
Restated Executive Stock Option Plan to be surrendered immediately before the
Effective Time in exchange for cash equal to the difference between $14.125 and
the per share exercise price or base price, as the case may be, of each Option
or SAR. See 'THE MERGER AGREEMENT -- Payment for Employee Stock Options and
Stock Appreciation Rights.'
Certain Federal Income Tax Consequences to Holders of Common Stock. The
receipt of cash in exchange for Common Stock pursuant to the Merger (and the
receipt of cash by a Stockholder who exercises dissenter's rights) will be a
taxable transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local and foreign tax laws. Stockholders
will generally recognize gain or loss for federal income tax purposes in an
amount equal to the difference between the amount of cash received and their
adjusted tax basis in their Common Stock. Such gain or loss will be a capital
gain or loss if such Common Stock is held as a capital asset, and shall be long
term capital gain or loss if, on the date of the Merger, such Common Stock was
held for more than one year. See 'CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO
HOLDERS OF COMMON STOCK.'
Dissenters' Rights. If the Merger is consummated, holders of Common Stock
who do not vote in favor of approval of the Merger Agreement and who otherwise
comply with the requirements of Section 262 of the Delaware Law will be entitled
to statutory appraisal rights. See 'DISSENTERS' RIGHTS.'
Price Range of the Common Stock. The Common Stock is traded on the
American Stock Exchange ('AMEX') under the symbol 'LQ'. On November 8, 1994, the
day prior to the public announcement of the Company's engagement of Oppenheimer
to evaluate alternatives to maximize stockholder value, the high and low sale
prices of the Common Stock on the AMEX were $11.25 and $11.175 per share,
respectively. On May 24, 1995, the day prior to the announcement of the proposed
Merger, the high and low sale prices of the Common Stock on the AMEX were $14.00
and $13.875 per share, respectively. On August 18, 1995, a day shortly prior to
the mailing of this Proxy Statement, the closing price of the Common Stock on
the AMEX was $13.375 per share. For additional information about prices of
Common Stock see 'MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.'
4
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THE SPECIAL MEETING
Matters to be Considered at the Special Meeting. At the Special Meeting,
the Stockholders will be asked to consider and vote upon the Proposal to approve
and adopt the Merger Agreement and the Merger. If the requisite votes in favor
of the Merger Agreement and the Merger are obtained and certain conditions are
satisfied or waived, where permissible, the terms of the Merger Agreement
provide, among other things, that: (i) Acquisition will be merged with and into
the Company; and (ii) each share of Common Stock that is issued and outstanding
immediately prior to the Effective Time (other than certain shares of Common
Stock as are described elsewhere herein) will be converted into the right to
receive $14.125, in cash, without interest, and each share of Common Stock owned
by Imperial and DLLG will be converted into the right to receive $13.875, in
cash, without interest. For additional information concerning the terms and
conditions of the Merger, see 'THE MERGER' and 'THE MERGER AGREEMENT.'
Record Date; Shares Outstanding and Entitled to Vote. Only holders of
record of the Common Stock at the close of business on August 14, 1995 (the
'Record Date'), are entitled to notice of, and to vote at, the Special Meeting
and any adjournment or postponement thereof. On the Record Date, there were
issued and outstanding 7,587,398 shares of Common Stock, each of which is
entitled to one vote on matters brought before the Special Meeting. As of August
14, 1995, the Common Stock was held of record by approximately 9,500
stockholders.
Votes Required. Under the Delaware Law, approval and adoption of the
Merger Agreement and the Merger will require the affirmative vote of the holders
of a majority of the Common Stock outstanding on the Record Date. The Company
has been informed that Imperial and DLLG, which hold in the aggregate 6,177,093
shares, or approximately 81.4%, of the outstanding Common Stock, intend to vote
FOR approval of the Merger Agreement and Merger, in which case approval would be
assured.
Under rules of the AMEX, the proposal to adopt the Merger Agreement is
considered a 'non discretionary item' as to which brokerage firms may not vote
in their discretion on behalf of their clients if such clients have not
furnished voting instructions. Such broker 'non-votes' will not be considered,
but abstentions will be counted, in determining the presence of a quorum at the
Special Meeting. Broker non-votes and abstentions will not be counted as votes
FOR or AGAINST the Proposal, but because the Proposal is required to be approved
by the holders of at least a majority of the Common Stock, abstentions and
broker 'non-votes' will have the same effect as votes against the Proposal.
Voting, Solicitation and Revocation of Proxies. The enclosed proxy is
being solicited by the Board of Directors for use in connection with the Special
Meeting and any adjournment thereof. Shares represented by each proxy duly
executed and received by the Company will be voted in accordance with the
instructions contained therein. If no instructions are given, the proxy will be
voted FOR the approval and adoption of the Merger Agreement and the Merger. Any
Stockholder is empowered to revoke a proxy at any time before its exercise. Any
Stockholder who executes a proxy has a right to revoke it at any time before it
is voted by advising the Company in writing, by executing a later dated proxy
which is presented to the Company at or prior to the meeting, or by appearing at
the meeting and advising the Secretary of the meeting, in writing, of the
revocation of the proxy at any time prior to the exercise of the proxy. The
Company will bear the costs of soliciting proxies from stockholders.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of Common Stock held of record by such persons, and the Company will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
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THE MERGER
The Parties. The parties to the Merger Agreement are the Company, AAG, and
Acquisition.
The Company is an insurance holding company organized under Delaware law.
For additional information regarding the Company, see 'INFORMATION ABOUT THE
COMPANY.'
AAG is a holding company incorporated in Delaware whose primary asset is
the capital stock of Great American Life Insurance Company ('GALIC'), an Ohio
stock insurer engaged principally in the sale of tax-deferred annuities. AAG's
principal executive offices are located at 250 East Fifth Street, Cincinnati,
Ohio 45202. Its telephone number is (513) 333-5300. AAG has reported that
neither it nor any of its affiliates owns any Common Stock, and AAG is not
otherwise affiliated with the Company.
Acquisition is a direct, wholly-owned subsidiary of AAG. Acquisition was
recently formed by AAG solely to facilitate AAG's acquisition of the Company and
will not perform any activities other than of an organizational nature and as
required by the Merger Agreement prior to consummation of the Merger.
Acquisition's principal executive offices are located at 250 East Fifth Street,
Cincinnati, Ohio 45202. Its telephone number is (513) 333-5300.
Background of Merger. In mid-1994, management of the Company became aware
that Desjardins Laurentian Financial Corporation ('DLFC'), the indirect parent
company of Imperial and DLLG, was evaluating its long-term strategic plans.
Subsequently, management was informed that DLFC had been approached informally
by a third party regarding possible disposition of DLFC's U.S. interests.
On October 20, 1994, DLFC received an unsolicited expression of interest
from a large insurance holding company regarding a possible acquisition of the
Company, subject to a number of conditions including a specified range of
possible prices being subject to adjustment based on a due diligence review of
the Company. In response to that expression of interest, several investment
banking firms were invited to prepare a presentation, to be made to the Board of
Directors at its next scheduled meeting, describing the services they could
provide to advise the Board of Directors with respect to strategic alternatives
available to the Company. Thereafter, in late October 1994, the Company received
an unsolicited proposal from a brokerage firm purporting to represent certain
persons interested in considering an unspecified transaction with the Company at
an unspecified price.
At its previously scheduled November 8 meeting, the Board of Directors was
advised of the expressions of interest. Representatives of three investment
banking firms made presentations to the Board, describing their respective
approaches to evaluating strategic alternatives to maximize stockholder values.
At this meeting the Board of Directors determined that the interests of the
Company's controlling stockholder, DLFC, were not inconsistent with the
interests of all of the stockholders of the Company, and that an evaluation of
strategic alternatives should be undertaken with the objective of maximizing
value for all stockholders of the Company. After considering the presentations
by the investment banking firms, the Board of Directors authorized engagement of
Oppenheimer & Co., Inc. ('Oppenheimer') to evaluate various strategies for
maximizing stockholder values, including possible business combinations or other
transactions, subject to clarification of certain terms of the letter of
engagement with Oppenheimer. On November 9, the Company issued a press release
announcing the engagement and its purpose, and on November 10 a letter agreement
specifying the terms of the Company's engagement of Oppenheimer was completed.
Oppenheimer proceeded with an evaluation of the Company, and began the
process of canvassing the market by preparing an information memorandum
containing financial information and other background materials regarding the
Company and identifying parties that might have potential interest in a
strategic combination with the Company. The information memorandum was
distributed to such parties by late November, and at a meeting of the Board of
Directors held on December 22, 1994, Oppenheimer reported its progress to that
date, including results of its evaluation of the Company. It was reported that
Oppenheimer representatives and management had begun the process of coordinating
extensive due diligence reviews by interested parties after obtaining
confidentiality agreements from those parties, and that Oppenheimer was
continuing to evaluate other strategic alternatives. Oppenheimer analyzed a
number of strategies, including (i) the sale of 100% of the
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Common Stock for cash; (ii) the sale of 100% of the Common Stock for common
stock and/or securities of the acquiror; (iii) the sale of one Company operating
unit plus recapitalization of the remaining operations; (iv) the individual sale
of all Company operating units; (v) the sale of one Company operating unit only;
(vi) the public or private sale of Common Stock; and (vii) no sale of the
Company or of any Company operating unit. Oppenheimer advised the Board of
Directors as to such strategic alternatives which might be considered, as well
as various methods which could be used to determine valuations of the Company. A
telephonic meeting of the Board of Directors was held on January 30, 1995, at
which time Oppenheimer representatives reported their progress on the
engagement, including continued expressions of interest by a number of parties
and scheduling of due diligence visits.
At the regular meeting of the Board of Directors held on February 17, 1995,
Oppenheimer further reviewed the status of its engagement to that date.
Oppenheimer reported that the information memorandum had been distributed to 206
parties, each of whom Oppenheimer subsequently contacted by telephone, that 35
interested parties had entered into confidentiality agreements pursuant to which
they received additional financial and other information about the Company and
its operations, that representatives of Oppenheimer and Company management had
held informational meetings with 15 of those interested parties, and that 9
parties had expressed interest in conducting additional on-site due diligence
reviews of the Company's insurance subsidiary operations. Oppenheimer
representatives also reviewed with the Board of Directors other strategic
alternatives, including possible recapitalization plans which would entail the
sale of one or the other of the Company's two primary insurance subsidiaries,
Prairie States Life Insurance Company ('Prairie') and Loyal American Life
Insurance Company ('Loyal'), using the proceeds from such sale to reduce the
Company's outstanding debt, and continued operations or the eventual sale of the
remaining insurance subsidiary. The Board of Directors instructed Oppenheimer
not to foreclose inquiries along these lines, but determined that the
uncertainties entailed in separate sales of the two subsidiaries, with the
values to be realized, made it unlikely that such a recapitalization plan would
yield greater value for stockholders than a strategic combination involving the
entire Company. The uncertainties arising from separate sales of the
subsidiaries included: the fact that separate sales of subsidiaries would
necessarily entail negotiations with at least two different acquirors, each of
which would be expected to condition any transaction on due diligence reviews
and conditions to closing that could result in failure of either or both of the
planned subsidiary sales; the probability that a potential acquiror would not be
willing to allow the Company to condition its obligation to sell one subsidiary
upon the successful sale of the other subsidiary; and questions as to the income
tax effects of such separate sales upon the Company and Stockholders.
Oppenheimer also reviewed with the Board of Directors the Company's prospects
without any strategic transaction, advising that, although Company operations
had been improved by increased operational efficiencies which resulted from
expense reduction programs implemented in recent years, including the
consolidation of certain operations and elimination of duplicated expenses, it
appeared that future improvements resulting from reductions of expenses would be
more limited, since most expenses which could be reduced without adversely
affecting the Company's ability to effectively operate had already been
curtailed.
At a telephonic meeting on March 27, 1995, Oppenheimer provided an update
for the Board of Directors with respect to parties which wished to make
proposals, including a report that 7 parties performed additional due diligence
visits at either or both of Prairie and Loyal. The Board of Directors agreed to
permit proposals involving acquisition of only one of the Company's insurance
subsidiaries, and to permit additional time for submission of proposals as
requested by certain parties. Accordingly, the Board of Directors instructed
Oppenheimer to request firm proposals from the parties which had expressed an
interest in a strategic combination with the Company. Each of those parties was
provided a proposed form of definitive agreement with the request for such a
proposal. Subsequently, five of the interested parties substantially completed
their due diligence reviews and responded to the request for a firm proposal
with respect to a strategic combination. Two insurance companies presented
proposals to purchase Loyal and one insurance company presented a proposal to
purchase Prairie. All three proposals included a number of conditions and
contingencies (for example, requirements that certain subsidiary assets be
liquidated) that would require detailed negotiations with the Company. All three
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proposals were for cash, and each provided an initial indication of a
transaction price, but proposed portfolio adjustments which reduced the initial
indication of value. Each proposal also made repayment of the Company's
approximately $45 million in outstanding debt the responsibility of the Company.
In addition, an investment partnership expressed a preliminary interest in a
strategic combination by which it would acquire the entire Company but
ultimately declined to make an offer believing that the value that the
partnership was prepared to offer would not be acceptable to the Board of
Directors. Following discussions with Oppenheimer, AAG presented a proposal for
acquisition of all of the Common Stock at a price of $14.125 per share, subject
to satisfactory completion of due diligence and negotiation of a definitive
agreement. The AAG proposal indicated that AAG believed that its due diligence
could be completed and a definitive agreement reached within ten business days.
At the April 17, 1995 meeting, at which the proposals were reviewed, the
Board of Directors again considered various alternatives available. The
conditional nature of the offers made for Prairie and Loyal, respectively, as
well as the values proposed for those transactions indicated that greater values
could be realized with greater certainty in a transaction involving sale of 100%
of the Common Stock, as was proposed by AAG. A primary consideration for the
Board of Directors in evaluating these proposals was that, even taking into
account the higher of the two proposals for Loyal, and without consideration of
the complexities and uncertainties involved in coordinating two separate
transactions with two acquirors, the aggregate of the purchase prices proposed,
net of income tax effects on the Company and outstanding debt, was significantly
less than the price proposed by AAG. Oppenheimer advised that the offer by AAG
was within the range of anticipated values for the Company. The price proposed
by AAG represented a premium over the market price, and AAG, with consolidated
assets in excess of $5 billion, proposed a cash transaction with no financing
contingencies. Based on the expressions of interest received as well as the
consideration of alternative transaction structures, Oppenheimer concluded that
the sale of 100% of the Common Stock for cash would maximize stockholder value.
Based on the foregoing, the Board of Directors instructed management and
Oppenheimer to attempt to complete a definitive agreement with AAG to be
reviewed by the Board of Directors within the ten business days specified in
AAG's proposal, and set a meeting for May 1, 1995 to review such an agreement,
if possible.
Representatives of the Company and AAG and their respective counsel and
Oppenheimer met on the following day, and began intensive efforts to complete a
definitive agreement and the remaining due diligence review sought by AAG. On
April 28, AAG informed the Company that it had reservations as to certain
matters which affected AAG's evaluation of the Company, and that if the
definitive agreement included provisions that would permit the Company to
terminate the definitive agreement if a better offer were made, a so-called
'fiduciary out' clause, AAG would require assurances that, having committed to
the transaction, AAG would not be prevented from completing the transaction by a
third-party bid. It was determined that a definitive agreement could not be
completed in time for review by the Board of Directors at its May 1 meeting.
At the May 1 meeting, the Board of Directors was advised of the
developments, and again reviewed available alternatives in light of the position
taken by AAG. The alternatives considered included possible sale of only one
subsidiary as part of a recapitalization plan in which the proceeds from such
sale would be used to reduce Company debt, sales of each of the two insurance
subsidiaries in separate transactions, and continued operation of the Company
without any strategic transaction. The consideration by the Board of Directors
of an alternative which involved no strategic transaction encompassed
consideration of the possible negative effects of such a transaction, including
one such as the proposed Merger. The Board of Directors recognized that
completing any strategic transaction would necessarily entail foregoing possible
benefits of continuing operations without such a transaction. However, the Board
of Directors believed that those possible benefits were minimal because the
future business operations of the Company were unlikely to provide sufficient
capital for significant growth, and because increases in value would be
increasingly difficult to achieve due to the competitive nature of the specialty
markets of the Company. Further, the Board of Directors viewed
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the need to meet debt repayment requirements and lack of capital for investment
in operations as significant limitations on the Company's possible future
growth.
The Board of Directors was advised that because of the inclusion of a
fiduciary out clause in the Merger Agreement, AAG had requested that DLFC grant
to AAG an option to acquire the Common Stock controlled by DLFC, and that DLFC
would be willing to grant such an option only if it protected the interests of
minority stockholders and was acceptable to the Board of Directors. The Board of
Directors authorized management to continue discussions with AAG to resolve the
outstanding issues, and authorized inclusion in the definitive agreement of
provisions requiring each party to pay a termination fee under certain
circumstances. In the following days ongoing attempts were made to resolve
issues raised by AAG representatives and to satisfy AAG's requirements for
assurances that it would have the opportunity to complete the transaction
notwithstanding a possible competing bid. Following the discussions with AAG
there remained a number of unresolved issues which precluded completion of a
definitive agreement, including the position taken by AAG upon completion of its
due diligence review that the per-share price that it would be willing to pay
for Common Stock had been reduced from $14.125 to $13.625.
At its regularly scheduled meeting on May 9, 1995, the Board of Directors
was advised of the issues which remained unresolved after negotiations with AAG.
The Board of Directors determined that if the originally proposed price of
$14.125 per share could be obtained without unacceptable conditions, the
transaction proposed by AAG remained the best strategic alternative, and that a
meeting with representatives of AAG, the Company and DLFC should be proposed to
attempt to resolve the outstanding issues. On May 15, 1995, Mr. Rakich, on
behalf of the Company, and Mr. Santos, on behalf of DLFC, met with
representatives of AAG to attempt to resolve outstanding issues that had arisen
in prior discussions. At this meeting, Mr. Santos advised AAG that DLFC would
consider some reduction in the price that it would accept for the Common Stock
it owned, but only if other Stockholders received the $14.125 per share
originally proposed by AAG, and that DLFC would consider a grant to AAG of an
option to purchase under certain circumstances the Common Stock held by DLFC's
subsidiaries, Imperial and DLLG. As a result of that meeting, AAG delivered to
the Board of Directors a May 17, 1995 revision to its proposal, proposing that
the price per share to be paid by AAG for shares of Common Stock owned directly
or indirectly by DLFC would be $13.875, and that all other stockholders of the
Company would receive $14.125 per share. The revised proposal conditioned AAG's
entering into a definitive agreement upon execution of non-competition
agreements by Robert T. Rakich, President and Chief Executive Officer of the
Company, Bernhard M. Koch, Senior Vice President and Chief Financial Officer of
the Company, and John A. Streetman, President of Prairie, and inclusion in the
Merger Agreement of a condition to AAG's obligation to complete the transaction
based on there being no adverse determination by a ratings agency resulting from
the Merger, and a reduction of the termination fee. In response to AAG's revised
proposal, a proposed definitive Merger Agreement was negotiated by AAG and the
Company; proposed definitive forms of a First Amendment to Change of Control
Agreement ('Change of Control Amendments') amending existing agreements between
Messrs. Rakich and Koch, respectively, and the Company, and Mr. Streetman and
Prairie, were negotiated by AAG and the respective executives; and a proposed
definitive Option Agreement between AAG on the one hand, and Imperial and DLLG,
on the other, was negotiated by AAG and DLFC.
At a meeting of the Board of Directors held on May 25, 1995 at which all
directors but one were present, the proposed forms of definitive Merger
Agreement, Change of Control Amendments and Option Agreement as negotiated were
presented to the Board for its review. Oppenheimer representatives delivered to
the Board of Directors Oppenheimer's fairness opinion dated May 25, 1995, and
the Board of Directors reviewed and updated the considerations as to various
alternatives available to the Company as discussed in previous Board meetings.
The Merger Agreement, Change of Control Amendments and Option Agreement were
each unanimously approved by the Board of Directors, and the Merger Agreement,
Option Agreement and Change of Control Amendments were signed by the respective
parties thereto on May 25, 1995.
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Opinion of Financial Advisor. As described above, Oppenheimer has acted as
financial advisor to the Company and the Board of Directors in connection with
the Merger. As part of its role as financial advisor, Oppenheimer was engaged to
render upon request of the Board of Directors an opinion as to the fairness,
from a financial point of view, of the $14.125 per share Merger Consideration to
be received by certain holders of Common Stock pursuant to the Merger Agreement.
The full text of the written opinion of Oppenheimer dated May 25, 1995 (the
'Fairness Opinion'), which sets forth the assumptions made, factors considered
and limitations on the review undertaken by Oppenheimer, is attached as Annex B
to this Proxy Statement and is incorporated herein. Stockholders are urged to
read such opinion carefully in its entirety. The summary of the Fairness Opinion
set forth in this Proxy Statement is qualified in its entirety by reference to
the full text of such opinion.
The Board of Directors did not establish any range of value for the
Company. In the course of its engagement, Oppenheimer derived a range of values
for the Company, which was not adopted by the Board of Directors, but the Board
of Directors considered such range of values to be reasonable. No restrictions
or limitations were imposed by the Board of Directors on the scope of
Oppenheimer's investigation or the procedures to be followed by Oppenheimer in
rendering its opinion.
In connection with rendering its opinion, Oppenheimer, among other things,
(i) reviewed the Merger Agreement attached hereto as Annex A; (ii) reviewed the
Company's Annual Reports to Stockholders and Annual Reports on Form 10-K, and
the statutory financial statements for Prairie and Loyal, in each case for the
years ended December 31, 1992 through 1994; (iii) reviewed the Company's
Quarterly Report on Form 10-Q, and the statutory financial statements for
Prairie and Loyal, in each case for the six months ended March 31, 1995; (iv)
discussed with the Board of Directors certain strategic alternatives available
to the Company; (v) discussed with certain officers of the Company, Prairie and
Loyal their respective operations, financial condition, historical financial
statements, future prospects, and other matters believed by Oppenheimer to be
relevant to its inquiry; (vi) reviewed pro forma financial statements, both GAAP
and statutory, based upon actuarial projections, for the Company, Prairie and
Loyal, which were furnished to Oppenheimer by management of the Company but
which were not publicly available; (vii) reviewed the historical market prices
and reported trading volume of the Common Stock; (viii) reviewed the financial
terms of recent acquisitions of selected companies it considered reasonably
comparable to the Company and compared such terms to the terms of the Merger;
(ix) reviewed an actuarial appraisal of Prairie (the 'Prairie Appraisal')
prepared by Milliman & Robertson, Inc. and an actuarial appraisal of Loyal (the
'Loyal Appraisal') prepared by Wakely and Associates, Inc. (collectively, the
'Actuarial Appraisals'); (x) reviewed financial and market data for selected
publicly-traded companies in lines of business and of a size it considered
reasonably comparable to that of the Company and its subsidiaries and compared
the valuation of such companies to the valuation of the Company in the Merger;
and (xi) performed such other studies, analyses, inquiries and investigations as
it deemed appropriate.
The following is a brief summary of the financial analyses utilized by
Oppenheimer in rendering the Fairness Opinion. Such summary does not purport to
be a complete description of all of the analyses performed by Oppenheimer in
connection with its opinion.
-- Analysis of Comparable Transactions -- Oppenheimer analyzed certain
recently completed acquisitions of life insurance and annuity companies in
relatively similar lines of business and of relatively comparable size to the
Company, for which there was sufficient publicly available information to
complete a comparative analysis. The comparable transactions reviewed by
Oppenheimer were the acquisitions of American Income Holding, Inc. by Torchmark
Corporation, USLICO Corporation by the NWNL Companies, Inc., Milwaukee Life
Insurance Company by The Mutual Group (U.S.) Inc., Heritage Insurance Group by
GE Capital Corporation, The Statesman Group, Inc. by Conseco Capital Partners
II, L.P., American Funeral Assurance Company by The Liberty Corporation, and
North American National Corporation by The Liberty Corporation.
Oppenheimer calculated the ratio of price-to-book value of the target
companies for these seven transactions and determined an inner range, consisting
of the three middle values, of 1.0x to 1.1x book
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value. Based on the Company's book value per share of $13.02 on December 31,
1994, this range produced values for the Company between $13.02 and $14.32 per
share. Based on the Company's book value per share of $14.15 on March 31, 1995,
this range produced values for the Company between $14.15 and $15.57 per share.
The values produced for the Company based on December 31, 1994 book value per
share and March 31, 1995 book value per share ranged from $13.02 to $15.57 per
share.
Oppenheimer calculated the ratio of the price-to-operating earnings (which
excludes realized investment gains) per share of the target companies for the
trailing twelve months for these seven transactions and determined an inner
range, consisting of the three middle values, of 14.6x to 15.3x operating
earnings. Based on the Company's operating earnings per share of $1.02 for the
year ended December 31, 1994, this range produced values for the Company between
$14.89 and $15.61 per share. Based on the Company's operating earnings per share
of $1.13 for the trailing twelve months ended March 31, 1995, this range
produced values for the Company between $16.50 to $17.29 per share. The values
produced for the Company based on operating earnings per share for the year
ended December 31, 1994 and for the trailing twelve months ended March 31, 1995
ranged from $14.89 to $17.29 per share.
-- Analysis of Actuarial Appraisals -- Oppenheimer determined the
transaction value for the Company based on the Actuarial Appraisals by adding
the value for Prairie as presented in the Prairie Appraisal and the value for
Loyal as presented in the Loyal Appraisal, subtracting the Company's debt and
preferred stock outstanding, and assuming the Company's cash would be
approximately equal to any payments on Options and SARs. The Actuarial
Appraisals assumed discount rates of 15%, 12%, and 9%. Using a discount rate of
15%, the combined value of Prairie and Loyal based on the Actuarial Appraisals,
after subtracting $45.0 million of the Company's debt outstanding and $3.3
million of the Company's preferred stock outstanding, produced a net transaction
value of $92.9 million, or $12.24 per share based on 7,587,000 shares
outstanding. Using a discount rate of 12%, this approach produced a net
transaction value of $111.1 million, or $14.64 per share based on 7,587,000
shares outstanding. A discount rate of 9% was not analyzed because such a rate
is considered inappropriate under current market conditions. The values produced
for the Company based on the Actuarial Appraisals ranged from $12.24 to $14.64
per share.
-- Analysis of Comparable Publicly-Traded Companies -- Oppenheimer analyzed
certain comparable publicly-traded life insurance companies in relatively
similar lines of business and of relatively comparable size to the Company. The
comparable publicly-traded companies analyzed by Oppenheimer were Allied Life
Financial Corporation, Intercontinental Life Corporation, Kansas City Life
Insurance Company, The Liberty Corporation, and Reliable Life Insurance Company.
Oppenheimer calculated the ratio of the May 22, 1995 closing price-to-book
value for these five companies and determined an inner range, consisting of the
three middle values, of 0.9x to 1.3x December 31, 1994 book value and 0.8x to
0.9x March 31, 1995 book value. Based on the Company's book value per share of
$13.02 on December 31, 1994 and an assumed acquisition premium of 30%,
considered by Oppenheimer reasonable for transactions of this size, this range
produced values for the Company between $15.23 and $22.00 per share. Based on
the Company's book value per share of $14.15 on March 31, 1995 and an assumed
acquisition premium of 30%, this range produced values for the Company between
$14.72 and $16.56 per share. The values produced for the Company based on
December 31, 1994 book value per share and March 31, 1995 book value per share
ranged from $14.72 to $22.00 per share.
Oppenheimer calculated the ratio of the May 22, 1995 closing
price-to-operating earnings per share for the year ended December 31, 1994 and
for the trailing twelve months ended March 31, 1995 for these five companies and
determined an inner range, consisting of the three middle values, of 7.5x to
10.1x operating earnings for the year ended December 31, 1994 and 7.5x to 9.6x
operating earnings for the trailing twelve months ended March 31, 1995. Based on
the Company's operating earnings per share of $1.02 for the year ended December
31, 1994 and an assumed acquisition premium of 30%, this range produced values
for the Company between $9.95 and $13.39 per share. Based on the Company's
operating earnings per share of $1.13 for the trailing twelve months ended March
31, 1995 and an
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assumed acquisition premium of 30%, this range produced values for the Company
between $11.02 to $14.10 per share. The values produced for the Company based on
operating earnings per share for the year ended December 31, 1994 and for the
trailing twelve months ended March 31, 1995 ranged from $9.95 to $14.10 per
share.
-- Conclusion -- The Merger Consideration of $14.125 per share (i) falls
within the range of $13.02 to $15.57 per share developed by analyzing the
price-to-book value in comparable transactions for both periods, and falls below
the range of $14.89 to $17.29 per share developed by analyzing the price-to-
operating earnings ratios in comparable transactions for both periods; (ii)
falls within the range of $12.24 to $14.64 per share developed in the process
using the Actuarial Appraisals; and (iii) falls above the range of $9.95 to
$14.10 per share developed by analyzing price-to-operating earnings ratios for
comparable publicly-traded companies for both periods, and falls below the range
of $14.72 to $22.00 developed by analyzing price-to-book value ratios for
comparable publicly-traded companies for both periods. Based on this analysis as
well as the full auction process and the values under alternative transaction
structures, as outlined above, Oppenheimer concluded that the $14.125 Merger
Consideration to be received by certain holders of Common Stock pursuant to the
Merger Agreement is fair from a financial point of view.
The Fairness Opinion does not constitute a recommendation to any
Stockholder as to how such Stockholder should vote at the Special Meeting.
Oppenheimer's Fairness Opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to it as of, the date of its opinion. It should be understood that,
although subsequent developments may affect its opinion, Oppenheimer does not
have any obligations to update, revise or reaffirm the Fairness Opinion after
the date of this Proxy Statement.
In addition, no company or transaction used in the above analyses is
directly comparable to the Company or the proposed Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather it involves
complex considerations and judgments concerning differences in the financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies or company to which they are being
compared.
The Company and the Board of Directors selected Oppenheimer as its
financial advisor because Oppenheimer is a nationally recognized investment
banking firm with substantial experience in transactions similar to the Merger.
As part of its investment banking business, Oppenheimer is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
Pursuant to the letter agreement dated November 10, 1994, the Company
retained Oppenheimer as financial advisor to evaluate various strategies for
maximizing shareholder value, including a possible business combination or
similar transaction, and upon the request of the Board of Directors, render the
opinion described above. Upon the signing of such letter, Oppenheimer received
an engagement fee in the amount of $25,000. Pursuant to such letter, Oppenheimer
received a fee in the amount of $250,000 upon rendering the Fairness Opinion and
will receive a fee of $574,416 at closing, which equals (i) 0.8% of the amount
to be received by holders of Common Stock up to $105.0 million; plus (ii) 1.5%
of the amount to be received by holders of Common Stock in excess of $105.0
million; less (iii) the $275,000 received by Oppenheimer to date. The Company
has also agreed to reimburse Oppenheimer for all reasonable out-of-pocket
expenses and to indemnify Oppenheimer against certain liabilities arising out of
or in connection with the services rendered by Oppenheimer under the engagement.
Except as described above, no material relationship has existed between
Oppenheimer and the Company during the past two years. Although Oppenheimer was
paid a fixed fee for rendering its Fairness Opinion with respect to the proposed
Merger, because the amount of the additional fee payable to Oppenheimer is
dependent upon the successful completion of a transaction, Oppenheimer may be
deemed to have had a potential conflict of interest in rendering such Fairness
Opinion.
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Update of Fairness Opinion. On August 21, 1995, Oppenheimer provided the
Board of Directors with a written update reporting that as of such date nothing
had come to its attention that would affect the conclusions presented in the
Fairness Opinion.
Recommendation of the Board of Directors. The Board of Directors has
determined that the Merger Agreement and the Merger are advisable and in the
best interests of the Company and its stockholders and has approved the Merger
Agreement. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
attached hereto as Annex A. All references to and summaries of the Merger
Agreement in this Proxy Statement are qualified in their entirety by reference
to the Merger Agreement.
Effective Time. The Merger will become effective at such time as a
Certificate of Merger is filed with the Secretary of State of the State of
Delaware in accordance with the provisions of the Delaware Law or at such later
time as may be specified in the Certificate of Merger in accordance with
applicable law. The Certificate of Merger is expected to be filed as promptly as
practicable after the Special Meeting and after satisfaction or waiver, where
permissible, of the conditions contained in the Merger Agreement. The date and
time when the Merger shall become effective is referred to herein as the
'Effective Time.'
The Merger. The Merger Agreement provides that, subject to the approval
and adoption of the Merger Agreement by the Stockholders, and compliance with
certain other covenants and conditions, Acquisition, a wholly-owned subsidiary
of AAG, will be merged with and into the Company, the separate corporate
existence of Acquisition will cease and the Company will continue as the
surviving corporation of the Merger (the 'Surviving Corporation'). Following
consummation of the Merger, the Company, as the Surviving Corporation, will be a
wholly-owned subsidiary of AAG.
At the Effective Time: (i) each share of Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than Common Stock
owned by Imperial and DLLG as described in clause (ii) below, Common Stock that
will be cancelled as described in clause (iii) below, and shares in respect of
which dissenter's rights have been properly exercised and perfected) will be
converted into the right to receive $14.125 in cash, without interest; (ii) each
share of Common Stock owned by Imperial and DLLG will be converted into the
right to receive $13.875 in cash, without interest; (iii) each share of Common
Stock owned by, or held in the treasury of, the Company or AAG or any direct or
indirect wholly-owned subsidiary of the Company or AAG immediately prior to the
Effective Time will be cancelled and no consideration shall be given with
respect thereto; and (iv) each share of common stock of Acquisition issued and
outstanding immediately prior to the Effective Time will be converted into one
share of common stock of the Surviving Corporation.
At the Effective Time, the directors of Acquisition will become the
directors of the Surviving Corporation, and the officers of the Company will
remain the officers of the Surviving Corporation. The officers and directors of
the Surviving Corporation will serve until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be. At the Effective Time, the Certificate of Incorporation and the
By-Laws of the Surviving Corporation will be conformed to the Certificate of
Incorporation and By-Laws of Acquisition as in effect immediately prior to the
Effective Time.
Payment for Common Stock After the Merger. Pursuant to the Merger
Agreement, AAG will select a Payment Agent for the payment of Merger
Consideration to holders of Common Stock entitled to receive payment therefor
under the Merger Agreement upon surrender of certificates formerly representing
such Common Stock. AAG or Acquiror is obligated under the Merger Agreement to
deposit in trust with the Payment Agent, and/or provide an unconditional
commitment to provide cash to the Payment Agent in the amount of, the aggregate
of the Merger Consideration to be paid in
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exchange for the outstanding Common Stock entitled to receive payment therefor
under the Merger Agreement. The Company has been informed that AAG intends to
select Chemical Bank, which is also the Transfer Agent/Registrar for the Common
Stock, to act as Payment Agent. The Merger Agreement provides that, promptly
after the Effective Time, AAG will cause the Payment Agent to mail to each
holder of record, a form letter of transmittal and instructions for use in
effecting the surrender of the certificates in exchange for payment therefor.
Upon surrender of a certificate to the Payment Agent together with such letter
of transmittal, duly executed, and such other documents as may be required by
the Payment Agent, the holder of such certificate will be entitled to receive in
exchange therefor the amount of cash which such holder has the right to receive
in accordance with the Merger Agreement.
In the event payment is to be made to a person other than a person in whose
name the certificate surrendered is registered, it shall be a condition of
payment that the certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer as reasonably determined by AAG, and that
the person requesting such payment shall pay to the Payment Agent any transfer
or other taxes required by reason of the payment to a person other than the
registered holder of such certificate, or establish to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable.
Any funds remaining with the Payment Agent one year after the Effective
Time, at the demand of AAG, will be delivered to the Surviving Corporation or
AAG, and any holders of certificates formerly representing Common Stock shall
look only to the Surviving Corporation (subject to abandoned property, escheat,
or other similar laws) for the Merger Consideration payable to them pursuant to
the Merger Agreement, and shall be general creditors thereof with respect to the
cash payable upon due surrender of their certificates formerly representing
Common Stock.
Payment for Employee Stock Options and Stock Appreciation Rights. Pursuant
to the Merger Agreement, each holder of Options or SARs granted pursuant to the
Laurentian Capital Corporation Amended and Restated Executive Stock Option Plan
is to receive payment from the Company in consideration of the surrender of such
Options or SARs immediately prior to the Effective Time, such manner of payment
having been elected by AAG in accordance with the provisions of the Merger
Agreement. All outstanding Options and SARs, whether or not presently vested,
will receive such treatment. The Company is obligated to obtain from the holders
and beneficiaries of outstanding Options and SARs their agreement to tender, for
surrender against such payment, all outstanding Options or SARs. The amount
payable with respect to each Option or SAR will be an amount in cash equal to
the excess of $14.125 over the per share exercise or base price, as the case may
be, of such Option or SAR. At the date hereof, Options with respect to 491,347
shares of Common Stock were outstanding at a weighted average exercise per share
of approximately $5.55, and 349,044 SARs were outstanding at a weighted average
base price of approximately $2.54. Holders of Options and SARs would in the
aggregate receive approximately $4,215,168 with respect to surrendered Options
and $4,042,742 with respect to surrendered SARs, for a total of $8,257,910 if
all currently outstanding Options and SARs are surrendered and paid for as
described above.
Redemption of Series A Cumulative Convertible Preferred Stock. The Merger
Agreement provides that all of the outstanding shares of the Company's Series A
Cumulative Convertible Preferred Stock ('Preferred Stock') will be redeemed at
or prior to the Effective Time. The Board of Directors called for the redemption
on August 14, 1995 of 22,358 shares of Preferred Stock, which were all shares of
Preferred Stock outstanding and not previously called for redemption, at a price
of $100 per share plus accrued and unpaid dividends to the redemption date, for
an aggregate of approximately $2.2 million.
Representations and Warranties. The Merger Agreement contains certain
representations, warranties and agreements of the Company, AAG, and Acquisition
including representations and warranties regarding: (i) their due organization,
valid existence, and authority to enter into the Merger Agreement; (ii)
compliance with all applicable laws, judgments, orders, decrees, rules and
regulations; (iii) the enforceability of the Merger Agreement; (iv) notices or
approvals required for execution and delivery of the Merger Agreement; and (v)
fees payable to brokers or finders. Furthermore, the Merger Agreement contains
certain representations and warranties made by the Company regarding itself and
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its subsidiaries as to their: (i) financial statements and reserves; (ii)
conduct of business and absence of material changes in their business since
December 31, 1994; (iii) litigation; (iv) benefit plans; (v) tax matters; (vi)
secured debt; (vii) reinsurance agreements; (viii) insurance matters; (ix) real
property leases and tangible personal property; (x) intellectual property and
rights under certain licenses; (xi) intercompany services and transactions;
(xii) environmental matters; (xiii) insurance coverage; and (xiv) operations of
the Company's American Funeral Trust business.
Conduct of Business Pending the Merger. The Company has agreed that it
will conduct the businesses of the Company and its subsidiaries prior to the
Effective Time only in the ordinary course of business and consistent with prior
practices. The Company has further agreed that subject to certain qualifications
and exceptions, neither it nor any of its subsidiaries will, directly or
indirectly, issue, sell, pledge, dispose of or incumber any shares of capital
stock of the Company or any of its subsidiaries, any investment assets or other
assets of the Company or any of its subsidiaries other than in the ordinary
course of business consistent with prior practices, or any insurance subsidiary
of the Company or all or substantially all of the business thereof. The Merger
Agreement also contains certain covenants which subject to certain
qualifications and exceptions restrict the ability of the Company and each of
its subsidiaries to: (a) amend its charter or by-laws; (b) split, combine or
reclassify any outstanding capital stock, or declare, set aside or pay any
dividend or distribution with respect to its capital stock; (c) redeem,
purchase, or acquire any of its capital stock; (d) grant, issue, sell, pledge or
dispose of any options, warrants or rights of any kind to acquire any shares of
its capital stock, or any securities that are convertible or exchangeable
thereto; (e) acquire any corporation, partnership or other business organization
or division thereof; (f) incur new indebtedness; (g) cancel any material debts
or obligations owing to it; (h) liquidate or merge into or consolidate with any
other corporation; (i) make, amend, terminate or waive any material right under
any material contract or agreement to which it is a party; (j) make or amend any
employment, consulting, separation or termination agreement, grant any new
separation or termination pay or increase benefits payable under its separation
or termination pay policies; (k) hire any new executive or other employees,
increase compensation, or pay any bonuses, with certain exceptions; (l) make new
capital expenditures or commitments above a specified amount; (m) make any
material change in accounting, underwriting, pricing or reserving principles,
methods or practices; (n) adopt any amendments or make certain contributions to
the Company's 401(k) Profit Sharing Savings Plan; or (o) agree or commit to do
any of the foregoing.
Furthermore, the Merger Agreement provides that the Company and each of its
subsidiaries will use its reasonable efforts to preserve intact the business
organization of the Company and its subsidiaries and to maintain in effect any
licenses, franchises, authorizations or similar rights material to the
businesses of the Company or its subsidiaries, to keep available the services of
their respective current officers and key employees and to preserve the goodwill
of those having relationships or business dealings with them, to cooperate with
AAG in jointly communicating with the Company's employees and with members of
the Company's product distribution system regarding the Merger and continuing
operations after consummation of the Merger, and to maintain its books and
records in accordance with sound business practice on a basis consistent with
prior practice.
Conditions to the Merger. The respective obligations of the Company, AAG
and Acquisition to consummate the Merger are subject to the satisfaction or
waiver of the following conditions: (i) the approval and adoption of the Merger
Agreement and the Merger by the requisite vote of the Stockholders; (ii) there
being no order in effect in any action or proceeding before any court,
governmental agency, regulatory or administrative agency or commission that
would prevent or make illegal the consummation of the Merger or impose any
conditions on the consummation of the transactions contemplated hereby which AAG
reasonably deems unacceptable; (iii) the procurement of necessary governmental
approvals, including approvals from insurance regulatory authorities; and (iv)
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the 'HSR Act').
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time: (i) by mutual consent of the Board of Directors of AAG ('AAG
Board') and the Board of Directors; (ii)
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by the AAG Board or the Board of Directors, if the Merger shall not have been
consummated on or before December 31, 1995 (unless such circumstance is the
result of a breach of the terms hereof in any material respect by the party
asserting the termination right); (iii) by the AAG Board or the Board of
Directors, if the Merger or the Merger Agreement shall have been submitted to a
vote of the Stockholders and shall not have been approved by the requisite vote;
or (iv) by the AAG Board or the Board of Directors, if an action is brought and
remains pending in a court of competent jurisdiction (a) seeking to restrain, or
enjoin or otherwise prevent the consummation of the Merger or the other
transactions contemplated by the Merger Agreement, or (b) seeking substantial
damages based on the consummation of the Merger or the other transactions
contemplated by the Merger Agreement, and in either case, the party seeking to
terminate believes in good faith that with the advice of counsel that such
action may have substantial merit. The Merger Agreement also provided that it
could be terminated by the AAG Board within 30 days of the date of execution of
the Merger Agreement in the event that A.M. Best Company communicated to AAG
that consummation of the transactions contemplated in the Merger Agreement had a
reasonable probability of resulting in a reduction of the Best rating of GALIC
to a rating lower than 'A.' Such event did not occur.
Payments upon Termination. In the event that the Merger Agreement is
terminated because (i) the Company shall have entered into, or shall have
publicly announced its intention to enter into an agreement or an agreement in
principle with respect to a merger or business combination with, or other
acquisition of any substantial portion of the assets of or equity interest in
the Company by, any person or entity other than AAG, or (ii) the Board of
Directors of the Company shall have withdrawn or materially negatively modified
its approval or recommendation of the Merger in accordance with its fiduciary
duties, then the Company shall pay to AAG the amount of $2,500,000 in
immediately available funds as liquidated damages if AAG and Acquisition have
not breached any of their representations, warranties, covenants or agreements
contained in the Merger Agreement.
In the event that AAG should fail to satisfy its obligations to pay or
provide for payment of the Merger Consideration as required by the Merger
Agreement, AAG shall pay to the Company the amount of $2,500,000 in immediately
available funds as liquidated damages if the Company has not breached any of its
representations, warranties, covenants or agreements contained in the Merger
Agreement.
Amendment and Waiver. Any provision of the Merger Agreement may be waived
at any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. The Merger Agreement may not be amended or supplemented at any
time, except by an instrument in writing signed on behalf of each party hereto.
The Merger Agreement, if approved and adopted by the Stockholders and the
stockholder of Acquisition, may then be amended only as may be permitted by
applicable provisions of the Delaware Law.
OPTION AGREEMENT
Concurrently with the execution of the Merger Agreement by the parties
thereto, AAG, Imperial and DLLG entered into an Option Agreement (the 'Option
Agreement') dated as of May 25, 1995, pursuant to which Imperial and DLLG
granted to AAG an option (the 'Option') to purchase an aggregate of 6,177,093
shares of Common Stock, consisting of 5,432,109 shares owned by Imperial and
744,984 shares owned by DLLG, at a price of $13.875 per share, subject to the
terms and conditions of the Option Agreement. Among other things, the Option
Agreement provides that, following satisfaction of certain conditions, the
Option may be exercised by AAG in whole but not in part, at any time prior to
the termination of the Option Agreement: (a) if the Company receives a proposal
from a third party with respect to an Acquisition Transaction (as defined in the
Merger Agreement) and the Company exercises its rights under Section 6.3 of the
Merger Agreement, provided that if the shares subject to the Option ('Option
Shares') are not sold to such third party by AAG in connection with such
Acquisition Transaction, then AAG shall promptly purchase or cause to be
purchased all of the outstanding Common Stock not held by AAG (other than the
Option Shares) at a price per share equal to the price per share of the proposed
third party Acquisition Transaction; or (b) if either or both of
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Imperial and DLLG fail to vote all shares of Common Stock owned by them in favor
of the Merger and for adoption of the Merger Agreement, or if the Company fails
to submit the Merger Agreement to the Stockholders for approval on or before
November 30, 1995 for any reason other than the exercise by the Company of its
rights under Section 6.3 of the Merger Agreement, provided that if the Option is
exercised in either event described in this clause (b), AAG shall promptly
purchase or cause to be purchased all of the outstanding Common Stock not held
by AAG (other than Option Shares) at the $14.125 price set forth in the Merger
Agreement to be paid for such shares.
The Board of Directors approved the granting of the Option and the entering
into of the Option Agreement at the May 25, 1995 meeting at which it approved
the Merger Agreement and the Merger.
EFFECTS OF THE MERGER ON CERTAIN PERSONS
The Merger will have certain effects on directors and executive officers of
the Company as described below. In all of its deliberations relating to he
Merger, the Board was aware of such effects. Because these effects result from,
or are continuations of, obligations of the Company to the persons described
which came into being prior to the commencement of negotiations with AAG, or
reflect amounts to be received based on the same per-share price as will be
received by all Stockholders (other than Imperial and DLLG), the Board of
Directors did not consider such matters as affecting the fairness of the Merger
to Stockholders.
Share Ownership. As of the Record Date, executive officers and directors
of the Company owned of record or beneficially (exclusive of shares subject to
Options and shares obtainable upon conversion of Preferred Stock) an aggregate
of 178,627 shares of Common Stock, for which they will receive the same Merger
Consideration as other Stockholders (other than Imperial and DLFC), for a total
of $2,523,106 if the Merger is consummated. See 'SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS and MANAGEMENT -- Security Ownership of Directors and
Executive Officers.'
Agreements with Certain Officers. Officers of the Company at the Effective
Time of the Merger will continue as officers of the Surviving Corporation after
the Merger. No officer of the Company is party to any employment agreement with
the Company. However, Messrs. Rakich, Koch and David L. Wilson, Jr., Chief
Investment Officer of the Company, had each previously entered into a Change of
Control Agreement with the Company which provided for certain benefits in the
event of termination of the employment of such executive within a certain period
after a Change of Control of the Company. The Merger would constitute such a
Change of Control. Pursuant to each such agreement, if the executive's
employment by the Company should be terminated within the twenty-four month
period subsequent to a Change of Control, either by the Company (other than for
cause or for Retirement, as defined therein) or by the executive for good reason
as defined therein, the executive would be paid a severance payment equal to two
times (one and one-half times in the case of Mr. Wilson) the sum of: (1) the
annual base salary paid to such executive by the Company as of the time of
termination of employment; and (2) an amount equal to such annual base salary
multiplied by the executive's average percentage annual bonus paid during the
preceding three years. Each agreement also provides for continuing participation
at the executive's election in the Company's health and hospital plan for a
period of twenty-four months (eighteen months in the case of Mr. Wilson). Each
agreement also provides that the Company will pay legal fees and expenses
incurred by the executive as a result of termination, seeking to enforce the
agreement, or a tax audit or proceeding attributable to application of certain
provisions of the Internal Revenue Code to payments for benefits under the
agreement, and that payments under the agreement are not reduced by any
compensation earned by the executive as a result of other employment after the
date of termination.
As a condition to its entering into the Merger Agreement, AAG required that
Messrs. Rakich and Koch enter into amendments of their existing Change of
Control Agreements which added certain noncompetition covenants to their Change
of Control Agreements, extended the period following a Change of Control during
which the agreements would have certain effects for an additional two years, and
provided for reduced severance payments during the additional two-year period
following a Change of Control.
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Directors and Officers Indemnification. Pursuant to the Merger Agreement,
AAG is required for a period of six years after the Effective Time to indemnify,
defend and hold harmless present and former officers and directors of the
Company in respect of acts or omissions occurring prior to the Effective Time to
the fullest extent permitted under applicable law and the Certificate of
Incorporation and By-Laws of the Company and its subsidiaries in effect on the
date of the Merger Agreement. The Merger Agreement also specifies that provision
shall be made for successors or assigns of AAG to assume the liability to
indemnify the officers and directors of the Company. In addition, for a period
of six years from and after the Effective Time, AAG is required to maintain
officers and directors liability insurance comparable in coverage to that from
time to time provided by AAG for its directors and officers.
Payment for Options and SARs. As is described in 'Payment for Employee
Stock Options and Stock Appreciation Rights' above, all holders of Options and
SARs will be paid upon surrender of same immediately prior to the Effective
Time. Amounts payable to executive officers of the Company for surrendered
Options and SARs are as follows: $385,420 for Options and $4,042,742 for SARs
payable to Mr. Rakich; $529,181 for Options payable to Mr. Koch; and $254,375
for Options payable to Mr. Wilson.
REGULATORY APPROVALS
Insurance Approvals. The Company's insurance subsidiaries are domiciled in
three states. Pursuant to the insurance holding company acts in each of those
states, before acquiring control of an insurance company domiciled within such
state, an acquiror must obtain approval of the acquisition from such state's
insurance regulatory authority. Consequently, the Merger is subject to the
approval of the insurance regulatory authorities of the states of Alabama, South
Dakota and Montana. By July 10, 1995, materials required to be filed with such
authorities to obtain such approvals were filed, and hearings with respect to
such approvals have been scheduled. Materials required to be filed with such
authorities to obtain approvals have been filed, and a hearing with respect to
such approvals has been scheduled before insurance regulatory authorities in
Alabama on August 24, 1995; the Company has been informed that hearings before
insurance regulatory authorities in South Dakota and Montana, originally
scheduled for August 14, 1995 and September 6, 1995, respectively, have been
postponed to as-yet undetermined dates. Although there can be no assurance,
the Company believes that all such regulatory approvals will be obtained. In
addition, the Company is informed that consummation by Imperial and DLLG of
the transactions contemplated by the Merger Agreement is subject to approvals
by certain Canadian regulatory authorities, and that such approvals have been
obtained.
Antitrust Matters. The HSR Act, as amended, provides that certain
transactions (including the Merger) may not be consummated until certain
information has been furnished to the Department of Justice (the 'Justice
Department') and the Federal Trade Commission (the 'FTC') and certain waiting
period requirements have been satisfied. By June 15, 1995, materials required to
be filed under the HSR Act with respect to the Merger were filed with the
Justice Department and the FTC. The Company has been advised that early
termination of the waiting period required under the HSR Act has been granted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TO HOLDERS OF COMMON STOCK
The following is a summary of certain United States federal income tax
consequences of the Merger to the holders of Common Stock. The receipt of cash
in exchange for Common Stock pursuant to the Merger, and the receipt of cash by
a Stockholder who exercises such Stockholder's dissenters' rights under Delaware
law, will be a taxable transaction for federal income tax purposes and may also
be a taxable transaction under applicable state, local and foreign tax laws. A
Stockholder will generally recognize gain or loss for federal income tax
purposes in an amount equal to the difference between such Stockholder's
adjusted tax basis in the Common Stock, and the amount of cash received in
exchange therefor (other than amounts received pursuant to a Stockholder's
statutory rights of
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appraisal that are denominated as interest, which amounts would be taxable as
ordinary income). Such gain or loss will be a capital gain or loss if such
Common Stock is held as a capital asset, and shall be long term capital gain or
loss if, on the date of the Merger, such Common Stock was held for more than one
year.
The foregoing discussion may not apply to stockholders who acquired their
Common Stock pursuant to the exercise of employee stock options or who are not
citizens or residents of the United States or who are otherwise subject to
special tax treatment. EACH STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S
TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for under the 'purchase' method of accounting
whereby the purchase price will be allocated among the Company's assets and
liabilities based on the fair value of the assets acquired and liabilities
assumed.
DISSENTERS' RIGHTS
Stockholders of the Company who follow the procedures specified in Section
262 of the Delaware Law ('Section 262') will be entitled to have their shares of
Common Stock appraised by the Delaware Court of Chancery and to receive payment
of the 'fair value' of such shares of Common Stock, exclusive of any element of
value arising from the accomplishment or expectation of the Merger, as
determined by such Court in connection with the Merger Agreement. Stockholders
should assume that the Company will take no action to assist any Stockholders in
perfecting their appraisal rights or to notify them of deadlines prescribed by
Section 262. Therefore, Stockholders desiring to exercise appraisal rights
should comply strictly with the procedures set forth in Section 262 and are
urged to consult a legal advisor before electing or attempting to exercise such
rights. Failure to follow any of such procedures may result in a termination or
waiver of appraisal rights under Section 262.
The following is a summary in general terms of the material provisions of
Section 262. This discussion is qualified in its entirety by reference to the
full text of that statute, a copy of which is included herein as Annex C, and to
any amendments thereto after the date of this Proxy Statement.
Under Section 262, not less than 20 days prior to the Special Meeting the
Company is required to notify each stockholder eligible for appraisal rights of
the availability of such appraisal rights. This Proxy Statement constitutes the
notice to Stockholders that appraisal rights are available to them. Under
Section 262, Stockholders electing to exercise appraisal rights must satisfy the
requirements set forth in Paragraphs (1), (2), and (3) below:
1. Delivery to the Company, before the taking of the vote on the
Proposal to approve the Merger Agreement, a written demand for
appraisal of their Common Stock which reasonably informs the Company
of the identity of the Stockholder of record and that such
Stockholder intends thereby to demand the appraisal of such
Stockholder's Common Stock. This written demand is in addition to
and separate from any proxy or vote against the proposal to approve
the Merger Agreement. Neither a vote against adoption of the Merger
Agreement nor a proxy directing such vote will satisfy the
requirement of such written demand. The written demand for appraisal
should be delivered either in person to the Secretary of the Company
at the Special Meeting before the vote on the adoption of the Merger
Agreement or by mail (certified mail, return receipt requested,
being the recommended form of transmittal) before the Special
Meeting to the Secretary of the Company, at Laurentian Capital
Corporation, 640 Lee Road, Suite 303, Wayne, Pennsylvania 19087;
2. Not vote in favor of adoption of the Merger Agreement. A failure
to vote against adoption of the Merger Agreement will not constitute
a waiver of appraisal rights. However,
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Stockholders who execute a proxy and who desire to perfect their
appraisal rights must mark the proxy 'AGAINST' the proposal to
approve adoption of the Merger Agreement or 'ABSTAIN', because if
the proxy is left blank, it will be voted for such proposal; and
3. Hold the shares of Common Stock for which appraisal is sought of
record on the date the demand is made and continue to hold the
shares of Common Stock of record through the Effective Time.
The written demand for appraisal must be made by or for the holder of
record of the Common Stock. Accordingly, such demand should be executed by or
for such Stockholder of record, fully and correctly, as such Stockholder's name
appears on such Stockholder's stock certificates. If the Common Stock is owned
of record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in such capacity and if the Common Stock
is owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand should be executed by or for all joint owners. An authorized
agent, including one of two or more joint owners, may execute the demand for
appraisal for a Stockholder of record. However, the agent must identify the
record owner or owners and expressly disclose the fact of that agency in
executing the demand.
A record owner, such as a broker, who holds shares of Common Stock as
nominee for others may exercise the right of appraisal with respect to the
Common Stock held for all or less than all of the others. In such case, the
written demand should set forth the number of shares of Common Stock covered by
it. Where no number of shares of Common Stock covered by it is specified, the
demand will be presumed to cover all shares of Common Stock standing in the name
of such record owner.
Within 10 days after the Effective Time, the Surviving Corporation will
notify each Stockholder of the Company who has satisfied the foregoing
conditions of the date on which the Merger became effective. Within 120 days of
the Effective Time, the Surviving Corporation or any such Stockholder who has
satisfied the foregoing conditions and is otherwise entitled to appraisal rights
under Section 262 may file a petition in the Delaware Court of Chancery
demanding a determination of value of the Common Stock held by all Stockholders
entitled to appraisal rights. If no such petition is filed, appraisal rights
will be lost for all Stockholders who had previously demanded appraisal of their
shares of Common Stock. Stockholders of the Company seeking to exercise
appraisal rights should assume that the Surviving Corporation will not file a
petition with respect to the appraisal of the value of Common Stock and that the
Surviving Corporation will not institute any negotiations with respect to the
'fair value' of Common Stock. Accordingly, Stockholders of the Company who wish
to exercise their appraisal rights should regard it as their obligation to take
all steps necessary to perfect their appraisal rights in the manner prescribed
in Section 262.
If the Delaware Court of Chancery so requires, Stockholders of record who
are seeking a determination of the value of their shares of Common Stock must
submit their stock certificates to the Register in Chancery for notation thereon
of the pendency of the appraisal proceedings. If the Court invokes such a
requirement, and a Stockholder fails to comply with it, the Court may dismiss
the appraisal proceedings as to that Stockholder, and such Stockholder will lose
appraisal rights.
Within 120 days after the day of the Effective Time, a Stockholder who has
complied with the provisions of Section 262 is entitled, upon written request,
to receive from the Surviving Corporation a statement setting forth the
aggregate number of shares of Common Stock not voted in favor of adoption of the
Merger Agreement and with respect to which demands for appraisal were received
by the Company and the number of holders of such Common Stock. Such statement
must be mailed within 10 days after the written request thereof has been
received and within 10 days after expiration of the time for delivery of demands
for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the Stockholders
entitled to appraisal rights and will appraise the value of the Common Stock
owned by such Stockholders, determining the 'fair value' exclusive of any
element of value arising from the accomplishment or expectation of the Merger.
The 'fair value' may be determined to be the same, more or less than the Merger
Consideration.
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The Court may also (i) determine a fair rate of interest, simple or
compound, if any, to be paid to dissenting Stockholders in addition to the value
of the Common Stock for the period from the Effective Time to the date of
payment, (ii) assess costs among the parties as the Court deems equitable, and
(iii) order all or a portion of the expenses incurred by the dissenting
Stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and fees and expenses of experts, to be
charged pro rata against the value of all shares of Common Stock entitled to
appraisal. Determinations by the Court are subject to appellate review by the
Delaware Supreme Court.
Stockholders who have duly demanded an appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote their shares of
Common Stock for any purpose nor be entitled to the payment of dividends or
other distributions on their Common Stock.
If no petition for an appraisal is filed within the time provided, or if a
Stockholder delivers to the Surviving Corporation a written withdrawal of such
Stockholder's demand for an appraisal and an acceptance of the Merger, either
within 60 days after the Effective Time or with the written approval of the
Surviving Corporation thereafter, then the right of such Stockholder to an
appraisal will cease and such Stockholder shall be entitled to receive the
Merger Consideration to which such Stockholder would have been entitled had such
Stockholder not demanded appraisal of such Stockholder's Common Stock. No
pending appraisal proceeding in the Court of Chancery will be dismissed to any
Stockholder without the approval of the Court, which approval may be conditioned
on such terms as the Court deems just.
FINANCIAL INFORMATION
For information with respect to the Company's financial position at
December 31, 1994 and June 30, 1995 and results of operations for the year and
six months then ended, see the consolidated financial statements, related notes
and other financial information, including management's discussion and analysis
of financial condition and results of operations, set forth under 'LAURENTIAN
CAPITAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS' on page F-1.
21
<PAGE>
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>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------------ ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums...................... $ 47,673 $ 40,653 $ 85,751 $ 81,443 $ 80,186 $ 79,551 $ 79,889
Realized investment gains
(losses).................... 2,427 2,380 2,323 2,773 53 3,696 (2,548)
Net investment and other
income...................... 25,751 23,615 49,611 50,038 50,159 47,774 46,557
------------ ---------- ------------ ---------- ---------- ---------- ----------
Total revenues................ $ 75,851 $ 66,648 $ 137,685 $ 134,254 $ 130,398 $ 131,021 $ 123,898
------------ ---------- ------------ ---------- ---------- ---------- ----------
------------ ---------- ------------ ---------- ---------- ---------- ----------
Benefits and expenses......... $ 69,754 $ 60,339 $ 125,119 $ 122,876 $ 120,221 $ 122,798 $ 139,973
Income tax expense
(benefit)................... 2,081 1,703 3,058 3,584 3,463 2,777 (410)
Income (loss) before
cumulative effect of
accounting change........... 4,016 4,606 9,508 7,794 6,714 5,446 (15,665)
Cumulative effect of
accounting change:
Effect of implementation of
SFAS 109.................... 0 0 0 400 0 0 0
Net income (loss)............. $ 4,016 $ 4,606 $ 9,508 $ 8,194 $ 6,714 $ 5,446 $ (15,665)
PER SHARE DATA
Income (loss) before
cumulative effect of
accounting change........... $ 0.52 $ 0.59 $ 1.22 $ 1.00 $ 0.80 $ 0.63 $ (1.97)
Cumulative effective of
accounting change:
Effect of implementation of
SFAS 109.................... 0 0 0 .05 0 0 0
------------ ---------- ------------ ---------- ---------- ---------- ----------
Net income (loss)............. $ 0.52 $ 0.59 $ 1.22 $ 1.05 $ 0.80 $ 0.63 $ (1.97)
------------ ---------- ------------ ---------- ---------- ---------- ----------
------------ ---------- ------------ ---------- ---------- ---------- ----------
Weighted average number of
shares outstanding.......... 7,587 7,570 7,580 7,549 7,984 8,111 8,111
Stockholders' equity.......... $ 15.20 $ 13.15 $ 13.02 $ 13.44 $ 12.20 $ 10.84 $ 10.06
BALANCE SHEET DATA
Invested assets............... $ 594,021 $ 570,207 $ 580,826 $ 585,284 $ 542,984 $ 528,013 $ 501,122
Total assets.................. 1,059,198 962,031 1,027,886 972,732 942,180 952,398 931,059
Debt.......................... 45,000 45,000 45,000 54,822 54,454 54,249 53,377
Stockholders' equity.......... 115,355 99,515 98,796 101,484 92,030 87,918 81,641
</TABLE>
22
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on the AMEX under the symbol 'LQ'. The table below
presents the high and low sales prices of Common Stock on the AMEX during the
time periods indicated.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ----------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1995:
First quarter................................................................. $ 12 5/8 $ 10 3/4
Second quarter................................................................ 13 7/8 12 1/2
Third quarter (through August 18, 1995)....................................... 13 3/8 13 1/8
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 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. If the Merger is not consummated, 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, and in such event 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.
23
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Directors and Executive Officers. The following
table sets forth the beneficial ownership of Common Stock as of August 14, 1995
by each director and executive officer of the Company, and all directors and
executive officers as a group. Unless otherwise indicated, no director or
officer beneficially owns more than 1% of the outstanding Common Stock, and
unless otherwise indicated each such person is believed to have sole voting and
investment power with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME OWNED
- ----------------------------------------------------------------------------------------- -------------------
<S> <C> <C>
Thomas E. Beach.......................................................................... 10,000
Jared M. Billings........................................................................ 6,462
Stephen B. Bonner........................................................................ 1,000
Claude Castonguay........................................................................ 1,965(1)
Robert J. Ferguson....................................................................... 0(1)
Jack Kinder, Jr.......................................................................... 0
Robert D. Larrabee....................................................................... 3,713(2)
Guy Rivard............................................................................... 0(1)
Humberto Santos.......................................................................... 0(1)
Alan J. Zakon............................................................................ 11,000
Robert T. Rakich......................................................................... 189,867(1)(3)
Bernhard M. Koch......................................................................... 52,713(4)
David L. Wilson, Jr...................................................................... 28,334(5)
Thomas W. Alesi.......................................................................... 1,000
All directors and executive officers of the Company as a group, consisting of 14
persons................................................................................ 306,054(6)
</TABLE>
- ------------------
(1) Messrs. Castonguay, Ferguson, Rakich, Rivard and Santos by virtue of being
directors and/or executive officers of companies affiliated with DLFC may,
within the intendment of Rule 13d-3 under the Securities Exchange Act of
1934, be deemed to be beneficial owners of the shares of LCC Common Stock
beneficially owned by affiliates of DLFC. Messrs. Castonguay, Ferguson,
Rakich, Rivard and Santos have expressly disclaimed any actual beneficial
interest in the shares of LCC Common Stock owned by affiliates of DLFC
except as otherwise indicated. Messrs. Castonguay, Ferguson, Rakich, Rivard
and Santos are the owners of record of the shares of Common Stock set forth
in the table.
(2) Indicates the number of common shares into which 1,350 shares of Series A
Preferred Stock beneficially owned by Mr. Larrabee may be converted. Such
shares are owned by Merchant Funeral Home, Inc., a corporation owned by Mr.
Larrabee, and will be redeemed as described in 'THE MERGER AGREEMENT --
Redemption of Series A Cumulative Convertible Preferred Stock.'
(3) Includes 56,667 shares subject to Options which will be paid for as
described in 'EFFECTS OF THE MERGER ON CERTAIN PERSONS -- Payment for
Options and SARs.' Mr. Rakich's beneficial ownership is approximately 2.4%
of beneficial ownership of Common Stock.
(4) Includes 47,713 shares subject to Options, which are among 66,046 shares
subject to Options which will be paid for as described in 'EFFECTS OF THE
MERGER ON CERTAIN PERSONS -- Payment for Options and SARs.'
(5) Includes 19,334 shares subject to Options, which are among 33,000 shares
subject to Options which will be paid for as described in 'EFFECTS OF THE
MERGER ON CERTAIN PERSONS -- Payment for Options and SARs.'
(6) See notes (2), (3), (4) and (5) above. Represents 3.8% of beneficial
ownership of Common Stock.
24
<PAGE>
Security Ownership of Certain Beneficial Owners. The following table sets
forth information as of August 14, 1995 with respect to each person known to
management to be the beneficial owner of more than five per cent (5%) of
outstanding Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
The Imperial Life Assurance 5,432,109 71.6%
Company of Canada;
95 St. Clair Avenue West
Toronto, Ontario
Canada M4V 1N7
Desjardins-Laurentian Life Group Inc. 6,177,093(1) 81.4%
(formerly Laurentian Financial, Inc.);
1100 Rene Levesque Blvd., West
Montreal, Quebec
Canada H3B 4N4
The Laurentian Group Corporation; 6,177,093(2) 81.4%
1100 Rene Levesque Blvd., West
Montreal, Quebec
Canada H3B 4N4
Desjardins Laurentian Financial 6,177,093(3) 81.4%
Corporation, Inc.;
1 Complexe Desjardins - 40th Fl.
P.O. Box 10500-Desjardins Station
Montreal, Quebec
Canada H5B 1J1
La Societe Financiere 6,177,093(4) 81.4%
des caisses Desjardins, Inc.;
1 Complexe Desjardins - 40th Fl.
P.O. Box 10500-Desjardins Station
Montreal, Quebec
Canada H5B 1J1
La Confederation 6,177,093(5) 81.4%
des caisses popularies et
d'economie Desjardins du Quebec;
100 Commandeurs Avenue
Levis, Quebec
Canada G6Y 7N5
</TABLE>
- ------------------
(1) Desjardins-Laurentian Life Group Inc. ('DLLG'; formerly Laurentian
Financial, Inc.) owns 744,984 shares of LCC Common Stock. DLLG also owns
99.9% of the outstanding capital stock of The Imperial Life Assurance
Company of Canada ('Imperial'). Under the applicable provisions of the
Securities and Exchange Act of 1934, DLLG may be deemed to be a joint
beneficial owner of the 5,432,109 shares of LCC Common Stock owned by
Imperial.
(2) The Laurentian Group Corporation ('Group') owns all of the outstanding
capital stock of DLLG. Under the applicable provisions of the Securities
Exchange Act of 1934, Group may be deemed to be a joint beneficial owner of
the 5,432,109 shares of LCC Common Stock owned by Imperial and the 744,984
shares owned by DLLG.
(3) Desjardins Laurentian Financial Corporation ('DLFC') owns 98.6% of Group.
Under the applicable provisions of the Securities Exchange Act of 1934,
Desjardins Laurentian may be deemed to be a joint beneficial owner of the
5,432,109 shares of LCC Common Stock owned by Imperial and the 744,984
shares owned by DLLG.
25
<PAGE>
(4) La Societe Financiere des caisses Desjardins ('SFCD') owns directly and
indirectly 81.6% of DLFC. Under the applicable provisions of the Securities
Exchange Act of 1934, Societe Financiere may be deemed to be a joint
beneficial owner of the 5,432,109 shares of LCC Common Stock owned by
Imperial and the 744,984 shares owned by DLLG.
(5) La Confederation des caisses popularies et d'economie Desjardins du Quebec
('Confederation') owns 99.9% of SFCD. Under the applicable provisions of the
Securities Exchange Act of 1934, Confederation may be deemed to be a joint
beneficial owner of the 5,432,109 shares of LCC Common Stock owned by
Imperial and the 744,984 shares owned by DLLG.
INFORMATION ABOUT THE COMPANY
General. 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 is owned by Imperial
and an additional 9.8% is owned by Imperial's direct parent,
Desjardins-Laurentian Life Group Inc. ('DLLG', formerly known as Laurentian
Financial, Inc.), 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, DLFC and La Societe
financiere des caisses Desjardins, Inc., 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.
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.
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.
26
<PAGE>
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.
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.
27
<PAGE>
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> <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>
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
28
<PAGE>
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 were classified as investment grade.
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>
CASH, ACCRUED NET INVESTMENT
INVESTMENT INCOME INCOME EXCLUDING PERCENTAGE
AND INVESTMENTS GAIN OR LOSS FROM EARNED ON AVERAGE
YEAR ENDED AT DECEMBER 31, SALE OF INVESTMENTS OF CASH AND
DECEMBER 31, ------------------ ------------------- 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>
29
<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.
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
30
<PAGE>
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.
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.
31
<PAGE>
Based upon the enacted RBC rules, both Loyal and Prairie had 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 AMEX, the Company is also subject to the
rules and policies of the AMEX.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1933, as amended (the 'Exchange Act'), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the 'Commission') Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, Suite 1300, New York,
New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition,
such reports, proxy statements and other information can be inspected at the
offices of Laurentian Capital Corporation, 640 Lee Road, Suite 303, Wayne,
Pennsylvania 19087.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994 and all other reports filed by the Company with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act since December 31, 1994 are
incorporated into this Proxy Statement by reference. The Company will provide
without charge to any person to whom this Proxy Statement is delivered, on the
written or oral request of such person, a copy of any or all of the foregoing
documents incorporated by reference (other than exhibits not specifically
incorporated by reference into the texts of such documents). Requests for such
documents should be directed to: Laurentian Capital Corporation, 640 Lee Road,
Suite 303, Wayne, Pennsylvania 19087, Attention: Bernhard M. Koch, Secretary.
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P., Certified Public Accountants, serves as the
Company's independent certified public accountants. Representatives of Coopers &
Lybrand L.L.P. are expected to be at the Special Meeting to answer questions by
stockholders and will have the opportunity to make a statement if so desired.
OTHER MATTERS
Management knows of no business which will be presented for action at the
meeting other than as set forth in this Proxy Statement, but if any other
matters properly come before the meeting, the persons named in the accompanying
proxy will vote such proxy on such matters in accordance with their best
judgment.
By Order of the Board of Directors
[ SIG CUT ]
Bernhard M. Koch, Secretary
Wayne, Pennsylvania
August 21, 1995
32
<PAGE>
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FISCAL YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... F-2
Report of Independent Accountants.......................................................................... F-9
Consolidated Balance Sheets as of December 31, 1994 and 1993............................................... F-10
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-11
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-12
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992......................................................................... F-13
Notes to Consolidated Financial Statements................................................................. F-14
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... F-31
Consolidated Balance Sheets as at June 30, 1995
(Unaudited) and December 31, 1994........................................................................ F-34
Consolidated Statements of Operations (Unaudited) for the
Six Months Ended June 30, 1995 and 1994.................................................................. F-36
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 1995 and 1994.................................................................. F-37
Notes to Interim Consolidated Financial Statements (Unaudited)............................................. F-38
</TABLE>
F-1
<PAGE>
-------------------------------------------------------------------------
FISCAL YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
-------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------ --------- ---------------
<S> <C> <C>
(IN THOUSANDS)
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.
F-2
<PAGE>
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.
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 AMOUNT PERCENTAGE
DECEMBER 31, 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.
F-3
<PAGE>
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>
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
F-4
<PAGE>
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
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
F-5
<PAGE>
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 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.
F-6
<PAGE>
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 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
F-7
<PAGE>
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 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.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Laurentian Capital Corporation:
We have audited the accompanying consolidated balance sheets of Laurentian
Capital Corporation and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the 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.
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.
/s/ COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 17, 1995
F-9
<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-10
<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-11
<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-12
<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-13
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization And Principles Of Consolidation -- The consolidated financial
statements include, after intercompany eliminations, Laurentian Capital
Corporation (individually or collectively with its subsidiaries, the Company),
and its wholly-owned subsidiaries, principally Loyal American Life Insurance
Company (Loyal), and Prairie 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:
o 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.
o Fixed maturities available for sale (bonds, notes and redeemable
preferred stocks)--at current market value, adjusted for other than
temporary impairments in market value.
F-14
<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)
o Equity securities (common and nonredeemable preferred stocks)--at
current market value, adjusted for other than temporary impairments
in market value.
o Mortgage loans on real estate--at unpaid balances, net of valuation
allowances and adjusted for amortization of premium or discount.
o Investment real estate--at cost, net of valuation allowances and
less allowances for depreciation computed on the straight-line
method.
o Policy loans--at unpaid balances.
o 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. Declines in fair value of investments which are considered
to be other than temporary are reported as realized losses. In determining fair
value, the Company considers numerous variables such as contemporaneous market
price, issuer's financial performance, industry prospects and other issuer
circumstances. 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.
F-15
<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)
Policy Liabilities -- Liabilities for future policy benefits of traditional
ordinary life policies are computed using a net level premium method including
assumptions as to investment yields, mortality, withdrawals, and other
assumptions commensurate with the Company's past experience, modified as
necessary to reflect anticipated trends, including possible unfavorable
deviations. The liability for future policy benefits for universal life policies
and deferred annuities is equal to the accumulated fund balance including
interest credits at rates declared by the Company. Interest rate assumptions
range from 4.25% to 10%. Assumed mortality and withdrawals are based on various
industry published tables modified as appropriate for the Company's actual
experience. Morbidity and withdrawals are based on actual and projected
experience.
Life insurance in force, net of reinsurance, was approximately $2.6 billion
as of December 31, 1994 and 1993.
Liabilities for other policy claims and benefits payable include provisions
for reported claims and an estimate based on ratios developed through prior
experience for claims incurred but not reported.
Assets Held In And Liabilities Related To Separate Accounts -- Investment
annuity deposits and related liabilities represent deposits maintained by
several banks under a previously offered tax deferred annuity program. The
Company receives an annual fee from each bank for sponsoring the program and
depositors may elect to purchase an annuity from the Company at which time funds
are transferred to the Company.
Premium Revenue And Related Expenses -- For traditional life and accident
and health products, premiums are recognized as revenue when legally collectible
from policyholders. Policy reserves have been established in a manner which
allocates policy benefits and expenses on a basis consistent with the
recognition of related premiums and generally results in the recognition of
profits over the premium-paying period of the policies.
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is classified as a liability. Revenue
is recognized as amounts are assessed against the policyholder account for
mortality coverage and contract expenses. Surrender benefits reduce the account
value. Death benefits are expensed when incurred, net of the account value.
For investment type contracts, principally deferred annuity contracts,
premiums are treated as policyholder deposits and are recorded as liabilities.
Benefits paid reduce the policyholder liability. Revenues for investment
products consist of investment 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.
F-16
<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)
Prior years' financial statements have not been restated to reflect the
provisions of SFAS 109. The adoption of SFAS 109 resulted in a cumulative
benefit of $400,000 for the year ended December 31, 1993, or $0.05 per common
share.
Reinsurance -- Insurance liabilities are reported gross of the effects of
reinsurance. Reinsurance receivables, including amounts related to insurance
liabilities, are reported as assets. Estimated reinsurance receivables are
recognized in a manner consistent with the liabilities related to the underlying
reinsured contracts.
Recently Issued Accounting Standards -- In May 1993, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 114, 'Accounting by Creditors for Impairment of a Loan' (SFAS
114), as amended by SFAS 118, 'Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures' (SFAS 118), which establishes
accounting standards for creditors when a loan is deemed impaired. These
statements are primarily applicable to the Company's commercial loan portfolio,
as residential loans are excluded. The Company has determined that the adoption
of these statements will not have a material effect on the Company's financial
position or results of operations, as the Company's impaired loan portfolio is
not material. The Company will adopt these statements effective January 1, 1995.
Reclassifications -- Certain reclassifications have been made in the
previously reported financial statements to make the prior year amounts
comparable to those of the current year.
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>
F-17
<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 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>
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
F-18
<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)
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>
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.
F-19
<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 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
----------- -----------
----------- -----------
Fixed Maturities Available for Sale
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-20
<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
F-21
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. DEBT--(CONTINUED)
Agreement which fixed the LIBOR component of the RUF at 7.94% beginning April
29, 1991 through April 25, 1994.
Interest expense included in the consolidated statements of operations was
$3.6 million, $4.9 million, and $5.0 million for 1994, 1993 and 1992,
respectively.
Cash paid for interest was $4.0 million, $4.9 million, and $5.3 million for
1994, 1993 and 1992, respectively.
Repayment of the revolving credit facility is scheduled as follows:
<TABLE>
<S> <C>
1995............................................................................... $ 0
1996............................................................................... 0
1997............................................................................... 4,583
1998............................................................................... 9,167
1999............................................................................... 31,250
---------
Total......................................................................... $ 45,000
---------
---------
</TABLE>
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
F-22
<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)
of the non-life companies. The valuation allowance was reduced by $0.6 million
during 1993 for the realization of benefits associated with the sale of certain
real estate assets. The valuation allowance against deferred tax assets will be
continually evaluated and adjustments will be reflected in the Statement of
Operations as an increase or decrease in income tax expense.
For 1992, under previously enacted GAAP, the total provision for federal
income tax differed from amounts currently payable due to providing deferred
taxes on certain items reported for financial statement purposes in periods
which differed from those in which they were reported for tax purposes.
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-23
<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
F-24
<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)
required in each of the following four years. During 1993, the Company completed
a tender offer wherein 4,534 shares of the redeemable preferred stock were
purchased for $87 per share and subsequently retired. During 1994, the Company
redeemed 8,524 shares of the preferred stock at $100 per share, in accordance
with the mandatory redemption provision, and subsequently retired the stock. In
order to satisfy the 1995 mandatory redemption provision, the Company must
redeem 9,832 additional shares by July 7, 1995.
The remaining 4.97 million unissued shares of preferred stock may be
divided into series with rights and preferences established at the discretion of
the Board of Directors.
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividend payments to the Company from its insurance subsidiaries are
restricted by state insurance law as to the amount that may be paid without
prior notice or approval by insurance regulatory authorities. The maximum
dividend distribution which can be made to the Company by Loyal during 1995
without prior notice or approval is $3.4 million. Upon prior notice to state
regulatory authorities, the maximum dividend distribution which can be made by
Prairie States to Prairie National during 1995 under current insurance law is
$5.6 million. This distribution would then be available to Prairie National to
remit interest and principal payments due under its surplus debenture to the
Company, subject to prior approval of the state regulatory authorities. The
unpaid balance of the surplus debenture is $24 million at December 31, 1994.
Dividend payments of $4.3 million and $2.1 million were made to the Company
by its insurance subsidiaries during the years ended December 31, 1993 and 1992,
respectively. Surplus debenture interest and principal payments were $8.4
million, $6.8 million and $1.2 million for the years ended December 31, 1994,
1993 and 1992, respectively.
In connection with the 1989 acquisition of Rushmore, the policyholders of
Rushmore are entitled to 90% of the statutory accounting earnings arising from
the existing participating business during the ten years after the acquisition.
In addition, the statutory surplus which was in existence at the date of
acquisition has been distributed to the policyholders.
Approximately 14% of the Company's insurance in force is related to
participating insurance policies. A portion of the Company's earnings is
allocated to these policies based on excess interest earnings, mortality savings
and premium loading experience. Premium income and dividends allocated to
participating policies during the past three years were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Premium income............................................... $ 11,761 $ 12,924 $ 15,131
Dividends allocated.......................................... 2,129 2,540 3,894
</TABLE>
8. STOCK OPTION AND OTHER INCENTIVE PLANS
STOCK OPTION PLAN
Under the terms of the Company's Amended and Restated Executive Stock
Option Plan (Plan), options to purchase up to the greater of 800,000 shares or
10.3% of the Company's outstanding common stock may be granted to officers and
key employees. Options are granted at not less than market value on the date of
grant and are exercisable during the term fixed by the Company, but not earlier
than six months, nor later than ten years after the date of the grant.
F-25
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCK OPTION AND OTHER INCENTIVE PLANS--(CONTINUED)
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.
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
F-26
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. EMPLOYEE BENEFIT PLANS--(CONTINUED)
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.
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>
F-27
<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)
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.
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.
F-28
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
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-29
<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-30
<PAGE>
---------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
---------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PENDING MERGER AGREEMENT
On May 26, 1995, the Company and American Annuity Group, Inc. (AAG) jointly
announced that they had executed a definitive agreement by which AAG will
acquire by merger the Company for an aggregate consideration of $105.6 million
in cash, and will repay approximately $45 million of the Company's debt. AAG
will pay $13.875 per share for all of the more than 80% of the Company's shares
beneficially owned by Desjardins Laurentian Financial Corporation and $14.125
for all remaining Company shares. The consumation of the merger is subject to
fulfillment of various conditions, including regulatory and shareholder
approvals.
PREMIUM INCOME
The following table sets forth for the periods shown the amount of premium
income for the Company, and the percentage change from the corresponding
prior-year period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30 JUNE 30
------------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1995 amount............................................... $ 47,673 $ 24,144
1994 amount............................................... 40,653 21,377
Percentage increase....................................... 17.3% 12.9%
</TABLE>
For the six months and quarter ended June 30, 1995, the increase in premium
income, as compared to the corresponding period in 1994, was due to increased
single premium life insurance sales at Prairie, higher levels of accident and
health insurance sales at Loyal and improved persistency at both companies.
NET INVESTMENT INCOME, REALIZED INVESTMENT GAINS AND OTHER REVENUE
The following table sets forth for the periods shown the amount of net
investment income, realized investment gains and other revenue and the
percentage change from the corresponding prior-year period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30 JUNE 30
------------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1995 amount............................................... $ 28,178 $ 14,680
1994 amount............................................... 25,995 12,511
Percentage increase....................................... 8.4% 17.3%
</TABLE>
For the six months and quarter ended June 30, 1995, the increase in net
investment income, realized investment gains and other revenue in 1995, as
compared to 1994, were primarily due to increases in net investment income and
other revenue. The increase in net investment income reflects the improving
portfolio yield as funds invested during the fourth quarter of 1994 and the
first six months of 1995 were invested at higher rates than the portfolio yield.
An increase in invested assets also contributed to higher investment income.
Other revenue increased due to continued growth in the Company's non-life
insurance operations.
F-31
<PAGE>
BENEFITS & 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>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
BENEFITS EXPENSES BENEFITS EXPENSES
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1995............................................... 96.1% 50.2% 97.1% 52.8%
1994............................................... 93.7% 54.7% 92.4% 51.3%
</TABLE>
For the six months and quarter ended June 30, 1995, benefits increased by
$7.7 million and $3.7 million, respectively. The increase in the benefit ratios
for both the three and six month period reflects the higher level of single
premium life insurance sales at Prairie that have a high initial benefit
reserve. In addition, improved accident and health sales at Loyal also
contributed to a high benefits ratio as the initial benefit reserve is a high
percentage of initial premium collected.
For the six months and quarter ended June 30, 1995, expenses increased as
compared to the prior year by $1.7 million and $1.8 million, respectively. The
increase was due primarily to expenses associated with the pending merger with
American Annuity Group. Expenses increased $1.7 million for the six month period
in 1995 as compared to the prior year with merger related expenses accounting
for $1.0 million of the increase. For the three month period in 1995, as
compared to the comparable 1994 period, expenses increased $1.8 million with
merger related expenses of $1.0 million being incurred. Higher expenses were
incurred due to premium taxes which are directly related to higher sales
produced in 1995 as compared to 1994. In addition, the Company continued its
development of its sales distribution network.
INCOME TAXES
The Company's effective tax rates for the periods ended June 30, 1995 and
1994 were 34% and 27%, respectively. The 1995 effective tax rate is equal to the
statutory tax rate. The effective tax rate for the 1994 period reflects the
realization of certain tax benefits associated with the Company's sale of
certain real estate assets during the 1994 period.
NET INCOME
The following table sets forth for the periods shown net income and
earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 QUARTER ENDED JUNE 30
------------------------ ------------------------
NET INCOME EARNINGS NET INCOME EARNINGS
AMOUNT PER SHARE AMOUNT PER SHARE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995 amount............................ $ 4,016 $ 0.52 $ 1,725 $ 0.22
1994 amount............................ 4,606 0.59 2,378 0.30
Decrease amount........................ (590) (0.07) (653) (0.08)
</TABLE>
The decrease in net income of approximately $0.6 million and $0.7 million
for the six month and quarter periods ended June 30, 1995, respectively, over
the corresponding periods in 1994, was due primarily to merger related expenses
and a higher effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The life insurance industry is one that 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 using certain assumed
interest rates. Since future benefit payments are primarily long-term
obligations, the Company's investments are predominately long-term fixed rate
investments such as bonds and mortgage loans which should 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
F-32
<PAGE>
statutes and regulations imposed by the states in which that company is
licensed. These statutes and regulations generally require that investments be
in high grade investments which provide protection for policyholders.
As of June 30, 1995, the Company's total fixed maturity investment
portfolio had an amortized cost of $478.1 million with a market value of $478.3
million, $0.2 million above amortized cost. This differential between amortized
cost and market is significantly influenced by changes in interest rates
subsequent to purchase of the investment. The Company had $19.7 million in
mortgage loans at June 30, 1995, which could reflect a small premium or discount
if those loans had quoted market prices. Since these assets are invested for
terms generally corresponding to anticipated future benefit payments and carry
interest rates in excess of assumed reserve interest rates, they produce
predictable cash flows and when combined with future premium income 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 position in mortgage-backed securities
('MBS'). These are instruments collaterized by pools of residential or
commercial mortgages, which return interest and principal payments to the
investor monthly. The Company's MBS holdings are primarily issued by either U.S.
government agencies (i.e., GNMA, FNMA and FHLMC) or major U.S. financial
institutions. MBS are subject to prepayment risk, especially in periods when
interest rates are falling, which can adversely affect their yield and maturity.
With the significant decline experienced in interest rates throughout 1993 and
early 1994, the Company had experienced significant prepayment activity. As a
result, the Company experienced a decline in the portfolio yield as a result of
reinvesting these proceeds into similar investments at then lower interest
rates. The level of prepayment activity abated steadily during 1994. The
portfolio yield is modestly improving as maturities and new funds are being
invested at higher rates in the current economic environment.
During the second quarter, the Company's main life insurance companies,
Prairie and Loyal, were notified by a state insurance department that their
ability to conduct business in the state was under review due to the extent of
concentration in Mortgage Backed Securities (MBS), in general, and certain types
of Collateralized Mortgage Obligations in particular. In addition, certain state
regulators in the past had expressed general concerns regarding the
concentration of MBS in the Company's fixed maturities portfolio. In response to
regulatory concerns, the Company reduced the percentage of investments in
certain types of MBS. The Company sold $54.6 million of MBS of which $24.4
million were designated as Fixed maturities held to maturity and $30.2 million
of Fixed maturities available for sale.
Policy loans at June 30, 1995 were $49.9 million. These loans have
associated rates in the 3.5% 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. The level
of expenses normally fluctuates in direct proportion to the amount of premium
produced; however, the Company's cash disbursements in the holding company have
from time to time exceeded its cash receipts, principally due to its former
acquisitions program. Funding of interest on debt incurred in connection with
acquisitions and the subsequent consolidation of operations required an
expenditure of approximately $1.8 million for the six month period ended June
30, 1995.
The Company's subsidiaries are currently producing earnings and net cash
flow sufficient to cover debt service 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 cash 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.
F-33
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost
(market, 1995 -- $266,513; 1994 -- $243,191).................................. $ 268,918 $ 273,418
Fixed maturities available for sale, at market
(amortized cost, 1995 -- $209,197; 1994 -- $234,537).......................... 211,823 218,645
Equity securities, at market
(cost, 1995 -- $10,318; 1994 -- $11,313)...................................... 10,456 10,638
Mortgage loans on real estate.................................................... 19,662 21,420
Investment real estate........................................................... 3,558 4,489
Policy loans..................................................................... 49,883 50,600
Short-term investments........................................................... 29,721 1,616
-------------- -------------
Total investments........................................................... 594,021 580,826
Cash............................................................................... 49,992 20,250
Accounts, notes and premiums receivable............................................ 6,024 5,379
Reinsurance receivables............................................................ 73,012 92,170
Accrued investment income.......................................................... 4,922 6,190
Deferred policy acquisition costs.................................................. 76,606 74,085
Costs in excess of net assets of business acquired................................. 7,204 7,362
Property and equipment, net........................................................ 10,928 11,738
Other assets....................................................................... 6,343 3,535
Assets held in separate accounts................................................... 230,146 226,351
-------------- -------------
TOTAL ASSETS................................................................ $ 1,059,198 $ 1,027,886
-------------- -------------
-------------- -------------
</TABLE>
See notes to Interim Consolidated Financial Statements.
F-34
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future policy benefits........................................................... $ 445,395 $ 436,318
Unearned premiums................................................................ 1,776 1,710
Other policy claims and benefits payable......................................... 12,253 12,033
-------------- -------------
Total policy liabilities and accruals.............................................. 459,424 450,061
Other policyholders' funds......................................................... 169,184 179,143
Debt............................................................................... 45,000 45,000
Other liabilities.................................................................. 24,801 17,289
Current income taxes............................................................... 41 241
Deferred income taxes.............................................................. 15,247 7,711
Liabilities related to separate accounts........................................... 230,146 226,351
-------------- -------------
TOTAL LIABILITIES........................................................... 943,843 925,796
-------------- -------------
Commitments and contingent liabilities
Redeemable preferred stock, Series A Convertible, $.01 par value, at redemption
value
Shares authorized: 5 million
Shares issued: 57,767
Outstanding: 1995 -- 0; 1994 -- 32,939........................................ 0 3,294
-------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.05 par value
Shares authorized: 20 million
Shares issued: 8,111,496......................................................... 406 406
Capital in excess of par value..................................................... 59,127 59,127
Net unrealized appreciation (depreciation) of securities, net of tax
(1995 -- $940; 1994 -- ($5,633))................................................. 1,824 (10,934)
Treasury stock, at cost (shares -- 524,098)........................................ (2,656) (2,656)
Retained earnings.................................................................. 56,654 52,853
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................. 115,355 98,796
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $ 1,059,198 $ 1,027,886
-------------- -------------
-------------- -------------
</TABLE>
See notes to Interim Consolidated Financial Statements.
F-35
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Premiums............................................................ $ 47,673 $ 40,653 $ 24,144 $ 21,377
Net investment income............................................... 23,237 21,959 11,654 10,963
Realized investment gains........................................... 2,427 2,380 1,917 758
Other revenue....................................................... 2,514 1,656 1,109 790
--------- --------- --------- ---------
Total revenues...................................................... 75,851 66,648 38,824 33,888
--------- --------- --------- ---------
Benefits and expenses:
Benefits and settlement expenses.................................... 45,829 38,099 23,441 19,751
Amortization of deferred policy acquisition costs................... 6,799 6,685 2,998 3,217
Insurance and other expenses........................................ 17,126 15,555 9,759 7,749
--------- --------- --------- ---------
Total benefits and expenses......................................... 69,754 60,339 36,198 30,717
--------- --------- --------- ---------
Income before income taxes............................................ 6,097 6,309 2,626 3,171
Income tax expense:
Current............................................................. 1,135 200 835 100
Deferred............................................................ 946 1,503 66 693
--------- --------- --------- ---------
2,081 1,703 901 793
--------- --------- --------- ---------
NET INCOME............................................................ $ 4,016 $ 4,606 $ 1,725 $ 2,378
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income available to common shareholders:
Net income.......................................................... $ 4,016 $ 4,606 $ 1,725 $ 2,378
Less: accrued dividends on preferred stock.......................... 103 127 52 64
--------- --------- --------- ---------
Net income attributable to common shareholders........................ $ 3,913 $ 4,479 $ 1,673 $ 2,314
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share.................................................... $ 0.52 $ 0.59 $ .22 $ 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding (in thousands).................... 7,587 7,570 7,587 7,591
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to Interim Consolidated Financial Statements.
F-36
<PAGE>
LAURENTIAN CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flow from operations:
Net income............................................................................... $ 4,016 $ 4,606
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes................................................................. 946 1,503
Increase in policy liabilities and accruals, policyholders' funds and income taxes.... 17,325 6,801
Decrease in accrued investment income and accounts and notes receivable............... 1,402 1,187
Decrease (increase) in accrued expense and other liabilities.......................... 4,369 (466)
Amortization of deferred policy acquisition costs..................................... 7,140 6,685
Policy acquisition costs deferred..................................................... (9,661) (6,231)
Depreciation expense.................................................................. 686 744
Amortization of goodwill.............................................................. 173 133
Realized gains on investments......................................................... (2,427) (2,380)
Other reconciling adjustments, net.................................................... (5,653) (1,634)
--------- ---------
Net cash provided by operating activities........................................... 18,316 10,948
--------- ---------
Cash flow from investing activities:
Sale of fixed maturities available for sale.............................................. 84,358 6,714
Sale of fixed maturities held to maturity................................................ 25,141 0
Sale of other investments................................................................ 5,689 0
Maturity or repayment of investments..................................................... 15,356 67,373
Purchases of fixed maturities available for sale......................................... (60,807) (37,392)
Purchases of fixed maturities held to maturity........................................... (23,844) (31,886)
Purchases of other investments........................................................... (6,166) (4,568)
Purchases (disposals) of property and equipment.......................................... (176) (708)
Net (increase) decrease in short-term investments........................................ (28,105) 6,932
Other, net............................................................................... (20) 0
--------- ---------
Net cash provided by investing activities........................................... 11,426 6,465
--------- ---------
Cash flow from financing activities:
Proceeds from borrowing.................................................................. 0 45,000
Repayment of debt........................................................................ 0 (54,822)
Sale of treasury shares.................................................................. 0 225
Other financing activities, net.......................................................... 0 52
--------- ---------
Net cash (used in) financing activities............................................. 0 (9,545)
--------- ---------
Net increase in cash....................................................................... 29,742 7,868
Cash at beginning of period................................................................ 20,250 8,722
--------- ---------
Cash at end of period...................................................................... $ 49,992 $ 16,590
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest expense........................................................... $ 1,868 $ 2,121
Cash paid for federal income taxes....................................................... 1,035 70
</TABLE>
See notes to Interim Consolidated Financial Statements.
F-37
<PAGE>
LAURENTIAN CAPITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
The Interim Consolidated Financial Statements should be read in conjunction
with the following notes and with the Notes to the Consolidated Financial
Statements included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994. In the opinion of management, the financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position as of June 30, 1995 and the
results of operations and statements of cash flows for the three month and six
month periods ended June 30, 1995 and 1994.
The consolidated financial statements include, after intercompany
eliminations, Laurentian Capital Corporation (individually or collectively with
its subsidiaries, the 'Company'), and its wholly-owned subsidiaries Loyal
American Life Insurance Company ('Loyal'), Prairie States Life Insurance Company
('Prairie'), and Rushmore National Life Insurance Company ('Rushmore').
The results of operations for the six month period ended June 30, 1995 are
not necessarily indicative of the results to be expected for the full year.
Certain prior year information has been reclassified to conform with the current
year's presentation.
NOTE 2 -- PENDING MERGER AGREEMENT:
On May 26, 1995, the Company and American Annuity Group, Inc. (AAG) jointly
announced that they had executed a definitive agreement by which AAG will
acquire by merger the Company for an aggregate consideration of $105.6 million
in cash, and will repay approximately $45 million of the Company's debt. AAG
will pay $13.875 per share for all of the more than 80% of the Company's shares
beneficially owned by Desjardins Laurentian Financial Corporation and $14.125
for all remaining Company shares. The consumation of the merger is subject to
fulfillment of various conditions, including regulatory and shareholder
approvals.
Pursuant to the definitive agreement, the Company's outstanding Series A
Convertible Cumulative Preferred Stock is to be redeemed prior to the closing of
the transaction. As of June 30, 1995, the Company has sent notices of redemption
to all Preferred Stockholders and has recorded the redemption payable in Other
Liabilities in the balance sheet. The amounts will be paid during the third
quarter.
NOTE 3 -- INVESTMENTS:
During the second quarter, the Company's main life insurance companies,
Prairie and Loyal, were notified by a state insurance department that their
ability to conduct business in the state was under review due to the extent of
concentration in Mortgage Backed Securities (MBS), in general, and certain types
of Collateralized Mortgage Obligations in particular. In addition, certain state
regulators in the past had expressed general concerns regarding the
concentration of MBS in the Company's fixed maturities portfolio. In response to
regulatory concerns, the Company reduced the percentage of investments in
certain types of MBS. The Company sold $54.6 million of MBS of which $24.4
million were designated as Fixed maturities held to maturity and $30.2 million
of Fixed maturities available for sale. The sale of Fixed maturities held to
maturity resulted in $0.8 million in net realized gains.
The Company's fixed maturity investments include $2.3 million at amortized
cost, less permanent impairments, rated as below investment grade as of June 30,
1995. These investments had an associated market value of $2.4 million. As of
December 31, 1994, $3.4 million at amortized cost, less permanent impairments,
with an associated market value of $3.1 million were rated as below investment
grade. Most of these securities have been evaluated by the National Association
of Insurance Commissioners and found to be suitable for reporting at book value
for statutory reporting purposes. No material effect is expected from these
holdings on the Company's financial condition or the results of operations. The
Company's investment strategy is to hold fixed income instruments to maturity
and to recognize permanent impairments on those investments where reduction in
amounts to be received at maturity is likely.
F-38
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
AMERICAN ANNUITY GROUP, INC.,
L.Q. ACQUISITION CORP.
AND
LAURENTIAN CAPITAL CORPORATION
DATED AS OF
MAY 25, 1995
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this 'Merger Agreement' or this
'Agreement'), dated as of May 25, 1995, by and among American Annuity Group,
Inc., a Delaware corporation ('Acquiror'), L.Q. Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Acquiror formed for the purposes of
the transactions contemplated hereby ('Newco'), and Laurentian Capital
Corporation, a Delaware corporation ('LCC').
WHEREAS, the Board of Directors of Acquiror (the 'Acquiror Board') believes
it is in the best interests of Acquiror and its stockholders and the Board of
Directors of LCC (the 'LCC Board') believes it is in the best interests of LCC
and its stockholders that Acquiror, Newco and LCC effect the transactions
contemplated hereby; and
WHEREAS, the parties hereto desire to adopt a plan of merger, providing for
the merger of Newco with and into LCC (the 'Merger') pursuant to which all of
the issued and outstanding shares of Common Stock, $.05 par value per share, of
LCC ('LCC Common Stock') will be converted into the right to receive the amount
in cash per share specified herein; and
WHEREAS, the LCC Board has concurrently herewith approved that certain
Option Agreement made by Acquiror, The Imperial Life Assurance Company of Canada
and Desjardins-Laurentian Life Group Inc. as of the date hereof; and
WHEREAS, Acquiror, Newco and LCC desire to effect the Merger and the other
transactions contemplated hereby; and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties, covenants and agreements made herein as an inducement to the
consummation of the Merger and the other transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
I. THE MERGER
In accordance with the terms and subject to the conditions of this Merger
Agreement, Acquiror, Newco and LCC shall effect the Merger as follows:
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3), in
accordance with this Merger Agreement and the General Corporation Law of the
State of Delaware (the 'Delaware Law'), Newco shall be merged with and into LCC,
and the separate existence of Newco shall cease. LCC shall continue as the
surviving corporation and is herein sometimes referred to in this capacity as
the 'Surviving Corporation.'
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
Section 259 of the Delaware Law.
1.3 CONSUMMATION OF THE MERGER. As soon as is practicable on the Closing
Date (as defined in Section 1.4) after all conditions to the consummation of the
Merger set forth herein have been satisfied or duly waived, the parties hereto
shall cause the Merger to be consummated by filing with the Secretary of State
of the State of Delaware, a Certificate of Merger in such form as is required
by, and executed, acknowledged and certified in accordance with, the relevant
provisions of the Delaware Law (the later of the time of such filing or the
effective time of the Certificate of Merger filed pursuant to the Delaware Law
is herein referred to as the 'Effective Time').
1.4 CLOSING. The closing of the Merger (the 'Closing') shall take place on
the last business day of the month ending no less than four business days after
the date of satisfaction of all the conditions to the Closing set forth in
ARTICLE VIII or on such other date as Acquiror and LCC shall mutually agree
(such specified day following the satisfaction of all conditions to Closing or
such other mutually agreed to date being herein referred to as the 'Closing
Date') at such place as Acquiror and LCC shall mutually agree.
A-2
<PAGE>
1.5 CERTIFICATE OF INCORPORATION AND BY-LAWS; DIRECTORS AND OFFICERS.
(a) At the Effective Time, each of the Certificate of Incorporation of LCC
(the 'Certificate') and the By-Laws of LCC (the 'By-Laws'), shall be
amended in their entirety to conform to Exhibit A and Exhibit B,
respectively, attached hereto and made a part hereof, and shall be
after such amendment the Certificate of Incorporation and By-Laws of
the Surviving Corporation and thereafter shall continue to be such
Certificate of Incorporation and By-Laws until amended as provided
therein and in accordance with the Delaware Law.
(b) From and after the Effective Time, the directors of Newco shall be the
directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly
elected and qualified, as the case may be. The officers of LCC shall be
the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly
appointed and qualified, as the case may be.
II. CONVERSION OF SHARES; DISSENTING LCC SHARES;
PAYMENT FOR LCC COMMON STOCK.
2.1 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof or of any party hereto:
(a) LCC Common Stock. Each share of LCC Common Stock issued and outstanding
immediately prior to the Effective Time, other than (i) DLFC Shares (as
hereinafter defined), (ii) LCC Common Stock held by Acquiror, any
direct or indirect subsidiary of Acquiror, LCC or any direct or
indirect Subsidiary of LCC ('Excluded Shares'), and (iii) Dissenting
LCC Shares (as hereinafter defined), shall be automatically converted
into the right to receive $14.125 in cash, payable to the holder
thereof without interest thereon upon the surrender of the certificate
formerly representing such share in the manner provided by Section 2.2.
(b) DLFC Shares. Each of the 6,177,093 shares of LCC Common Stock issued
and outstanding immediately prior to the Effective Time held by The
Imperial Life Assurance Company of Canada and Desjardins-Laurentian
Life Group Inc. (collectively, the 'DLFC Shares'), shall be
automatically converted into the right to receive in cash $13.875,
payable to the holders thereof without interest thereon upon the
surrender of the certificates formerly representing such share in the
manner provided by Section 2.2.
(c) Excluded Shares. Each of the Excluded Shares shall be automatically
cancelled and extinguished, and no payment shall be made with respect
to such shares.
(d) Newco Common Stock. Each share of common stock, no par value per share,
of Newco outstanding immediately prior to the Effective Time shall be
automatically converted into one validly issued, fully paid and
nonassessable newly issued share of common stock, par value $0.05 per
share, of the Surviving Corporation, and the shares converted pursuant
to this Section 2.1(d) shall constitute the only outstanding shares of
capital stock of the Surviving Corporation.
(e) Dissenting LCC Shares. Each share of LCC Common Stock with respect to
which dissenters' rights have been properly exercised by the holders
thereof under Section 262 of the Delaware Law and perfected to the
extent necessary, as of the Effective Time ('Dissenting LCC Shares',
or, individually, a 'Dissenting LCC Share'), shall thereafter represent
only such rights as are provided by Section 262 of the Delaware Law,
and shall be subject to compliance by the holder thereof with the
obligations imposed by Section 262 of the Delaware Law.
2.2 SURRENDER AND EXCHANGE OF LCC COMMON STOCK, OPTIONS AND SARs.
(a) Payment Agent. Prior to the Effective Time, Acquiror shall designate a
bank or trust company reasonably acceptable to LCC to act as Payment
Agent in the Merger (the 'Payment Agent'). At the Effective Time, in
accordance with Section 8.3(e) Acquiror or Newco shall deposit in trust
with the Payment Agent and/or an unconditional commitment to provide
cash in the
A-3
<PAGE>
aggregate amount equal to the Acquiror Payment (as hereinafter
defined). Such funds shall be invested by the Payment Agent on behalf
of the Surviving Corporation in securities issued or guaranteed by the
United States government or certificates of deposit of commercial banks
that have consolidated total assets of not less than $500,000,000.
(b) Letter of Transmittal. Promptly after the Effective Time, the Payment
Agent shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the
Effective Time represented LCC Common Stock (the 'Certificates'), other
than Certificates evidencing Dissenting LCC Shares or Excluded Shares,
a form letter of transmittal and instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender to
the Payment Agent of a Certificate, together with such letter of
transmittal duly executed, and any other documents required by the
Payment Agent, the holder of such Certificate shall be entitled to
receive in exchange therefor the consideration set forth in Section
2.1, and such Certificate shall forthwith be cancelled. No interest
will be paid or accrued for the benefit of holders of the Certificates
on the cash payable upon the surrender of the Certificates. If payment
is to be made to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed
or otherwise in proper form for transfer as reasonably determined by
Acquiror and that the person requesting such payment shall pay to the
Payment Agent any transfer or other taxes required by reason of the
payment to a person other than the registered holder of such LCC Common
Stock or establish to the satisfaction of the Surviving Corporation
that such tax has been paid or is not applicable.
(c) Payment for Employee Options and SARs. There shall be mailed to each
holder of an Employee Option or SAR (as defined in Section 3.2(b))
outstanding at the time for payment therefor pursuant to this Section
2.2(c) the consideration set forth in Section 5.3, and upon the mailing
of such payment each such Employee Option or SAR shall forthwith be
cancelled. Payment shall be made in the manner specified in Section
2.2(c)(i), unless Acquiror by notice to LCC given not less than thirty
(30) days prior to the filing of the Proxy Statement described in
Section 6.1(b) requests that LCC pay such consideration in accordance
with Section 2.2(c)(ii). No interest will be paid or accrued for the
benefit of holders of Employee Options or SARs on the cash payable with
respect to Employee Options or SARs. Payment shall be made either:
(i) promptly after the Effective Time by the Payment Agent to each
holder of an Employee Option or SAR listed on LCC's certificate
delivered pursuant to Section 5.3, or
(ii) by LCC immediately prior to the Effective Time.
(d) Undisbursed Funds. At any time following one year after the Effective
Time, Acquiror shall be entitled to require the Payment Agent to
deliver to it or to the Surviving Corporation any funds (including any
interest received with respect thereto) which have been made available
to the Payment Agent and which have not been disbursed to holders of
Certificates or Employee Options or SARs, and thereafter such holders
shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) only as general
creditors thereof with respect to the cash payable upon due surrender
of their Certificates or Employee Options or SARs. The Surviving
Corporation shall pay all charges and expenses, including those of the
Payment Agent, in connection with the exchange of the Acquiror Payment
for LCC Common Stock, other than transfer or other taxes to be paid
pursuant to Section 2.2(b) by a person requesting payment to be made to
a person other than the person in whose name a Certificate surrendered
is registered. Until surrendered in accordance with the provisions of
this Section, each Certificate (other than Certificates representing
Excluded Shares and Dissenting LCC Shares) shall, at all times after
the Effective Time, represent for all purposes the right to receive in
cash the amount per share specified in Section 2.1 multiplied by the
number of shares of LCC Common Stock evidenced by such Certificate,
without any interest thereon. Notwithstanding the foregoing, Acquiror
shall not be
A-4
<PAGE>
liable to any holder of LCC Common Stock for any amount paid to a
public official or governmental entity pursuant to applicable abandoned
property laws.
(e) No Stock Transfers. After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of LCC Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented for transfer to the Surviving Corporation,
they shall be cancelled and exchanged for the per share cash amount
specified in Section 2.1 as provided in this Article in accordance with
the procedures set forth in this Article.
2.4 ACQUIROR PAYMENT
The 'Acquiror Payment' shall be the sum of
(a) the aggregate of the amounts payable to holders of LCC Common Stock
issued and outstanding as of the Effective Time pursuant to Section
2.1, plus
(b) if payment is to be made to such holders pursuant to Section 2.2(c)(i),
the aggregate amount payable to holders of Employee Options or SARs
outstanding at the Effective Time in accordance with Section 5.3.
2.5 CREDIT AGREEMENT. On the Closing Date and prior to the Effective Time:
(a) Acquiror shall pay or cause to be paid in full to the Lenders
identified in that certain $45,000,000 Credit Agreement among
Laurentian Capital Corporation and the several Lenders named therein as
Lenders and National Bank of Canada, New York Branch, as Agent (the
'Agent'), dated as of April 25, 1994 (the 'Credit Agreement'), the
outstanding balance of the indebtedness under the Credit Agreement
including principal, interest, fees and expenses;
(b) LCC shall have terminated the commitments under the Credit Agreement
effective as of the Closing Date; and
(c) LCC and the Agent shall have executed and delivered to Desjardins
Laurentian Financial Corporation ('DLFC') an appropriate instrument of
discharge acknowledging the termination of the Long Term Financing
Support Agreement dated as of April 25, 1994, executed between DLFC and
LCC as well as that certain agreement dated as of April 25, 1994
executed among DLFC, LCC and the Agent, and releasing DLFC from all
liabilities and obligations under such agreements.
III. REPRESENTATIONS AND WARRANTIES OF LCC
LCC hereby represents and warrants to Acquiror that:
3.1 ORGANIZATION AND COMPLIANCE WITH LAW.
(a) Each of LCC and its direct and indirect subsidiaries (such subsidiaries
being those corporations of which LCC beneficially owns all of the
outstanding voting securities, including without limitation Loyal
American Life Insurance Company ('Loyal American'), an Alabama stock
insurance corporation and a wholly-owned subsidiary of LCC, and Prairie
States Life Insurance Company ('Prairie States'), a South Dakota stock
insurance corporation and an indirect wholly-owned subsidiary of LCC;
and all such subsidiaries, collectively referred to herein as the 'LCC
Subsidiaries,' being listed on Exhibit 22 to the LCC 10-K hereinafter
defined) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has
all requisite corporate power and corporate authority and all requisite
governmental and other authorizations to own, lease and operate its
assets and properties and to carry on its business as now being
conducted;
(b) each of LCC and the LCC Subsidiaries is duly qualified as a foreign
corporation to do business and is in good standing in each jurisdiction
in the United States, Puerto Rico and the U.S.
A-5
<PAGE>
Virgin Islands ('Jurisdiction') in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary; and
(c) other than is disclosed in a disclosure letter delivered by LCC to
Acquiror prior to the date hereof (the 'LCC Disclosure Letter'), each
of LCC and the LCC Subsidiaries is in compliance with all applicable
laws, judgments, orders, decrees, rules and regulations, including
without limitation all Environmental Laws (as defined in Section 3.21),
without regard to any waiver or forbearance arrangement; except with
respect to the foregoing (a), (b) and (c) as to such matters (if any)
where failure of such authorizations, qualifications or compliance does
not and would not, either individually or in the aggregate, have a
material adverse effect on the financial condition, results of
operations or business of LCC and the LCC Subsidiaries taken as a
whole. LCC has heretofore delivered to Acquiror true and complete
copies of its Certificate and By-laws and of the charter and bylaws of
each of the LCC Subsidiaries, in each case as in existence on the date
hereof.
3.2 CAPITALIZATION
(a) The authorized capital stock of LCC consists of 20,000,000 shares of
LCC Common Stock and 5,000,000 shares of preferred stock. As of the
date hereof:
(i) there were issued and outstanding 7,587,398 shares of LCC Common
Stock and 33,747 shares of Series A Cumulative Convertible
Preferred Stock of LCC ('Preferred Stock'), of which 808 shares
are held by Loyal American, and
(ii) 524,098 shares of LCC Common Stock were held in treasury by LCC.
As of December 31, 1994, LCC had over 9,000 record holders of LCC
Common Stock. Except as disclosed in the LCC Disclosure Letter,
since such date no shares of LCC Common Stock have been issued.
All outstanding shares of LCC Common Stock are validly issued,
fully paid and nonassessable and no holder thereof is entitled to
any preemptive rights. Except as disclosed in the LCC Disclosure
Letter, neither LCC nor any of the LCC Subsidiaries is a party
to, nor is LCC aware of, any voting agreement, voting trust or
similar agreement, arrangement or understanding relating to any
class of capital stock of, or any agreement, arrangement or
understanding providing for registration rights with respect to
any class of capital stock or other securities of, LCC or any of
the LCC Subsidiaries.
(b) As of the date hereof, there are outstanding (i) options (the 'Employee
Options') to purchase under the Laurentian Capital Corporation Amended
and Restated Executive Stock Option Plan (the 'LCC Option Plan') an
aggregate of not more than 496,680 shares of LCC Common Stock at a
weighted average exercise price per share of $5.58 (ranging from $2.125
to $8.50 per share), and (ii) 349,044 Stock Appreciation Rights
('SARs') granted under the LCC Option Plan at a weighted average base
price per share of approximately $2.54 (ranging from $2.125 to $5.50
per SAR). Other than as set forth in this Section 3.2 and any shares of
LCC Common Stock issued pursuant to any of the foregoing, there are not
now, and at the Effective Time there will not be, any (A) outstanding
shares of capital stock or other equity securities of LCC or (B)
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of
capital stock of LCC, or contracts, agreements, arrangements or
understandings to which LCC is a party, or by which it is or may be
bound, to issue additional shares of any class of its capital stock or
options, warrants, scrip or rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, any additional shares of
any class of capital stock of LCC.
(c) The shares of capital stock or other equity securities of each of the
LCC Subsidiaries are collectively referred to herein as the 'LCC
Subsidiary Shares'. All outstanding LCC Subsidiary Shares are validly
issued, fully paid and nonassessable and, except as set forth in the
LCC Disclosure Letter, owned beneficially and of record directly or
indirectly by LCC, and in each case owned free and clear of all liens,
pledges, security interests, claims or other
A-6
<PAGE>
encumbrances. Except as aforesaid or as described in the LCC Disclosure
Letter, there are not now, and at the Effective Time there will not be,
any (A) outstanding LCC Subsidiary Shares that are owned of record or
beneficially by any person or entity other than LCC or one of the LCC
Subsidiaries, or (B) outstanding options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable
for, shares of any class of capital stock of any of the LCC
Subsidiaries, or contracts, agreements, arrangements or understandings
to which LCC or any of the LCC Subsidiaries is a party, or by which any
thereof is or may be bound, to issue additional shares of any class of
capital stock or options, warrants, scrip or rights to subscribe for,
calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, any
additional shares of capital stock of any of the LCC Subsidiaries.
3.3 AUTHORIZATION AND VALIDITY OF AGREEMENTS. Subject only, with respect
to the Merger, to approval of this Agreement by the stockholders of LCC as
provided for in Section 8.1(a), LCC has all requisite corporate power and
corporate authority to enter into this Agreement and to perform its obligations
hereunder, and the execution and delivery by LCC of this Agreement and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all requisite corporate action. On or prior to the date hereof,
the LCC Board has determined to recommend approval of the Merger to the
stockholders of LCC, and such determination is in effect as of the date hereof.
This Agreement has been duly executed and delivered by LCC and is the valid and
binding obligation of LCC, enforceable against LCC in accordance with its terms,
except that (i) such enforcement may be subject to bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to certain equitable defenses and to the discretion of the
court before which any proceedings therefor may be brought.
3.4 NO NOTICES OR APPROVALS REQUIRED AND NO CONFLICTS. None of the
execution and delivery of this Agreement by LCC, the performance by LCC of its
obligations hereunder or the consummation by LCC of the transactions
contemplated hereby will:
(a) conflict with the Certificate or By-laws of LCC or with the charter or
bylaws of any of the LCC Subsidiaries;
(b) assuming satisfaction of the requirements set forth in Clause (c) (i),
(ii), (iii) and (iv) below, violate any provision of law applicable to
LCC or any of the LCC Subsidiaries;
(c) require any consent or approval of, or filing with or notice to, any
public body or authority, domestic or foreign, under any provision of
law applicable to LCC or any of the LCC Subsidiaries, except for
<TABLE>
<S> <C>
(i) requirements of Federal and state securities laws,
</TABLE>
<TABLE>
<S> <C>
(ii) requirements arising out of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the 'HSR Act'),
</TABLE>
<TABLE>
<S> <C>
(iii) the filing of a Certificate of Merger in accordance with the Delaware Law, and
</TABLE>
<TABLE>
<S> <C>
(iv) approvals of or notices to regulatory authorities pursuant to the insurance laws of jurisdictions
requiring same; or
</TABLE>
(d) assuming satisfaction of the condition set forth in Section 8.3(d),
require any consent, approval or notice under, or violate, breach, be
in conflict with or constitute a default (or an event that, with notice
or lapse of time or both, would constitute a default) under, or permit
the termination of, or result in the creation or imposition of any lien
upon any assets, properties or business of LCC or any of the LCC
Subsidiaries under, any note, bond, indenture, mortgage, deed of trust,
lease, franchise, permit, authorization, license, contract, instrument
or other agreement or commitment, order, judgment or decree to which
LCC or any of the LCC Subsidiaries is a party or by which LCC or any of
the LCC Subsidiaries or any of the assets or properties thereof is
bound or encumbered, except those disclosed in the LCC Disclosure
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<PAGE>
Letter. Except as disclosed in the LCC Disclosure Letter, there are no
contracts, agreements or arrangements by which LCC or any LCC
Subsidiary is bound under which the parties thereto or persons covered
thereby have any rights or entitlements dependent upon the change of
control to be effected by the Merger.
3.5 LCC REPORTS AND FINANCIAL STATEMENTS; RESERVES.
(a) Since December 31, 1991, each of LCC and the LCC Subsidiaries has
timely filed all reports, registration statements and other filings,
together with any amendments required to be made with respect thereto,
that it has been required to file with the Securities and Exchange
Commission ('SEC') under the Securities and Exchange Act of 1934, as
amended (the '1934 Act'), or the Securities Act of 1933. All reports,
registration statements and other filings (including all exhibits,
notes and schedules thereto and documents incorporated by reference
therein) filed by LCC and any of the LCC Subsidiaries with the SEC on
or after January 1, 1992, together with any amendments thereto,
including, when filed, the Proxy Statement described in Section 6.1(b),
together with any amendments thereto, insofar as such Proxy Statement
contains data and information with respect to LCC or any of the LCC
Subsidiaries, are herein sometimes collectively referred to as the 'LCC
SEC Reports'. LCC has heretofore delivered to Acquiror true and
complete copies of all of the LCC SEC Reports that have been filed with
the SEC prior to the date hereof. As of the respective dates of their
filing with the SEC the LCC SEC Reports complied or will comply, as the
case may be, in all material respects with the rules and regulations of
the SEC and did not or will not, as the case may be, contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements made therein
not misleading.
(b) The consolidated financial statements (including any related notes or
schedules) included in LCC's Annual Report on Form 10-K for the year
ended December 31, 1994 (the 'LCC 10-K') and LCC's Quarterly Reports on
Form 10-Q for the quarter ended March 31, 1995 and for quarters ended
subsequent thereto (the 'LCC 10-Qs'), as filed with the SEC, were or
will be, as the case may be, prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as
may be noted therein or in the notes or schedules thereto) and fairly
present or will fairly present, as the case may be, the consolidated
financial position of LCC and its consolidated subsidiaries as of
December 31, 1993 and 1994 and March 31 (or the last day of the
subsequent fiscal quarter, in the case of subsequently-filed LCC
10-Qs), 1994 and 1995 and the consolidated results of their operations
and cash flows for each of the three years in the three-year period
ended December 31, 1994 and each of the interim periods reported on in
the LCC 10-Qs, subject, in the case of the unaudited interim financial
statements contained in the LCC 10-Qs, to normal year-end audit
adjustments on a basis comparable with prior periods. The accountants
who certified any financial statements and supporting schedules
included or incorporated by reference in the LCC SEC Reports are
independent public accountants with respect to LCC as required by the
rules and regulations of the SEC.
(c) The statutory financial statements of each of the LCC Subsidiaries
engaged in the business of insurance (the 'Insurance Subsidiaries'),
including Loyal American and Prairie States, for each of the three
years in the three-year period ended December 31, 1994 and for the
quarter ended March 31, 1995 and quarters ended subsequent thereto have
been or will be, as the case may be, prepared in accordance with
accounting practices prescribed or permitted by the National
Association of Insurance Commissioners and, with respect to each such
Insurance Subsidiary, the appropriate insurance department of the state
of domicile of such Insurance Subsidiary, and such accounting practices
have been or will be, as the case may be, applied on a consistent basis
throughout the periods involved, and such statutory financial
statements fairly present or will fairly present, as the case may be,
the financial condition of each respective Insurance Subsidiary as of
such dates in accordance with such accounting practices, except as
disclosed therein. LCC has heretofore delivered to Acquiror true and
complete copies of all such statements which have heretofore been
filed.
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(d) Since December 31, 1991 (or if later, the date an LCC Subsidiary became
an LCC Subsidiary), each of LCC and the LCC Subsidiaries has filed all
reports and other filings, together with any amendments required to be
made with respect thereto, that it has been required to file with state
and other insurance and securities regulatory authorities (the 'LCC
Insurance Filings'), and all of the LCC Insurance Filings filed prior
to the date hereof complied, and all such filings made hereafter prior
to the Effective Time will comply, in all material respects with
applicable laws, rules and regulations, and, except as disclosed in the
LCC Disclosure Letter, there are no material open or unresolved issues
raised by any insurance or securities regulatory authority with respect
to any of such filings. LCC has heretofore delivered to Acquiror true
and complete copies of (a) all Reports of Examination issued by any
insurance regulatory authority for any Insurance Subsidiary since
January 1, 1992 and all written responses made by Insurance
Subsidiaries concerning such Reports of Examination, and (b) all
Reports of Examination or similar documents issued by any other
regulatory authority for any other LCC Subsidiary since January 1, 1992
and all written responses made by LCC Subsidiaries concerning such
Reports of Examination, and a list of same is included in the LCC
Disclosure Letter.
(e) The aggregate reserves and (except with respect to clause (i) below)
other amounts of liabilities or obligations of each Insurance
Subsidiary (including, without limitation, reserves established as an
allowance for uncollectible amounts under any reinsurance, coinsurance
or similar contract) as established or reflected on the books and
records of each of the Insurance Subsidiaries (i)(A) were determined in
accordance with generally accepted actuarial standards consistently
applied, (B) are fairly stated in accordance with sound actuarial
principles, and (C) on the date hereof are, and at the Effective Time
will be, based on actuarial assumptions that are in accordance with
those specified in the related insurance contracts, (ii) meet on the
date hereof, and at the Effective Time will meet, in all material
respects, the requirements of the insurance laws of the applicable
jurisdiction as in effect on the date hereof, or on the date of the
Effective Time, as the case may be, and (iii), except as set forth in
the LCC SEC Reports, are on the date hereof, and at the Effective Time
will be, adequate to cover the total amount of all matured and
unmatured liabilities and obligations of such Insurance Subsidiary
under all outstanding insurance contracts pursuant to which such
Insurance Subsidiary has any liability (whether absolute, accrued,
contingent or otherwise) or obligation, including without limitation
any incurred but not reported claims and any liability or obligation
arising as a result of any reinsurance, coinsurance or other similar
contract. For the purposes of clause (iii) above, the fact that
reserves covered by any such representation are subsequently adjusted
at times and under circumstances consistent with LCC's ordinary
practices of reassessing the adequacy of its reserves shall not be used
to support any claim regarding the accuracy of such representation,
provided that such adjustments do not exceed $6,000,000 in the
aggregate. As of the date hereof, each Insurance Subsidiary owns assets
that qualify as reserve assets to the extent required by applicable
insurance laws.
(f) Except as set forth in the financial statements referred to in
Sections 3.5(b) and 3.5(c) (the 'Financial Statements') or the LCC
Disclosure Letter, neither LCC nor any of its subsidiaries has any
liabilities or obligations (whether absolute, accrued, contingent or
otherwise) that in the aggregate have or may reasonably be expected to
have a material adverse effect on LCC and the LCC Subsidiaries, taken
as a whole.
3.6 CONDUCT OF BUSINESS IN THE ORDINARY COURSE AND ABSENCE OF CERTAIN
CHANGES AND EVENTS
(a) Except as contemplated by this Merger Agreement or as disclosed in the
LCC SEC Reports filed with the SEC prior to the date hereof or in the
LCC Disclosure Letter, to the extent material to LCC and the LCC
Subsidiaries taken as a whole, since December 31, 1994 LCC and the LCC
Subsidiaries have taken no action of the type referred to in Section
6.2 and there has not been any material adverse change in the financial
condition, results of operations or businesses of LCC and the LCC
Subsidiaries, taken as a whole (excluding for purposes of the
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foregoing the effect of any conditions, trends, uncertainties, events
and developments adversely affecting the life insurance industry
generally).
(b) Neither LCC nor any of the LCC Subsidiaries is in violation of its
charter or bylaws or, to the extent material to LCC and the LCC
Subsidiaries taken as a whole, in default in the performance of, and no
event has occurred that, with notice or lapse of time or both, would
constitute a default in the performance of, any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization,
license, contract, instrument or other agreement or commitment, order,
judgment or decree to which LCC or any of the LCC Subsidiaries is a
party or by which LCC or any of the LCC Subsidiaries or any of the
assets or properties thereof is bound or encumbered.
3.7 CERTAIN FEES. With the exception of the engagement by LCC of
Oppenheimer & Co., Inc., none of LCC or any of the LCC Subsidiaries, or any of
their respective officers, directors or employees, has employed any financial
advisor, broker or finder or incurred any liability for any financial advisory,
brokerage or finders' fees or commissions in connection with the transactions
contemplated hereby.
3.8 LITIGATION. Except as disclosed in the LCC SEC Reports filed with the
SEC prior to the date hereof or in the LCC Disclosure Letter, there are no
claims, actions, suits, investigations or proceedings pending or, to the
knowledge of LCC, threatened against or affecting LCC or any of the LCC
Subsidiaries or any of their respective assets or properties, at law or in
equity, before or by any Federal, state, municipal or other governmental agency
or authority, foreign or domestic, or before any arbitration board or panel,
wherever located, other than those in the ordinary course of the insurance
business of the LCC Subsidiaries, or those which, individually or in the
aggregate, would not have a material adverse effect on LCC and the LCC
Subsidiaries, taken as a whole. LCC has heretofore delivered to Acquiror a list
of all litigation pending on the date hereof to which LCC or any LCC Subsidiary
is a party.
3.9 BENEFIT PLANS
(a) The LCC Disclosure Letter lists the name and a short description of
each Benefit Plan (as herein defined), together with an indication of
its funding status (e.g., trust, insured or general company assets).
For purposes hereof, the term 'Benefit Plan' shall mean any plan,
program, arrangement or contract currently maintained or terminated
within the last five years by LCC or any of the LCC Subsidiaries for
the benefit of its employees, former employees or Directors which
constitutes (i) any retirement plan intended to be qualified under
Section 401(a) such as a pension, profit sharing, 401(k), stock bonus
plan or employee stock ownership plan or other 'employee pension
benefit plan' as defined in ERISA Section 3(2), and (ii) any plan,
program or arrangement providing deferred compensation, bonus deferral
or incentive benefits, whether funded through a trust or otherwise, and
(iii) any welfare plan, program or policy providing vacation,
severance, salary continuation, supplemental unemployment, disability,
life, health coverage, retiree health, VEBA, medical expense
reimbursement or dependent care assistance benefits, in any such
foregoing case without regard to whether the Benefit Plan constitutes
an employee welfare benefit plan under Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
number of employees covered under such Benefit Plan. The term Benefit
Plan shall include any of the foregoing, whether or not maintained
currently for the benefit of employees, former employees or Directors
of LCC or an LCC Subsidiary, with respect to which there is any current
obligation (or with respect to which there is any material likelihood
of an obligation being asserted against LCC or an LCC Subsidiary) for
LCC or an LCC Subsidiary to make contributions or benefit payments.
(b) LCC shall deliver to Acquiror within two weeks after the date hereof
true, complete and correct copies of all plan documents comprising each
Benefit Plan, together with, when applicable (i) the most recent
summary plan description, if any, required under ERISA, (ii) the most
recent actuarial and financial reports, if any, and the most recent
annual reports filed with any governmental agency and (iii) all
Internal Revenue Service ('IRS') or other
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governmental agency rulings and determination letters or any open
requests for IRS rulings or letters with respect to Benefit Plans.
(c) With respect to each Benefit Plan which is an employee pension benefit
plan (as defined in Section 3(2) of ERISA) other than any such plan
that meets the 'top-hat' exception under Section 201(1) of ERISA (a
'Qualified Benefit Plan'), except as disclosed on the LCC Disclosure
Letter: (i) the IRS has issued a determination letter which determined
that such Qualified Benefit Plan satisfied the requirements of Section
401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'),
as amended by all of the laws referred to in Section 1 of Revenue
Procedure 93-39, such determination letter has not been revoked or
threatened to be revoked by the IRS and the scope of such determination
letter is complete and does not exclude consideration of any of the
requirements of matters referred to in Sections 4.02 through 4.04 of
Revenue Procedure 93-39; (ii) such Qualified Benefit Plan is in
compliance with all qualification requirements of Section 401(a) of the
Code, except for noncompliance which would not have a material adverse
effect on LCC and the LCC Subsidiaries taken as a whole; (iii) no
application has been made to the IRS under the voluntary compliance
resolution program or the walk-in closing agreement program and no
circumstance or condition exists which would qualify as a subject
matter of such a filing; (iv) such Qualified Benefit Plan has been
operated in material compliance with all notice, reporting and
disclosure requirements of ERISA and the Code which apply to employee
pension benefit plans; (v) any Qualified Benefit Plan which is an ESOP
as defined in Section 4975(3)(7) of the Code (an 'ESOP') is in material
compliance with the applicable qualification requirements of Section
409 of the Code; and (vi) with respect to such Qualified Benefit Plan,
if it was terminated or is currently in the process of being
terminated, such Qualified Benefit Plan has been or is being terminated
in compliance with the requirements of the Code and ERISA and the
liabilities of such Qualified Benefit Plan, if already terminated, were
fully satisfied or, if such Plan is in the process of termination, are
not greater than the assets held under such Plan. For purposes hereof,
a Qualified Benefit Plan shall not be considered in 'material
compliance' if circumstances exist which, (x) if discovered by the
Internal Revenue Service, would likely cause the Internal Revenue
Service to either disqualify the Plan or place the Plan in its closing
agreement program or (y) would cause the Department of Labor to impose
material penalties which would have a material adverse effect upon the
financial condition of LCC and the LCC Subsidiaries taken as a whole.
(d) With respect to each Benefit Plan, other than a Qualified Benefit Plan,
except as noted on the LCC Disclosure Letter: (i) to the extent such
Benefit Plan is intended to provide benefits to plan participants that
are not subject to federal income tax so long as specific provisions of
the Code are met, such Benefit Plan currently meets such Code
provisions; (ii) such Benefit Plan has been operated in material
compliance with all applicable notice, reporting and disclosure
requirements of ERISA and the Code (including but not limited to the
filing of timely Forms 5500); (iii) such Benefit Plan, if a group
health plan subject to the requirements of Section 4980B of the Code or
Sections 601 through 608 of ERISA, has been operated in material
compliance with such requirements; and (iv) there is not now, and never
has been, any 'unrelated business taxable income' as defined in
Sections 512 through 514 of the Code. For purposes hereof, a Benefit
Plan shall not be considered in 'material compliance' if circumstances
exist which allow the Internal Revenue Service or the Department of
Labor to impose material penalties which would have a material adverse
effect upon the financial condition of LCC and the LCC Subsidiaries
taken as a whole.
(e) No prohibited transaction under Section 406 of ERISA has occurred with
respect to any Benefit Plan subject thereto which would result, with
respect to any person, in (i) the imposition, directly or indirectly,
of an excise tax under Section 4975 of the Code or (ii) fiduciary
liability under Section 409 of ERISA which would have a material
adverse effect upon the financial condition of LCC and the LCC
Subsidiaries taken as a whole. No ESOP is leveraged.
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(f) Except as noted on the LCC Disclosure Letter, no actions, suits or
claims (other than routine claims for benefits) are pending or
threatened against any Benefit Plan or against LCC or any of the LCC
Subsidiaries with respect to any Benefit Plan.
(g) All material Unfunded Liabilities, as hereinafter defined, with respect
to each Benefit Plan have been recorded and disclosed on one or more of
the most recent Financial Statements or, if not, in the LCC Disclosure
Letter. For purposes hereof, the term 'Unfunded Liabilities' shall mean
(i) any amounts properly accrued to date under generally accepted
accounting principles in effect as of the date of this Merger Agreement
('GAAP'), or (ii) amounts not yet accrued for GAAP purposes but for
which an obligation (which has legally accrued and cannot legally be
eliminated) exists for payment in the future which is attributable to
any Benefit Plan, including but not limited to (A) severance pay
benefits, (B) deferred compensation or unpaid bonuses, (C) any
liabilities on account of the change in control which will result from
this Agreement, including any potential 20% excise tax under Section
4999 of the Code relating to excess parachute payments under Section
280G of the Code, (D) any unpaid defined benefit or money purchase
pension plan contributions for the current plan year or any accumulated
funding deficiency under Section 412 of the Code and related penalties
under Section 4971 of the Code, including unpaid defined benefit or
money purchase pension plan contributions of funding deficiencies owed
by members of a controlled group of corporations which includes LCC or
any of the LCC Subsidiaries and for which LCC is liable under
applicable law, (E) authorized but unpaid profit sharing contributions
or contributions under Section 401(k) and Section 401(m) of the Code,
(F) former employee or Director health benefit or life insurance
coverage and (G) insurance premiums due but unpaid required under any
group health plan to maintain such plan's coverage through the Closing
Date.
(h) Neither LCC nor any of the LCC Subsidiaries maintain a defined benefit
pension plan subject to the provisions of Title IV of ERISA. Neither
LCC nor any of the LCC Subsidiaries has, or within the past five years
has had, any obligation to contribute to any multiemployer plan, as
defined in Section 3(37) of ERISA.
(i) Except as listed on the LCC Disclosure Letter and identified as
'Retiree Liability,' LCC and the LCC Subsidiaries have no obligation
to provide medical benefits, or life insurance benefits to or with
respect to retirees, former employees or any of their relatives, other
than under Sections 601 through 608 of ERISA or Section 4980(B) of the
Code.
(j) Except as disclosed in the LCC Disclosure Letter, LCC and the LCC
Subsidiaries have all power and authority necessary to amend or
terminate each Benefit Plan established and maintained by them.
3.10 TAX MATTERS
(a) Definitions. For purposes of this Section 3.10, the following terms
have the following meanings:
<TABLE>
<S> <C>
(i) 'Code' -- The Internal Revenue Code of 1986, as amended.
</TABLE>
<TABLE>
<S> <C>
(ii) 'Tax Return' -- Any report, return, form, declaration or other document or information required to
be supplied to any authority in connection with Taxes.
</TABLE>
<TABLE>
<S> <C>
(iii) 'Taxes' -- All taxes, charges, fees, levies or other assessments, including without limitation,
all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, estimated, severance, stamp,
occupation, property, premium or other taxes, fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties (including penalties for failure to file in
accordance with applicable information reporting requirements), and additions to tax by any
authority (domestic or foreign).
</TABLE>
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<TABLE>
<S> <C>
(iv) 'Taxable Period' -- Any taxable year or any other period that is treated as a taxable year
(including any Short Period) with respect to which any Tax may be imposed under any applicable
statute, rule, or regulation.
</TABLE>
<TABLE>
<S> <C>
(v) 'Pre-Closing Period' -- Any Short Period, Interim Period or other Taxable Period that ends on or
before the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(vi) 'Post-Closing Period' -- Any Taxable Period that begins after the Closing Date and, with respect
to any Taxable Period that begins on or before and ends after the Closing Date, the portion of
such Taxable Period beginning on the day following the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(vii) 'Interim Period' -- With respect to any Taxable Period that begins on or before the Closing Date
and ends after the Closing Date, the portion of such period that ends on the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(viii) 'Short Period' -- Any Taxable Period that ends on the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(ix) 'LCC Subsidiaries' -- For purposes of this Section 3.10, LCC Subsidiaries shall include former
subsidiaries of LCC for the periods during which any such subsidiaries were owned directly or
indirectly by LCC.
</TABLE>
(b) Representations and Warranties. Except as set forth in the LCC
Disclosure Letter:
<TABLE>
<S> <C>
(i) Filing Status. LCC is the 'common parent' of an 'affiliated group' of corporations (as those terms
are used in Section 1504(a) of the Code and the Treasury Regulations promulgated under Section
1502 of the Code). LCC is and will be eligible to file a consolidated federal income Tax Return
for the Short Period ending on the Closing Date. The LCC Disclosure Letter discloses the LCC
Subsidiaries eligible for inclusion in LCC's consolidated federal income Tax Return and those
Subsidiaries that file separate federal income Tax Returns.
</TABLE>
<TABLE>
<S> <C>
(ii) Filing Tax Returns and Payment of Taxes. All Tax Returns required to be filed with respect to LCC
and LCC Subsidiaries for all Taxable Periods ending on or before the date hereof have been or will
be timely filed. All such Returns (A) were prepared in the manner required by applicable law, (B)
are true, correct, and complete in all material respects, and (C) reflect the liability for Taxes
of LCC and LCC Subsidiaries. All Taxes shown to be payable on such Returns, and all assessments of
Tax made against LCC and LCC Subsidiaries with respect to such Returns, have been or will be paid
when due. No adjustment to the income of LCC and LCC Subsidiaries relating to such Returns has
been proposed formally or informally by any Tax authority and, to the best knowledge of LCC, no
basis exists for any such adjustment, other than such for which adequate reserves have been
established in the Financial Statements described in Section 3.5(b).
</TABLE>
<TABLE>
<S> <C>
LCC and LCC Subsidiaries have paid, have caused to be paid, or have provided a sufficient reserve
on the Financial Statements for the period ended on or prior to the Closing Date, for the payment
of all Taxes in the aggregate with respect to all Taxable Periods, or portions thereof, ending on
or before the date of such statements; and such Taxes paid or provided for include those for which
LCC and LCC Subsidiaries may be liable in their own right, or as the transferee of the assets of,
or as successor to, any other corporation, association, partnership, joint venture, or other
entity.
</TABLE>
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<TABLE>
<S> <C>
(iii) Returns Filed. LCC shall deliver to Acquiror within two weeks after the date hereof, for each
Pre-Closing Period for which the applicable statute of limitations for the assessment of an
income, franchise or premium Tax against LCC and LCC Subsidiaries has not lapsed, a list of (A)
all jurisdictions in which LCC and LCC Subsidiaries have filed an income, franchise, or premium
Tax Return and (B) all consolidated, combined, group, and unitary Tax Returns in which LCC and LCC
Subsidiaries have been included.
</TABLE>
<TABLE>
<S> <C>
(iv) Audit Status. There are no claims or investigations by the IRS or any other Tax authority pending
or threatened against LCC and LCC Subsidiaries for any past due Taxes, and there has been no
waiver of any applicable statute of limitations or extension of the time for the assessment of any
Tax for which LCC and LCC Subsidiaries could be liable under any provision of federal, state,
foreign or local law.
</TABLE>
<TABLE>
<S> <C>
(v) Liens. Except for liens for real and personal property Taxes that are not yet due and payable,
there are no material liens for any Tax upon any asset of LCC and LCC Subsidiaries.
</TABLE>
<TABLE>
<S> <C>
(vi) Power of Attorney. No power of attorney has been granted to any person with respect to LCC and LCC
Subsidiaries relating to any Tax for any Taxable Period ending after the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(vii) Tax Sharing Agreement. With the exception of the tax allocation agreement(s) disclosed in the LCC
Disclosure Letter, there is no contract, agreement, or intercompany account under which LCC and
LCC Subsidiaries have, or may at any time in the future have, an obligation to assume, share, or
contribute to the payment of any portion of a Tax (or any amount calculated with reference to any
portion of a Tax) determined on a consolidated, combined, group, or unitary basis with respect to
any group of corporations of which LCC and LCC Subsidiaries are or were a member.
</TABLE>
<TABLE>
<S> <C>
(viii) Partner in Partnerships. As of the date of this Merger Agreement, for federal income Tax purposes,
LCC and LCC Subsidiaries are not treated as a partner in any partnership, joint venture, or any
other entity treated as a partnership.
</TABLE>
<TABLE>
<S> <C>
(ix) Liability Under Reg. 1.1502-6. LCC has no knowledge of any liability for Taxes asserted against
LCC and LCC Subsidiaries under Reg. 1.1502-6 for federal income Tax, or under any similar state,
local, or foreign law for a state, local or foreign income or franchise Tax, of any corporation
other than LCC and the LCC Subsidiaries.
</TABLE>
<TABLE>
<S> <C>
(x) Accounting Method Changes. LCC and LCC Subsidiaries are not required to include in taxable income
any adjustments under Code Section 481(a) for any Taxable Period, or portion thereof, ending after
the date of this Agreement for matters arising prior to the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(xi) Deferred Income. LCC and LCC Subsidiaries have no income reportable for a Taxable Period ending
after the Closing Date, but attributable to a transaction (e.g., an installment sale) occurring in
a Taxable Period ending on or prior to the Closing Date, that resulted in a deferred reporting of
income from such transaction (other than a 'deferred intercompany transaction').
</TABLE>
<TABLE>
<S> <C>
(xii) Taxable Year. The taxable year of LCC and LCC Subsidiaries for federal and state income and
franchise Tax purposes is the calendar year.
</TABLE>
<TABLE>
<S> <C>
(xiii) Collapsible Corporations. Neither LCC nor any of the LCC Subsidiaries are collapsible corporations
as defined in Code Section 341.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(xiv) Depreciable and Amortizable Assets. The Tax Returns of LCC and the LCC Subsidiaries reflect
deductions for depreciation of tangible and amortization of intangible assets. LCC and the LCC
Subsidiaries have used appropriate lives and methods in calculating Pre-Closing Period
depreciation and amortization.
</TABLE>
(c) Additional Covenants.
<TABLE>
<S> <C>
(i) Tax Sharing Agreements. All contracts, agreements, or intercompany accounts under which LCC and
LCC Subsidiaries have, or may at any time in the future have, an obligation to assume, share, or
contribute to the payment of any portion of a Tax (or any amount calculated with reference to any
portion of a Tax) determined on a consolidated, combined, group, or unitary basis with respect to
any group of corporations of which LCC and LCC Subsidiaries are or were a member shall terminate
with respect to LCC and LCC Subsidiaries on or before the Closing Date.
</TABLE>
<TABLE>
<S> <C>
(ii) Access to Information. From the date hereof, LCC shall make available to the Acquiror and its
authorized representatives: (A) all federal, state, local and foreign income, franchise, gross
premium, and similar Tax Returns for Taxable Periods or portions thereof ended on or before the
Closing Date and any examination reports and statements of deficiencies assessed against, proposed
to be assessed against, or agreed to by LCC and LCC Subsidiaries for such Taxable Periods; (B) any
tax sharing or allocation agreement or arrangement involving LCC and LCC Subsidiaries and a true
and complete description of any such unwritten or informal agreement or arrangement; (C) any pro
forma federal income Tax Returns of LCC and LCC Subsidiaries together with any schedule
reconciling the items in the pro forma Tax Returns to the items as included in the consolidated
Tax Return or any separate federal income Tax Returns for all Taxable Periods ended on or before
the Closing Date; (D) any workpapers or schedules in LCC's possession showing the amount of Tax
earnings and profits for LCC and LCC Subsidiaries; (E) any workpapers or schedules in LCC's
possession showing the amount of Tax basis in LCC Subsidiaries; and (F) the amount of any net
operating loss, capital loss, charitable contribution, general business credit, or any other
carryover Tax attribute (if any) for Taxable Periods beginning on the day following the Closing
Date.
</TABLE>
3.11 NO SECURED DEBT. Except as set forth in the LCC Disclosure Letter,
there is not now, and there will not be immediately prior to the Effective Time,
any secured debt (including capitalized leases) of LCC or any of the LCC
Subsidiaries, except for (i) capitalized leases of less than $1 million in the
aggregate as to which LCC and the LCC Subsidiaries are parties, or (ii)
capitalized leases of LCC or any of the LCC Subsidiaries that are not reflected
(and should not be reflected in accordance with generally accepted accounting
principles) on the consolidated financial statements of LCC, and, in either
case, the existence of which does not violate the terms of any material note,
bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument or other agreement or commitment to
which LCC or any of the LCC Subsidiaries is a party or by which LCC or any of
the LCC Subsidiaries or any of the assets or properties thereof is bound or
encumbered.
3.12 OPINION OF FINANCIAL ADVISOR. The LCC Board has received from
Oppenheimer & Co., Inc. a written opinion, dated on or prior to the date of this
Agreement, to the effect that the consideration to be received by holders of LCC
Common Stock pursuant to Section 2.1(a) is fair to such stockholders of LCC from
a financial point of view.
3.13 REINSURANCE AGREEMENTS. The LCC Disclosure Letter sets forth a list
of all material treaties, agreements, arrangements or contracts regarding
reinsurance to which any Insurance Subsidiary is a party or a named reinsured
and currently has any rights, privileges, liabilities or obligations.
3.14 INSURANCE MATTERS. Except as required by law or as set forth in the
LCC Disclosure Letter:
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<PAGE>
(a) since December 31, 1994, except as originated or amended in the
ordinary course of business and as would not have a material adverse
effect on any such Insurance Subsidiary, no insurance product or
program of any Insurance Subsidiary has been amended in any material
respect or introduced.
(b) since December 31, 1994, all insurance contract obligations incurred by
any Insurance Subsidiary have in all material respects been paid (or
provision for payment has been made therefor) in accordance with the
terms of the contracts under which they arose, except for such
obligations for which such Insurance Subsidiary reasonably believes
there is a reasonable basis to contest payment.
(c) except as set forth in the LCC Insurance Filings or the LCC SEC
Reports, since December 31, 1991 there have been no outstanding
insurance contracts which would entitle the holder thereof or any other
person to receive dividends, distributions or other benefits based on
the revenues or earnings of any Insurance Subsidiary.
(d) the underwriting standards utilized and ratings applied by each
Insurance Subsidiary with respect to insurance contracts outstanding as
of the date hereof conform in all material respects to industry
accepted practices (or otherwise are reasonable where no such industry
accepted practices exist) and, with respect to any such contract
reinsured in whole or in part, conform in all material respects to the
standards and ratings required pursuant to the terms of the related
reinsurance, coinsurance or other similar contracts. To the knowledge
of LCC and the Insurance Subsidiaries: (i) as of the date hereof, all
amounts recoverable under reinsurance, coinsurance or other similar
contracts (including without limitation amounts based on paid and
unpaid losses) are fully collectible in the ordinary course, net of
established reserves as set forth in the Financial Statements or as
reflected in the LCC SEC Reports, except for amounts which would not,
in the aggregate, have a material adverse effect on LCC and the LCC
Subsidiaries, taken as a whole; (ii) since December 31, 1991, each
insurance agent or broker appointed by any Insurance Subsidiary, at the
time such agent or broker wrote, sold or produced business for any
Insurance Subsidiary, was duly appointed and, to the best of LCC's
knowledge, duly licensed, as an insurance agent or broker (for the type
of business written, sold or produced by such insurance agent or
broker) in the particular jurisdiction in which such agent or broker
wrote, sold or produced such business for any Insurance Subsidiary,
except for such failures to be so appointed or so licensed which would
not, in the aggregate, have a material adverse effect on LCC and the
LCC Subsidiaries, taken as a whole; (iii) to the best of LCC's
knowledge, since December 31,1991 no such insurance agent or broker
violated (or with or without notice or lapse of time or both would have
violated) any term or provision of any law or any writ, judgment,
decree, injunction or similar order applicable to the writing, sale or
production of business for any Insurance Subsidiary, the result of
which violations in the aggregate has or may reasonably be expected to
have a material adverse effect on LCC and the LCC Subsidiaries, taken
as a whole, and (iv) as of the date hereof, each Insurance Subsidiary
has all material licenses and permits required to conduct its insurance
business and operations as they are currently being conducted.
(e) No action at law or in equity, and no investigation or proceeding of
any kind, is now pending or, to the knowledge of LCC after due inquiry,
threatened to liquidate or dissolve any Insurance Subsidiary or to
declare any of the corporate rights, powers, or privileges of any
Insurance Subsidiary to be null and void or otherwise than in full
force and effect or which would jeopardize any insurance license or
permit held by any Insurance Subsidiary in any state or other
jurisdiction or result in sanctions against any Insurance Subsidiary or
require the restructuring of the ownership, organization, business or
assets of any Insurance Subsidiary, except for actions which would not,
in the aggregate, have a material adverse effect on LCC and the LCC
Subsidiaries, taken as a whole, if adversely determined.
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(f) Neither LCC nor any LCC Subsidiary is a party to any agreement which
limits in any material respect its freedom to compete in the life,
annuity, health and accident lines of business or to solicit employees
from any person.
(g) Without limiting the generality of subsection 3.1(c), each Insurance
Subsidiary is authorized to write insurance for the types of insurance
in the Jurisdictions in which it presently writes. LCC shall deliver to
Acquiror at or prior to Closing true and complete copies of all
insurance licenses held by each Insurance Subsidiary.
(h) All insurance and annuity contracts which are being issued by any
Insurance Subsidiary as of the date of this Merger Agreement are in all
material respects, to the extent required under applicable laws, on
forms approved by the insurance regulatory authority of the
Jurisdiction where issued or have been filed with and not objected to
by such authority within the period provided for objection.
3.15 REAL PROPERTY LEASES. The Financial Statements and LCC SEC Reports
disclose each lease and sublease pursuant to which LCC or an LCC Subsidiary is a
lessee or sublessee of real property which is required to be disclosed therein;
each such lease and sublease is valid and in full force and effect and
enforceable in accordance with its terms, assuming due execution and
authorization by all other parties thereto; there exists no material event of
default or event, occurrence, condition or act, including without limitation,
the execution and delivery of this Merger Agreement and the consummation of the
transactions contemplated by this Merger Agreement, which constitutes or would
constitute (with notice or lapse of time or both) a default in any material
respect under any of such leases or subleases; and neither LCC nor any LCC
Subsidiary has received any notice of any event of default or any event,
occurrence, condition or act, including without limitation, the execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated by this Merger Agreement, which constitutes or would constitute
(with notice or lapse of time or both) a default in any respect under any of
such leases or subleases.
3.16 INTELLECTUAL PROPERTY. Except as disclosed on the LCC Disclosure
Letter and to the extent material to LCC and the LCC Subsidiaries, taken as a
whole, LCC and each LCC Subsidiary owns or is licensed or otherwise has the full
and exclusive right to use all trade names, trademarks, logos, service marks,
patents and copyrights used in its business as presently conducted and the use
thereof does not, to the best knowledge of LCC, conflict with or infringe upon
or otherwise violate any rights of others; no claim has been asserted by any
person against LCC or any LCC Subsidiary with respect to the use of any
trademark, trade name, service mark, patent, copyright, know-how or process used
by LCC if challenging or questioning the validity or effectiveness of such use
or any such license or agreement and, to the best knowledge of LCC, there exists
no valid basis for any such claim; the consummation of the transactions
contemplated by this Merger Agreement will not alter or impair any rights
referred to in this Section 3.16; and to the best knowledge of LCC, no person is
infringing or otherwise violating the trade names, trademarks, logos, service
marks, patents and copyrights of LCC and the LCC Subsidiaries and neither LCC
nor any LCC Subsidiary has made any claim with respect thereto.
3.17 RIGHTS UNDER LICENSES; SOFTWARE. To the extent material to LCC and
the LCC Subsidiaries, taken as a whole, all license agreements under which LCC
or any LCC Subsidiary has obtained rights to use or permit its customers or
agents to use computer software programs or data owned by others are in full
force and effect (assuming due authorization and execution by the other parties
thereto) and enforceable in accordance with their terms and, to the best
knowledge of LCC, there is no claim that either LCC or any LCC Subsidiary or the
other party or parties to such agreements is in material default thereof; none
of LCC or any of the LCC Subsidiaries has materially infringed the proprietary
software rights of any third party and, to the best knowledge of LCC, no third
party has infringed the proprietary software rights of LCC or any LCC
Subsidiary; and the consummation of the transactions contemplated by this Merger
Agreement will not alter or impair any rights of LCC or any LCC Subsidiary
referred to in this Section 3.17.
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3.18 INTERCOMPANY SERVICES AND TRANSACTIONS. Except as disclosed in the
LCC Disclosure Letter, LCC has provided Acquiror with true and complete copies
of the annual holding company filings made by the Insurance Subsidiaries for the
years ended December 31, 1993 and December 31, 1994, including monthly
amendments, if any, in 1995, which identify all reportable transactions and all
agreements or arrangements relating to all intercompany services provided
currently or since January 1, 1993 by members of the holding company system of
which the Insurance Subsidiaries are a part. To the extent material to LCC and
the LCC Subsidiaries, taken as a whole, all intercompany services or
transactions so described have been carried out in accordance with applicable
law and all consents and notice filings for such services or transactions have
been obtained or made, as applicable. There are no agreements between LCC or any
LCC Subsidiary and DLFC or any affiliate of DLFC which will remain in effect
after the Effective Time, except for insurance coverages provided by DLFC
affiliates to LCC and the LCC Subsidiaries.
3.19 THREATS OF CANCELLATION. Since December 31, 1994, no policyholder,
group of affiliated policyholders, agents, group of affiliated agents, person or
group of affiliated persons holding, writing, selling or producing insurance
(that accounted in the aggregate for 5% or more of the aggregate premium or
annuity income of the Insurance Subsidiaries for the year ended December 31,
1994 or which with respect to which LCC has established reserves in an amount in
excess of 5% of its total reserves) has terminated (or to the knowledge of LCC
threatened to terminate) its relationship with LCC or any LCC Subsidiary.
3.20 DISCLOSURE. No representation, warranty or statement made by LCC (i)
in this Merger Agreement, (ii) in the LCC Disclosure Letter or (iii) any other
written materials furnished or to be furnished by LCC to Acquiror or their
respective representatives, attorneys or accountants pursuant to this Merger
Agreement, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact required to be stated herein or
therein or necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
3.21 ENVIRONMENTAL MATTERS. Except as set forth in the LCC Disclosure
Letter, to the best of LCC's knowledge no claims by third parties ('Third Party
Claims') and/or regulatory actions have been asserted or assessed against LCC or
any LCC Subsidiary or any real property owned or leased by LCC or any LCC
Subsidiary (the 'Real Property') and, to the best of LCC's knowledge, no Third
Party Claims and/or regulatory actions are pending or threatened against LCC or
the Real Property, arising out of or due to, or allegedly arising out of or due
to, (i) the Release on, under or from the Real Property of any Hazardous
Substances; (ii) any contamination of the Real Property by Hazardous Substances,
including without limitation, the presence of any Hazardous Substance which has
come to be located on or under the Real Property from another location; (iii)
any material violation or alleged violation of any Environmental Laws with
respect to the Real Property; (iv) any injury to human health or safety or to
the environment by reason of the past or present condition of, or past or
present activities on or under, the Real Property; or (v) the generation,
manufacture, storage, treatment, handling, transportation or other use, however
defined, of any Hazardous Substance on the Real Property. As used herein,
'Environmental Laws' means any and all laws, regulations, ordinances, policies,
standards, permits, licenses, orders and other restrictions or requirements,
whether judicial or administrative, of the United States, or any other country,
of any state or other jurisdiction, or of any political subdivision of any
thereof, that relate to the condition of the air, ground or surface water, land,
or other parts of the environment; to the Release or potential Release of any
Hazardous Substances into the air, ground or surface water, land or other parts
of the environment; or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or other handling of Hazardous
Substances; 'Hazardous Substances' means any and all hazardous, toxic or
dangerous waste, substance, pollutant, contaminant, radiation or material
defined as such in (or deemed as such for purposes of) the Comprehensive
Environmental Response, Compensation and Liability Act, any so-called
'Superfund' or 'Superlien' law, or any Environmental law or other applicable law
or other requirement of any governmental authority, relating to, or imposing
liability or standards of or for conduct concerning, any hazardous or toxic
waste, substance, pollutant,
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<PAGE>
contaminant or material, or any petroleum or petroleum-based products; and
'Release' means any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or other disposal in any
amount into or onto the air, ground or surface water, land or other parts of the
environment, however caused.
3.22 INSURANCE COVERAGE. On the date hereof, to the extent material to LCC
and the LCC Subsidiaries, taken as a whole, LCC and the LCC Subsidiaries
maintain insurance covering their respective properties, assets and businesses
against such casualties, risks and contingencies, and in such types and amounts,
as are consistent with customary practice and standards of companies engaged in
similar businesses.
3.23 TANGIBLE PERSONAL PROPERTY. To the extent material to LCC and the LCC
Subsidiaries, taken as a whole, all equipment and tangible personal property
used by LCC and the LCC Subsidiaries are leased or owned by LCC or the LCC
Subsidiaries, free and clear of all liens, encumbrances or other third party
interests of any nature whatsoever which would materially impair the intended
use of such equipment and tangible personal property, and are in usable
condition for the purpose for which they are intended subject to ordinary wear
and tear and routine maintenance.
3.24 AMERICAN FUNERAL TRUST. To the extent material to LCC and the LCC
Subsidiaries, taken as a whole, (a) each state trust established by American
Funeral Trust (each, an 'AFT Trust') is listed in the LCC Disclosure Letter, (b)
each AFT Trust was established and is validly existing under the laws applicable
to it, and (c) each AFT Trust is in compliance with applicable law. At the time
of Closing, each AFT Trust will be in compliance in all material respects with
applicable law, notwithstanding any disclosure in the LCC Disclosure Letter.
IV. REPRESENTATIONS AND WARRANTIES OF ACQUIROR.
Acquiror and Newco represent and warrant to LCC as follows:
4.1 ORGANIZATION.
(a) Each of Acquiror and Newco is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite corporate power and corporate
authority and all requisite governmental and other authorizations to
own, lease and operate its assets and properties and to carry on its
business as it is now being conducted;
(b) each of Acquiror and Newco is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary; and
(c) each of Acquiror and Newco is in compliance with all applicable laws,
judgments, orders, decrees, rules and regulations; except with respect
to the foregoing (a), (b) and (c) as to such matters (if any) where
failure of such authorizations, qualifications or compliance does not
and would not, either individually or in the aggregate, have a material
adverse effect on the financial condition, results of operations or
business of Acquiror and its subsidiaries taken as a whole. All of the
outstanding capital stock of Newco is owned by Acquiror.
4.2 AUTHORIZATION AND VALIDITY OF AGREEMENTS. Each of Acquiror and Newco
has the requisite corporate power and corporate authority to enter into this
Merger Agreement and to perform its obligations hereunder, and the execution and
delivery of this Merger Agreement and the consummation by them of the
transactions contemplated hereby have been duly authorized by all requisite
corporate action. This Merger Agreement has been duly executed and delivered by
each of Acquiror and Newco and constitutes a valid and binding agreement of each
of Acquiror and Newco, enforceable against each of Acquiror and Newco in
accordance with its terms, except that (i) such enforcement may be subject to
bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and other
forms of
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equitable relief may be subject to certain equitable defenses and to the
discretion of the court before which any proceedings therefor may be brought.
4.3 NO NOTICES OR APPROVALS REQUIRED AND NO CONFLICTS. None of the
execution and delivery of this Agreement by Acquiror and Newco, the performance
by them of their obligations hereunder or the consummation by them of the
transactions contemplated hereby will:
(a) conflict with the articles of incorporation or bylaws of Acquiror or
with the charter or bylaws of Newco;
(b) assuming satisfaction of the requirements set forth in Clause (c) (i),
(ii), (iii) and (iv) below, violate any provision of law applicable to
Acquiror or Newco;
(c) require any consent or approval of, or filing with or notice to, any
public body or authority, domestic or foreign, under any provision of
law applicable to Acquiror or Newco, except for:
<TABLE>
<S> <C>
(i) requirements of Federal and state securities laws,
</TABLE>
<TABLE>
<S> <C>
(ii) requirements arising out of the HSR Act,
</TABLE>
<TABLE>
<S> <C>
(iii) the filing of a Certificate of Merger in accordance with the Delaware Law, and
</TABLE>
<TABLE>
<S> <C>
(iv) approvals of or notices to regulatory authorities pursuant to the insurance laws of the
jurisdictions requiring same; or
</TABLE>
(d) require any consent, approval or notice under, or violate, breach, be
in conflict with or constitute a default (or an event that, with notice
or lapse of time or both, would constitute a default) under, or permit
the termination of, or result in the creation or imposition of any lien
upon any assets, properties or business of Acquiror or Newco under, any
note, bond, indenture, mortgage, deed of trust, lease, franchise,
permit, authorization, license, contract, instrument or other agreement
or commitment, order, judgment or decree to which either is a party or
by which either or any of the assets or properties of either is bound
or encumbered.
4.4 PROXY STATEMENT. None of the information relating to Acquiror or its
affiliates supplied in writing by Acquiror for inclusion in the Proxy Statement
described in Section 6.1(b) will at the time such Proxy Statement is mailed or
at the time of the LCC Stockholders Meeting contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.5 BROKERS AND FINDERS. Neither Acquiror nor Newco, nor any of their
respective officers, directors or employees, has employed any financial advisor,
broker or finder or incurred any liability for any financial advisor, brokerage
or finders' fees or commissions in connection with the transactions contemplated
herein.
4.6 AVAILABLE FUNDS. At the Effective Time, Acquiror and Newco will in
accordance with Section 8.3(e) have provided, or will have provided an
irrevocable commitment to provide, the funds available to satisfy the
obligations of Acquiror and Newco pursuant to the Merger.
V. ADDITIONAL PROVISIONS
5.1 EMPLOYEE MATTERS.
(a) Without limiting any obligations of the Surviving Corporation to assume
any LCC employee benefit plan, program, policy, contract, agreement or
arrangement as may arise by operation of law, at the Effective Time the
Surviving Corporation will continue the existing LCC employee benefit
plans, programs, policies, contracts, agreements and arrangements (the
'LCC Plans') and shall succeed to such rights as LCC may have as the
employer or sponsor under the LCC Plans to amend, modify or terminate
the same in accordance with their terms and applicable law. For
purposes of any of the LCC Plans that contains a provision relating to
a change in control of LCC (each of which is disclosed in the LCC
Disclosure Letter pursuant
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to Section 3.4(d)), Acquiror acknowledges that the consummation of the
Merger constitutes such a change in control. Nothing contained in this
Section 5.1 or elsewhere in this Merger Agreement shall restrict the
right to terminate the LCC Plans subsequent to the Effective Time.
(b) Acquiror agrees that, following the Effective Time, Acquiror or the
Surviving Corporation shall provide to employees who are employees of
LCC or any of the LCC Subsidiaries the employee benefit plans,
programs, policies and arrangements provided to employees of Acquiror
and its subsidiaries (the 'Acquiror Plans'), subject to its rights as
the employer or sponsor under the Acquiror Plans to amend, modify or
terminate the same in accordance with their terms and applicable law.
The specific Acquiror Plans to be made available to employees of LCC or
any of the LCC Subsidiaries shall be in accordance with the policies
applicable to the employees of Acquiror and its subsidiaries (the
'Acquiror Subsidiaries').
(c) Nothing contained in this Section 5.1 or elsewhere in this Agreement
shall confer, or be deemed to confer, upon any person who is an
employee of Acquiror or any of the Acquiror Subsidiaries or of LCC or
any of the LCC Subsidiaries any rights to continued employment or to
continuation of any benefit plans, programs, policies or arrangements,
including the LCC Plans and the Acquiror Plans, for any particular
period of time following consummation of the Merger.
5.2 INDEMNIFICATION.
(a) Acquiror agrees that from and after the Effective Time it will assume
and honor with respect to each officer and director of LCC and each LCC
Subsidiary the indemnification and advancement of expense obligations
of LCC set forth in Article V of the By-laws of LCC as in effect on the
date hereof with respect to any and all persons described in such bylaw
provision (the 'indemnitees') as to any matter arising out of any
action or omission of any such indemnitee prior to the Effective Time
(including without limitation indemnification for any claim that is
based upon, arises out of or in any way relates to the Merger, the
Proxy Statement, this Agreement or any of the transactions contemplated
hereby) and that such indemnitees shall be entitled to the full
benefits of, and Acquiror shall be bound by, such bylaw provision as
though such bylaw provision continued in full force and effect after
the effective time as an obligation of Acquiror with respect to such
matters.
(b) Acquiror agrees that for a period of six years from and after the
Effective Time it will provide directors' and officers' liability
insurance coverage for the benefit of the indemnitees on substantially
the same terms and conditions as from time to time is provided by
Acquiror for its directors and officers; provided however, that this
Section 5.2(b) shall not prohibit Acquiror from modifying or
terminating any such coverage for the indemnitees with the modification
or termination of its directors' and officers' liability insurance
coverage generally, so long as the coverage provided for the
indemnitees remains the same as that provided for directors and
officers of Acquiror.
(c) In the event Acquiror or any of its successors or assigns (i)
reorganizes or consolidates with or merges into or enters into another
business combination transaction with any other person or entity and is
not the resulting, continuing or surviving corporation or entity of
such consolidation, merger or transaction, or (ii) liquidates,
dissolves or transfers all or substantially all of its properties and
assets to any person or entity, then, and in each such case, proper
provision shall be made so that the successors and assigns of Acquiror
assume the obligations set forth in this Section 5.2.
(d) This Section 5.2 shall be construed as an agreement, as to which the
indemnitees are intended to be third-party beneficiaries, between
Acquiror and such indemnitees as unaffiliated third parties and is not
subject to any limitations, other than those imposed by the Delaware
Law, to which Acquiror may be subject in indemnifying its own directors
or officers or other persons.
5.3 STOCK OPTIONS AND SARs. Each holder of an outstanding Employee Option
or SAR immediately before the Effective Time will be entitled to receive from
the Payment Agent promptly
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<PAGE>
after the Effective Time or from LCC immediately before the Effective Time, all
in accordance with Section 2.2(c), for each such Employee Option or SAR, an
amount in cash (subject to any applicable withholding taxes) equal to the
product of (A) the excess, if any, of (i) the amount per share payable to
holders of LCC Common Stock pursuant to Section 2.1(a) over (ii) the per share
exercise price or base price, as the case may be, of such Employee Option or
SAR, and (B) the number of shares of LCC Common Stock subject to such Employee
Option or the number of SARs, and such Employee Option or SAR will be cancelled.
The LCC Option Plan shall terminate as of the Effective Time, and LCC shall
ensure that, following the Effective Time, no holder of an Employee Option or
SAR or any participant in the LCC Option Plan shall have any right thereunder to
acquire equity securities of the Company, Acquiror or any subsidiary thereof.
Prior to the Effective Time, LCC shall cause each holder of Employee Options or
SARs whose Employee Options or SARs have not otherwise been satisfied to tender
to LCC for surrender against payment by the Payment Agent or LCC in accordance
with Section 2.2(c) at or before the Effective Time all Employee Options or SARs
granted under the LCC Option Plan which remain outstanding on the Closing Date.
At the Effective Time, unless it has previously paid holders of Employee Options
or SARs in accordance with Section 2.2(c)(ii), LCC shall deliver to the Payment
Agent a certificate specifying the name and address of each holder of Employee
Options or SARs, the number of Employee Options or SARs owned by such holder and
the exercise price of each Employee Option or SAR. LCC has heretofore delivered
to Acquiror a true and complete list providing such information with respect to
holders of Employee Options or SARs as of the date hereof.
5.4 SERIES A PREFERRED STOCK. LCC shall redeem all outstanding shares of
Preferred Stock at or prior to the later of July 7, 1995 or the Effective Time.
5.5 MANAGEMENT SERVICES AGREEMENT. LCC shall cause the Management Services
Agreement between LCC and Desjardin Laurentian Financial Corporation to be
cancelled at or prior to the Effective Time, without cost to LCC other than for
services performed to and including the date of cancellation.
5.6 USE OF LAURENTIAN NAME. Immediately after the Effective Time with
respect to such use in Canada, and as soon as practicable after the Effective
Time and in any event within two years thereafter with respect to such use other
than in Canada, Acquiror shall discontinue all use of the 'Laurentian' name,
marks and logos.
VI. COVENANTS OF LCC
6.1 STOCKHOLDERS MEETING. In order to consummate the Merger, LCC acting
through its Board of Directors, shall, in accordance with applicable law and
subject to the fiduciary duties of the LCC Board under applicable law (as
determined by the LCC Board in good faith after consultation with and based upon
advice of counsel),
(a) duly call, give notice of, convene and hold an annual or special
meeting of its stockholders (the 'LCC Stockholders Meeting') as soon as
practicable following the date of this Agreement for the purpose of
approving and adopting this Merger Agreement;
(b) include in the proxy statement with respect to the LCC Stockholders
Meeting (the 'Proxy Statement') the recommendation of its Board of
Directors that holders of LCC Common Stock vote in favor of the
approval and adoption of this Merger Agreement; and
(c) obtain and furnish the information required to be included by it in the
Proxy Statement, to file the Proxy Statement promptly with the SEC and,
after consultation with Acquiror, respond promptly to any comments made
by the SEC with respect to the Proxy Statement and any preliminary
version thereof, and cause the Proxy Statement to be mailed to its
stockholders at the earliest practicable time.
6.2 CONDUCT OF BUSINESS BY LCC AND LCC SUBSIDIARIES PENDING THE
MERGER. LCC covenants and agrees with Acquiror that, with respect to LCC and the
LCC
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Subsidiaries, prior to the Effective Time, unless Acquiror shall otherwise agree
in writing or as is otherwise expressly contemplated by this Agreement:
(a) The businesses of LCC and the LCC Subsidiaries will be conducted only
in, and LCC and the LCC Subsidiaries will not take any material action
except in, the ordinary course of business and consistent with prior
practices.
(b) Each of LCC and the LCC Subsidiaries will not directly or indirectly do
any of the following: (i) issue, sell, pledge, dispose of or encumber
(A) any shares of capital stock of LCC or any of the LCC Subsidiaries
(including without limitation any such shares held in treasury), except
the issuance of shares of LCC Common Stock upon conversion of Preferred
Stock or upon exercise of LCC Stock Options outstanding as of the date
hereof, (B) any investment assets of LCC or any of the LCC Subsidiaries
other than in the ordinary course of business consistent with prior
practices, (C) any other assets or properties of LCC or any of the LCC
Subsidiaries other than in the ordinary course of business and
consistent with prior practices or in transactions not in excess of
$500,000 in the aggregate, or (D) any Insurance Subsidiary or all or
substantially all of the business thereof; (ii) amend or propose to
amend its charter or bylaws; (iii) split, combine or reclassify any
outstanding capital stock, or declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect
to its capital stock whether now or hereafter outstanding, except for
cash dividends from any LCC Subsidiaries paid to LCC or another of the
LCC Subsidiaries; (iv) redeem, purchase or acquire or offer to acquire
any of their capital stock other than redemption of Preferred Stock as
contemplated by Section 5.4; or (v) agree or commit to do any of the
foregoing.
(c) Each of LCC and the LCC Subsidiaries will not directly or indirectly do
any of the following: (i) grant, issue, sell, pledge or dispose of any
options, warrants or rights of any kind to acquire any shares of any
class of capital stock of LCC or any of the LCC Subsidiaries or any
securities that are convertible or exchangeable therefor; (ii) acquire
(whether by merger, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization
or division thereof; (iii) incur any indebtedness for borrowed money or
issue any debt securities, except under the existing line of credit
under the Credit Agreement; (iv) cancel any material debts or
obligations owing to it, except in connection with the settlement of
policy claims; (v) liquidate or merge into or consolidate with any
other corporation; or (vi) agree or commit to do any of the foregoing.
(d) Each of LCC and the LCC Subsidiaries will not enter into, amend in any
material respect, terminate or waive any material right under any
material contract or agreement to which it is a party; provided
however, that this Section 6.2(d) shall not prohibit LCC or any of the
LCC Subsidiaries from taking any actions in the ordinary course of
business and consistent with prior practices, including without
limitation accepting or reinsuring insurance or annuity risks (provided
that after the date hereof LCC shall notify Acquiror at least ten (10)
days before entering into or materially modifying any reinsurance
agreement), or entering into, modifying or terminating agency
contracts.
(e) Each of LCC and the LCC Subsidiaries will not enter into or amend any
employment, consulting, separation or termination agreement,
arrangement or understanding nor take any action with respect to the
grant of any separation or termination pay or with respect to any
increase of benefits payable under its separation or termination pay
policies or agreements or arrangements in effect as of the date hereof.
(f) Each of LCC and the LCC Subsidiaries will not (i) hire any new
executive employee, (ii) hire any new management employee with annual
compensation greater than $60,000, (iii) except for replacements in
the ordinary course of business consistent with prior practices, hire
any other new employee, (iv) except in the ordinary course of business
consistent with prior practices, increase the compensation of any
employee or pay any bonus, or (v) adopt or amend (except to comply
with applicable law) any bonus, profit sharing, compensation, stock
option, pension, retirement, separation, deferred compensation or
other employee benefit plan,
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<PAGE>
agreement, trust fund or arrangement for the benefit or welfare of,
any employee or former employee.
(g) Each of LCC and the LCC Subsidiaries will not make any capital
expenditure or commitment for which it is not contractually bound at
the date hereof except (i) necessary replacements in the ordinary
course of business consistent with past practices, and (ii) other
capital expenditures and commitments not to exceed $2 million in the
aggregate. All capital expenditures and commitments in excess of
$500,000 for which LCC and the LCC Subsidiaries are contractually bound
at the date hereof are disclosed in the LCC Disclosure Letter.
(h) Subject to the provisions hereof, each of LCC and the LCC Subsidiaries
will use its reasonable efforts (i) to preserve intact the business
organization of LCC, Loyal American, Prairie States and each of the
other LCC Subsidiaries, to maintain in effect any licenses, franchises,
authorizations or similar rights material to the businesses of LCC and
the LCC Subsidiaries, to keep available the services of their
respective current officers and key employees and to preserve the
goodwill of those having relationships or business dealings with LCC or
any of the LCC Subsidiaries, (ii) to cooperate with Acquiror in jointly
communicating with LCC's employees and with members of LCC's product
distribution system, including independent contractors, regarding the
Merger and continuing operations after consummation of the Merger; and
(iii) to maintain its books and records in accordance with sound
business practice on a basis consistent with prior practice.
(i) Except as may be required under generally accepted accounting
principles or statutory accounting requirements, each of LCC and the
LCC Subsidiaries will not make any material changes in its accounting,
underwriting, pricing or reserving principles, methods or practices.
(j) After the date hereof, (i) LCC shall not adopt any amendments to the
LCC 401(k) Profit Sharing Savings Plan except for such amendments as
may be required by the Internal Revenue Service, and (ii) LCC shall
not make any contributions to the LCC 401(k) Profit Sharing Savings
Plan except for 401(k) employee contributions and employer matching
contributions (not to exceed the guidelines established in the LCC
401(k) Profit Sharing Savings Plan) or as disclosed in the LCC
Disclosure Letter.
6.3 NO SOLICITATION OF ACQUISITION TRANSACTIONS. Each of LCC and the LCC
Subsidiaries will not directly or indirectly, through any director, officer,
employee, agent, representative or otherwise, solicit, initiate or intentionally
encourage submission of any inquiries, proposals or offers from any person or
entity (other than Acquiror) relating to any merger, consolidation, share
exchange, purchase or other acquisition of all or (other than in the ordinary
course of business) any substantial portion of the assets of or any substantial
equity interest in LCC or any of the LCC Subsidiaries or any business
combination with LCC or any of the LCC Subsidiaries (collectively, an
'Acquisition Transaction'), or participate in any discussions or negotiations
regarding, or, unless otherwise required by law, furnish to any other person any
information with respect to LCC or any of the LCC Subsidiaries or afford access
to the properties, books or records of LCC or any of the LCC Subsidiaries for
the purposes of, or cooperate with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person or entity to seek or effect
an Acquisition Transaction; provided however, that in the event that
notwithstanding compliance by LCC and the LCC Subsidiaries with the foregoing
provisions of this Section 6.3, LCC receives from a third party a proposal with
respect to an Acquisition Transaction, only to the extent necessary to act in
accordance with the fiduciary duties of the LCC Board under applicable laws (as
determined by the LCC Board in good faith after consultation with and based upon
advice of counsel): (a) LCC and the LCC Subsidiaries may take actions otherwise
prohibited by the foregoing provisions of this Section 6.3; and (b) in such
event or in the event of withdrawal of (or failure to update at the time of
mailing of the Proxy Statement) the opinion referred to in Section 3.12, the LCC
Board may fail to make, withdraw or modify its recommendation of the Merger to
the stockholders of LCC, and LCC may fail to disseminate the Proxy Statement,
fail to solicit proxies or fail to take other action to secure a favorable vote
of its stockholders for the Merger or fail to hold a meeting of its stockholders
to vote on the
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<PAGE>
Merger. In addition, following receipt of a proposal or offer relating to an
Acquisition Transaction, LCC may take and disclose to its stockholders a
position contemplated by Rule 14e-2 or Rule 14d-9 under the 1934 Act or
otherwise make a disclosure to its stockholders.
6.4 ACCESS TO INFORMATION. From the date hereof to the Effective Time,
each of LCC and the LCC Subsidiaries will, and their respective directors,
officers, employees, agents and representatives will, afford the officers,
employees, agents and representatives of Acquiror reasonable access at all
reasonable times to the officers, employees, representatives, properties, books
and records of LCC and the LCC Subsidiaries, including without limitation
present or past employee benefit plans, and to the books and records of any
predecessors thereof in the possession of or under the control of LCC or any of
the LCC Subsidiaries, and will furnish to Acquiror all financial, operating and
other data and information as Acquiror, through its officers, employees or
representatives, may reasonably request. Nonpublic data and information received
by Acquiror hereunder shall be deemed to be Evaluation Information as defined
in, and shall be subject to the terms and conditions respecting same specified
in, the Confidentiality Agreement made by LCC and Acquiror on December 8, 1994.
6.5 DETERMINATION LETTER. LCC has filed a request for a determination
letter as to the qualified status of the LCC 401(k) Profit Sharing Savings Plan,
as amended and restated October 1, 1994, and shall diligently prosecute same.
VII. MUTUAL COVENANTS
7.1 EXPENSES. Except as provided in Section 9.3, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby will be paid by the party incurring such costs and expenses.
7.2 ADDITIONAL AGREEMENTS. In accordance with the terms and subject to the
conditions hereof, each of the parties hereto agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable to fulfill the conditions and
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
7.3 NOTIFICATION OF CERTAIN MATTERS. LCC will give prompt notice to
Acquiror, and Acquiror will give prompt notice to LCC, of (a) the occurrence, or
failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty contained in this Merger Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, and (b) any material failure of LCC or Acquiror, or any
director, officer, employee, agent or representative thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
7.4 AGREEMENT TO DEFEND. In the event of any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, whether before or after the Effective Time, the parties
hereto agree to cooperate and use all reasonable efforts to defend against and
respond thereto.
7.5 COMPLIANCE WITH HSR ACT; STOCKHOLDER APPROVAL; REGULATORY
APPROVALS. Each party hereto will use its best efforts and shall fully cooperate
with the others to make promptly all registrations, filings and applications and
to give all notices to obtain all governmental and third party consents,
permits, approvals, orders, authorizations, qualifications, exemptions and
waivers necessary for the consummation of the transactions contemplated by this
Agreement or that thereafter may be necessary to effectuate the transfer or
renewal of any material license, approval or authorization or that may be
necessary or appropriate to effectuate the transfer of contracts, agreements or
arrangements with change of control provisions. Without limiting the generality
of the foregoing, each of Acquiror and LCC will use all reasonable efforts to:
(a) file as promptly as possible and in any event within twenty (20) days
after the date of this Merger Agreement with the Department of Justice
and the Federal Trade Commission any
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<PAGE>
premerger notification required of it under the HSR Act, respond
promptly to any inquiries from the Department of Justice or the Federal
Trade Commission in connection with the transactions contemplated
hereby, and obtain the earliest possible termination or waiver of any
applicable HSR Act waiting period;
(b) prepare and file the Proxy Statement with the SEC as promptly as
possible and in any event within forty-five (45) days after the date of
this Merger Agreement; and
(c) prepare and file such requests for regulatory approvals as may be
required to be filed with the insurance departments of the States of
Alabama, South Dakota, Montana, Texas, if required, and Ohio as
promptly as possible in any event within forty-five (45) days after the
date of this Merger Agreement.
7.6 SECURITIES LAWS. Acquiror and LCC acknowledge that the transactions
contemplated hereby are subject to the provisions of the 1934 Act. Each of
Acquiror and LCC agrees to provide promptly to the other such data and
information concerning its financial condition, assets and properties, affairs,
operations and businesses as may be required or appropriate for inclusion in the
Proxy Statement and to cause its counsel, investment advisors, accountants and
actuaries to cooperate with the other's counsel, investment advisors,
accountants and actuaries in the preparation of the Proxy Statement.
7.7 FURTHER DISCLOSURE. If in the course of the transactions contemplated
by this Merger Agreement, either Acquiror or LCC shall acquire knowledge of any
fact, law or circumstance which, if existing or occurring as of the date of this
Merger Agreement, would be required to be disclosed by such party to avoid a
breach of its representations and warranties contained in this Merger Agreement,
then such party shall immediately disclose such fact, law or circumstance to the
other party.
VIII. CONDITIONS
8.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party hereto to effect the Merger and to
consummate the other transactions contemplated hereby will be subject to the
fulfillment at or prior to the Closing of the following conditions.
(a) The Merger and this Merger Agreement shall have been approved and
adopted by the requisite vote of the stockholders of LCC and Acquiror
as the sole stockholder of Newco as required by law, the rules of the
American Stock Exchange with respect to LCC, and any applicable
provisions of the respective charters and bylaws of the parties.
(b) The waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(c) No order shall have been entered and remain in effect in any action or
proceeding before any foreign, Federal or state court or governmental
agency or other foreign, Federal or state regulatory or administrative
agency or commission that would prevent or make illegal the
consummation of the Merger or impose any conditions on the consummation
of the transactions contemplated hereby which Acquiror reasonably deems
unacceptable.
(d) There shall have been obtained permits, consents and approvals of
insurance, securities or 'blue sky' commissions or agencies of any
jurisdiction and of other governmental bodies or agencies that may
reasonably be deemed necessary so that the consummation of the Merger
and the other transactions contemplated hereby will be in compliance
with applicable laws, and they shall not contain any condition that, in
the judgment of Acquiror reasonably exercised, would reasonably be
expected to result in a material adverse change in the financial
condition, results of operations or businesses of either Acquiror or
LCC and the LCC Subsidiaries, taken as a whole.
8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of
Acquiror to effect the Merger and to consummate the other transactions
contemplated hereby are, at
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<PAGE>
the option of Acquiror, also subject to the fulfillment at or prior to the
Closing of the following conditions:
(a) The representations and warranties of LCC contained in Article III
shall be accurate in all material respects as of the date of this
Merger Agreement, and there shall be no inaccuracy in any such
representations and warranties as of the Closing Date except to the
extent that any such inaccuracy individually or in the aggregate does
not constitute a material adverse change in the financial condition,
results of the operations or businesses of LCC and the LCC
Subsidiaries, taken as a whole; all of the terms, covenants and
conditions of this Merger Agreement to be complied with and performed
by LCC at or before the Closing (including without limitation those
specified in Sections 5.3 and 5.4) shall have been duly complied with
and performed in all material respects; and a certificate to the
foregoing effect dated as of the Closing Date and signed by the Chief
Executive Officer and Chief Financial Officer of LCC shall have been
delivered to Acquiror.
(b) Since the date of this Merger Agreement, no material adverse change in
the financial condition, results of operations or businesses of LCC and
the LCC Subsidiaries, taken as a whole, shall have occurred (excluding
for these purposes the effect of any conditions, events and
developments adversely affecting the life insurance industry
generally), including without limitation any of the following suffered
by LCC or any LCC Subsidiary: (i) any material adverse change in the
credit quality, yield and diversification characteristics of its
investment portfolio, except declines in yield caused by general
economic conditions; (ii) any material casualty loss with respect to
its assets; (iii) any business interruption which has not been cured
prior to the Closing; or (iv) any material labor difficulty or customer
boycott; and a certificate to such effect dated as of the Closing Date
and signed by the Chief Executive Officer and Chief Financial Officer
of LCC shall have been delivered to Acquiror.
(c) Acquiror and its subsidiaries shall have received all requisite
approvals required under applicable insurance laws necessary to
consummate the Merger and the transactions contemplated thereby.
(d) Acquiror shall have received an opinion of counsel to LCC reasonably
satisfactory to Acquiror, dated as of the Effective Time and in form
and substance reasonably satisfactory to Acquiror, substantially to the
effect that:
<TABLE>
<S> <C>
(i) Each of LCC and the LCC Subsidiaries has been duly organized, and is subsisting and in good
standing, as a corporation under the laws of its respective jurisdiction of incorporation.
</TABLE>
<TABLE>
<S> <C>
(ii) LCC has the corporate power and corporate authority to enter into this Merger Agreement and
consummate the transactions provided for herein. The execution and delivery of this Merger
Agreement by LCC and the consummation by it of the transactions provided for herein, have been
duly authorized by requisite corporate action on the part of LCC. This Merger Agreement has been
executed and delivered by LCC and (assuming this Merger Agreement is a valid and binding
obligation of Acquiror) is a valid and binding obligation of LCC enforceable against it in
accordance with its terms, except (A) that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally and (B) that remedies of specific performance and injunctive and
other forms of relief may be subject to general principles of equity and public policy and to the
discretion of the court before which any proceeding therefor may be brought.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(iii) The execution, delivery and performance by LCC of this Merger Agreement will not (A) conflict with
or result in a breach of any provision of the Certificate or By-laws of LCC, (B) result in,
constitute a violation of or a default under, or cause the creation of any security interest or
lien upon any of the properties or assets of LCC or the LCC Subsidiaries pursuant to, or cause the
acceleration of the maturity of any debt or obligation of LCC or the LCC Subsidiaries pursuant to,
any agreement, instrument, order, judgment or decree to which LCC or the LCC Subsidiaries is
subject and of which such counsel is specifically aware and which LCC has advised such counsel in
connection with this transaction is material to LCC and the LCC Subsidiaries or (C) insofar as is
actually known to such counsel, violate any law, rule or regulation or any judgment, decree,
order, governmental permit or license to which LCC or any LCC Subsidiary is subject which would
have a material adverse effect on LCC and the LCC Subsidiaries taken as a whole.
</TABLE>
<TABLE>
<S> <C>
(iv) Except for such changes as are required by this Merger Agreement, the capitalization of LCC is as
described in Section 3.2(a) of this Merger Agreement.
</TABLE>
As to any matter contained in such opinion which involves the laws of
any jurisdiction other than the federal laws of the United States or the
laws of a state in which such counsel is licensed, such counsel may rely
upon opinions of counsel admitted to practice in such other
jurisdictions. Any opinions relied upon by such counsel as aforesaid
shall be delivered together with the opinion of such counsel, which
shall state that Acquiror's and such counsel's reliance thereon is
justified. Such opinion may include assumptions as to the accuracy of
the representations and warranties made by LCC in this Merger Agreement,
may include qualifications similar to those set forth in Article III
hereof and other qualifications customarily contained in legal opinions
rendered in connection with transactions of the nature of the Merger,
and may expressly rely as to matters of fact upon certificates furnished
by appropriate officers and directors of LCC and the LCC Subsidiaries
and by public officials.
(e) None of the insurance regulatory approvals referred to in Section
8.1(d) shall be subject to any condition, satisfaction of all of which
conditions would materially restrict the business or financial
activities of LCC and the LCC Subsidiaries, taken as a whole, or
Acquiror and the Acquiror Subsidiaries, taken as a whole, or materially
increase the cost to Acquiror of consummating the transactions herein
contemplated, or have a material adverse effect on the financial
condition, results of operations, prospects or business of LCC and the
LCC Subsidiaries, taken as a whole, or Acquiror and the Acquiror
Subsidiaries, taken as a whole.
(f) There shall not have been issued and be in effect any order of any
court or tribunal of competent jurisdiction, and there shall not have
been enacted any statute, rule, regulation or order by, or be
threatened, instituted or pending any suit, action, investigation,
inquiry or other proceeding by, any governmental or regulatory agency,
department, commission, authority, board, bureau, body or
instrumentality which in the reasonable judgment of Acquiror (i) makes
the acquisition by Acquiror of LCC illegal or otherwise prohibits the
acquisition of LCC, (ii) would require the divestiture by Acquiror or
any Acquiror subsidiary of a material portion of the business or
assets of Acquiror and the Acquiror Subsidiaries, taken as a whole, as
a result of the transactions contemplated hereby, or (iii) would
impose any material limitation on the ability of Acquiror to
effectively exercise full rights of ownership of LCC or of a material
portion of the assets or business of LCC and the LCC Subsidiaries,
taken as a whole, as a result of the transactions contemplated hereby.
(g) Acquiror shall have been provided by LCC at or before the Closing such
additional documents as are customarily provided for such a closing as
may be reasonably required by Acquiror.
8.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF LCC. The obligations of LCC to
effect the Merger and to consummate the other transactions contemplated hereby
are, at the option of LCC, also subject to the fulfillment at or prior to the
Closing of the following conditions:
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<PAGE>
(a) The representations and warranties of Acquiror contained in Article IV
shall be accurate in all material respects as of the date of this
Merger Agreement, and there shall be no inaccuracy in any such
representations and warranties as of the Closing Date except to the
extent that any such inaccuracy individually or in the aggregate does
not constitute a material adverse change in the financial condition,
results of operations or businesses of Acquiror and the Acquiror
Subsidiaries, taken as a whole; all of the terms, covenants and
conditions of this Merger Agreement to be complied with and performed
by Acquiror at or before the Closing shall have been duly complied with
and performed in all material respects; and a certificate to the
foregoing effect dated as of the Closing Date and signed by the Chief
Executive Officer and Chief Financial Officer of Acquiror shall have
been delivered to LCC.
(b) Since the date of this Merger Agreement, no material adverse change in
the financial condition, results of operations or businesses of
Acquiror and the Acquiror Subsidiaries, taken as a whole, shall have
occurred (excluding for these purposes the effect of any conditions,
events and developments adversely affecting the life insurance industry
generally), and a certificate to such effect dated as of the Closing
Date and signed by the Chief Executive Officer and Chief Financial
Officer of Acquiror shall have been delivered to LCC.
(c) On the date of the Proxy Statement, the LCC Board shall have received
from Oppenheimer & Co., Inc. a written update, dated as of such date,
confirming the opinion referred to in Section 3.12.
(d) Acquiror shall have paid or caused to be paid the outstanding balance
under the Credit Agreement as provided in Section 2.5.
(e) At or before the Closing Date, either: (i) Acquiror (directly or
through one or more of its Subsidiaries) shall have deposited with the
Payment Agent in trust, for the benefit of the stockholders of LCC at
the Effective Time, funds sufficient to make all payments required
under Article II hereof to the holders of LCC Common Stock and Employee
Options or SARs, or (ii) Acquiror shall have provided to the Payment
Agent an unconditional and irrevocable written commitment of Acquiror
for the benefit of the holders of LCC Common Stock and Employee Options
and SARs at the Effective Time, in form reasonably satisfactory to LCC
and the Payment Agent, to make such funds available as they are
required, such commitment to include provisions by which the Payment
Agent is assured of access to cash and/or marketable securities of
Acquiror sufficient to satisfy such commitment. This condition may be
satisfied by a combination of a deposit under subsection (i) and a
commitment under subsection (ii) which together equal the amount of
funds necessary to make all payments required under ARTICLE II hereof.
(f) LCC shall have received an opinion of counsel to Acquiror reasonably
satisfactory to LCC, dated as of the Effective Time and in form and
substance reasonably satisfactory to LCC, substantially to the effect
that:
(i) Each of Acquiror and Newco has been duly organized, and is subsisting
and in good standing, as a corporation under the laws of its
respective jurisdiction of incorporation.
(ii) Each of Acquiror and Newco has the corporate power and corporate
authority to enter into this Merger Agreement and consummate the
transactions provided for herein. The execution and delivery of this
Merger Agreement by Acquiror and Newco and the consummation by them
of the transactions provided for herein, have been duly authorized by
requisite corporate action on the part of Acquiror and Newco. This
Merger Agreement has been executed and delivered by Acquiror and
Newco and (assuming this Merger Agreement is a valid and binding
obligation of LCC) is a valid and binding obligation of Acquiror and
Newco enforceable against each of them in accordance with its terms,
except (A) that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (B)
that remedies of specific performance and injunctive and other forms
of relief may be subject to
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<PAGE>
general principles of equity and public policy and to the discretion
of the court before which any proceeding therefor may be brought.
(iii) The execution, delivery and performance by Acquiror and Newco of this
Merger Agreement will not (A) conflict with or result in a breach of
any provision of the Articles of Incorporation or By-laws of either
of them, (B) result in, constitute a violation of or a default under,
or cause the creation of any security interest or lien upon any of
the properties or assets of Acquiror pursuant to, or cause the
acceleration of the maturity of any debt or obligation of Acquiror
pursuant to, any agreement, instrument, order, judgment or decree to
which Acquiror is subject and of which such counsel is specifically
aware and which LCC has advised such counsel in connection with this
transaction is material to Acquiror and would have a material adverse
effect on Acquiror's ability to perform its obligations hereunder or
(C) insofar as is actually known to such counsel, violate any law,
rule or regulation or any judgment, decree, order, governmental
permit or license to which Acquiror is subject which would have a
material adverse effect on Acquiror and the Acquiror Subsidiaries
taken as a whole.
As to any matter contained in such opinion which involves the laws of any
jurisdiction other than the federal laws of the United States or the laws of a
state in which such counsel is licensed, such counsel may rely upon opinions of
counsel admitted to practice in such other jurisdictions. Any opinions relied
upon by such counsel as aforesaid shall be delivered together with the opinion
of such counsel, which shall state that Acquiror's and such counsel's reliance
thereon is justified. Such opinion may include assumptions as to the accuracy of
the representations and warranties made by Acquiror in this Merger Agreement,
may include qualifications similar to those set forth in Article IV hereof and
other qualifications customarily contained in legal opinions rendered in
connection with transactions of the nature of the Merger, and may expressly rely
as to matters of fact upon certificates furnished by appropriate officers and
directors of Acquiror and the Acquiror Subsidiaries and by public officials.
IX. TERMINATION
9.1 TERMINATION EVENTS. This Agreement may be terminated and the Merger
and the other transactions contemplated herein may be abandoned at any time
prior to the Effective Time, whether prior to or after approval by the
stockholder of Newco or the stockholders of LCC:
(a) By mutual consent of the Acquiror Board and the LCC Board.
(b) By the Acquiror Board or the LCC Board, if the Merger shall not have
been consummated on or before December 31, 1995 (unless such
circumstance is the result of a breach of the terms hereof in any
material respect by the party asserting the termination right).
(c) By the Acquiror Board or the LCC Board, if the Merger and this Merger
Agreement shall have been submitted to a vote of the stockholders of
LCC and shall not have been approved by the requisite votes.
(d) By the LCC Board, if a condition to LCC's obligations to close set
forth in Article VIII of this Merger Agreement is not met on the
Closing Date and is not waived.
(e) By the Acquiror Board, if a condition to Acquiror's obligations to
close set forth in Article VIII of this Merger Agreement cannot be met
on the Closing Date and is not waived.
(f) By the Acquiror Board or the LCC Board, if an action is brought and
remains pending in a court of competent jurisdiction (i) seeking to
restrain, enjoin or otherwise prevent the consummation of the Merger
or the other transactions contemplated hereby, or (ii) seeking
substantial damages based on the consummation of the Merger or the
other transactions contemplated hereby, and in either case, the party
seeking to terminate believes in good faith with the advice of counsel
that such action may have substantial merit.
(g) By the Acquiror Board or the LCC Board, if the LCC Board does not make
to the stockholders of LCC a favorable recommendation with respect to
the Merger or such recommendation is modified or withdrawn in a way
detrimental to Acquiror.
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<PAGE>
(h) By the Acquiror Board, but only within thirty (30) days after the date
hereof, if A. M. Best Company ('Best') has communicated to Acquiror
that consummation of the transactions contemplated hereby has a
reasonable probability of resulting in a reduction of the Best's rating
of Great American Life Insurance Company to a rating lower than 'A',
and Acquiror shall have delivered to LCC within thirty (30) days after
the date hereof the certificate of Acquiror executed by its President
or a Senior Vice President, stating the particulars of such
communication.
9.2 EFFECT OF TERMINATION. In the event of any termination of this Merger
Agreement pursuant to Section 9.1, Acquiror and LCC shall have no obligation or
liability to each other except that (a) the provisions of the last sentence of
Section 6.4 and Section 9.3 shall survive any such termination, and (b) nothing
herein and no termination pursuant hereto shall relieve any party from liability
for any breach of this Merger Agreement.
9.3 CERTAIN FEES AND EXPENSES.
(a) LCC agrees to pay to Acquiror the amount of $2,500,000 in immediately
available funds, which amount shall be for the purpose of (i)
reimbursement to Acquiror of costs, expenses and fees actually incurred
by or on behalf of Acquiror and/or Newco in connection with the Merger
and the consummation of all transactions contemplated by this Agreement
and (ii) compensation to Acquiror for its expenditure of time and
effort in connection with such transactions, such payment to be made
promptly, but in no event later than ten business days, after the
termination of this Merger Agreement as a result of the occurrence of
either of the events set forth below which results in Acquiror or Newco
not consummating the transactions contemplated by this Merger
Agreement:
(A) in compliance with Section 6.3, LCC shall have entered into, or
shall have publicly announced its intention to enter into, an
agreement or an agreement in principle with respect to any
Acquisition Transaction or shall have determined and such
determination shall have become public knowledge that any such
transaction is more favorable to the stockholders of LCC than the
transactions contemplated by this Merger Agreement; or
(B) in compliance with Section 6.3, the Board of Directors of LCC
shall have withdrawn or materially negatively modified its
approval or recommendation of this Merger Agreement or the
transactions contemplated hereby or shall have resolved to do any
of the foregoing (and such resolution shall have become public
knowledge) if Acquiror and Newco have not breached any of their
representations, warranties, covenants or agreements contained in
this Merger Agreement in any material respect.
(b) Acquiror agrees to pay to LCC the amount of $2,500,000 in immediately
available funds, which amount shall be for the purposes of (i)
reimbursement to LCC of costs, expenses and fees actually incurred by
or on behalf of LCC in connection with the Merger and the consummation
of all transactions contemplated by this Merger Agreement and (ii)
compensation to LCC for its expenditure of time and effort in
connection with such transactions, such payment to be made promptly,
but in no event later than ten business days, after the termination of
this Merger Agreement as a result of the failure of Acquiror to satisfy
the condition to closing set forth in Section 8.3(e) hereof, if LCC has
not breached any of its representations, warranties, covenants or
agreements contained in this Merger Agreement in any material respect.
(c) Any payment made pursuant to Section 9.3(a) or 9.3(b) shall be
liquidated damages paid in full satisfaction of all claims that the
recipient of the payment may have against the party making such payment
based on the circumstances giving rise to such payment. The parties
hereto acknowledge the difficulty of ascertaining actual damages in the
circumstances under which payments would be made pursuant to Section
9.3(a) or Section 9.3(b), and agree that the amounts specified in said
Sections are reasonable and do not constitute a penalty.
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X. MISCELLANEOUS
10.1 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived
at any time by the party that is, or whose stockholders are, entitled to the
benefits thereof. This Merger Agreement may not be amended or supplemented at
any time, except by an instrument in writing signed on behalf of each party
hereto; provided however, that after this Merger Agreement has been approved and
adopted by the stockholder of Newco and the stockholders of LCC this Merger
Agreement may be amended only as may be permitted by applicable provisions of
the Delaware Law.
10.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representation or
warranty in this Merger Agreement shall survive the consummation of the Merger.
10.3 PUBLIC STATEMENTS. Acquiror and LCC agree to consult with each other
prior to issuing any press release or otherwise making any public statement or
disclosure with respect to the transactions contemplated hereby, and neither
will issue any such press release or make any such public statement or
disclosure prior to such consultation, except as may be required by law or
applicable stock exchange policy.
10.4 KNOWLEDGE. All references in this Merger Agreement to knowledge of a
corporation shall be deemed to mean knowledge of any one or more of its
executive officers.
10.5 ASSIGNMENT. This Merger Agreement will not be assignable by the
parties hereto.
10.6 NOTICES. All notices, requests, claims, demands and other
communications hereunder will be in writing and will be given (and will be
deemed to have been duly received if so given) by delivery by cable, telegram,
telex, telecopy or by registered or certified mail, postage prepaid, return
receipt requested, to the respective parties as follows:
If to Acquiror:
American Annuity Group, Inc.
250 East Fifth Street
Cincinnati, Ohio 45202
Attention: Mark F. Muething, Esquire
Telephone Number: (513) 333-5515
Telecopy Number: (513) 357-3397
with a copy to:
Keating, Muething & Klekamp
1800 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Edward E. Steiner, Esquire
Telephone Number: (513) 579-6468
Telecopy Number: (513) 579-6957
and if to LCC:
Laurentian Capital Corporation
640 Lee Road, Suite 303
Wayne, Pennsylvania 19087
Attention: Mr. Robert T. Rakich
Telephone Number: (610) 889-7400
Telecopy Number: (610) 889-7406
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with a copy to:
Armbrecht, Jackson, DeMouy,
Crowe, Holmes & Reeves, L.L.C.
1300 AmSouth Center
Post Office Box 290
Mobile, Alabama 36601
Attention: E. B. Peebles III, Esquire
Telephone Number: (334) 405-1300
Telecopy Number: (334) 432-6843
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
10.7 GOVERNING LAW. THIS MERGER AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAW OF THE STATE OF DELAWARE
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
10.8 SEVERABILITY. If any term, provision, covenant, agreement or
restriction of this Merger Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants, agreements and restrictions of this Merger Agreement will
continue in full force and effect and will in no way be affected, impaired or
invalidated.
10.9 COUNTERPARTS. This Merger Agreement may be executed in counterparts,
each of which will be an original, but all of which together will constitute one
and the same agreement.
10.10 HEADINGS. The section headings herein are for convenience only and
will not affect the construction hereof.
10.11 ENTIRE AGREEMENT. This Merger Agreement constitutes the entire
agreement between the parties hereto and supersede all other prior agreements
and understandings, both oral and written, between the parties relating to the
subject matter hereof and thereof, and except as provided in Section 5.2 do not
confer upon any person or entity not a party hereto or thereto any rights or
remedies hereunder or thereunder.
IN WITNESS WHEREOF, each of the parties hereto has caused this Merger
Agreement to be signed by its respective President or a Vice President and
attested by its respective Secretary or an Assistant Secretary, all as of the
date first above written.
AMERICAN ANNUITY GROUP, INC.
By: /s_/_Jeffrey S. Tate______________
Senior Vice President
ATTEST:
/s_/_Mark F. Muething_________________
Secretary
LQ ACQUISITION CORP.
By: /s_/_Jeffrey S. Tate______________
Senior Vice President
ATTEST:
/s_/_Mark F. Muething_________________
Secretary
LAURENTIAN CAPITAL CORPORATION
By: /s_/_Robert T. Rakich_____________
President
ATTEST:
/s_/_Bernhard M. Koch_________________
Secretary
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EXHIBIT A TO AGREEMENT AND PLAN OF MERGER
CERTIFICATE OF INCORPORATION
OF
LAURENTIAN CAPITAL CORPORATION
FIRST. The name of the corporation is Laurentian Capital Corporation (the
'Corporation').
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. The aggregate number of shares of stock which the Corporation shall
have authority to issue is One Thousand (1,000), all of which shall be common
stock without par value.
FIFTH. Unless and except to the extent that the by-laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
SIXTH. In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors of the Corporation is
expressly authorized to make, alter and repeal the by-laws of the Corporation,
subject to the power of the stockholders of the Corporation to alter or repeal
any by-law whether adopted by them or otherwise.
SEVENTH. To the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended and
supplemented, a director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any amendment or modification of the foregoing provisions of
this Article SEVENTH shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such amendment or
modification. Without limiting the generality of the foregoing contained in this
Article SEVENTH, no director of this Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability: (i) for any breach of the director's
duty of loyalty to this Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which include intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
The foregoing provisions shall continue as to a person who has ceased to be
a director and shall inure to the benefit of the heirs, executors and
administrators of such a person.
EIGHTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or
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class of creditors, and/or on all the stockholders or class of stockholders, of
this Corporation, as the case may be, and also on this Corporation.
NINTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same as may
be amended and supplemented, indemnify any person serving as a director or
officer of the Corporation from and against any and all of the expenses,
liabilities or other matters referred in or covered by said section. Any
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in other capacity while
holding such position, and shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
TENTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, advance expenses to those persons serving as directors
of the Corporation and the advancement of expenses provided for herein shall not
be deemed exclusive of any other rights to which those persons to whom expenses
have been or may be advanced may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's position as a director, and as to action in any other capacity while
holding such position as a director, and shall continue as to a person who has
ceased to be a director and shall inure to the benefit of the heirs, executors
and administrators of such person.
ELEVENTH. The Corporation reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the rights reserved in this
article.
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EXHIBIT B TO AGREEMENT AND PLAN OF MERGER
BY-LAWS
ARTICLE I
STOCKHOLDERS
1. STOCKHOLDER MEETINGS.
-- TIME. The annual meeting of stockholders shall be held on the second
Tuesday in April at 10:00 a.m. or such other date or time fixed, from time to
time, by the directors. The first stockholders meeting following adoption of
these By-Laws shall be held in 1996. A special meeting shall be held on the date
and at the time fixed by the directors.
-- PLACE. Annual meetings and special meetings of stockholders shall be
held at such place, within or without the State of Delaware, as the directors
may, from time to time, fix.
Whenever the directors shall fail to fix such place, the meeting shall be
held at the registered office of the corporation in the State of Delaware.
-- CALL. Annual meetings and special meetings of stockholders may be called
by the directors or by any officer instructed by the directors to call the
meeting or at the written request of stockholders holding a majority in the
amount of the outstanding common stock of the Corporation issued and outstanding
and entitled to vote. Any such request by stockholders shall state the purpose
or purposes of the proposed meeting.
-- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings of
stockholders shall be given, stating the place, date, and hour of the meeting
and stating the place within the city or other municipality or community where
the meeting is to be held at which the list of stockholders of the corporation
may be examined. The notice of an annual meeting shall state that the meeting is
called for the election of directors and for the transaction of other business
which may properly come before the meeting, and shall, (if any other action
which could be taken at a special meeting is to be taken at such annual meeting)
state the purpose or purposes. The notice of a special meeting shall in all
instances state the purpose or purposes for which the meeting is called. Except
as otherwise provided by the Delaware General Corporation Law, a copy of the
notice of any meeting shall be given, personally or by mail, not less than ten
days nor more than sixty days before the date of the meeting, unless the lapse
of the prescribed period of time shall have been waived, and directed to each
stockholder at his address as shown on the stock ledger of the corporation.
Notice by mail shall be deemed to be given when deposited, with postage thereon
prepaid, in the United States Mail. If a meeting is adjourned to another time
and/or to another place, and if an announcement of the adjourned time and/or
place is made at the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the adjournment is for more than 30 days or the
directors, after adjournment, fix a new record date for the adjourned meeting.
Notice need not be given to any stockholder who submits a written waiver of
notice signed by him. Attendance of a stockholder at a meeting of stockholders
shall constitute a waiver of notice of such meeting, except when the stockholder
attends the meeting for the limited purpose of objecting, expressed at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice.
-- STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within
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the city or other municipality or community where the meeting is to be held,
which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list required by this section or the books of the
corporation, or to vote at any meeting of stockholders.
-- CONDUCT OF MEETING. Meetings of the stockholders of the corporation
shall be presided over by one of the following officers in the order of
seniority and if present and acting -- the Chairman of the Board, if any, the
Vice-Chairman of the Board, if any, the President, a Vice-President, or if none
of the foregoing is in office and present and acting, by a chairman to be chosen
by the stockholders. The Secretary of the corporation, or in his absence, an
Assistant Secretary, shall act as secretary of every meeting, but if neither the
Secretary nor an Assistant Secretary is present the Chairman of the meeting
shall appoint a secretary of the meeting. At each stockholders meeting action
may be taken only with respect to those items contained in the Notice of
Meeting, otherwise proposed by the Board of Directors or proposed by a
shareholder through a submission in writing to the Secretary of the Corporation
at least fifteen days prior to the date of the meeting.
Only persons nominated by an officer, director or in writing by a
shareholder at least fifteen days prior to the meeting at which directors are to
be elected shall be eligible for election.
-- INSPECTORS. The directors, in advance of any meeting, may, but need not,
appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors. In
case any person who may be appointed as an inspector fails to appear or act, the
vacancy may be filled by appointment made by the directors in advance of the
meeting or at the meeting by the chairman of the meeting. Each inspector, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares of stock outstanding and the voting power
of each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the person presiding at
the meeting, the inspector or inspectors, if any, shall make a report in writing
of any challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them.
-- QUORUM. The holders of one-third of the outstanding shares of stock
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
-- VOTING. In the election of directors, a plurality of the votes cast
shall elect. Any other action shall be authorized by a majority of the votes
cast except where the General Corporation Law prescribes a different percentage
of votes and/or a different exercise of voting power, and except as may be
otherwise prescribed by the provisions of the certificate of incorporation and
these By-Laws.
2. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General
Corporation Law of the State of Delaware to be taken at any annual or special
meeting of stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than Unanimous written consent shall be given to those stockholders who
have not consented in writing.
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3. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the
corporation shall be signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice-President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law of the State of Delaware. Any restrictions on the
transfer or registration of transfer of any shares of stock of any class or
series shall be noted conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
4. UNCERTIFICATED SHARES. Subject to any conditions imposed by the Law of
the State of Delaware, the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
the stock of the corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any uncertificated shares, the
corporation shall send to the registered owner thereof the written notice or
statement prescribed by the Law of the State of Delaware.
5. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
6. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
7. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any
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dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock
or for the purpose of any other lawful action, the directors may fix, in
advance, a record date, which shall not be more than sixty days nor less than
ten days before the date of such meeting, nor more than sixty days prior to any
other action. If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is expressed and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at any meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
8. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term 'share' or 'shares' or 'share of stock' or 'shares of
stock' or 'stockholder' or 'stockholders' refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law of the State of
Delaware confers such rights notwithstanding that the certificate of
incorporation may provide for more than one class or series of shares of stock,
one or more of which are limited or denied such rights thereunder; provided,
however, that no such right shall vest in the event of an increase or a decrease
in the authorized number of shares of stock of any class or series which is
otherwise denied voting rights under the provisions of the certificate of
incorporation, except as any provision of law may otherwise require.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITIONS. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors of the
corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase 'whole board' herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. NUMBER AND TERM. The Board of Directors shall initially consist of at
least one person. The exact number of Directors may be fixed or changed by the
Stockholders at any meeting or by the Directors in the interim between
stockholder meetings. The number of Directors may be increased by the
stockholders at any meeting or by the Directors in the interim between
stockholder meetings.
3. VACANCIES. In the interim between annual meetings of stockholders or
special meetings of stockholders called for the election of Directors and/or for
the removal of one or more Directors and for the filling of any vacancy in that
connection, newly created directorships and any vacancies on the Board of
Directors, including unfilled vacancies resulting from the removal of Directors
for cause or without cause, may be filled by the vote of a majority of the
remaining Directors then in office, although less than a quorum, or by the sole
remaining Director. Directors who are elected in the interim to fill vacancies
shall hold office until the next annual meeting of stockholders and until their
successors are elected and qualified or until their earlier resignation or
removal.
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4. BOARD OF DIRECTORS MEETINGS.
-- TIME. Meetings shall be held at such time as the Board shall fix.
-- PLACE. Meetings shall be held at such place within or without the State
of Delaware as shall be fixed by the Board.
-- CALL. No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the direction
of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any,
the President, or of a majority of the directors in office.
-- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. Notice of the time, place and
purpose of any special meeting of the Board of Directors or of any committee
thereof, shall be given by personal or written delivery, at least 72 hours
before the meeting. Notice need not be given to any director or to any member of
a committee of directors who submits a written waiver of notice signed before or
after the time stated therein. Attendance of any such person at a meeting shall
constitute a waiver of notice of such meeting, except when that person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors need be specified in any written
waver of notice.
-- QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevent such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A majority
of the directors present, whether or not a quorum is present, may adjourn a
meeting to another time and place. Except as herein otherwise provided, and
except as otherwise provided by the General Corporation Law of the State of
Delaware, the vote of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board. The quorum and voting
provisions herein stated shall not be construed as conflicting with any
provisions of the General Corporation Law of the State of Delaware and these
By-Laws which govern a meeting of directors held to fill vacancies and newly
created directorships in the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
Unless waived by a majority of Directors in attendance, not less than
twenty-four (24) hours before any regular or special meeting of the Board of
Directors, any Director who desires the presence at such meeting of not more
than one person who is not a Director shall so notify all other Directors,
request the presence of such person at the meeting, and state the reason in
writing. Such person will not be permitted to attend the Directors' meeting
unless a majority of the Directors in attendance vote to admit such person to
the meeting. Such vote shall constitute the first order of business for any such
meeting of the Board of Directors. Such right to attend, whether granted by
waiver or vote, may be revoked at any time during any such meeting by the vote
of a majority of the Directors in attendance.
-- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent
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provided in the resolution of the Board, shall have and may exercise the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation with the exception of any authority the delegation of
which is prohibited by Section 141 of the General Corporation Law of the State
of Delaware.
6. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President, a Secretary,
a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of
Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive
Vice-President, one or more other Vice-Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers with such
titles as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board of
Directors, no officer other than the Chairman or Vice-Chairman of the Board, if
any, need be a director. Any number of offices may be held by the same person,
as the directors may determine.
Unless otherwise provided in the resolution choosing an officer, each
officer shall be chosen for a term which shall continue until the meeting of the
Board of Directors following the next annual meeting of stockholders and until a
successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform such
duties in the management and operation of the corporation as shall be prescribed
in the resolutions of the Board of Directors designating and choosing such
officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign. In the absence of the Secretary or
the Assistant Secretary the Chairman of the meeting shall appoint a Secretary to
record the proceedings of the meeting. Any officer may be removed, with or
without cause, by the Board of Directors. Any vacancy in any office may be
filled by the Board of Directors.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS
1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any actual or threatened action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter a 'proceeding'), by reason of the fact that he or she is or was a
director or officer of the Corporation or that, being or having been such a
director or officer of the Corporation, he or she is or was serving at the
request of an executive officer of the Corporation as a director, partner,
officer, employee, or agent of another corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to an
employee benefit plan (hereinafter an 'indemnitee'), whether the basis of such
proceeding is alleged action in an official capacity as such a director,
officer, partner, employee, or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by the General Corporation Law
of Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
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Corporation to provide broader indemnification rights than permitted prior
thereto), or by other applicable law as then in effect, against all expense,
liability, and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties, and amounts paid in settlement) actually and reasonably
incurred or suffered by such indemnitee in connection therewith and such
indemnification shall continue as to an indemnitee who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
indemnitee's heirs, executors, and administrators. Except as provided in Section
IV(2) with respect to proceedings seeking to enforce rights to indemnification,
the Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized or ratified by the Board of
Directors of the Corporation.
The right to indemnification conferred in this Section IV(1) shall be a
contract right.
The right to indemnification conferred in this Section IV(1) shall, solely
in the case of those who are or were serving as a director of the Corporation,
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an 'advancement of expenses'). An advancement of expenses incurred by a person
in his or her capacity as a director shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an 'undertaking'), by or on behalf of
such director, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appear that such director is not entitled to be indemnified for such expenses
under this Section IV(1) or otherwise. An advancement of expenses shall not be
made to a director if the Corporation's Board of Directors makes a good faith
determination that such payment would violate law or public policy.
The right to indemnification conferred in this Section IV(1) may, in the
case of those who are or were serving as an officer of the Corporation, include
the right to be paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition (hereinafter an 'advancement
of expenses'). An advancement of expenses incurred by a person in his or her
capacity as an officer shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such officer, to repay all amounts so advanced
if it shall ultimately be determined by final judicial decision from which there
is no further right to appear that such officer is not entitled to be
indemnified for such expenses under this Section IV(1) or otherwise. An
advancement of expenses shall not be made to an officer if the Corporation's
Board of Directors makes a good faith determination that such payment would
violate law or public policy.
2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section IV(1) is not
paid in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall also be
entitled to be paid the expense of prosecuting or defending such suit. The
indemnitee shall be presumed to be entitled to indemnification under this
Article IV upon submission of a written claim (and, in an action brought to
enforce a claim for an advancement of expenses, where the required undertaking
has been tendered to the Corporation), and thereafter the Corporation shall have
the burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee is not entitled to indemnification shall be a
defense to the suit or create a presumption that the indemnitee is not so
entitled.
3. NONEXCLUSIVITY AND SURVIVAL OF RIGHTS. The rights to indemnification and
to the advancement of expenses conferred in this Article IV shall not be
exclusive of any other right which
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any person may have or hereafter acquire under any statute, provisions of the
Certificate of Incorporation, By-Laws, agreement, vote of stockholders or
disinterested directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article IV, or of any of
the procedures established by the Board of Directors pursuant to Section IV(7),
any indemnitee shall be entitled to indemnification in accordance with the
provisions hereof and thereof with respect to any acts or omissions of such
indemnitee occurring prior to such amendment or repeal.
4. INSURANCE, CONTRACTS, AND FUNDING. The Corporation may maintain
insurance, at its expense, to protect itself and any director, officer,
employee, or agent of the Corporation or another corporation, partnership, joint
venture, trust, or other enterprise against any expense, liability, or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability, or loss under the General Corporation Law of
Delaware. The Corporation may enter into contracts with any indemnitee in
furtherance of the provisions of this Article IV and may create a trust fund,
grant a security interest, or use other means (including, without limitation, a
letter of credit) to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article IV.
5. PERSONS SERVING OTHER ENTITIES. Any person who is or was a director,
officer, or employee of the Corporation who is or was serving (i) as a director
or officer of another corporation of which a majority of the shares entitled to
vote in the election of its directors is held by the Corporation or (ii) in an
executive or management capacity in a partnership, joint venture, trust, or
other enterprise of which the Corporation or a wholly-owned subsidiary of the
Corporation is a general partner or has a majority ownership shall be deemed to
be so serving at the request of an executive officer of the Corporation and
entitled to indemnification and advancement of expenses under Section IV(1).
6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, by action of its Board of Directors, authorize one or more
executive officers to grant rights to advancement of expenses to employees or
agents of the Corporation on such terms and conditions as such officer or
officers deem appropriate under the circumstances. The Corporation may, by
action of its Board of Directors, grant rights to indemnification and
advancement of expenses to employees or agents or groups of employees or agents
of the Corporation with the same scope and effect as the provisions of this
Article IV with respect to the indemnification and advancement of expenses of
directors and officers of the Corporation; provided, however, that an
undertaking shall be made by an employee or agent only if required by the Board
of Directors.
7. PROCEDURES FOR THE SUBMISSION OF CLAIMS. The Board of Directors may
establish reasonable procedures for the submission of claims for indemnification
pursuant to this Article IV, determination of the entitlement of any person
thereto, and review of any such determination. Such procedures shall be set
forth in an appendix to these By-Laws and shall be deemed for all purposes to be
a part hereof.
ARTICLE V
CORPORATE SEAL
The Corporation may have a seal which shall be in such form as the Board of
Directors shall prescribe but the presence or absence of a corporate seal shall
have no effect.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
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ARTICLE VII
CONTROL OVER BY-LAWS
Subject to the provisions of the Certificate of Incorporation and the
provisions of the General Corporation Law of the State of Delaware the By-Laws
may be amended by the Board of Directors or by the affirmative vote of the
holders of outstanding voting securities of the Corporation entitling them to
exercise two-thirds of the voting power of the Corporation on such proposal.
WITNESS my hand and the seal of the Corporation.
Dated:
______________________________________
Secretary
(SEAL)
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ANNEX B
FAIRNESS OPINION
<PAGE>
May 25, 1995
The Board of Directors
Laurentian Capital Corporation
640 Lee Road
Suite 303
Wayne, Pennsylvania 19087
Dear Sirs:
It is our understanding that, pursuant to the Agreement and Plan of Merger
(the 'Agreement'), dated as of May 25, 1995, between Laurentian Capital
Corporation ('LCC') and American Annuity Group, Inc. ('AAG'), LCC will be merged
into AAG in a transaction (the 'Transaction') in which certain outstanding
shares of LCC Common Stock will be converted into the right to receive $14.125
in cash (the 'Consideration') pursuant to Section 2.1(a) of the Agreement.
You have asked us to render our opinion (the 'Opinion') as to the fairness,
from a financial point of view, of the Consideration to be received by certain
holders of LCC Common Stock pursuant to Section 2.1(a) of the Agreement.
In rendering our Opinion, we have, among other things:
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(i) Reviewed the Agreement;
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(ii) Reviewed LCC's Annual Reports to Stockholders and Annual Reports on Form 10-K, and the statutory
financial statements for Prairie States Life Insurance Company ('Prairie States') and Loyal
American Life Insurance Company ('Loyal American'), in each case for the years ended December 31,
1992 through 1994;
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(iii) Reviewed LCC's quarterly report to Stockholders and Quarterly Report on Form 10-Q, and the
statutory financial statements for Prairie States and Loyal American, in each case for the three
months ended March 31, 1995;
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(iv) LCC's Board of Directors certain strategic alternatives available to LCC;
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(v) Discussed with certain officers of LCC, Prairie States and Loyal American their respective
operations, financial condition, historical financial statements, future prospects, and other
matters we believe relevant to our inquiry;
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(vi) Reviewed certain financial forecasts of LCC, Prairie States and Loyal American, which were
furnished to us by management of LCC but which were not publicly available;
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(vii) Reviewed the historical market prices and reported trading volume of LCC Common Stock;
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(viii) Reviewed the financial terms of recent acquisitions of selected companies we considered reasonably
comparable to LCC and compared such terms to the terms of the Transaction;
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(ix) Reviewed an actuarial appraisal of Prairie States prepared by Milliman & Robertson, Inc. and an
actuarial appraisal of Loyal American prepared by Wakely and Associates, Inc. (collectively, the
'Actuarial Appraisals');
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(x) Reviewed financial and market data for selected publicly-traded companies in lines of business we
considered reasonably comparable to those of LCC and its subsidiaries and compared the valuation
of such companies to the valuation of LCC in the Transaction; and
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(xi) Performed such other studies, analyses, inquiries and investigations as we deemed appropriate.
</TABLE>
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In arriving at our Opinion, we have relied upon and assumed the accuracy
and completeness of the financial and other information provided to us by LCC
and its representatives, but we have not assumed any responsibility for
verification of the foregoing information. We have assumed that the financial
forecasts for LCC, Prairie States and Loyal American prepared by management of
LCC have been reasonably prepared and are based on the best currently available
estimates and business judgement of management at the time of preparation. We
express no view as to such financial forecasts or the assumptions on which they
were based. We have also assumed that there have been no material changes in
LCC's financial position, results of operations, business or prospects since
March 31, 1995. We have neither made nor obtained any independent evaluation or
appraisal of LCC's or its subsidiaries' properties and facilities or any of
LCC's or its subsidiaries' assets or liabilities, and we have not had an
additional independent actuarial firm examine or review the Actuarial
Appraisals.
Our Opinion is further based upon our analyses of the foregoing and upon
our assessment as of the date of this letter of general economic, financial and
market conditions.
We have acted as financial advisor to the Board of Directors of LCC in
connection with the Transaction and will receive a fee for our services,
including for rendering this Opinion.
Based upon and subject to the foregoing, it is our opinion as of the date
hereof that the Consideration to be received by certain holders of LCC Common
Stock pursuant to Section 2.1(a) of the Agreement is fair, from a financial
point of view.
Very truly yours,
OPPENHEIMER & CO., INC.
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ANNEX C
SECTION 262 OF THE DELAWARE LAW
<PAGE>
SECTION 262 OF THE DELAWARE GENERAL CORPORATE LAW
SECTION 262. APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word 'stockholder' means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words 'stock' and 'share' mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words 'depository receipt' mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sec. 251, Sec. 252, Sec. 254, Sec. 257, Sec. 258, Sec. 263
or Sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Sec.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to
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its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Sec. 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with
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whom agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the
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written approval of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING OF STOCKHOLDERS, SEPTEMBER 26, 1995
The undersigned stockholder of Laurentian Capital Corporation (the
"Company"), revoking previous proxies, acknowledges receipt of the Notice of
Special Meeting of Stockholders dated August 21, 1995, and the accompanying
Proxy Statement, and hereby appoints Robert T. Rakich and Claude Castonguay and
each of them, the true and lawful attorneys and proxies of the undersigned, with
full power of substitution and revocation, to attend the Special Meeting of
Stockholders of the Company to be held at the Four Seasons Hotel, 1 Logan
Square, Philadelphia, Pennsylvania 19103, on Tuesday, September 26, 1995 at 9:00
A.M., local time, and at any adjournment or adjournments thereof, with all
powers the undersigned would possess if personally present. The undersigned
authorizes and instructs said proxies to vote all of the shares of stock of the
Company which the undersigned would be entitled to vote if personally present as
follows:
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
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THIS PROXY WILL BE VOTED AS DIRECTED. IF NO CONTRARY INSTRUCTION IS INDICATED,
THE VOTE OF THE UNDERSIGNED WILL BE CAST "FOR" APPROVAL AND ADOPTION OF THE
AGREEMENT AND PLAN OF MERGER AND APPROVAL OF THE MERGER.
I. Proposal to approve and adopt the Agreement and Plan of Merger dated as of
May 25, 1995, providing for the Merger of a subsidiary of American Annuity
Group, Inc. with and into the Company, as described in the accompanying
Proxy Statement, and to approve such Merger.
FOR |_] AGAINST |_| ABSTAIN |_|
II. In their discretion, said proxies are authorized to vote upon any other
business which may properly come before the Meeting.
FOR |_] AGAINST |_| ABSTAIN |_|
NOTE: Your signature should appear as your name appears hereon. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
The Board of Directors requests that you fill in, sign, date and return the
proxy card promptly using the enclosed envelope.
Signature(s) ________________________________________ Date ___________________
