<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 12, 1995)
Registration Nos. 33-55227 and 33-60185
Filed Pursuant to Rule 424(b)(5)
1,700,000 SHARES
UNITED COMPANIES FINANCIAL CORPORATION
[LOGO]
6 3/4% PRIDESSM
CONVERTIBLE PREFERRED STOCK, PAR VALUE $2.00 PER SHARE
The shares offered hereby are 1,700,000 shares of Preferred Redeemable
Increased Dividend Equity SecuritiesSM, 6 3/4% PRIDESSM, Convertible Preferred
Stock, par value $2.00 per share ("PRIDES"), of United Companies Financial
Corporation (the "Company").
The annual dividend payable with respect to each share of PRIDES is $2.97.
Dividends will be cumulative from the date of issuance and will be payable
quarterly in arrears on each January 1, April 1, July 1 and October 1,
commencing July 1, 1995. The liquidation preference applicable to each share of
PRIDES is equal to the sum of (i) the per share price to the public shown below
and (ii) the amount of accrued and unpaid dividends thereon.
On July 1, 2000 (the "Mandatory Conversion Date"), unless either previously
redeemed or converted at the option of the holder, each of the outstanding
shares of PRIDES will mandatorily convert into (i) one share of common stock,
par value $2.00 per share, of the Company (the "Common Stock"), subject to
adjustment in certain events, and (ii) the right to receive an amount in cash
equal to all accrued and unpaid dividends thereon.
Shares of PRIDES are not redeemable prior to July 1, 1998. At any time and
from time to time on or after July 1, 1998 until immediately prior to the
Mandatory Conversion Date, the Company may redeem any or all of the outstanding
shares of PRIDES. Upon any such redemption, each holder will receive, in
exchange for each share of PRIDES, the number of shares of Common Stock equal to
(A) the sum of (i) $45.188, declining after July 1, 1998 as set forth herein to
$44.00 until the Mandatory Conversion Date, and (ii) all accrued and unpaid
dividends thereon (the "Call Price") divided by (B) the Current Market Price (as
defined herein) on the applicable date of determination, but in no event less
than .826 of a share of Common Stock, subject to adjustment in certain events.
At any time prior to the Mandatory Conversion Date, unless previously
redeemed, each of the shares of PRIDES is convertible at the option of the
holder thereof into .826 of a share of Common Stock (equivalent to a conversion
price of $53.24 per share of Common Stock (the "Conversion Price")), subject to
adjustment in certain events. The number of shares of Common Stock a holder will
receive upon redemption, and the value of the shares received upon conversion,
will vary depending on the market price of the Common Stock from time to time,
all as set forth herein.
Dividends on the shares of PRIDES will accrue at a higher rate than the rate
at which dividends are currently paid on the Common Stock. The opportunity for
equity appreciation afforded by an investment in the shares of PRIDES is less
than that afforded by an investment in the Common Stock because the Conversion
Price is higher than the per share price to the public of the shares of PRIDES
and the Company may, at its option, redeem the shares of PRIDES at any time on
or after July 1, 1998 and prior to the Mandatory Conversion Date, and may be
expected to do so if, among other circumstances, the Current Market Price of the
Common Stock exceeds the Call Price. In such event, a holder of a share of
PRIDES will receive less than one share of Common Stock, but no less than .826
of a share of Common Stock. The per share value of the Common Stock received by
holders of shares of PRIDES may be more or less than the per share amount paid
for the shares of PRIDES offered hereby, due to market fluctuations in the price
of the Common Stock. For a detailed description of the terms of the shares of
PRIDES, see "Description of PRIDES."
The shares of PRIDES have been approved for listing on the Nasdaq National
Market under the symbol "UCFCP." On June 12, 1995, the last reported sale price
of the Common Stock on the Nasdaq National Market was $44 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Share of PRIDES......................... $44.00 $1.21 $42.79
- -----------------------------------------------------------------------------------------------------------
Total(4).................................... $74,800,000 $2,057,000 $72,743,000
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the date of issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $400,000.
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 255,000 shares of PRIDES to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $86,020,000, $2,365,550, and
$83,654,450, respectively. See "Underwriting."
------------------------
The PRIDES are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, and subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the PRIDES offered hereby will be made in New York, New York, on or
about June 16, 1995.
(SM)Service mark of Merrill Lynch & Co., Inc.
------------------------
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INCORPORATED
------------------------
The date of this Prospectus Supplement is June 12, 1995.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF
PRIDES AND THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS.
LOUISIANA INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO PERSON MAY ACQUIRE
CONTROL OF THE COMPANY AND THUS INDIRECT CONTROL OF ITS LOUISIANA DOMICILED
INSURANCE SUBSIDIARIES, UNITED COMPANIES LIFE INSURANCE COMPANY AND UNITED
GENERAL TITLE INSURANCE COMPANY, UNLESS SUCH PERSON HAS PROVIDED CERTAIN
REQUIRED INFORMATION TO THE INSURANCE COMMISSIONER OF THE STATE OF LOUISIANA AND
SUCH ACQUISITION HAS BEEN APPROVED BY THE INSURANCE COMMISSIONER OF THE STATE OF
LOUISIANA, AFTER PUBLIC HEARING. UNDER LOUISIANA INSURANCE LAWS AND REGULATIONS,
ANY PERSON WHO OWNS, CONTROLS OR HAS THE POWER TO VOTE 10% OR MORE OF THE VOTING
SECURITIES OF A CORPORATION IS PRESUMED TO HAVE CONTROL OF THAT CORPORATION AND
ITS SUBSIDIARIES. A SECURITY WHICH IS CONVERTIBLE INTO OR EVIDENCES A RIGHT TO
ACQUIRE A VOTING SECURITY IS VIEWED AS A VOTING SECURITY. CONSEQUENTLY, NO
PURCHASER IN THIS OFFERING MAY ACQUIRE, DIRECTLY OR INDIRECTLY, AN AMOUNT OF
VOTING SECURITY WHICH WOULD BRING SUCH PURCHASER'S TOTAL HOLDINGS TO 10% OR MORE
OF THE VOTING SECURITIES OF THE COMPANY, UNLESS SUCH PURCHASER HAS PROVIDED THE
REQUIRED INFORMATION TO THE INSURANCE COMMISSIONER OF THE STATE OF LOUISIANA AND
THE ACQUISITION HAS BEEN APPROVED BY THE INSURANCE COMMISSIONER OF THE STATE OF
LOUISIANA.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in the Prospectus, this Prospectus Supplement
and the consolidated financial statements, including the notes thereto, included
herein and incorporated herein by reference. Except as otherwise noted, all
information in this Prospectus Supplement assumes that the over-allotment option
granted to the Underwriters will not be exercised. Unless the context otherwise
requires, references in this Prospectus Supplement to the "Company" include the
Company and its consolidated subsidiaries. Capitalized terms used in this
Prospectus Supplement but not defined herein shall have the meanings set forth
in the Prospectus unless otherwise provided herein.
THE COMPANY
United Companies Financial Corporation (the "Company"), founded in 1946, is
a financial services holding company having mortgage and insurance operations.
The Company's mortgage operations are focused on the origination, sale and
servicing of first mortgage, non-conventional, home equity loans. Loan
originations are accomplished primarily through a retail branch network, which
as of March 31, 1995, consisted of 143 offices in 39 states, and a wholesale
loan network of correspondents and brokers. The Company's strategy for
increasing loan production includes continued geographic expansion, increased
wholesale loan originations, loan acquisitions and the introduction of new loan
products. Home equity loan production in 1994, 1993 and 1992 was $909 million,
$540 million and $301 million, respectively. Home equity loan production for the
first three months of 1995 was $309 million compared to $197 million for the
same period of 1994. The Company believes its loan securitizations improve its
access to funding and thereby provide a distribution outlet sufficient to meet
the Company's expanded home equity loan production. Increased loan production
and its reduced cost of funding are the primary reasons that operating income
before income taxes of the Company's mortgage operations rose to $81.2 million
in 1994 from $46.3 million in 1993 and from $24.0 million in 1992. Although loan
sale gains increased from $22.6 million for the first quarter of 1994 to $26.7
million for the same period in 1995, the Company's operating income before
income taxes of its mortgage operations declined to $17.9 million for the first
quarter of 1995 as compared to $20.4 million for the first quarter of 1994,
primarily as a result of increased expenses relating to the expansion of its
mortgage operations. The Company's insurance operations sell primarily single
premium deferred annuities marketed in 47 states, the District of Columbia and
Puerto Rico. For additional information regarding the Company's operations by
business segment, see "Selected Financial and Other Data" in the Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Prospectus and in the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, as amended by Amendment No. 1 on Form
10-K/A, and the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
RECENT DEVELOPMENTS
Pricing of Home Equity Loan Securitization. On June 7, 1995, the Company's
subsidiary, UCFC Acceptance Corporation, announced the pricing for a sale in a
public offering of $405 million of mortgage-backed pass-through certificates.
Primarily first lien, fixed rate and adjustable rate residential home equity
loans originated, directly or through correspondents or mortgage brokers, by
United Companies Lending Corporation ("UC Lending" or "UCLC") will be sold to
the trustee under a pooling and servicing agreement. The sale is scheduled to
close on June 22, 1995. Under the terms of this transaction, a portion of the
proceeds from the sale of these certificates will be held in prefunding accounts
by the trustee to purchase home equity loans originated by UC Lending on or
prior to September 10, 1995. Eight classes of mortgage pass-through certificates
will be issued in this securitization, seven of which will be fixed rate classes
aggregating $305 million and having pass-through rates ranging from 6.60% to
7.45% and one of which will be a $100 million floating rate class having an
initial pass-through rate of 6.45%. It is anticipated that the certificates will
be insured by MBIA Insurance Corporation and will receive the highest investment
grade ratings from Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group, a division of McGraw-Hill, Inc. In connection with this securitization
transaction, the Company utilized a series of hedging mechanisms on May 22, 24
and 30, 1995 with respect to the fixed rate classes so as to protect the Company
S-3
<PAGE> 4
against an increase in market interest rates. Market interest rates declined
from the respective dates of these hedges to the date of pricing. The gain
recorded by the Company from the sale of certificates in this securitization
transaction will be net of the results of the hedge transactions. This offering
will be the second sale of mortgage-backed securities by the Company in 1995 and
the ninth securitization conducted under this subsidiary's shelf registration
statement filed with the Securities and Exchange Commission, initially effective
in June 1993 in the amount of $1 billion and subsequently amended and increased
by $3 billion.
United General Title Insurance Company. On April 10, 1995, the Company made
a decision to dispose of its investment in United General Title Insurance
Company ("UG Title"), a wholly owned subsidiary of the Company, and, on May 1,
1995, approved a formal plan of disposal. The decision to dispose of UG Title is
independent of the consummation of the sale thereof contemplated by the letter
of intent referred to below. As a result, the operations of UG Title have been
classified as discontinued operations, and, accordingly, the consolidated
financial statements and the related notes of the Company segregate continuing
and discontinued operations. It is anticipated that the disposal will be
completed during 1995. In connection therewith, a letter of intent to sell UG
Title has been signed which provides for a reduction of the sale price for
certain claims relating to transactions occurring prior to the date of sale and
discovered within twelve months thereafter. The transaction contemplated by the
letter of intent is subject to negotiation and execution of a definitive
agreement and the satisfaction of certain conditions, including receipt of
necessary regulatory approvals. The Company believes that the failure to
consummate the transaction contemplated by the letter of intent should not have
a material adverse effect on the Company's financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Discontinued Operations -- UG Title" in the Prospectus.
Warehouse Facility. To help finance its originations and acquisitions of
home equity loans, UC Lending and other mortgage lending subsidiaries of the
Company entered into a credit agreement dated as of May 23, 1995 with First
Union National Bank of North Carolina and certain other lenders signatory
thereto (the "Warehouse Facility"). Under the Warehouse Facility, UC Lending and
the other mortgage lending subsidiaries may borrow up to $150,000,000 on a
revolving basis secured by home equity loans eligible thereunder. Loans under
the Warehouse Facility are subject to the satisfaction of certain borrowing
conditions, including a minimum borrowing base and will bear interest at a
floating rate. Borrowings under the Warehouse Facility are required to be repaid
from the proceeds of the sale or other disposition of the home equity loan
collateral. The Warehouse Facility contains certain provisions that may affect
the ability of the Company to pay dividends on the PRIDES as described under
"Price Range of Common Stock and Dividends." The lenders' commitment under the
Warehouse Facility is scheduled to terminate on May 23, 1997. As of May 23,
1995, no amounts were outstanding under the Warehouse Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the Prospectus.
First Quarter of 1995. For a discussion of the Company's results of
operations for the three months ended March 31, 1995, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Three Months Ended March 31, 1995
Compared to Three Months Ended March 31, 1994" in the Prospectus.
S-4
<PAGE> 5
THE OFFERING
Securities................. The PRIDES are shares of convertible preferred
stock and rank prior to the Common Stock as to
payment of dividends and distribution of assets
upon liquidation. The shares of PRIDES mandatorily
convert into shares of Common Stock on July 1,
2000, the Mandatory Conversion Date, and the
Company has the option to redeem the shares of
PRIDES, in whole or in part, at any time and from
time to time on or after July 1, 1998, and prior to
the Mandatory Conversion Date at the Call Price,
payable in shares of Common Stock. In addition, the
shares of PRIDES are convertible into shares of
Common Stock at the option of the holder at any
time prior to the Mandatory Conversion Date as set
forth below.
Dividends.................. Holders of shares of PRIDES will be entitled to
receive annual cumulative dividends at a rate per
annum of 6 3/4% of the stated liquidation
preference (equivalent to a rate of $2.97 per annum
for each share of PRIDES), from the date of initial
issuance, payable quarterly in arrears on each
January 1, April 1, July 1, and October 1, or, if
any such date is not a business day, on the next
succeeding business day, commencing July 1, 1995.
See "Description of PRIDES -- Dividends."
Mandatory Conversion....... On the Mandatory Conversion Date, unless previously
redeemed or converted, each outstanding share of
PRIDES will mandatorily convert into (i) one share
of Common Stock, subject to adjustment in certain
events, and (ii) the right to receive cash in an
amount equal to all accrued and unpaid dividends
thereon (other than previously declared dividends
payable to a holder of record as of a prior date).
See "Description of PRIDES -- Mandatory Conversion
of PRIDES." The value of the Common Stock that may
be received by holders of shares of PRIDES upon
their mandatory conversion may be more or less than
the amount paid for the shares of PRIDES offered
hereby due to market fluctuations in the price of
the Common Stock.
Optional Redemption........ Shares of PRIDES are not redeemable prior to July
1, 1998. At any time and from time to time on or
after July 1, 1998, and ending immediately prior to
the Mandatory Conversion Date, the Company may
redeem any or all of the outstanding shares of
PRIDES. Upon any such redemption, each holder will
receive, in exchange for each share of PRIDES, the
number of shares of Common Stock equal to the Call
Price (the sum of (i) $45.188, declining after July
1, 1998, as set forth herein to $44.00 until the
Mandatory Conversion Date and (ii) all accrued and
unpaid dividends thereon (other than previously
declared dividends payable to a holder of record as
of a prior date)) divided by the Current Market
Price (as defined herein) on the applicable date of
determination, but in no event less than .826 of a
share of Common Stock, subject to adjustment as
described herein. See "Description of
PRIDES -- Optional Redemption." The number of
shares of Common Stock to be delivered in payment
of the applicable Call Price will be determined on
the basis of the Current Market Price of the Common
Stock prior to the announcement of the redemption,
and the market price of the Common Stock may vary
between the date of such determination and the
subsequent delivery of such shares.
S-5
<PAGE> 6
Conversion at the Option
of the Holder............ At any time prior to the Mandatory Conversion Date,
unless previously redeemed, each share of PRIDES is
convertible at the option of the holder thereof
into .826 of a share of Common Stock (the "Optional
Conversion Rate"), equivalent to the Conversion
Price of $53.24 per share of Common Stock, subject
to adjustment as described herein. The number of
shares of Common Stock a holder will receive upon
redemption, and the value of the shares received
upon conversion, will vary depending on the market
price of the Common Stock from time to time, all as
set forth herein. The right of holders to convert
shares of PRIDES called for redemption will
terminate immediately prior to the close of
business on the redemption date. See "Description
of PRIDES -- Conversion at the Option of the
Holder."
Enhanced Dividend Yield;
Less Equity Appreciation
Than Common Stock........ Dividends will accrue on the shares of PRIDES at a
higher rate than the rate at which dividends are
currently paid on the Common Stock. The opportunity
for equity appreciation afforded by an investment
in the shares of PRIDES is less than that afforded
by an investment in the Common Stock because the
Conversion Price is higher than the per share price
to the public of the shares of PRIDES and the
Company may, at its option, redeem the shares of
PRIDES at any time on or after
July 1, 1998, and prior to the Mandatory Conversion
Date, and may be expected to do so if, among other
circumstances, the Current Market Price of the
Common Stock after July 1, 1998, exceeds the Call
Price. In such event, a holder of a share of PRIDES
will receive less than one share of Common Stock,
but no less than .826 of a share of Common Stock,
subject to adjustment as described herein. A holder
may also surrender for conversion any shares of
PRIDES called for redemption up to the close of
business on the redemption date, and a holder that
so elects to convert will receive .826 of a share
of Common Stock per share of PRIDES, subject to
adjustment as described herein. The per share value
of Common Stock received by holders of shares of
PRIDES may be more or less than the per share
amount paid for the shares of PRIDES offered
hereby, due to market fluctuations in the price of
the Common Stock. See "Description of
PRIDES -- Enhanced Dividend Yield; Less Equity
Appreciation Than Common Stock."
Voting Rights.............. The holders of shares of PRIDES will have the right
with the holders of Common Stock to vote in the
election of Directors and upon each other matter
coming before any meeting of the holders of Common
Stock on the basis of 4/5 of a vote for each share
of PRIDES. On such matters, the holders of shares
of PRIDES and the holders of Common Stock will vote
together as one class except as otherwise provided
by law or the Company's Articles of Incorporation.
In addition, (i) whenever dividends on the shares
of PRIDES or any other series of the Company's
preferred stock (all series of which, including the
shares of PRIDES, hereinafter are called the
"Preferred Stock") with like voting rights are in
arrears and unpaid for six quarterly dividend
periods, and in certain other circumstances, the
holders of the shares of PRIDES (voting separately
as a class) will be entitled to vote, on the basis
of one vote for each share of PRIDES, for the
election of two Directors of the Company, such
Directors to be in addition to the number of
Directors
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<PAGE> 7
constituting the Board of Directors immediately
prior to the accrual of such right, and (ii) the
holders of the shares of PRIDES may have voting
rights with respect to certain alterations of the
Company's Articles of Incorporation and certain
other matters, voting on the same basis or
separately as a series. See "Description of
PRIDES -- Voting Rights" herein and "Description of
Capital Stock -- Common Stock" and "-- Special
Charter, By-Law and Louisiana Law Provisions" in
the Prospectus.
Liquidation Preference
and Ranking.............. The shares of PRIDES will rank prior to the Common
Stock as to payment of dividends and distribution
of assets upon liquidation. The liquidation
preference of each share of PRIDES is an amount
equal to the sum of (i) the per share price to the
public shown on the cover page of this Prospectus
Supplement and (ii) all accrued and unpaid
dividends thereon. See "Description of
PRIDES -- Dividends" and "-- Liquidation Rights."
Nasdaq National Market
Symbol
of Common Stock.......... UCFC
Listing.................... The shares of PRIDES have been approved for listing
on the Nasdaq National Market under the symbol
"UCFCP."
Use of Proceeds............ The Company intends to use the net proceeds for
general corporate purposes, which may include (i)
the repayment of revolving indebtedness, (ii) the
financing of continued expansion of its mortgage
operations and (iii) the possible introduction of
new loan products. See "Use of Proceeds."
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<PAGE> 8
SELECTED FINANCIAL AND OTHER DATA
The selected financial data set forth below are derived from the Company's
Consolidated Financial Statements. The Company's Consolidated Balance Sheets at
December 31, 1994 and 1993, and Consolidated Statements of Income, Stockholders'
Equity and Cash Flows for the years ended December 31, 1994, 1993 and 1992 and
notes thereto were audited by Deloitte & Touche LLP, independent certified
public accountants, and are incorporated by reference herein and available as
described under "Incorporation of Certain Documents by Reference" and "Available
Information" in the Prospectus. The Company's Consolidated Financial Statements
should be read in conjunction with this table and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Prospectus and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, as amended by Amendment No. 1 on Form 10-K/A. The financial
information and other data set forth for the three months ended March 31, 1995
and 1994 are unaudited; however, in the opinion of the Company's management, the
accompanying financial information contains all adjustments, consisting only of
normal accruals, except for discontinued operations, necessary to present fairly
the financial information for such periods. The results of operations for the
three months ended March 31, 1995 may not be indicative of results of operations
to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,(1) YEAR ENDED DECEMBER 31,(1)
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest, charges and fees on
loans.............................. $ 30,788 $ 27,285 $ 116,747 $ 96,284 $ 92,785 $ 90,180 $ 63,300
Loan sale gains...................... 26,734 22,554 86,735 59,441 33,475 29,627 18,613
Investment income.................... 25,011 18,221 84,666 75,527 65,548 61,828 65,349
Loan servicing income................ 3,484 3,689 15,173 10,077 10,611 9,492 10,592
Net insurance premiums............... 2,102 3,068 11,373 18,684 22,860 36,269 39,820
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues....................... 88,119 74,817 314,694 260,013 225,279 227,396 197,674
Total expenses....................... 68,570 53,985 230,620 216,952 204,664 219,580 190,837
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes................ 19,549 20,832 84,074 43,061 20,615 7,816 6,837
Provision for income taxes........... 6,725 7,355 29,492 14,744 7,601 3,164 2,473
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations.... 12,824 13,477 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations......................... (128) 233 (5,048) (16,742) (2,768) 6,824 3,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 12,696 $ 13,710 $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA(2):
Primary:
Income from continuing
operations....................... $ .91 $ .93 $ 3.83 $ 2.52 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations....................... (.01) .02 (.35) (1.51) (.28) .69 .40
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ .90 $ .95 $ 3.48 $ 1.01 $ 1.03 $ 1.16 $ .84
========== ========== ========== ========== ========== ========== ==========
Fully diluted:
Income from continuing
operations....................... $ .91 $ .93 $ 3.83 $ 2.38 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations....................... (.01) .02 (.35) (1.41) (.28) .69 .40
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ .90 $ .95 $ 3.48 $ .97 $ 1.03 $ 1.16 $ .84
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding:
Primary............................ 14,081 14,402 14,245 11,104 9,917 9,883 9,832
Fully Diluted...................... 14,123 14,402 14,245 11,853 9,917 9,883 9,832
Cash dividends....................... $ .1000 $ .0909 $ .3636 $ .3092 $ .2728 $ .2556 $ .2372
Stockholders' equity -- period
end(3)............................. $ 13.96 $ 11.89 $ 11.34 $ 11.45 $ 9.70 $ 8.94 $ 8.08
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,(1) YEAR ENDED DECEMBER 31,(1)
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA -- PERIOD END:
Investment securities -- net(3)...... $1,142,954 $ 961,672 $1,044,842 $ 902,091 $ 759,354 $ 376,966 $ 588,397
Loans -- net......................... 394,362 494,723 369,382 517,720 502,229 604,942 362,164
Capitalized excess servicing
income............................. 195,609 131,611 179,065 113,192 72,062 53,942 47,153
Deferred policy acquisition costs.... 92,802 83,584 91,915 83,495 80,007 78,599 77,601
Total assets......................... 2,087,806 1,863,915 1,978,255 1,817,153 1,627,900 1,492,816 1,363,955
Annuity reserves..................... 1,440,233 1,317,878 1,425,973 1,294,983 1,147,555 1,014,649 875,346
Notes payable........................ 240,342 180,950 213,668 155,500 206,850 200,447 216,971
Total liabilities.................... 1,893,914 1,702,254 1,823,005 1,663,785 1,531,642 1,404,382 1,284,524
Stockholders' equity(3).............. 193,892 161,661 155,250 153,368 96,258 88,434 79,430
OTHER DATA:
Mortgage
Total loan originations............ $ 309,564 $ 197,357 $ 913,319 $ 545,229 $ 321,198 $ 328,184 $ 397,794
Home equity loan originations...... 309,290 197,329 908,821 539,868 301,234 253,613 224,783
Average home equity loan size...... 43 43 41 39 28 24 23
Home equity loans
serviced -- period end........... 1,895,955 1,248,424 1,683,698 1,125,139 819,448 703,922 575,282
Total loans serviced -- period
end.............................. 2,234,232 1,668,714 2,032,405 1,568,781 1,367,822 1,344,388 1,175,038
Average coupon on home equity loans
originated....................... 12.4% 11.0% 11.7% 11.8% 13.4% N/A N/A
Loan origination fees as % of home
equity loans..................... 5.2% 6.0% 6.0% 7.0% 7.9% 8.2% 7.9%
Weighted average interest spread
retained on home equity loans
sold............................. 4.42% 5.61% 4.49% 6.06% 4.56% 4.42% 4.01%
Life Insurance
Annuity sales...................... $ 48,563 $ 45,029 $ 249,737 $ 207,682 $ 187,050 $ 175,796 $ 102,391
Net interest spread on annuities... 2.38% 2.61% 2.73% 2.20% 1.84% 1.88% 2.18%
Investment grade bonds as % of
invested assets.................. 72.0% 64.3% 69.6% 59.6% 54.3% 25.1% 45.5%
</TABLE>
- ---------------
(1) On April 10, 1995, the Company decided to dispose of its investment in its
wholly owned subsidiary, UG Title, and on May 1, 1995, approved a formal
plan of disposal of UG Title. In addition, on May 7, 1993, the Company
announced its decision to dispose of the net assets and operations of Foster
Mortgage Corporation ("FMC"), a wholly owned subsidiary of the Company. The
operations of UG Title and FMC have been reclassified as discontinued
operations and the prior years' financial statements of the Company included
herewith have been reclassified accordingly.
(2) All share and per share data have been adjusted to reflect stock dividends.
(3) During the first quarter of 1994, the Company implemented the provisions of
FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which
revised the method of accounting for certain of the Company's investments.
Prior to adoption of SFAS 115, the Company reported its investments in fixed
income investments at amortized cost, adjusted for declines in value
considered to be other than temporary. SFAS 115 requires the classification
of securities in one of three categories: "available-for-sale",
"held-to-maturity" or "trading securities." Securities classified as
held-to-maturity are carried at amortized cost, whereas securities
classified as trading securities or available-for-sale are recorded at fair
value. Effective with the adoption of SFAS 115, the Company determined the
appropriate classification of its investments and, if necessary, adjusted
the carrying value of such securities accordingly as if the unrealized gains
or losses had been realized. The adjustment, net of applicable income taxes,
for investments classified as available-for-sale is recorded in "Net
unrealized loss on securities" and is included in Stockholders' equity. In
accordance with the provisions of SFAS 115, prior year investments were not
restated.
S-9
<PAGE> 10
SELECTED FINANCIAL INFORMATION BY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE
Interest, charges and fees on loans......... $20,140 $14,798 $ 68,658 $ 44,797 $ 35,003 $ 36,174 $ 33,029
Investment income........................... 1,465 266 2,762 1,054 696 1,137 --
Loan sale gains............................. 26,734 22,554 86,289 59,220 29,679 15,571 14,636
Loan servicing income....................... 4,734 4,977 19,892 15,568 15,284 12,108 10,289
------- ------- -------- -------- -------- -------- --------
Total revenues.............................. 53,073 42,595 177,601 120,639 80,662 64,990 57,954
Total expenses.............................. 35,170 22,244 96,446 74,344 56,661 60,592 54,406
------- ------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 17,903 20,351 81,155 46,295 24,001 4,398 3,548
------- ------- -------- -------- -------- -------- --------
LIFE INSURANCE
Interest, charges and fees on loans......... 9,267 11,577 43,647 45,561 51,396 51,585 32,399
Investment income........................... 24,145 18,313 83,614 75,594 67,287 63,285 65,549
Net insurance premiums...................... 2,102 3,068 11,373 18,684 22,860 36,269 39,820
Loan sale gains............................. -- -- -- -- 3,310 -- 3,977
Loan servicing income (loss)................ (427) (44) (505) 340 673 1,645 2,625
------- ------- -------- -------- -------- -------- --------
Total revenues.............................. 35,087 32,914 138,129 140,179 145,526 152,784 144,370
Total expenses.............................. 31,918 31,335 129,049 137,544 140,061 150,707 131,216
------- ------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 3,169 1,579 9,080 2,635 5,465 2,077 13,154
------- ------- -------- -------- -------- -------- --------
CORPORATE, OTHER OPERATIONS AND ELIMINATIONS
Income (loss) from continuing operations
before income taxes....................... (1,523) (1,098) (6,161) (5,869) (8,851) 1,341 (9,865)
------- ------- -------- -------- -------- -------- --------
CONSOLIDATED
Income from continuing operations before
income taxes.............................. 19,549 20,832 84,074 43,061 20,615 7,816 6,837
Provision for income taxes.................. 6,725 7,355 29,492 14,744 7,601 3,164 2,473
------- ------- -------- -------- -------- -------- --------
Income from continuing operations........... 12,824 13,477 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations................................ (128) 233 (5,048) (16,742) (2,768) 6,824 3,943
------- ------- -------- -------- -------- -------- --------
Net income.................................. $12,696 $13,710 $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
======= ======= ======== ======== ======== ======== ========
</TABLE>
S-10
<PAGE> 11
USE OF PROCEEDS
At an offering price of $44.00 per share, the net proceeds to be received
by the Company from the sale of 1,700,000 shares of PRIDES (after deducting
applicable underwriting discounts and estimated expenses payable by the Company)
are estimated to be approximately $72,343,000 ($83,254,450 if the Underwriters'
over-allotment option is exercised in full). The Company intends to use the net
proceeds for general corporate purposes, which may include (i) the repayment of
revolving indebtedness, (ii) the financing of continued expansion of its
mortgage operations and (iii) the possible introduction of new loan products.
See "The Company -- Business Strategies" in the Prospectus.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1995 and as adjusted to give effect to the sale by the
Company of the 1,700,000 shares of PRIDES offered hereby (before giving effect
to underwriting discounts and commissions and expenses payable by the Company).
<TABLE>
<CAPTION>
MARCH 31, 1995
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Notes payable -- current........................................... $ 3,112 $ 3,112
Notes payable -- long term......................................... 112,230 39,887
9.35% Senior Notes due November 1, 1999............................ 125,000 125,000
-------- --------
Total debt................................................. 240,342 167,999
-------- --------
STOCKHOLDERS' EQUITY:
6 3/4% PRIDES, convertible preferred stock, par value $2.00 per
share; 1,955,000 shares authorized; 1,700,000 shares
outstanding, as adjusted; $74,800,000 aggregate liquidation
value........................................................... -- 3,400
Common stock, par value $2.00 per share; 100,000,000 shares
authorized; 14,464,790 shares issued; and 13,884,949 shares
outstanding(1).................................................. 28,930 28,930
Additional paid-in capital......................................... 126,085 195,028
Net unrealized loss on securities.................................. (21,132) (21,132)
Retained earnings.................................................. 73,314 73,314
Treasury stock at cost (579,841 shares)............................ (6,780) (6,780)
ESOP debt(2)....................................................... (6,525) (6,525)
-------- --------
Total stockholders' equity................................. 193,892 266,235
-------- --------
Total capitalization..................................... $434,234 $434,234
======== ========
</TABLE>
- ---------------
(1) Does not include 831,454 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's stock option plans as of
March 31, 1995.
(2) See Note 9.1 of Notes to Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994,
as amended by Amendment No. 1 on Form 10-K/A, and Note 7 to Consolidated
Financial Statements contained in the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995.
As of May 23, 1995, no amounts were outstanding under the Warehouse Facility.
See "Prospectus Supplement Summary -- Recent Developments."
S-11
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "UCFC." The following table sets forth for the periods indicated the
high and low sale prices of the Company's Common Stock as reported on the Nasdaq
National Market and the per share cash dividends declared. All amounts have been
adjusted for stock dividends.
<TABLE>
<CAPTION>
SALES PRICES
------------------- CASH
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1995
First Quarter....................................... $36.500 $22.750 $ .1000
Second Quarter (through June 12, 1995).............. 46.750 34.750 .1000
1994
First Quarter....................................... $43.641 $34.321 $ .0909
Second Quarter...................................... 38.185 28.639 .0909
Third Quarter....................................... 40.231 28.866 .0909
Fourth Quarter(1)................................... 31.821 22.000 .0909
1993
First Quarter....................................... $ 8.524 $ 7.501 $ .0682
Second Quarter...................................... 8.355 7.501 .0682
Third Quarter(2).................................... 29.889 7.901 .0864
Fourth Quarter...................................... 37.049 25.116 .0864
</TABLE>
- ---------------
(1) On October 26, 1994, the Company announced a 10% Common Stock dividend
payable on January 10, 1995, to stockholders of record on December 22,
1994.
(2) On September 20, 1993, the Company announced a 100% Common Stock dividend
payable on October 18, 1993, to stockholders of record on October 1, 1993.
On June 12, 1995, the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $44. As of May 23, 1995, there were approximately
3,100 holders of record of the Common Stock.
The Company has declared and paid regular quarterly cash dividends on its
Common Stock since 1974. While the Company intends to continue to pay regular
quarterly cash dividends on its Common Stock, its ability to do so will be
subject to its earnings, financial condition, capital and regulatory
requirements, credit facility restrictions and such other factors as the
Company's Board of Directors may consider relevant. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in the Prospectus.
As a holding company, the ability of the Company to pay dividends is
dependent upon the receipt of dividends or other payments from its subsidiaries.
UC Life's ability to pay dividends is subject to certain regulatory
restrictions. UC Life had the capacity at March 31, 1995 to pay dividends of
$8.2 million. UC Life did not pay dividends to the Company during 1992, 1993 or
1994 in order to retain capital in UC Life.
The ability of UC Lending and other mortgage lending subsidiaries of the
Company to pay dividends may be restricted by certain provisions of the
Warehouse Facility. The Warehouse Facility requires UC Lending not to permit its
Adjusted Net Worth (as defined in the Warehouse Facility), on a consolidated
basis, at any date to be less than an amount (the "Threshold Amount") equal to
the sum of (i) $97.2 million plus (ii) 25% of the net income of UC Lending, on a
consolidated basis, for the period commencing on January 1, 1995 through the
date of the most recently ended fiscal quarter prior to the date of
determination (for purposes of the foregoing computation, for any fiscal quarter
in which UC Lending reports a net loss on a consolidated basis it will be deemed
to have net income of $0 and net loss of $0). The payment of dividends by UC
Lending to the Company would reduce UC Lending's Adjusted Net Worth. As of March
31, 1995, if the Warehouse
S-12
<PAGE> 13
Facility were in effect, UC Lending's Adjusted Net Worth would have exceeded the
Threshold Amount by $34.4 million.
The Warehouse Facility also requires UC Lending not to permit the ratio of
(i) the sum of (A) its Adjusted Average Indebtedness (as defined in the
Warehouse Facility), on a consolidated basis, plus (B) all Unfunded Liabilities
(as defined in the Warehouse Facility) of UC Lending, on a consolidated basis,
plus (C) 50% of the amount outstanding of all Reserve Standby Letters of Credit
(as defined in the Warehouse Facility) issued on behalf of UC Lending and other
mortgage lending subsidiaries of the Company to (ii) its Adjusted Net Worth, on
a consolidated basis, at the end of any fiscal quarter to be more than 10.0:1.0.
As of March 31, 1995, the foregoing ratio was 1.8:1.0. Consequently, under the
provisions of the Warehouse Facility, approximately $34.4 million of retained
earnings at March 31, 1995 would have been available for the payment of
dividends by UC Lending had the Warehouse Facility been in effect at such date
and an equivalent amount would have been available assuming that the Warehouse
Facility had been fully drawn throughout the quarter ended March 31, 1995.
In addition, the Company's ability to pay dividends may be restricted due
to certain covenants in its debt instruments. The Company's 9.35% Senior Notes
due November 1, 1999 require the Company to maintain its consolidated
stockholders' equity, on a fiscal quarter basis, at not less than $100,000,000,
subject to certain adjustments. Moreover, the Company's existing revolving
credit facility (the "Bank Facility") requires the Company to maintain at all
times its consolidated stockholders' equity (as determined in accordance with
the Bank Facility) at not less than the sum of (i) $63,000,000 plus (ii) 50% of
the Consolidated Net Income (as defined in the Bank Facility) of the Company and
its subsidiaries after June 30, 1988 to and including the fiscal quarter most
recently ended (but without deducting any amount for any fiscal quarter in which
Consolidated Net Income of the Company and its subsidiaries, so determined, is
negative) (the "Minimum Consolidated Stockholders' Equity"). The payment of
dividends by the Company would reduce the Company's consolidated stockholders'
equity. As of March 31, 1995, the Company's consolidated stockholders' equity
(as determined in accordance with the Bank Facility) exceeded the Minimum
Consolidated Stockholders' Equity by $97.2 million.
In addition, under the Bank Facility, the Company is also prohibited from
declaring or paying any dividends (other than dividends payable solely in stock
of the Company) on, or making any distributions of cash or property or in
obligations of the Company or any of its subsidiaries to holders of any shares
of, stock or from directly or indirectly redeeming, purchasing, retiring or
otherwise acquiring for any consideration any shares of any class of stock or
making or permitting any subsidiary to make any payment on account of or
purchasing or otherwise acquiring any shares of any class of stock of the
Company, if the sum of said dividends and other purchases and redemptions during
the period from December 31, 1987 through the end of the fiscal quarter
immediately preceding the date of said dividends and other purchases and
redemptions would exceed $10,000,000 plus 50% of the Consolidated Net Income of
the Company and its subsidiaries during such period. The required lenders under
the Bank Facility have confirmed that a conversion or redemption of the PRIDES
solely into shares of Common Stock will not constitute a redemption, purchase,
retirement or acquisition by the Company of any class of stock for purposes of
the above-described covenant. Under the provisions of the Bank Facility,
approximately $50.4 million of retained earnings at March 31, 1995, was
available for the payment of dividends by the Company.
Further, there can be no assurance that neither the Company nor its
subsidiaries will enter into financing arrangements that may restrict the
ability of the Company and its subsidiaries to pay dividends in the future.
S-13
<PAGE> 14
DESCRIPTION OF PRIDES
The following description of the terms of shares of PRIDES offered hereby
supplements and, to the extent inconsistent therewith, replaces the description
of the general terms and provisions of the Preferred Stock set forth in the
accompanying Prospectus. The summary contained herein of the terms of shares of
PRIDES does not purport to be complete and is subject to and qualified in its
entirety by reference to all of the provisions of the Company's Articles of
Incorporation and form of Articles of Amendment relating to shares of PRIDES
(the "Articles of Amendment"), a copy of each of which either has been or will
be filed with the Securities and Exchange Commission (the "Commission") as an
exhibit to or incorporated by reference into the Registration Statement of which
this Prospectus Supplement is a part. The stated annual dividend, certain of the
Call Prices (as defined herein) and the Optional Conversion Rate (as defined
herein) applicable to the shares of PRIDES have been rounded.
The Company's Board of Directors has adopted resolutions authorizing the
issuance of up to 1,955,000 shares of 6 3/4% PRIDES, Convertible Preferred
Stock, par value $2.00 per share.
DIVIDENDS
Holders of shares of PRIDES will be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available therefor, cash
dividends from June 16, 1995, the date of initial issuance of the shares of
PRIDES at the rate of 6 3/4% per annum of the stated liquidation preference per
share (equivalent to $2.97 per annum or $.7425 per quarter for each share of
PRIDES), payable quarterly in arrears on the 1st of January, April, July and
October or, if any such date is not a business day, on the next succeeding
business day; provided, however, that, with respect to any dividend period
during which a redemption occurs, the Company may, at its option, declare
accrued dividends to, and pay such dividends on, the date fixed for redemption,
in which case such dividends would be payable in cash to the holders of shares
of PRIDES as of the record date for such dividend payment and would not be
included in the calculation of the related Call Price as set forth below. The
first dividend period will be from June 16, 1995, the date of initial issuance
of the shares of PRIDES, to but excluding July 1, 1995, and the first dividend
will be payable on July 1, 1995. Dividends will cease to accrue in respect of
the shares of PRIDES on the Mandatory Conversion Date or on the date of their
earlier conversion or redemption.
Dividends will be payable to holders of record as they appear on the stock
register of the Company on such record date, not less than 10 days nor more than
60 days preceding the payment date thereof, as shall be fixed by the Board of
Directors. Dividends payable on shares of PRIDES for any period less than a full
quarterly dividend period will be computed on the basis of a 360-day year of
twelve 30-day months and the actual number of days elapsed in any period less
than one month.
Dividends on shares of PRIDES will accrue whether or not there are funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Accrued but unpaid dividends on shares of PRIDES shall
cumulate as of the dividend payment date on which they first become payable, but
no interest shall accrue on accumulated but unpaid dividends on shares of
PRIDES.
The shares of PRIDES will rank on a parity, both as to payment of dividends
and distribution of assets upon liquidation, with any future preferred stock
issued by the Company that by its terms ranks pari passu with the shares of
PRIDES.
As long as any shares of PRIDES are outstanding, no dividends for any
dividend period (other than dividends payable in shares of, or warrants, rights
or options exercisable for or convertible into shares of, Common Stock or any
other capital stock of the Company ranking junior to the shares of PRIDES as to
the payment of dividends and the distribution of assets upon liquidation
("Junior Stock") and cash in lieu of fractional shares of such Junior Stock in
connection with any such dividend) will be paid in cash or otherwise, nor will
any other distribution be made (other than a distribution payable in Junior
Stock and cash in lieu of fractional shares of such Junior Stock in connection
with any such distribution), on any Junior Stock unless (i) full dividends on
Preferred Stock (including the shares of PRIDES) that does not constitute Junior
Stock
S-14
<PAGE> 15
("Parity Preferred Stock") have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the date of such
Junior Stock dividend or distribution payment to the extent such dividends are
cumulative; (ii) dividends in full, in the case of a dividend payment with
respect to Junior Stock, for any Parity Preferred Stock dividend period
commencing on or prior to the date of such Junior Stock dividend payment or, in
the case of any other distribution with respect to Junior Stock, for the current
quarterly dividend period, have been paid, or declared and set aside for
payment, on all Parity Preferred Stock to the extent such dividends are
cumulative; (iii) the Company has paid or set aside all amounts, if any, then or
theretofore required to be paid or set aside for all purchase, retirement, and
sinking funds, if any, for any Parity Preferred Stock; and (iv) the Company is
not in default on any of its obligations to redeem any Parity Preferred Stock.
In addition, as long as any shares of PRIDES are outstanding, no shares of
any Junior Stock may be purchased, redeemed, or otherwise acquired by the
Company or any of its subsidiaries (except in connection with a reclassification
or exchange of any Junior Stock through the issuance of other Junior Stock (and
cash in lieu of fractional shares of such Junior Stock in connection therewith)
or the purchase, redemption, or other acquisition of any Junior Stock with any
Junior Stock (and cash in lieu of fractional shares of such Junior Stock in
connection therewith)) nor may any funds be set aside or made available for any
sinking fund for the purchase or redemption of any Junior Stock unless: (i) full
dividends on Parity Preferred Stock have been paid, or declared and set aside
for payment, for all dividend periods terminating on or prior to the date of
such purchase, redemption or acquisition to the extent such dividends are
cumulative; (ii) the Company has paid or set aside all amounts, if any, then or
theretofore required to be paid or set aside for all purchase, retirement, and
sinking funds, if any, for any Parity Preferred Stock; and (iii) the Company is
not in default on any of its obligations to redeem any Parity Preferred Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property, or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or otherwise
acquired by the Company or any of its subsidiaries from time to time. In the
event of the declaration and payment of any such dividends or other
distributions, the holders of such Junior Stock will be entitled, to the
exclusion of holders of any Parity Preferred Stock, to share therein according
to their respective interests.
As long as any shares of PRIDES are outstanding, dividends for any dividend
period or other distributions may not be paid on any Parity Preferred Stock
(other than dividends or other distributions payable in Junior Stock and cash in
lieu of fractional shares of such Junior Stock in connection therewith), unless
either: (a)(i) full dividends on Parity Preferred Stock have been paid, or
declared and set aside for payment, for all dividend periods terminating on or
prior to the date of such Parity Preferred Stock dividend or distribution
payment to the extent such dividends are cumulative; (ii) dividends in full, in
the case of a dividend payment, for any Parity Preferred Stock dividend period
commencing on or prior to the date of such Parity Preferred Stock dividend
payment or, in the case of any other distribution, for the current quarterly
dividend period, have been paid, or declared and set aside for payment, on all
Parity Preferred Stock to the extent such dividends are cumulative; (iii) the
Company has paid or set aside all amounts, if any, then or theretofore required
to be paid or set aside for all purchase, retirement, and sinking funds, if any,
for any Parity Preferred Stock; and (iv) the Company is not in default on any of
its obligations to redeem any Parity Preferred Stock; or (b) any such dividends
are declared and paid pro rata so that the amounts of any dividends declared and
paid per share of PRIDES and each other share of such Parity Preferred Stock
will in all cases bear to each other the same ratio that accrued and unpaid
dividends (including any accumulation with respect to unpaid dividends for prior
dividend periods, if such dividends are cumulative) per share of PRIDES and such
other shares of Parity Preferred Stock bear to each other.
In addition, as long as any shares of PRIDES are outstanding, the Company
may not purchase, redeem or otherwise acquire any Parity Preferred Stock (except
with any Junior Stock and cash in lieu of fractional shares of such Junior Stock
in connection therewith) unless: (i) full dividends on Parity Preferred Stock
have been paid, or declared and set aside for payment, for all dividend periods
terminating on or prior to the date of such Parity Preferred Stock purchase,
redemption or other acquisition payment to the extent such dividends are
cumulative; (ii) the Company has paid or set aside all amounts, if any, then or
theretofore required to be
S-15
<PAGE> 16
paid or set aside for all purchase, retirement, and sinking funds, if any, for
any Parity Preferred Stock; and (iii) the Company is not in default on any of
its obligations to redeem any Parity Preferred Stock.
MANDATORY CONVERSION OF PRIDES
Unless previously either redeemed or converted at the option of the holder
into Common Stock, as hereinafter described, on the Mandatory Conversion Date,
each outstanding share of PRIDES will mandatorily convert into (i) shares of
Common Stock at the Common Equivalent Rate (as defined herein) in effect on such
date and (ii) the right to receive cash in an amount equal to all accrued and
unpaid dividends on such share of PRIDES (other than previously declared
dividends payable to a holder of record as of a prior date) to the Mandatory
Conversion Date, whether or not declared, out of funds legally available for the
payment of dividends, subject to the right of the Company to redeem the shares
of PRIDES on or after July 1, 1998, and prior to the Mandatory Conversion Date,
as described below, and subject to the conversion of the shares of PRIDES at the
option of the holder at any time prior to the Mandatory Conversion Date, as
described below. The "Common Equivalent Rate" is initially one share of Common
Stock for each share of PRIDES and is subject to adjustment as described below.
Dividends will cease to accrue on the Mandatory Conversion Date in respect of
the shares of PRIDES then outstanding.
Because the price of the Common Stock is subject to market fluctuations,
the value of the Common Stock that may be received by holders of shares of
PRIDES upon their mandatory conversion may be more or less than the amount paid
for the shares of PRIDES offered hereby.
OPTIONAL REDEMPTION
Shares of PRIDES are not redeemable by the Company prior to July 1, 1998.
At any time and from time to time on or after that date until immediately prior
to the Mandatory Conversion Date, the Company will have the right to redeem, in
whole or in part, the outstanding shares of PRIDES. Upon any such redemption,
the Company will deliver to the holders thereof in exchange for each share of
PRIDES subject to redemption the greater of: (i) the number of shares of Common
Stock equal to the applicable Call Price in effect on the redemption date
divided by the Current Market Price of the Common Stock, determined as of the
second trading day immediately preceding the Notice Date (as defined herein), or
(ii) .826 of a share of Common Stock (subject to adjustment in the same manner
as the Optional Conversion Rate is adjusted). Dividends will cease to accrue on
the shares of PRIDES on the date fixed for their redemption.
The "Call Price" of each share of PRIDES is the sum of (i) $45.188 on and
after July 1, 1998, to and including September 30, 1998, $45.040 on and after
October 1, 1998, to and including December 31, 1998, $44.891 on and after
January 1, 1999, to and including March 31, 1999, $44.743 on and after April 1,
1999, to and including June 30, 1999, $44.594 on and after July 1, 1999, to and
including September 30, 1999, $44.446 on and after October 1, 1999, to and
including December 31, 1999, $44.297 on and after January 1, 2000, to and
including March 31, 2000, $44.149 on and after April 1, 2000, to and including
May 31, 2000, and $44.00 (being the price to the public of a share of PRIDES
appearing on the cover page of this Prospectus Supplement), on and after June 1,
2000, to and including July 1, 2000, and (ii) all accrued and unpaid dividends
thereon to but not including the date fixed for redemption (other than
previously declared dividends payable to a holder of record as of a prior date).
The "Current Market Price" per share of the Common Stock on any date of
determination means the lesser of (x) the average of the Closing Prices (as
defined below) of the Common Stock for the 15 consecutive trading days ending on
and including such date of determination and (y) the Closing Price of the Common
Stock for such date of determination; provided, however, that, with respect to
any redemption of shares of PRIDES, if any event resulting in an adjustment of
the Common Equivalent Rate occurs during the period beginning on the first day
of such 15-day period and ending on the applicable redemption date, the Current
Market Price as determined pursuant to the foregoing will be appropriately
adjusted to reflect the occurrence of such event. The "Notice Date" with respect
to any notice given by the Company in connection with a redemption of the shares
of PRIDES means the earlier of the date of the public announcement of such
redemption or the commencement of mailing of such notice to the holders of
shares of PRIDES. The term
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"Closing Price" on any day means the last reported sales price on such day or,
in case no such sale takes place on such day, the average of the reported
closing high and low quotations, in each case on the Nasdaq National Market, or,
if the Common Stock is not listed on the Nasdaq National Market, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if not listed or admitted to trading on any national
securities exchange, the average of the high bid and low-asked quotations of the
Common Stock in the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similarly generally accepted
reporting service, or, if no such quotations are available, the fair market
value of the Common Stock as determined by any New York Stock Exchange member
firm selected from time to time by the Board of Directors of the Company for
such purpose.
If fewer than all the outstanding shares of PRIDES are to be called for
redemption, shares of PRIDES to be called will be selected by the Company from
outstanding shares of PRIDES not previously called by lot or pro rata (as nearly
as may be) or by any other method determined by the Board of Directors in its
sole discretion to be equitable.
The Company will provide notice of any call for redemption of shares of
PRIDES to holders of record of the shares of PRIDES to be called for redemption
not less than 15 days nor more than 60 days prior to the date fixed for
redemption. Accordingly, the earliest Notice Date for any call for redemption of
shares of PRIDES will be May 2, 1998. Any such notice will be provided by mail,
sent to each holder of record of the shares of PRIDES to be called at such
holder's address as it appears on the stock register of the Company, first class
postage prepaid; provided, however, that failure to give such notice or any
defect therein shall not affect the validity of the proceeding for redemption of
any shares of PRIDES to be redeemed except as to the holder to whom the Company
has failed to give said notice or whose notice was defective. On and after the
redemption date, all rights of the holders of the shares of PRIDES called for
redemption shall terminate except the right to receive the redemption price
(unless the Company defaults on the payment of the redemption price). A public
announcement of any call for redemption will be made by the Company prior to, or
at the time of, the mailing of such notice for redemption.
Each holder of shares of PRIDES called for redemption must surrender the
certificates evidencing such shares of PRIDES to the Company at the place
designated in the notice of redemption and will thereupon be entitled to receive
certificates for shares of Common Stock and cash for any fractional share
amount.
CONVERSION AT THE OPTION OF THE HOLDER
The shares of PRIDES are convertible, in whole or in part, at the option of
the holders thereof, at any time prior to the Mandatory Conversion Date, unless
previously redeemed, into shares of Common Stock at a rate of .826 of a share of
Common Stock for each share of PRIDES (the "Optional Conversion Rate"),
equivalent to a conversion price of $53.24 per share of Common Stock (the
"Conversion Price"), subject to adjustment as described below. The right to
convert shares of PRIDES called for redemption will terminate immediately prior
to the close of business on any redemption date with respect to such shares.
Conversion of shares of PRIDES at the option of the holder may be effected
by delivering certificates evidencing such shares of PRIDES, together with
written notice of conversion and a proper assignment of such certificates to the
Company or in blank (and, if applicable, cash payment of an amount equal to the
dividend attributable to the current quarterly dividend accrued on such shares),
to the office of any transfer agent for shares of PRIDES or to any other office
or agency maintained by the Company for that purpose and otherwise in accordance
with conversion procedures established by the Company. Each optional conversion
shall be deemed to have been effected immediately prior to the close of business
on the date on which the foregoing requirements shall have been satisfied. The
conversion shall be at the Optional Conversion Rate in effect at such time and
on such date.
Holders of shares of PRIDES at the close of business on a record date for
any payment of declared dividends will be entitled to receive the dividend
payable on such shares of PRIDES on the corresponding dividend payment date
notwithstanding the optional conversion of such shares of PRIDES following such
record date and prior to the corresponding dividend payment date. However,
shares of PRIDES surrendered for conversion after the close of business on a
record date for any payment of declared dividends and before
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the opening of business on the next succeeding dividend payment date must be
accompanied by payment in cash of an amount equal to the dividend attributable
to the current quarterly dividend period payable on such date (unless such
shares of PRIDES are subject to redemption on a redemption date between such
record date and such dividend payment date). A holder of shares of PRIDES called
for redemption on July 1, 1998 or any other dividend payment date thereafter
will receive the dividend on such shares of PRIDES payable on that date and will
be able to convert such shares of PRIDES after the record date for such dividend
without paying an amount equal to such dividend to the Company upon conversion.
Except as provided above, upon any optional conversion of shares of PRIDES, the
Company will make no payment of or allowance for unpaid dividends, whether or
not in arrears, on such shares of PRIDES, or for previously declared dividends
or distributions on the shares of Common Stock issued upon such conversion.
ENHANCED DIVIDEND YIELD; LESS EQUITY APPRECIATION THAN COMMON STOCK
Dividends will accrue on the shares of PRIDES at a higher rate than the
rate at which dividends are currently paid on the Common Stock. The opportunity
for equity appreciation afforded by an investment in shares of PRIDES is less
than that afforded by an investment in the Common Stock because the Conversion
Price is higher than the per share price to the public of the shares of PRIDES
and the Company may, at its option, redeem the shares of PRIDES at any time on
or after July 1, 1998, and prior to the Mandatory Conversion Date, and may be
expected to do so if, among other circumstances, the Current Market Price of the
Common Stock after July 1, 1998 exceeds the Call Price for a share of PRIDES. In
such event, a holder of a share of PRIDES will receive less than one share of
Common Stock per share of PRIDES, but not less than .826 of a share of Common
Stock, subject to adjustment as described herein. A holder may also surrender
for conversion any shares of PRIDES called for redemption up to the close of
business on the redemption date, and a holder that so elects will receive .826
of a share of Common Stock, subject to adjustment as described herein. The per
share value of Common Stock received by holders of shares of PRIDES may be more
or less than the per share amount paid for the shares of PRIDES offered hereby,
due to market fluctuations in the price of the Common Stock.
As a result of these provisions, holders of shares of PRIDES would be
expected to realize no equity appreciation if the Current Market Price of the
Common Stock is below the Conversion Price, and less than all of such
appreciation if the Current Market Price of the Common Stock is above the
Conversion Price. Holders of shares of PRIDES will realize the entire decline in
equity value if the market price of the Common Stock is less than the price paid
for a share of PRIDES.
CONVERSION ADJUSTMENTS
The Common Equivalent Rate and the Optional Conversion Rate are each
subject to adjustment as appropriate in certain circumstances, including if the
Company shall (a) pay a stock dividend or make a distribution with respect to
its Common Stock in shares of Common Stock, (b) subdivide or split its
outstanding Common Stock, (c) combine its outstanding Common Stock into a
smaller number of shares, (d) issue by reclassification of its shares of Common
Stock any shares of Common Stock, (e) issue certain rights (excluding the Rights
(as defined under "Description of Capital Stock -- Rights Plan" in the
Prospectus)) or warrants to all holders of its Common Stock unless such rights
or warrants are issued to each holder of shares of PRIDES on a pro rata basis
with the shares of Common Stock based on the Common Equivalent Rate in effect on
the date immediately preceding such issuance, or (f) pay a dividend or
distribute to all holders of its Common Stock evidences of its indebtedness,
cash or other assets (including capital stock of the Company but excluding any
cash dividends or distributions, other than Extraordinary Cash Distributions (as
defined below), and dividends referred to in clause (a) above) unless such
dividend or distribution is made to each holder of shares of PRIDES on a pro
rata basis with the shares of Common Stock based on the Common Equivalent Rate
in effect on the date immediately preceding such dividend or distribution. In
addition, the Company will be entitled (but will not be required) to make upward
adjustments in the Common Equivalent Rate, the Optional Conversion Rate and the
Call Price as the Company, in its sole discretion, shall determine to be
advisable, in order that any stock dividend, subdivision or split of shares,
distribution of rights to purchase stock or securities, or distribution of
securities convertible into or exchangeable for stock (or any
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transaction which could be treated as any of the foregoing transactions pursuant
to Section 305 of the Internal Revenue Code of 1986, as amended (the "Code"))
hereafter made by the Company to its stockholders will not be taxable.
"Extraordinary Cash Distributions" means, with respect to any cash dividend or
distribution paid on any date, the amount, if any, by which all cash dividends
and cash distributions on the Common Stock paid during the consecutive 12-month
period ending on and including such date (other than cash dividends and cash
distributions for which an adjustment to the Common Equivalent Rate or the
Optional Conversion Rate was previously made) exceeds, on a per share of Common
Stock basis, 10% of the average of the daily Closing Prices of the Common Stock
over such consecutive 12-month period. All adjustments to the Common Equivalent
Rate and the Optional Conversion Rate will be calculated to the nearest 1/100th
of a share of Common Stock. No adjustment in the Common Equivalent Rate or the
Optional Conversion Rate will be required unless such adjustment would require
an increase or decrease of at least one percent in the Common Equivalent Rate;
provided, however, that any adjustments which, by reason of the foregoing, are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All adjustments will be made successively.
Whenever the Common Equivalent Rate and the Optional Conversion Rate are
adjusted as provided in the preceding paragraph, the Company will file with the
transfer agent for the shares of PRIDES a certificate with respect to such
adjustment, make a prompt public announcement thereof and mail a notice to
holders of the shares of PRIDES providing specified information with respect to
such adjustment. At least 10 business days prior to taking any action that could
result in certain adjustments in the Common Equivalent Rate and the Optional
Conversion Rate, the Company will notify each holder of shares of PRIDES
concerning such proposed action.
ADJUSTMENT FOR CERTAIN CONSOLIDATIONS OR MERGERS
In the case of (i) any consolidation or merger to which the Company is a
party (other than a merger or consolidation in which the Company is the
surviving or continuing corporation and in which the shares of Common Stock
outstanding immediately prior to the merger or consolidation remain unchanged),
(ii) any sale or transfer to another corporation of the property of the Company
as an entirety or substantially as an entirety, or (iii) any statutory exchange
of securities with another corporation (other than in connection with a merger
or acquisition), each share of PRIDES shall, after consummation of such
transaction, be subject to (A) conversion at the option of the holder into the
kind and amount of securities, cash or other property receivable upon
consummation of such transaction by a holder of the number of shares of Common
Stock into which such share of PRIDES might have been converted immediately
prior to consummation of such transaction, (B) conversion on the Mandatory
Conversion Date into the kind and amount of securities, cash, or other property
receivable upon consummation of such transaction by a holder of the number of
shares of Common Stock into which such share of PRIDES would have been converted
if the conversion on the Mandatory Conversion Date had occurred immediately
prior to the date of consummation of such transaction, plus the right to receive
cash in an amount equal to all accrued and unpaid dividends on such share of
PRIDES (other than previously declared dividends payable to a holder of record
as of a prior date), and (C) redemption on any redemption date in exchange for
the kind and amount of securities, cash, or other property receivable upon
consummation of such transaction by a holder of the number of shares of Common
Stock that would have been issuable, using the Call Price in effect on such
redemption date, upon a redemption of such shares of PRIDES immediately prior to
consummation of such transaction, assuming that, if the Notice Date for such
redemption is not prior to such transaction, the Notice Date had been the date
of such transaction; and assuming in each case that such holder of shares of
Common Stock failed to exercise rights of election, if any, as to the kind or
amount of securities, cash, or other property receivable upon consummation of
such transaction (provided that, if the kind or amount of securities, cash or
other property receivable upon consummation of such transaction is not the same
for each non-electing share, then the kind and amount of securities, cash, or
other property receivable upon consummation of such transaction for each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). The kind and amount of
securities into or for which the shares of PRIDES shall be convertible or
redeemable after consummation of such transaction shall be subject to adjustment
as described above under the caption "Conversion Adjustments" following the date
of consummation of such transaction.
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The Company may not become a party to any such transaction unless the terms
thereof are consistent with the foregoing or the last sentence of the third
paragraph under "-- Voting Rights" below.
For purposes of the preceding paragraph, any sale or transfer to another
corporation of property of the Company which did not account for at least 50% of
the consolidated net income of the Company for its most recent fiscal year
ending prior to the consummation of such transaction will not in any event be
deemed to be a sale or transfer of the property of the Company as an entirety or
substantially as an entirety.
FRACTIONAL SHARES
No fractional shares of Common Stock will be issued upon redemption or
conversion of shares of PRIDES. In lieu of any fractional share otherwise
issuable in respect of the aggregate number of shares of PRIDES of any holder
that are redeemed or converted on any redemption date or upon mandatory
conversion or any optional conversion, such holder shall be entitled to receive
an amount, in cash equal to the same fraction of the (i) Current Market Price of
the Common Stock, determined as of the second trading day immediately preceding
the Notice Date, in the case of redemption, or (ii) Closing Price of the Common
Stock determined (A) as of the fifth trading day immediately preceding the
Mandatory Conversion Date, in the case of mandatory conversion, or (B) as of the
second trading day immediately preceding the effective date of conversion, in
the case of an optional conversion by a holder.
RIGHTS PLAN
Reference is made to the section "Description of Capital Stock -- Rights
Plan" in the Prospectus for a description of the Company's Rights Plan.
Shares of Common Stock issued upon conversion or redemption of the shares
of PRIDES may be entitled to receive Rights in accordance with the terms and
conditions of the Rights Plan. Holders of PRIDES who do not convert their shares
of PRIDES into Common Stock prior to a Distribution Date (as defined in the
Rights Plan) will not receive any Rights and therefore will not be entitled to
participate in the Rights Plan.
The method of calculation of the Current Market Price of the Common Stock
does not take into account any separate value of the Rights, except to the
extent any such value may be reflected in the Current Market Price.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, and subject to the rights of holders of any other
series of Preferred Stock, the holders of outstanding shares of PRIDES are
entitled to receive an amount equal to the per share price to the public of the
shares of PRIDES shown on the cover page of this Prospectus Supplement, plus
accrued and unpaid dividends thereon, out of the assets of the Company available
for distribution to stockholders, before any distribution of assets is made to
holders of Junior Stock upon liquidation, dissolution, or winding up.
If upon any voluntary or involuntary liquidation, dissolution, or winding
up of the Company, the assets of the Company are insufficient to permit the
payment of the full preferential amounts payable with respect to shares of
PRIDES and all other series of Parity Preferred Stock, the holders of shares of
PRIDES and of all other series of Parity Preferred Stock will share ratably in
any distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of PRIDES will not be entitled to any further participation in any
distribution of assets by the Company. A consolidation or merger of the Company
with one or more corporations (whether or not the Company is the corporation
surviving such consolidation or merger), or a sale, lease or transfer or
exchange of all or substantially all of the assets of the Company shall not be
deemed to be a voluntary or involuntary liquidation, dissolution, or winding up
of the Company.
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VOTING RIGHTS
The holders of shares of PRIDES shall have the right with the holders of
Common Stock to vote in the election of Directors and upon each other matter
coming before any meeting of the holders of Common Stock on the basis of 4/5 of
a vote for each share of PRIDES held. The holders of shares of PRIDES and the
holders of Common Stock will vote together as one class on such matters except
as otherwise provided by law or the Articles of Incorporation of the Company.
In the event that dividends on the shares of PRIDES or any other series of
Preferred Stock are in arrears and unpaid for six quarterly dividend periods, or
if any other series of Preferred Stock are entitled for any other reason to
exercise voting rights, separate from the Common Stock, to elect any Directors
of the Company ("Preferred Stock Directors"), the holders of the shares of
PRIDES (voting separately as a class with holders of all other series of
Preferred Stock upon which like voting rights have been conferred and are
exercisable), with each share of PRIDES entitled to one vote on this and other
matters on which Preferred Stock votes as a group, will be entitled to vote for
the election of two Preferred Stock Directors, such Directors to be in addition
to the number of Directors constituting the Board of Directors immediately prior
to the accrual of such right. Such right, when vested, shall continue until all
dividends in arrears on the shares of PRIDES and such other series of Preferred
Stock shall have been paid in full and the right of any other series of
Preferred Stock to exercise voting rights, separate from the Common Stock, to
elect Preferred Stock Directors terminates or has terminated, and, when so paid
and any such termination occurs or has occurred, such right of the holders of
the shares of PRIDES will cease. The term of office of any Preferred Stock
Director elected by the holders of the shares of PRIDES and such other series
will terminate on the earlier of (i) the next annual meeting of stockholders at
which a successor shall have been elected and qualified or (ii) the termination
of the right of holders of the shares of PRIDES and such other series to vote
for such Directors. Vacancies on the Board of Directors of the Company
(including with respect to a Preferred Stock Director) resulting from death,
resignation or other cause shall be filled exclusively by no less than 2/3 of
the remaining Directors and the Director so elected shall hold office until a
successor is elected and qualified.
The Company will not, without the affirmative vote or consent of the
holders of at least 66 2/3% of the shares of PRIDES actually voting (voting
separately as a class): (i) amend, alter, or repeal any of the provisions of the
Articles of Incorporation of the Company so as to affect adversely the powers,
preferences, or rights of the holders of the shares of PRIDES then outstanding
or reduce the minimum time required for any notice to which only the holders of
the shares of PRIDES then outstanding may be entitled (neither the proposed
amendments to the Articles of Incorporation which have been submitted for a vote
of the Company's Shareholders at the Company's Annual Meeting of Shareholders to
be held on June 14, 1995 (as described under "Description of Capital
Stock -- Special Charter, By-Law and Louisiana Law Provisions" in the
Prospectus) nor an amendment of the Articles of Incorporation to authorize or
create, or to increase the authorized amount, of Junior Stock or any stock of
any class ranking on a parity with the shares of PRIDES shall be deemed to
affect adversely the powers, preferences, or rights of the holders of the shares
of PRIDES); (ii) authorize or create, or increase the authorized amount of, any
capital stock, or any security convertible into capital stock, of any class
ranking senior to the shares of PRIDES as to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of the
Company; or (iii) merge or consolidate with or into any other corporation,
unless each holder of the shares of PRIDES immediately preceding such merger or
consolidation shall have the right either to (A) receive or continue to hold in
the resulting corporation the same number of shares, with substantially the same
rights and preferences, as correspond to the shares of PRIDES so held or (B)
convert into shares of Common Stock at the Common Equivalent Rate in effect on
the date immediately preceding the announcement of any such merger or
consolidation.
There is no limitation on the issuance by the Company of Parity Preferred
Stock or of any class ranking junior to the shares of PRIDES.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of the shares of
PRIDES shall be required to authorize an increase in the number of authorized
shares of Preferred Stock or if, at or prior to the time when such amendment,
alteration, or repeal is to take effect or when the authorization, creation or
increase of any such senior stock or such
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security is to be made, or when such consolidation or merger, liquidation,
dissolution or winding up is to take effect, as the case may be, provision is
made for the redemption of all shares of PRIDES at the time outstanding.
LISTING
The shares of PRIDES have been approved for listing on the Nasdaq National
Market under the symbol "UCFCP."
TRANSFER AGENT AND REGISTRAR
Chemical Bank of New York, New York will act as transfer agent and
registrar for, and paying agent for the payment of dividends on, the shares of
PRIDES.
MISCELLANEOUS
Upon issuance, the shares of PRIDES will be fully paid and nonassessable.
Holders of shares of PRIDES have no preemptive rights. The Company shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion or redemption of shares of
PRIDES, such number of shares of Common Stock as shall from time to time be
issuable upon the conversion or redemption of all the shares of PRIDES then
outstanding. Shares of PRIDES redeemed for, or converted into, Common Stock of
the Company or otherwise reacquired by the Company shall resume the status of
authorized and unissued shares of Preferred Stock, undesignated as to series,
and shall be available for subsequent issuance.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Stroock & Stroock & Lavan, special tax counsel to the
Company ("Special Tax Counsel"), the following sets forth the material United
States Federal income tax consequences under existing law of the purchase,
ownership and disposition of shares of PRIDES. A copy of that opinion has been
filed with the Commission as an exhibit to or incorporated by reference into the
Registration Statement of which this Prospectus Supplement is a part, and the
following summary is qualified in its entirety by reference thereto, including
the assumptions set forth therein. The Company does not intend to seek a ruling
from the Internal Revenue Service (the "IRS") with respect to any of these tax
consequences. This summary is intended for general information only and deals
only with holders who are initial holders of shares of PRIDES and who hold
shares of PRIDES as capital assets within the meaning of Section 1221 of the
Code. It does not address aspects of taxation, other than Federal income
taxation, or all tax consequences that may be relevant in the particular
circumstances of each holder (some of which, such as dealers in securities,
banks, insurance companies and tax-exempt organizations, may be subject to
special rules). It also does not address the tax consequences of the receipt, if
any, of any Rights pursuant the Company's Rights Plan. Stock having terms
closely resembling those of shares of PRIDES has not been the subject of any
regulation, ruling or judicial decision currently in effect, and there can be no
assurance that the IRS will adopt the positions set forth below. There can be no
assurance that future changes in applicable law or administrative and judicial
interpretations thereof, any of which could have a retroactive effect, will not
adversely affect the tax consequences discussed herein or that there will not be
differences of opinion as to the interpretation of applicable law. For purposes
of this section, "U.S. Holder" means a citizen or resident of the United States,
a corporation, partnership or other entity created or organized under the laws
of the United States or of any State, or an estate or trust the income of which
is subject to United States Federal income taxation regardless of its source and
"non-U.S. Holder" means a holder other than a U.S. Holder. Certain aspects of
United States Federal income and estate tax relevant to a non-U.S. Holder are
discussed separately below. Persons considering the purchase of shares of PRIDES
should consult their tax advisors with respect to the application of the United
States Federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local, or foreign taxing
jurisdiction.
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DIVIDENDS
Dividends paid on shares of PRIDES out of the Company's current or
accumulated earnings and profits will be taxable as ordinary income. Corporate
U.S. Holders will generally qualify for the 70% intercorporate
dividends-received deduction subject to satisfaction of the minimum holding
period (generally at least 46 days) and other applicable requirements. Under
certain circumstances, a corporate holder may be subject to the alternative
minimum tax with respect to the amount of its dividends-received deduction.
Under certain circumstances, a corporation that receives an "extraordinary
dividend", as defined in Section 1059(c) of the Code, is required to reduce its
stock basis by the non-taxed portion of such dividend. Generally, quarterly
dividends not in arrears paid to an original holder of shares of PRIDES will not
constitute extraordinary dividends under Section 1059(c). Under Section 1059(f),
any dividend with respect to "disqualified preferred stock" is treated as an
"extraordinary dividend." While there is no authority directly on point, and the
issue is not free from doubt, based on the accuracy of certain factual
representations made by the Company, Special Tax Counsel believes that shares of
PRIDES should not be determined to constitute "disqualified preferred stock."
REDEMPTION PREMIUM
Under certain circumstances, Section 305(c) of the Code requires that any
excess of the redemption price of preferred stock over its issue price be
includible in income, prior to receipt, as a constructive dividend. However,
while there is no authority directly on point, and the issue is not free from
doubt, based on the accuracy of certain factual representations made by the
Company, Special Tax Counsel believes that a holder of shares of PRIDES should
not be required to include any redemption premium in income under Section
305(c).
REDEMPTION OR MANDATORY OR OPTIONAL CONVERSION INTO COMMON STOCK
As a general rule, gain or loss will not be recognized by a holder upon the
redemption of shares of PRIDES for shares of Common Stock or the conversion of
shares of PRIDES into shares of Common Stock if no cash is received. Income may
be recognized, however, to the extent Common Stock or cash is received in
payment of accrued and unpaid dividends upon a redemption or conversion. Such
income would likely be characterized as dividend income although some
uncertainty exists as to the appropriate characterization of payments in
satisfaction of undeclared, accrued and unpaid dividends. In addition, a holder
who receives cash in lieu of a fractional share will be treated as having
received such fractional share and as having exchanged it for cash in a
transaction subject to Section 302 of the Code and related provisions. Such
exchange should generally result in capital gain or loss measured by the
difference between the cash received for the fractional share interest and the
holder's basis in the fractional share interest.
Generally, a holder's basis in the Common Stock received upon the
redemption or conversion of shares of PRIDES, other than shares of Common Stock
taxed upon receipt, will equal the adjusted tax basis of the redeemed or
converted shares of PRIDES (exclusive of any basis allocable to a fractional
share interest) plus the amount of gain (if any) recognized, minus the amount of
cash (if any) received, and the holding period of such Common Stock will include
the holding period of the redeemed or converted shares of PRIDES. As a general
rule, a holder's basis in shares of Common Stock taxed upon receipt will equal
the fair market value thereof and the holding period for such Common Stock will
begin on the day following the redemption or conversion.
ADJUSTMENT OF CONVERSION RATE
Certain adjustments to the Common Equivalent Rate and the Optional
Conversion Rate to reflect the Company's distribution of certain rights,
warrants, evidences of indebtedness, securities or other assets to holders of
Common Stock may result in constructive distributions taxable as dividends to
the holders of shares of PRIDES which may constitute (and cause other dividends
to constitute) "extraordinary dividends" to corporate holders as described
above.
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CONVERSION OF PRIDES AFTER DIVIDEND RECORD DATE
If a holder, whose shares of PRIDES have not been called for redemption,
surrenders such shares for conversion into shares of Common Stock after a
dividend record date but before payment of the dividend, such holder will be
required to pay the Company an amount equal to such dividend upon conversion.
The holder would likely recognize the dividend payment which is received as
income, and would increase the basis of the Common Stock received by the amount
paid to the Company in connection with the receipt of such dividend.
BACKUP WITHHOLDING
Certain U.S. Holders may be subject to backup withholding at a rate of 31%
on dividends and certain consideration received upon the redemption or
conversion of shares of PRIDES unless such holders provide proof of an
applicable exemption or a correct taxpayer identification number, and otherwise
comply with applicable requirements of the backup withholding rules.
NON-U.S. HOLDERS
Dividends
In general, dividends (including constructive distributions taxable as
dividends) paid to a non-U.S. Holder will be subject to United States
withholding tax at a 30% rate (or a lower rate prescribed by an applicable tax
treaty) unless the dividends are either (i) effectively connected with a trade
or business carried on by the non-U.S. Holder within the United States, or (ii)
if a tax treaty applies, attributable to a United States permanent establishment
maintained by the non-U.S. Holder. Dividends effectively connected with such
trade or business or attributable to such permanent establishment will generally
be subject to United States Federal income tax at regular rates and, in the case
of a non-U.S. Holder which is a corporation, may be subject to the branch
profits tax. To determine the applicability of a tax treaty providing for a
lower rate of withholding, dividends paid to an address in a foreign country are
presumed under current Treasury regulations to be paid to a resident of that
country. Treasury regulations proposed in 1984 which have not been finally
adopted, however, would require non-U.S. Holders to file certain forms to obtain
the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends.
Gain on Redemption or Conversion into Common Stock
A non-U.S. Holder generally will not be subject to United States Federal
income tax on any gain recognized on a disposition, redemption or conversion (a
"disposition") of a share of PRIDES unless (i) such gain is treated as dividend
income; (ii) the Company is or has been a "U.S. real property holding
corporation" for United States Federal income tax purposes (which the Company
does not believe that it is or is likely to become) and the non-U.S. Holder
disposing of the share owned, directly or constructively, at any time during the
five-year period preceding the disposition, more than five percent of shares of
PRIDES or the shares of PRIDES are not regularly traded (within the meaning of
applicable Treasury Regulations) on an established securities market; (iii) the
gain is effectively connected with a trade or business carried on by the non-
U.S. Holder within the United States or, if a tax treaty applies, attributable
to a United States permanent establishment maintained by the non-U.S. Holder;
(iv) in the case of a non-U.S. Holder who is an individual, who holds the share
as a capital asset and who is present in the United States for 183 days or more
in the taxable year of the disposition, either (a) such non-U.S. Holder has a
"tax home" (as defined for U.S. Federal income tax purposes) in the United
States and the gain from the disposition is not attributable to an office or
other fixed place of business maintained by such non-U.S. Holder outside of the
United States or (b) the gain from the disposition is attributable to an office
or other fixed place of business maintained by such non-U.S. Holder in the
United States; or (v) the non-U.S. Holder is subject to tax pursuant to
provisions of the Code applicable to certain United States expatriates.
S-24
<PAGE> 25
Federal Estate Tax
Shares of PRIDES owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States Federal estate tax purposes)
of the United States at the time of death will be includible in the individual's
gross estate for United States Federal estate tax purposes unless an applicable
estate tax treaty provides otherwise.
Backup Withholding and Information Reporting Requirements
The Company must report annually to the IRS and to each non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to such holder.
These information reporting requirements apply regardless of whether withholding
was reduced or eliminated by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
non-U.S. Holder resides. United States backup withholding tax (which generally
is a withholding tax imposed at the rate of 31% on certain payments to persons
that fail to furnish the information required under the United States
information reporting requirements) will generally not apply to dividends paid
on shares of PRIDES to a non-U.S. Holder at an address outside the United
States.
The payment of the proceeds from the disposition of shares of PRIDES to or
through the United States office of a broker will be subject to information
reporting and backup withholding at a rate of 31% unless the owner certifies,
among other things, its status as a non-U.S. Holder under penalties of perjury
or otherwise establishes an exemption. The payment of the proceeds from the
disposition of shares of PRIDES to or through a non-U.S. office of a broker will
generally, except as noted below, not be subject to backup withholding and
information reporting. In the case of proceeds from a disposition of shares of
PRIDES paid to or through a non-U.S. office of a U.S. broker or paid to or
through a non-U.S. office of a non-U.S. broker that is (i) a "controlled foreign
corporation" for United States Federal income tax purposes or (ii) a person 50%
or more of whose gross income from all sources for a certain three-year period
was effectively connected with a United States trade or business, (a) backup
withholding will not apply unless the broker has actual knowledge that the owner
is not a non-U.S. Holder, and (b) information reporting will not apply if the
broker has documentary evidence in its files that the owner is a non-U.S. Holder
(unless the broker has actual knowledge to the contrary).
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. Holder will be refunded (or credited against the non-U.S. Holder's
United States Federal income tax liability, if any), provided that the required
information is furnished to the IRS.
The backup withholding and information reporting rules are currently under
review by the Treasury Department, and their application to shares of PRIDES is
subject to change.
PROPOSED LEGISLATION
On May 3, 1995, legislation was introduced that would amend portions of
Sections 302 and 1059 of the Code and characterize non-pro rata redemptions
otherwise eligible for the dividends received deduction as a sale of the stock
redeemed. The Congressional statement introducing this legislation indicated
that the bill retained the existing regulatory authority of the Treasury
Department to issue regulations which, among other things, would subject certain
reorganizations, including recapitalizations, and similar transactions to the
provisions of the bill. It is not possible to predict whether and, if so, in
what form any such legislation will be enacted into law and, if enacted, whether
it would affect the tax treatment of the PRIDES, as discussed above.
S-25
<PAGE> 26
UNDERWRITING
Each of the underwriters named below (the "Underwriters"), for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc and Prudential
Securities Incorporated are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement-Basic Provisions, dated September 29, 1994, and the
related Terms Agreement, dated June 12, 1995 (collectively, the "Underwriting
Agreement"), among the Company and the Underwriters to purchase from the Company
the number of shares of PRIDES set forth opposite each Underwriter's name.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF PRIDES
----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................ 603,000
Salomon Brothers Inc................................................. 603,000
Prudential Securities Incorporated................................... 134,000
Bear, Stearns & Co. Inc. ............................................ 60,000
NatWest Securities Limited........................................... 60,000
Oppenheimer & Co., Inc. ............................................. 60,000
William Blair & Company.............................................. 30,000
J.C. Bradford & Co. ................................................. 30,000
Johnson Rice & Company............................................... 30,000
Parallax Group, Inc. ................................................ 30,000
The Robinson-Humphrey Company, Inc. ................................. 30,000
Wheat, First Securities, Inc. ....................................... 30,000
-------------
Total................................................... 1,700,000
=============
</TABLE>
In the Underwriting Agreement, the Underwriters severally have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of PRIDES being sold pursuant to the Underwriting Agreement if any of the
shares being sold pursuant to the Underwriting Agreement are purchased. Under
certain circumstances, the commitments of a non-defaulting Underwriter may be
increased.
The Representatives have advised the Company that they propose initially to
offer the shares of PRIDES to the public at the public offering price set forth
on the cover page of this Prospectus Supplement and to certain dealers at such
price less a concession not in excess of $.70 per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per share
on sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 255,000
additional shares of PRIDES at the price to the public set forth on the cover
page of this Prospectus Supplement, less the underwriting discount. The
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of shares of PRIDES offered hereby. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage of
such shares as the number of shares of PRIDES to be purchased by each
Underwriter shown in the foregoing table bears to the total number of shares
initially offered hereby.
The Company has agreed, for a period of 90 days after the date of this
Prospectus Supplement, to not, without the prior written consent of the
Representatives, directly or indirectly, sell, offer to sell, grant any option
for the sale of, or otherwise dispose of, any shares of its capital stock or
securities convertible into or exchangeable for capital stock of the Company
other than to the Underwriters pursuant to the Underwriting Agreement, subject
to certain exceptions set forth in the Underwriting Agreement, and other than
currently authorized shares of Common Stock or options for shares of Common
Stock issued pursuant to or sold in connection with qualified employee benefit,
dividend reinvestment and stock option and stock purchase plans
S-26
<PAGE> 27
and shares of Common Stock issuable upon conversion of securities, including
shares of PRIDES, or exercise of stock options.
Prior to this offering, there has been no public market for the shares of
PRIDES. The initial public offering price for the shares of PRIDES was
determined by negotiations between the Company and the Representatives. Among
the factors considered in determining the price to the public were the market
price of the Common Stock, an assessment of the Company's recent results of
operations, the future prospects of the Company and the industry in general,
market prices of securities of other companies engaged in activities similar to
the Company and prevailing conditions in the securities markets. There can be no
assurance that an active trading market will develop for the shares of PRIDES or
that the shares of PRIDES will trade in the public market subsequent to the
offering at or above the initial public offering price.
The Underwriters receive customary fees for ordinary brokerage transactions
with the Company and its affiliates. The Underwriters and their affiliates have
performed investment banking services in the ordinary course of their respective
businesses for the Company and its affiliates in the past, for which they have
received customary compensation, and may continue to do so in the future.
The Company and the several Underwriters have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments that the other may be required to make in
respect thereof.
S-27
<PAGE> 28
PROSPECTUS
UNITED COMPANIES FINANCIAL CORPORATION
DEBT SECURITIES AND PREFERRED STOCK
United Companies Financial Corporation ("UCFC" or the "Company") may offer
from time to time, together or separately, (i) its unsecured debt securities,
which may be either senior (the "Senior Debt Securities") or subordinated (the
"Subordinated Debt Securities" and, together with the Senior Debt Securities,
the "Debt Securities"), and (ii) shares of its preferred stock, par value $2.00
per share (the "Preferred Stock"), (the Debt Securities and the Preferred Stock
are collectively referred to herein as the "Securities"), in amounts, at prices
and on terms to be determined at the time of the offering thereof. The
Subordinated Debt Securities and Preferred Stock may be convertible or
exchangeable into other series of Debt Securities or shares of the common stock,
par value $2.00 per share, of the Company (the "Common Stock"). The Securities
offered pursuant to this Prospectus may be issued in one or more series or
issuances the aggregate offering price of which will not exceed $200,000,000 (or
the equivalent thereof if the Debt Securities are denominated in one or more
foreign currencies or foreign currency units).
The specific terms of the Securities in respect of which this Prospectus is
being delivered (the "Offered Securities") will be set forth in an accompanying
supplement to this Prospectus (each, a "Prospectus Supplement"), including,
where applicable (i) in the case of Debt Securities, the specific designation,
aggregate principal amount, ranking as Senior Debt Securities or Subordinated
Debt Securities, authorized denominations, maturity, any premium, rate or method
of calculation of interest, if any, and dates for payment thereof, any terms for
optional or mandatory redemption, any sinking fund provisions, any terms for
conversion or exchange into other series of Debt Securities or Common Stock and
any other special terms, and (ii) in the case of the Preferred Stock, the
specific designation, the aggregate number of shares offered, the dividend rate
(or method of calculation thereof), the dividend period and dividend payment
dates, whether such dividends will be cumulative or noncumulative, the
liquidation preference, voting rights, if any, any terms for optional or
mandatory redemption, any terms for conversion or exchange into other series of
Debt Securities or Common Stock and any other special terms. If so specified in
the applicable Prospectus Supplement, Debt Securities of a series may be issued
in whole or in part in the form of one or more temporary or permanent global
securities.
The Senior Debt Securities will rank equally with all other unsubordinated
and unsecured indebtedness of the Company. The Subordinated Debt Securities will
be subordinate in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company.
The Securities may be sold (i) through underwriting syndicates represented
by managing underwriters, or by underwriters without a syndicate, with such
underwriters to be designated at the time of sale; (ii) through agents
designated from time to time; or (iii) directly by the Company. The names of any
underwriters or agents of UCFC involved in the sale of the Securities, the
public offering price or purchase price thereof, any applicable commissions or
discounts, any other terms of the offering of such Securities and the net
proceeds to the Company from such sale, will be set forth in the applicable
Prospectus Supplement.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 12, 1995.
<PAGE> 29
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
LOUISIANA INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO PERSON MAY ACQUIRE
CONTROL OF THE COMPANY AND THUS INDIRECT CONTROL OF ITS LOUISIANA DOMICILED
INSURANCE SUBSIDIARIES, UNITED COMPANIES LIFE INSURANCE COMPANY AND UNITED
GENERAL TITLE INSURANCE COMPANY, UNLESS SUCH PERSON HAS PROVIDED CERTAIN
REQUIRED INFORMATION TO THE INSURANCE COMMISSIONER OF THE STATE OF LOUISIANA AND
SUCH ACQUISITION HAS BEEN APPROVED BY THE INSURANCE COMMISSIONER OF THE STATE OF
LOUISIANA, AFTER PUBLIC HEARING. UNDER LOUISIANA INSURANCE LAWS AND REGULATIONS,
ANY PERSON WHO OWNS, CONTROLS OR HAS THE POWER TO VOTE 10% OR MORE OF THE VOTING
SECURITIES OF A CORPORATION IS PRESUMED TO HAVE CONTROL OF THAT CORPORATION AND
ITS SUBSIDIARIES. A SECURITY WHICH IS CONVERTIBLE INTO OR EVIDENCES A RIGHT TO
ACQUIRE A VOTING SECURITY IS VIEWED AS A VOTING SECURITY. CONSEQUENTLY, NO
PURCHASER IN THIS OFFERING MAY ACQUIRE, DIRECTLY OR INDIRECTLY, AN AMOUNT OF
VOTING SECURITY WHICH WOULD BRING SUCH PURCHASER'S TOTAL HOLDINGS TO 10% OR MORE
OF THE VOTING SECURITIES OF THE COMPANY, UNLESS SUCH PURCHASER HAS PROVIDED THE
REQUIRED INFORMATION TO THE INSURANCE COMMISSIONER OF THE STATE OF LOUISIANA AND
THE ACQUISITION HAS BEEN APPROVED BY THE INSURANCE COMMISSIONER OF THE STATE OF
LOUISIANA.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated herein
by reference:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1994, as amended by Amendment No. 1 on Form 10-K/A;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995;
(c) The Company's Proxy Statement dated May 1, 1995 in connection with
the Company's Annual Meeting of Shareholders to be held on June 14, 1995;
(d) The Company's Current Report on Form 8-K filed on May 26, 1995;
(e) The Company's Registration Statement on Form 8-A filed on June 9,
1995; and
(f) The description of the Company's Preferred Share Purchase Rights
contained in the Company's Registration Statement on Form 8-A filed on
August 5, 1994.
All reports and any definitive proxy or information statements filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Securities offered hereby shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
2
<PAGE> 30
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A
COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). WRITTEN REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO DALE
E. REDMAN, CHIEF FINANCIAL OFFICER, UNITED COMPANIES FINANCIAL CORPORATION, 4041
ESSEN LANE, BATON ROUGE, LOUISIANA 70809. TELEPHONE REQUESTS MAY BE DIRECTED TO
MR. REDMAN AT (504) 924-6007.
AVAILABLE INFORMATION
UCFC is subject to the informational requirements of the Exchange Act and,
in accordance therewith, files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the following public reference facilities maintained by
the Commission: Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Seven World Trade Center, Suite 1300, New York, New York 10048; and
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained by mail from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
rates. In addition, reports, proxy statements and other information concerning
UCFC may be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission on Form S-3 under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement and related exhibits for further information with respect
to the Company and the securities offered hereby. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference. These
documents may be inspected without charge at the office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may
be obtained at fees and charges prescribed by the Commission.
3
<PAGE> 31
THE COMPANY
GENERAL
The Company, founded in 1946, is a financial services holding company
having mortgage and insurance operations. The Company's mortgage operations are
focused on the origination, sale and servicing of first mortgage,
non-conventional, home equity loans. Loan originations are accomplished
primarily through a retail branch network, which as of March 31, 1995, consisted
of 143 offices in 39 states, and a wholesale loan network of correspondents and
brokers. The Company's strategy for increasing loan production includes
continued geographic expansion, increased wholesale loan originations, loan
acquisitions and the introduction of new loan products. Home equity loan
production in 1994, 1993 and 1992 was $909 million, $540 million and $301
million, respectively. Home equity loan production for the first three months of
1995 was $309 million compared to $197 million for the same period of 1994. The
Company believes its loan securitizations improve its access to funding and
thereby provide a distribution outlet sufficient to meet the Company's expanded
home equity loan production. Increased loan production and its reduced cost of
funding are the primary reasons that operating income before income taxes of the
Company's mortgage operations rose to $81.2 million in 1994 from $46.3 million
in 1993 and from $24.0 million in 1992. Although loan sale gains increased from
$22.6 million for the first quarter of 1994 to $26.7 million for the same period
in 1995, the Company's operating income before income taxes of its mortgage
operations declined to $17.9 million for the first quarter of 1995 as compared
to $20.4 million for the first quarter of 1994, primarily as a result of
increased expenses relating to the expansion of its mortgage operations. The
Company's insurance operations sell primarily single premium deferred annuities
marketed in 47 states, the District of Columbia and Puerto Rico. For additional
information regarding the Company's operations by business segment, see
"Selected Financial and Other Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, as amended by
Amendment No. 1 on Form 10-K/A, and the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
The Company is incorporated in the State of Louisiana, its headquarters is
located at 4041 Essen Lane, Baton Rouge, Louisiana 70809, and its telephone
number is (504) 924-6007. As of March 31, 1995, the Company had approximately
1,550 employees.
MORTGAGE
United Companies Lending Corporation ("UC Lending" or "UCLC"), the
Company's wholly owned mortgage subsidiary, originates, sells and services
primarily first mortgage, non-conventional, home equity loans which are
typically not loans for the purchase of homes. These loans are made primarily to
individuals who may not otherwise qualify for conventional loans which are
readily marketable to government-sponsored mortgage agencies or conduits and
available through most commercial banks and many other lending institutions. The
weighted average interest rate and the weighted average loan origination fee on
UC Lending home equity loans originated during 1994 were 11.7% and 6.0%,
respectively, and for such loans originated during the first three months of
1995, were 12.4% and 5.2%, respectively. The Company attributes these loan terms
to its belief that its customers generally place a higher priority on the amount
of the monthly payment and prompt credit approval than on the interest rate and
origination fees associated with the loan. Further, borrowers of
non-conventional loans may present a greater credit risk and generally pay
higher interest rates and loan origination fees. Management of the Company
believes that any greater credit risk arising out of making loans to these
borrowers is compensated by higher fees and interest rates. The average home
equity loan amount at origination was approximately $41,000 during 1994, up from
$39,000 during 1993, and increased to $43,000 during the first three months of
1995. This increase has been due primarily to an expansion into geographic areas
where home values are higher, a de-emphasis of second mortgage loans, an
expansion of loan product lines and the introduction and growth of the wholesale
loan production programs. UC Lending originated $893 million of first mortgage
home equity loans in 1994, up 68% from $531 million in 1993 and originated $298
million of first mortgage home equity loans during the first three months of
1995 compared to $195 million for the same period of 1994. Loan originations are
accomplished primarily through a
4
<PAGE> 32
retail branch network in 39 states consisting of 143 offices as of March 31,
1995, and the wholesale loan network of correspondents and brokers. The
Company's strategy for increasing loan production includes continued geographic
expansion, increased wholesale originations, loan acquisitions and the
introduction of new loan products. In order to expand its distribution network,
during the third quarter of 1992, the Company initiated a wholesale loan network
of correspondents and brokers through a division of UC Lending operating under
the registered service mark UNICOR Mortgage(R), Inc. ("UNICOR"). The Company has
expanded this division which, as of March 31, 1995, was operating in 34 states.
The Company plans to further expand UNICOR on a selective basis into other
states. UNICOR offers fixed and adjustable rate home equity loans to borrowers
of a credit quality comparable to customers of UC Lending's branch network.
During late 1993, UC Lending began another wholesale loan network which offers
the same products as the UNICOR program to banks and other financial
institutions through its division that operates under the registered service
mark GINGER MAE(R), Inc. ("GINGER MAE"), the acronym for the Good Neighbor
Reinvestment Mortgage Assistance Loan Program. This program is intended to
permit participating institutions to originate loans to borrowers who do not
qualify for conventional credit. Loans purchased by UC Lending under this
program are underwritten by UC Lending personnel prior to approval and funding
under substantially the same guidelines as those utilized by UNICOR. As of March
31, 1995, GINGER MAE had 174 financial institutions in 16 states participating
in the GINGER MAE program. In August 1994, the Company incorporated two separate
subsidiaries, UNICOR Mortgage(R), Inc. and GINGER MAE(R), Inc., and intends to
commence operation of the wholesale division through these separate subsidiaries
during 1995.
The secondary mortgage market's growing acceptance of mortgage-backed
securities based on non-conventional home equity loans has allowed the Company
to pool large numbers of loans for sale as mortgage-backed securities. In late
1991 and in 1992, this was accomplished primarily through private placement
transactions. During 1993 and 1994, UC Lending sold publicly $451 million and
$973 million, respectively, of home equity loans through a Company-sponsored
shelf registration statement which was initially approved in 1993 for up to $1
billion principal amount of mortgage-backed securities and was amended in 1994
to cover an additional $3 billion principal amount of mortgage-backed
securities. The weighted average interest spread on loans sold to third parties
(the difference between the stated rate on the loan and the rate paid to
purchasers, less certain recurring fees) ranged from 4.56% in 1992 to 6.06% in
1993 to 4.49% in 1994 to 4.42% in the three months ended March 31, 1995. The
weighted average interest spread on loans sold is determined without regard to
expected credit losses. Therefore, the spread is not impacted by projected or
actual credit losses. The Company's securitization transactions are credit
enhanced and have received ratings of "Aaa" from Moody's Investors Service, Inc.
and "AAA" from Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc.
("Standard & Poor's"). The Company presently intends to effect securitization
transactions on a quarterly basis, but the amount and timing of sales of
securities under the shelf registration statement will depend upon market and
other conditions affecting the operations of the Company. Servicing rights are
retained on substantially all loans sold, and as of March 31, 1995, UC Lending
serviced 56,625 home equity loans having an aggregate principal balance of
approximately $1.9 billion.
The ability of the Company to sell loans and/or mortgage-backed securities
in the secondary market is essential for continuation of the Company's loan
origination operations. A prolonged, substantial reduction in the size of the
secondary market for home equity loans may adversely affect the Company's
ability to sell its loan originations and/or mortgage-backed securities in the
secondary market with consequent adverse impact on the Company's profitability
and future originations. Moreover, market and other considerations could affect
the timing of the Company's securitization transactions and delays in such sales
could reduce the amount of gains recognized from the sale of loans in a given
quarter.
The Company derives a significant portion of its income by realizing gains
upon the sale of loans due to the excess servicing income of such loans. Excess
servicing income represents the excess of the interest rate payable by a
borrower on a loan over the interest rate passed through to the investor
acquiring an interest in such loan, less the Company's normal servicing fee and
other applicable recurring fees. When loans are sold, the Company recognizes as
current income the present value of the excess servicing income expected to be
realized over the anticipated average life of loans sold less future estimated
credit losses relating to the loans sold. At March 31, 1995, the Company's
balance sheet reflected capitalized excess servicing income of
5
<PAGE> 33
approximately $196 million and an allowance for loss on loans serviced of
approximately $29.6 million. The capitalized excess servicing income is computed
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar instruments at the time of
sale. The weighted average discount rate used to determine the present value of
the balance of capitalized excess servicing income on home equity loans
reflected on the Company's balance sheet at March 31, 1995, was approximately
10%. The Company is not aware of an active market for this kind of receivable.
No assurance can be given that this receivable could in fact be sold at its
stated value on the balance sheet.
Capitalized excess servicing income is amortized over the lesser of the
estimated or actual remaining life of the underlying loans as an offset against
the excess servicing income component of servicing income actually received in
connection with such loans. Although management of the Company believes that it
has made reasonable estimates of the excess servicing income likely to be
realized, it should be recognized that the rate of prepayment and the amount of
defaults utilized by the Company are estimates and actual experience may vary
from these estimates. The Company periodically reviews its prepayment
assumptions in relation to current rates of prepayment and, if necessary, writes
down the remaining asset to the net present value of the estimated remaining
future excess servicing income. Rapid increases in interest rates or competitive
pressures may result in a reduction of excess servicing income, thereby reducing
the gains recognized by the Company upon the sale of loans in the future.
The gain recognized by the Company upon the sale of loans will have been
overstated if the excess servicing income actually received by the Company is
less than originally assumed. An acceleration of future prepayments could result
in capitalized excess servicing income amortization expense exceeding realized
excess servicing income, thereby adversely affecting the Company's servicing
income and resulting in a charge to earnings in the period of adjustment.
Likewise, if delinquencies or liquidations were to occur sooner in the portfolio
of loans sold by the Company and/or with greater frequency than was initially
assumed, capitalized excess servicing income amortization would occur more
quickly than originally anticipated, which would have an adverse effect on
servicing income in the period of such adjustment.
LIFE INSURANCE
United Companies Life Insurance Company ("UC Life" or "UCLIC"), the
Company's wholly owned life insurance company domiciled in Louisiana and
organized in 1955, is currently authorized to conduct business in 47 states, the
District of Columbia and Puerto Rico. The primary products of UC Life are
deferred annuities marketed on a commission basis principally through financial
institutions and independent general agents and are generally sold to middle
income customers seeking tax deferred insurance products, primarily to provide
savings for retirement. UC Life produced $250 million, $208 million and $48.6
million in sales of annuity products during the years ended December 31, 1994
and 1993 and in the three months ended March 31, 1995, respectively. At March
31, 1995, total annuity reserves were $1.4 billion. The Company intends to add
variable annuity products to its annuity line of business during 1995. UC Life
has also focused its efforts on improving the quality and liquidity of its
investment portfolio. At March 31, 1995, the invested assets of UC Life
consisted of $1.1 billion in investment grade fixed maturity securities (at
amortized cost), $152 million of residential first mortgage loans (which were
primarily originated by UC Lending) and $155 million of commercial mortgage
loans (also primarily originated by UC Lending). At March 31, 1995, the weighted
average rating of its publicly traded bond portfolio was "AA", the assets
allocated to investments in mortgage-backed securities were $789 million and the
amount of non-investment grade publicly traded bonds in the portfolio was $21.1
million or 1.8% of the portfolio. During the first three months of 1995 and
1994, the net interest spread on the Company's annuity business was 2.38%
compared to 2.61%, respectively.
Reserves for annuity policies constitute the Company's primary liabilities.
The duration of these liabilities is affected by a number of factors, including
interest rates, surrender penalties, ratings, public confidence in the insurance
industry generally and in the Company specifically, governmental regulations and
tax laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
6
<PAGE> 34
In June 1994, A.M. Best Company ("Best") reaffirmed its "A-" (Excellent)
rating of UC Life. Best's ratings depend in part on its analysis of an insurance
company's financial strength, operating performance and claims paying ability.
In addition, UC Life's claims paying ability has been rated "A+" by Duff &
Phelps, Inc. During 1994, Standard & Poor's revised the formula used in
assigning its qualified solvency ratings of insurance companies and, as a
result, revised its rating assigned to UC Life from "BBBq" to "BBq." The Company
believes that UC Life's ratings will enable it to continue to compete
successfully.
BUSINESS STRATEGIES
The Company's strategic plan focuses primarily on its continued emphasis on
its mortgage operations. Management of the Company believes that the
implementation of significant changes in mortgage operations, such as
centralization of collections and other loan servicing functions, institution of
a branch incentive compensation structure, and the addition of the UNICOR and
GINGER MAE programs have positioned the Company to be able to continue the
increased loan production in its mortgage operations. The Company's increased
profitability has resulted primarily from its increased loan origination
capacity and its ability to more efficiently pool and sell loans in the
secondary market, principally through securitizations. Management of the Company
intends to continue to pursue the following strategies in its mortgage
operations:
Mortgage Production Strategy
- Continue to focus production on first mortgage non-conventional, home
equity loans.
- Increase the number of retail branches and expand geographically to
become a national lender.
- Continue to expand the product line and distribution channels.
- Continue to centralize and improve customer service and loan servicing
functions to focus the Company's branches on loan originations.
- Continue to grow its wholesale lending operation to complement its retail
network and thereby broaden the market reach of the Company.
Securitization Strategy
- Continue to focus production on selected categories of loans that are
attractive to purchasers of mortgage-backed securities.
- Maintain direct access to the mortgage-backed securities markets through
a Company-sponsored conduit which uses its own shelf registration
statement.
- Continue to maintain the Company's underwriting standards.
- Use standardized loan documentation based upon Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") forms.
As part of its business strategy, the Company continues to seek ways to
serve better its existing customer base and to broaden its customer base. To
that end, the Company is actively considering the feasibility of introducing new
loan products, including manufactured housing loans and secured credit card
loans. The Company has recently decided to commence a program for manufactured
housing loan products which will be conducted through a new subsidiary. There
can be no assurance that the Company will introduce any other new loan products
or that any new loan products it may introduce will be successful. Neither the
manufactured housing loan products nor any other new loan product the Company
may introduce is expected to have a material effect on the Company's operations
in 1995.
In addition to its mortgage banking strategy, the Company intends to focus
its insurance operations on developing the economies of scale necessary to
compete in the current annuity marketplace while maintaining an operating
philosophy which emphasizes investment grade securities, cost control and
quality customer service.
7
<PAGE> 35
DISCONTINUED OPERATIONS
UG Title
On April 10, 1995, the Company made a decision to dispose of its investment
in United General Title Insurance Company ("UG Title"), a wholly owned
subsidiary of the Company, and, on May 1, 1995, approved a formal plan of
disposal. As a result, the operations of UG Title have been classified as
discontinued operations, and, accordingly, the consolidated financial statements
and the related notes of the Company segregate continuing and discontinued
operations. It is anticipated that the disposal will be completed during 1995.
In connection therewith, a letter of intent to sell UG Title has been
signed which provides for a reduction of the sale price for certain claims
relating to transactions occurring prior to the date of sale and discovered
within twelve months thereafter. The Company has estimated the risk of loss
related to such potential claims and recorded a provision for such loss in
connection with the disposition. Should such claims materially exceed the
Company's estimates for such losses, such consequence will have an adverse
impact on the Company's operations by reducing the proceeds to be received from
the sale. The transaction contemplated by the letter of intent is subject to
negotiation and execution of a definitive agreement and the satisfaction of
certain conditions, including receipt of necessary regulatory approvals. The
Company believes that the failure to consummate the transaction contemplated by
the letter of intent should not have a material adverse effect on the Company's
financial condition.
In connection with the decision to dispose of UG Title, the Company
recorded a $128,000 after tax loss in its financial statements as of and for the
quarter ended March 31, 1995. Total revenues of UG Title for the three months
ended March 31, 1995 and 1994 were $9.0 million and $9.1 million, respectively,
and net income (loss) was $(373,000) and $233,000, respectively. Total assets of
UG Title at March 31, 1995 and December 31, 1994 were $16.0 million and $18.0
million, respectively.
UG Title was formed in 1983 to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented less
than 3% of UG Title's business in 1994. At December 31, 1994, UG Title was
licensed in 28 states, was represented by approximately 880 independent general
agents and had no direct operations. Key markets for UG Title are Colorado,
Louisiana, Florida and California. During 1994 and 1993, title insurance
premiums were $44.7 million and $24.4 million, respectively. During 1994, UG
Title experienced a net loss of $5.0 million compared to net income of $0.8
million in 1993. Operations in 1994 suffered severely as the result of claims
related to agency escrow shortages in several states and losses associated with
a loan broker in California. In addition to the incurred losses, the
profitability of UG Title in 1994 was negatively impacted by a $3.8 million
increase in its reserve for policy losses.
UG Title provides single premium products insuring the validity of
residential first and second mortgage loans and indemnifying the policyholders
against loss or damage from obtaining an invalid title to real property. UG
Title focuses on underwriting title policies for resales and refinancings of
properties which policies averaged $80,100 in 1994. Risks in excess of $350,000
are reinsured primarily with Fidelity National Title Insurance Company; however,
UG Title remains contingently liable for reinsurance ceded. UG Title, unlike
some other title insurers, operates exclusively through independent title
agents.
Foster Mortgage Corporation
On May 7, 1993, the Company decided to divest its subsidiary Foster
Mortgage Corporation ("FMC"). As a result of this decision, the operations of
FMC have been classified as discontinued operations and, accordingly, the
consolidated financial statements of the Company and the related notes segregate
continuing and discontinued operations. In connection with the decision to
dispose of FMC, the Company recorded a $17.6 million after tax loss in its
financial statements as of and for the quarter ended March 31, 1993, reflecting
the operating loss of FMC for the quarter ended March 31, 1993 of $1.5 million,
net of tax benefit and the estimated loss from disposal of FMC of $16.1 million,
net of tax benefit. The Company has not reflected operating losses incurred by
FMC subsequent to that date in the Company's financial statements.
8
<PAGE> 36
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the institutional lenders under FMC's primary credit facility (the "FMC
Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause
the remaining affairs of FMC to be wound up under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court
has approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. The FMC Institutional Lenders
allege that FMC has certain claims against the Company, including a claim with
respect to the Company's alleged failure to remit all sums due FMC regarding
federal income taxes estimated by the FMC Institutional Lenders to range from
$2.1 million to $29 million. FMC and the Company executed, subject to the
approval of the bankruptcy court, a settlement agreement relating to payments
between FMC and the Company in connection with the federal income tax benefits
resulting from FMC's losses and to certain prior intercompany payments between
FMC and the Company. The settlement agreement included a release by FMC in favor
of the Company of any and all claims relating to federal income taxes. The FMC
Institutional Lenders opposed the proposed settlement agreement. At the
conclusion of a hearing on the proposed settlement on August 18, 1994, the
bankruptcy court approved the portion of the settlement providing for a net
payment by the Company of $1.65 million to FMC in satisfaction of the federal
income tax benefits resulting from FMC's losses and the release of any claims
regarding federal income taxes. The Company had previously recorded
substantially all of the impact of this portion of the settlement in its prior
financial statements. The bankruptcy court declined to approve the other portion
of the proposed settlement relating to payments received by the Company from FMC
within twelve months of the bankruptcy filing. These matters may be pursued by
the trustee under the plan of liquidation approved by the bankruptcy court. If
the Company were required to refund such payments, the Company has estimated the
potential additional loss to be $1.9 million, net of tax benefits. The decision
of the bankruptcy court on the settlement is not final and was appealed by the
FMC Institutional Lenders to the U.S. District Court which affirmed the
bankruptcy court's decision. The FMC Institutional Lenders have appealed this
decision to the United States Court of Appeals for the Fifth Circuit. Management
of the Company does not believe that any additional amounts are owed by the
Company to FMC and intends to vigorously contest any claims which may be brought
against it for such amounts.
The Company did not guarantee any debt of FMC and believes, based upon
advice of its counsel, that it has no responsibility for the obligations of FMC
under FMC's primary credit facility or (excluding potential consequences of the
bankruptcy filing on certain prior intercompany transactions or potential
additional payment for tax benefits as discussed above) for any other
liabilities to FMC's lenders.
GOVERNMENT REGULATION AND LEGISLATION; LEGAL PROCEEDINGS
The Company's mortgage and insurance businesses are subject to extensive
regulation, supervision and licensing by federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by the Company, disclosure in connection with loan
originations, credit reporting requirements, servicing requirements, insurance
premium rates and coverage issues, federal and state taxation, and multiple
qualification and licensing requirements for doing business in various
jurisdictions. While the Company believes that it maintains all requisite
licenses, permits and approvals and is in compliance in all material respects
with applicable federal and state regulations, there can be no assurance that
more restrictive laws or regulations will not be adopted which could make
compliance in the future more difficult and/or more expensive. Legislative and
regulatory proposals are frequently advanced which, if adopted, could adversely
affect the Company's profitability or the manner in which the Company conducts
its activities. In particular, amendments to the Federal Truth-in-Lending Act
(the "TILA") which may become effective on October 1, 1995, impose additional
disclosure requirements and prohibit certain prepayment penalty charges, among
other requirements, on loans with a specified level of origination fees or a
specified interest rate level. A significant percentage of the Company's loans
originated after the effective date could be subject to the requirements of this
legislation. The Company is currently reviewing this legislation in its final
form to determine the impact of its provisions on the Company's business or
results of operations.
9
<PAGE> 37
On March 21, 1994, the United States Court of Appeals for the Eleventh
Circuit in Rodash v. AIB Mortgage Company, held, in part, that a lender
improperly disclosed the collection of the Florida state intangible tax from the
borrower, thereby subjecting the loan to rescission under the TILA by the
borrower for three years after it was made. Subsequent to the court's initial
decision and prior to its refusal to reconsider its decision, the Florida
legislature amended the language of the intangible tax to clarify the
legislature's previous intention that the intangible tax be disclosed for
purposes of the TILA in the manner that had been followed by most lenders in
Florida, including the Company. Although the Florida legislature intended this
legislation to apply retroactively, no final court decision has been rendered as
to the effect of this legislation on loans originated prior to its effective
date. This court decision may also apply to a similar intangible tax imposed by
other states. To its knowledge, as of May 12, 1995, no claims have been filed
against the Company under this court decision (other than as a defense in
foreclosure proceedings) and no notice of a breach of a representation has been
received under the Company's loan sale agreements requesting it to repurchase,
cure or substitute other loans for the loans sold. If the intent of the Florida
legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot presently
be reasonably estimated, the Company has made no accrual therefor.
A substantial amount of the Company's annuity policies are marketed through
financial institutions. In a recent decision, the United States Supreme Court
upheld the United States Comptroller of the Currency's decision to permit
national banks to sell annuities in towns with more than 5,000 inhabitants.
COMPETITION
As a marketer of credit and annuity products, the Company faces intense
competition. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Competitors in the
annuity business include an increasing number of insurance companies which have
recently begun to offer annuity products. Many of these competitors in the
financial services and annuity business are substantially larger and have more
capital and other resources than the Company. Competition can take many forms
including convenience in obtaining a loan or annuity, customer service,
marketing and distribution channels and interest or crediting rates. In
addition, the current level of gains realized by the Company and its existing
competitors on the sale of its and their non-conventional loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales as the result of increased loan origination
competition.
USE OF PROCEEDS
Except as may otherwise be set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of the Offered Securities will be
used to reduce the Company's revolving bank debt and for general corporate
purposes. At March 31, 1995, the floating interest rate on the Company's
revolving bank debt was 7.82% per annum.
10
<PAGE> 38
RATIOS OF EARNINGS
The following tables set forth the ratio of earnings to fixed charges and
the ratio of earnings to combined fixed charges and preferred stock dividends
for the Company for the three months ended March 31, 1995 and for each of the
years in the five-year period ended December 31, 1994.
The ratio of earnings to fixed charges has been computed by dividing
earnings by fixed charges. The ratio of earnings to combined fixed charges and
preferred stock dividends has been computed by dividing earnings by the sum of
fixed charges and preferred stock dividend requirements. Earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of interest
on all indebtedness and the portion of rental expense considered to be
representative of interest.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ----------------------------------------
1995 1994 1993 1992 1991 1990
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
4.0 6.1 4.8 2.6 1.4 1.3
</TABLE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ----------------------------------------
1995 1994 1993 1992 1991 1990
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
4.0 6.1 4.6 * 2.6 1.4 1.3
</TABLE>
- ---------------
* The Company had no preferred stock outstanding other than for a portion of the
year ended December 31, 1993. The preferred stock dividend declared during
such period has been increased to an amount representing the pre-tax earnings
which would be required to cover such dividend.
11
<PAGE> 39
SELECTED FINANCIAL AND OTHER DATA
The selected financial data set forth below are derived from the Company's
Consolidated Financial Statements. The Company's Consolidated Balance Sheets at
December 31, 1994 and 1993, and Consolidated Statements of Income, Stockholders'
Equity and Cash Flows for the years ended December 31, 1994, 1993 and 1992 and
notes thereto were audited by Deloitte & Touche LLP, independent certified
public accountants, and are incorporated by reference herein and available as
described under "Incorporation of Certain Documents by Reference" and "Available
Information." The Company's Consolidated Financial Statements should be read in
conjunction with this table and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, as amended by
Amendment No. 1 on Form 10-K/A. The financial information and other data set
forth for the three months ended March 31, 1995 and 1994 are unaudited; however,
in the opinion of the Company's management, the accompanying financial
information contains all adjustments, consisting only of normal accruals, except
for discontinued operations, necessary to present fairly the financial
information for such periods. The results of operations for the three months
ended March 31, 1995 may not be indicative of results of operations to be
expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,(1) YEAR ENDED DECEMBER 31,(1)
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest, charges and fees on
loans.............................. $ 30,788 $ 27,285 $ 116,747 $ 96,284 $ 92,785 $ 90,180 $ 63,300
Loan sale gains...................... 26,734 22,554 86,735 59,441 33,475 29,627 18,613
Investment income.................... 25,011 18,221 84,666 75,527 65,548 61,828 65,349
Loan servicing income................ 3,484 3,689 15,173 10,077 10,611 9,492 10,592
Net insurance premiums............... 2,102 3,068 11,373 18,684 22,860 36,269 39,820
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues....................... 88,119 74,817 314,694 260,013 225,279 227,396 197,674
Total expenses....................... 68,570 53,985 230,620 216,952 204,664 219,580 190,837
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes................ 19,549 20,832 84,074 43,061 20,615 7,816 6,837
Provision for income taxes........... 6,725 7,355 29,492 14,744 7,601 3,164 2,473
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations.... 12,824 13,477 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations......................... (128) 233 (5,048) (16,742) (2,768) 6,824 3,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 12,696 $ 13,710 $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA(2):
Primary:
Income from continuing
operations....................... $ .91 $ .93 $ 3.83 $ 2.52 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations....................... (.01) .02 (.35) (1.51) (.28) .69 .40
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ .90 $ .95 $ 3.48 $ 1.01 $ 1.03 $ 1.16 $ .84
========== ========== ========== ========== ========== ========== ==========
Fully diluted:
Income from continuing
operations....................... $ .91 $ .93 $ 3.83 $ 2.38 $ 1.31 $ .47 $ .44
Income (loss) from discontinued
operations....................... (.01) .02 (.35) (1.41) (.28) .69 .40
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ .90 $ .95 $ 3.48 $ .97 $ 1.03 $ 1.16 $ .84
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding:
Primary............................ 14,081 14,402 14,245 11,104 9,917 9,883 9,832
Fully Diluted...................... 14,123 14,402 14,245 11,853 9,917 9,883 9,832
Cash dividends....................... $ .1000 $ .0909 $ .3636 $ .3092 $ .2728 $ .2556 $ .2372
Stockholders' equity -- period
end(3)............................. $ 13.96 $ 11.89 $ 11.34 $ 11.45 $ 9.70 $ 8.94 $ 8.08
</TABLE>
12
<PAGE> 40
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,(1) YEAR ENDED DECEMBER 31,(1)
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA -- PERIOD END:
Investment securities -- net(3)...... $1,142,954 $ 961,672 $1,044,842 $ 902,091 $ 759,354 $ 376,966 $ 588,397
Loans -- net......................... 394,362 494,723 369,382 517,720 502,229 604,942 362,164
Capitalized excess servicing
income............................. 195,609 131,611 179,065 113,192 72,062 53,942 47,153
Deferred policy acquisition costs.... 92,802 83,584 91,915 83,495 80,007 78,599 77,601
Total assets......................... 2,087,806 1,863,915 1,978,255 1,817,153 1,627,900 1,492,816 1,363,955
Annuity reserves..................... 1,440,233 1,317,878 1,425,973 1,294,983 1,147,555 1,014,649 875,346
Notes payable........................ 240,342 180,950 213,668 155,500 206,850 200,447 216,971
Total liabilities.................... 1,893,914 1,702,254 1,823,005 1,663,785 1,531,642 1,404,382 1,284,524
Stockholders' equity(3).............. 193,892 161,661 155,250 153,368 96,258 88,434 79,430
OTHER DATA:
Mortgage
Total loan originations............ $ 309,564 $ 197,357 $ 913,319 $ 545,229 $ 321,198 $ 328,184 $ 397,794
Home equity loan originations...... 309,290 197,329 908,821 539,868 301,234 253,613 224,783
Average home equity loan size...... 43 43 41 39 28 24 23
Home equity loans
serviced -- period end........... 1,895,955 1,248,424 1,683,698 1,125,139 819,448 703,922 575,282
Total loans serviced -- period
end.............................. 2,234,232 1,668,714 2,032,405 1,568,781 1,367,822 1,344,388 1,175,038
Average coupon on home equity loans
originated....................... 12.4% 11.0% 11.7% 11.8% 13.4% N/A N/A
Loan origination fees as % of home
equity loans..................... 5.2% 6.0% 6.0% 7.0% 7.9% 8.2% 7.9%
Weighted average interest spread
retained on home equity loans
sold............................. 4.42% 5.61% 4.49% 6.06% 4.56% 4.42% 4.01%
Life Insurance
Annuity sales...................... $ 48,563 $ 45,029 $ 249,737 $ 207,682 $ 187,050 $ 175,796 $ 102,391
Net interest spread on annuities... 2.38% 2.61% 2.73% 2.20% 1.84% 1.88% 2.18%
Investment grade bonds as % of
invested assets.................. 72.0% 64.3% 69.6% 59.6% 54.3% 25.1% 45.5%
</TABLE>
- ---------------
(1) On April 10, 1995, the Company decided to dispose of its investment in its
wholly owned subsidiary, UG Title, and on May 1, 1995, approved a formal
plan of disposal of UG Title. In addition, on May 7, 1993, the Company
announced its decision to dispose of the net assets and operations of FMC, a
wholly owned subsidiary of the Company. The operations of UG Title and FMC
have been reclassified as discontinued operations and the prior years'
financial statements of the Company included herewith have been reclassified
accordingly.
(2) All share and per share data have been adjusted to reflect stock dividends.
(3) During the first quarter of 1994, the Company implemented the provisions of
FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which
revised the method of accounting for certain of the Company's investments.
Prior to adoption of SFAS 115, the Company reported its investments in fixed
income investments at amortized cost, adjusted for declines in value
considered to be other than temporary. SFAS 115 requires the classification
of securities in one of three categories: "available-for-sale",
"held-to-maturity" or "trading securities." Securities classified as
held-to-maturity are carried at amortized cost, whereas securities
classified as trading securities or available-for-sale are recorded at fair
value. Effective with the adoption of SFAS 115, the Company determined the
appropriate classification of its investments and, if necessary, adjusted
the carrying value of such securities accordingly as if the unrealized gains
or losses had been realized. The adjustment, net of applicable income taxes,
for investments classified as available-for-sale is recorded in "Net
unrealized loss on securities" and is included in Stockholders' equity. In
accordance with the provisions of SFAS 115, prior year investments were not
restated.
13
<PAGE> 41
SELECTED FINANCIAL INFORMATION BY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE
Interest, charges and fees on loans......... $20,140 $14,798 $ 68,658 $ 44,797 $ 35,003 $ 36,174 $ 33,029
Investment income........................... 1,465 266 2,762 1,054 696 1,137 --
Loan sale gains............................. 26,734 22,554 86,289 59,220 29,679 15,571 14,636
Loan servicing income....................... 4,734 4,977 19,892 15,568 15,284 12,108 10,289
------- ------- -------- -------- -------- -------- --------
Total revenues.............................. 53,073 42,595 177,601 120,639 80,662 64,990 57,954
Total expenses.............................. 35,170 22,244 96,446 74,344 56,661 60,592 54,406
------- ------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 17,903 20,351 81,155 46,295 24,001 4,398 3,548
------- ------- -------- -------- -------- -------- --------
LIFE INSURANCE
Interest, charges and fees on loans......... 9,267 11,577 43,647 45,561 51,396 51,585 32,399
Investment income........................... 24,145 18,313 83,614 75,594 67,287 63,285 65,549
Net insurance premiums...................... 2,102 3,068 11,373 18,684 22,860 36,269 39,820
Loan sale gains............................. -- -- -- -- 3,310 -- 3,977
Loan servicing income (loss)................ (427) (44) (505) 340 673 1,645 2,625
------- ------- -------- -------- -------- -------- --------
Total revenues.............................. 35,087 32,914 138,129 140,179 145,526 152,784 144,370
Total expenses.............................. 31,918 31,335 129,049 137,544 140,061 150,707 131,216
------- ------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 3,169 1,579 9,080 2,635 5,465 2,077 13,154
------- ------- -------- -------- -------- -------- --------
CORPORATE, OTHER OPERATIONS AND ELIMINATIONS
Income (loss) from continuing operations
before income taxes....................... (1,523) (1,098) (6,161) (5,869) (8,851) 1,341 (9,865)
------- ------- -------- -------- -------- -------- --------
CONSOLIDATED
Income from continuing operations before
income taxes.............................. 19,549 20,832 84,074 43,061 20,615 7,816 6,837
Provision for income taxes.................. 6,725 7,355 29,492 14,744 7,601 3,164 2,473
------- ------- -------- -------- -------- -------- --------
Income from continuing operations........... 12,824 13,477 54,582 28,317 13,014 4,652 4,364
Income (loss) from discontinued
operations................................ (128) 233 (5,048) (16,742) (2,768) 6,824 3,943
------- ------- -------- -------- -------- -------- --------
Net income.................................. $12,696 $13,710 $ 49,534 $ 11,575 $ 10,246 $ 11,476 $ 8,307
======= ======= ======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying Notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, as amended by Amendment No. 1 on Form 10-K/A, and the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
See "Incorporation of Certain Documents by Reference" and "Available
Information."
OVERVIEW
The table below sets forth income from continuing operations before income
taxes for each of the Company's business segments and certain home equity loan
data for the indicated periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage................................ $ 17,903 $ 20,351 $ 81,155 $ 46,295 $ 24,001
Life Insurance.......................... 3,169 1,579 9,080 2,635 5,465
Corporate, other operations and
eliminations.......................... (1,523) (1,098) (6,161) (5,869) (8,851)
-------- -------- -------- -------- --------
Total......................... $ 19,549 $ 20,832 $ 84,074 $ 43,061 $ 20,615
======== ======== ======== ======== ========
Home equity loan originations........... $309,290 $197,329 $908,821 $539,868 $301,234
Home equity loans sold.................. 274,653 198,332 977,653 462,873 271,920
Interest spread retained on home equity
loans sold............................ 4.42% 5.61% 4.49% 6.06% 4.56%
</TABLE>
The following summary identifies the major factors which influenced the
results of operations of the Company's primary operating divisions during the
indicated periods.
MORTGAGE
The Company's mortgage operations primarily consist of the origination,
sale and servicing of first mortgage, non-conventional, home equity loans.
Fundamental to the profitability and funding of the Company's mortgage
operations is the sale of these loans with servicing rights retained. The
majority of the revenue of the mortgage segment is derived from gain recognized
on the sale of loans and the recognition of net loan fees at the time of sale of
the loans. Net loan fees on loans owned by the Company are recognized over the
lives of the loans.
Prior to 1991, the Company had either held the home equity loans it
originated in its own portfolio or sold them to financial institutions. Since
the fourth quarter of 1991, however, the secondary mortgage market's growing
acceptance of mortgage-backed securities based on non-conventional home equity
loans has allowed the Company to pool large numbers of loans for sale as
mortgage-backed securities. In late 1991 and 1992, this was accomplished
primarily through private placement transactions. In 1993, the Company began
selling its loans in public securitization transactions through its own shelf
registration statement and sold publicly $973 million and $451 million of home
equity loans during 1994 and 1993, respectively.
The Company's mortgage operations are interest rate sensitive and,
therefore, fluctuations in and the level of interest rates can have a variety of
effects on the Company's profitability. In particular, significant changes in
interest rates may impact the volume of loan originations, and will influence
the funding costs of such originations and the amount of gain recognized on
loans sold in the secondary market. During periods of declining interest rates
the mortgage operations will generally experience an increase in profitability
as the interest spread should widen both on loans held by the Company as an
investment and on loans sold in the secondary market.
15
<PAGE> 43
Although loan sale gains increased from $22.6 million for the first quarter
of 1994 to $26.7 million for the same period in 1995, the Company's operating
income before income taxes of its mortgage operations declined to $17.9 million
for the first quarter of 1995 as compared to $20.4 million for the first quarter
of 1994, primarily as a result of increased expenses relating to the expansion
of its mortgage operations. During 1993, the positive effect on income of the
mortgage operations resulted primarily from a wider interest margin retained on
loans sold and a lower cost of funding loan originations than experienced in
1992 or 1994. The weighted average interest spread on loans sold to third
parties (the difference between the stated rate on the loan and the rate paid to
purchasers, less recurring fees) increased from 4.56% in 1992 to 6.06% in 1993
and declined to 4.49% in 1994 due to a rising interest rate environment. This
spread was 4.42% for the first quarter of 1995 compared to 5.16% for the first
quarter of 1994, the reduction due primarily to the higher market interest rates
during the first quarter of 1995. The weighted average interest spread on loans
sold is determined without regard to credit losses. Therefore, the spread is not
impacted by projected or actual credit losses. The lower interest spread on
loans sold during 1994 and the first quarter of 1995 was somewhat offset by an
increased volume of loans originated and sold. In 1994, $909 million of home
equity loans were originated and $978 million were sold to third parties
compared to $540 million originated and $463 million sold to third parties in
1993. In the first three months of 1995, $309 million of home equity loans were
originated and $275 million were sold to third parties compared to $197 million
originated and $198 million sold to third parties in the first three months of
1994.
Although historically a lower interest rate environment has not resulted in
a significant increase in the level of prepayment of loans originated and
serviced by the Company, a significant and sustained reduction in interest rates
could cause prepayments to increase, and thereby result in a contraction of the
amount of loans owned and serviced and an accelerated amortization of
capitalized excess servicing income. Increased prepayments reduce the time
period during which the Company receives excess servicing income and other
servicing income with respect to prepaid loans. Increased amortization of
capitalized excess servicing income is a current charge to earnings. Likewise,
if delinquencies or liquidations were to occur sooner in the portfolio of loans
sold by the Company and/or with greater frequency than was initially assumed,
capitalized excess servicing income amortization would occur more quickly than
originally anticipated, which would have an adverse effect on servicing income
in the period of such adjustment. In contrast, an increase in the level of
interest rates for an extended period of time could adversely affect the ability
of the Company to originate loans, as well as the profitability of the loan
origination program, by increasing the cost of funding and reducing the interest
spread on loans retained and loans sold. If actual prepayments with respect to
loans sold occur more slowly than estimated at the time of sale, total income
would exceed previously estimated amounts; however, no adjustments would be made
to capitalized excess servicing income on the Company's consolidated balance
sheet as such income would be recognized prospectively.
LIFE INSURANCE
UC Life has focused its efforts on increased annuity sales by expanding its
distribution network of financial institutions and independent general agents.
In 1994, annuity sales were $250 million, the largest annual production since
1982. Annuity sales for the first quarter of 1995 were $48.6 million compared to
$45.0 million for the first quarter of 1994. UC Life focused in 1994 on
expanding the independent general agents share of its distribution network,
which agents sold approximately 46% of the total dollar amount of annuities
written in 1994 compared to 30% in 1993. As with the Company's mortgage
operation, fluctuations in and the level of interest rates also impacts the
operations of UC Life. The average spread on the annuity business was 1.84% in
1992 and increased to 2.20% and to 2.73% during 1993 and 1994, respectively.
This spread declined to 2.38% during the first quarter of 1995. Surrenders of
annuity policies increased in 1994 compared to prior years and in the first
quarter of 1995 compared to the first quarter of 1994 due in part to the
reduction in interest rates on new and existing annuity contracts and to a
rising interest rate environment and an increase in the number of annuity
contracts which were beyond the surrender penalty period.
UC Life has continued its efforts to improve the quality and liquidity of
its investment portfolio. At March 31, 1995, the weighted average rating of the
publicly traded bond portfolio was "AA", the amortized cost of assets allocated
to investments in investment grade fixed maturity securities was $337 million or
29.4%
16
<PAGE> 44
of the portfolio and in investment grade mortgage-backed securities was $789
million or 68.8% of the portfolio. At March 31, 1995, the amortized cost of UC
Life's holdings of non-investment grade publicly traded bonds was $21.1 million
or 1.8% of the portfolio. UC Life's invested assets also include residential and
commercial real estate mortgages originated and serviced by UC Lending; however,
the percentage of assets invested in mortgage loans in recent years has been
reduced primarily as the result of their disfavor with insurance regulatory
authorities and rating agencies.
The annuities sold by UC Life are monetary in nature and therefore
sensitive to changes in the interest rate environment. Profitability of UC Life
is directly affected by its ability to invest annuity premiums at yields above
the interest crediting rates on the related policy liabilities. One of the
primary financial objectives of UC Life is to effectively manage this interest
spread over time in changing interest rate environments. This is accomplished in
part by adjusting the interest crediting rate paid on its existing and new
annuity policies. During periods of declining interest rates, the fair value of
UC Life's investments, primarily fixed maturity investments, increases; however,
yields earned on investments made during such periods decline. In contrast,
during periods of rising interest rates the fair value of the investment
portfolio declines and the risk of policy surrenders increases. An unanticipated
increase in surrenders would impact the Company's liquidity, potentially
requiring the sale of certain investments prior to their maturities, which may
be at a loss.
Reserves for annuity policies constitute the Company's primary liabilities.
The duration of these liabilities is affected by a number of factors, including
interest rates, surrender penalties, ratings, public confidence in the insurance
industry generally and in UC Life specifically, governmental regulations and tax
laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
DISCONTINUED OPERATIONS
UG Title
On April 10, 1995, the Company made a decision to dispose of its investment
in UG Title, a wholly owned subsidiary of the Company, and, on May 1, 1995,
approved a formal plan of disposal. As a result, the operations of UG Title have
been classified as discontinued operations, and, accordingly, the consolidated
financial statements and the related notes of the Company segregate continuing
and discontinued operations. It is anticipated that the disposal will be
completed during 1995.
In connection therewith, a letter of intent to sell UG Title has been
signed which provides for a reduction of the sale price for certain claims
relating to transactions occurring prior to the date of sale and discovered
within twelve months thereafter. The Company has estimated the risk of loss
related to such potential claims and recorded a provision for such loss in
connection with the disposition. Should such claims materially exceed the
Company's estimates for such losses, such consequence will have an adverse
impact on the Company's operations by reducing the proceeds to be received from
the sale. The transaction contemplated by the letter of intent is subject to
negotiation and execution of a definite agreement and the satisfaction of
certain conditions, including receipt of necessary regulatory approvals. The
Company believes that the failure to consummate the transaction contemplated by
the letter of intent should not have a material adverse effect on the Company's
financial condition.
In connection with the decision to dispose of UG Title, the Company
recorded a $128,000 after tax loss in its financial statements as of and for the
quarter ended March 31, 1995. Total revenues of UG Title for the three months
ended March 31, 1995 and 1994 were $9.0 million and $9.1 million, respectively,
and net income (loss) was $(373,000) and $233,000, respectively. Total assets of
UG Title at March 31, 1995 and December 31, 1994 were $16.0 million and $18.0
million, respectively.
UG Title was formed in 1983 to compliment the Company's mortgage
operations; however, underwriting of affiliated transactions represented less
than 3% of UG Title's business in 1994. At December 31, 1994, UG Title was
licensed in 28 states, was represented by approximately 880 independent general
agents and had no direct operations. Key markets for UG Title are Colorado,
Louisiana, Florida and California. During 1994
17
<PAGE> 45
and 1993, title insurance premiums were $44.7 million and $24.4 million,
respectively. During 1994, UG Title experienced a net loss of $5.0 million
compared to net income of $0.8 million in 1993. Operations in 1994 suffered
severely as the result of claims related to agency escrow shortages in several
states and losses associated with a loan broker in California. In addition to
the incurred losses, the profitability of UG Title in 1994 was negatively
impacted by a $3.8 million increase in its reserve for policy losses.
UG Title provides single premium products insuring the validity of
residential first and second mortgage loans and indemnifying the policyholders
against loss or damage from obtaining an invalid title to real property. UG
Title focuses on underwriting title policies for resales and refinancings of
properties which policies averaged $80,100 in 1994. Risks in excess of $350,000
are reinsured primarily with Fidelity National Title Insurance Company; however,
UG Title remains contingently liable for reinsurance ceded. UG Title, unlike
some other title insurers, operates exclusively through independent title
agents.
FMC
On May 7, 1993, the Company decided to divest its subsidiary FMC. As a
result of this decision, the operations of FMC have been classified as
discontinued operations, and, accordingly, the consolidated financial statements
of the Company and the related notes segregate continuing and discontinued
operations. In connection with the decision to dispose of FMC, the Company
recorded a $17.6 million after tax loss in its financial statements as of and
for the quarter ended March 31, 1993, reflecting the operating loss of FMC for
the quarter ended March 31, 1993 of $1.5 million, net of tax benefit and the
estimated loss from disposal of FMC of $16.1 million, net of tax benefit. The
Company has not reflected operating losses incurred by FMC subsequent to that
date in the Company's financial statements.
As of November 30, 1993, the servicing rights owned by FMC, which
constituted substantially all of its assets, were sold. On December 21, 1993,
the FMC Institutional Lenders filed a petition in the U.S. bankruptcy court to
cause the remaining affairs of FMC to be wound up under the supervision of the
bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court
has approved a plan of liquidation for FMC providing for the appointment of a
trustee selected by the FMC Institutional Lenders, disposal of FMC's remaining
assets, and distributions to FMC's creditors. The FMC Institutional Lenders
allege that FMC has certain claims against the Company, including a claim with
respect to the Company's alleged failure to remit all sums due FMC regarding
federal income taxes estimated by the FMC Institutional Lenders to range from
$2.1 million to $29 million. FMC and the Company executed, subject to the
approval of the bankruptcy court, a settlement agreement relating to payments
between FMC and the Company in connection with the federal income tax benefits
resulting from FMC's losses and to certain prior intercompany payments between
FMC and the Company. The settlement agreement included a release by FMC in favor
of the Company of any and all claims relating to federal income taxes. The FMC
Institutional Lenders opposed the proposed settlement agreement. At the
conclusion of a hearing on the proposed settlement on August 18, 1994, the
bankruptcy court approved the portion of the settlement providing for a net
payment by the Company of $1.65 million to FMC in satisfaction of the federal
income tax benefits resulting from FMC's losses and the release of any claims
regarding federal income taxes. The Company had previously recorded
substantially all of the impact of this portion of the settlement in its prior
financial statements. The bankruptcy court declined to approve the other portion
of the proposed settlement relating to payments received by the Company from FMC
within twelve months of the bankruptcy filing. These matters may be pursued by
the trustee under the plan of liquidation approved by the bankruptcy court. If
the Company were required to refund such payments, the Company has estimated the
potential additional loss to be $1.9 million, net of tax benefits. The decision
of the bankruptcy court on the settlement is not final and was appealed by the
FMC Institutional Lenders to the U.S. District Court which affirmed the
bankruptcy court's decision. The FMC Institutional Lenders have appealed this
decision to the United States Court of Appeals for the Fifth Circuit. Management
of the Company does not believe that any additional amounts are owed by the
Company to FMC and intends to vigorously contest any claims which may be brought
against it for such amounts.
The Company did not guarantee any debt of FMC and believes, based upon
advice of its counsel, that it has no responsibility for the obligations of FMC
under FMC's primary credit facility or (excluding potential
18
<PAGE> 46
consequences of the bankruptcy filing on certain prior intercompany transactions
or potential additional payment for tax benefits as discussed above) for any
other liabilities to FMC's lenders.
RESULTS OF OPERATIONS
The Company's consolidated financial statements present UG Title and FMC as
discontinued operations. Discussed below are results of continuing operations
for the periods presented.
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31, 1994
Income from continuing operations for the first quarter of 1995 was $12.8
million ($.91 per share based on 14.1 million weighted average shares
outstanding) compared to net income of $13.5 million ($.93 per share based on
14.4 million shares outstanding) for the same period of 1994. In comparison to
the 1994 period, the decline in income in 1995 was primarily the result of costs
of expanding the Company's mortgage operations. Personnel costs in the Company's
mortgage division increased approximately $3.9 million as the average number of
employees in the unit increased by approximately 300 from the first quarter of
1994 to the same period of 1995. In addition, advertising expenses increased
approximately $2.0 million and occupancy costs of the mortgage operations
increased approximately $.6 million as the result of an increase in the number
of retail branches from 125 at March 31, 1994 to 143 at March 31, 1995. The
negative effect on income of these increased expense items was offset to some
extent by a $76 million increase in the amount of loans sold, which resulted in
an increase in loan sale gains from $22.6 million for the first quarter of 1994
to $26.7 million for the same period in 1995.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Total revenues.................................................... $88,119 $74,817
Total expenses.................................................... 68,570 53,985
Income from continuing operations before income taxes............. 19,549 20,832
Income from continuing operations................................. 12,824 13,477
</TABLE>
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the three months ended March 31, 1995
and 1994.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest, charges and fees on loans............................... $30,788 $27,285
Loan sale gains................................................... 26,734 22,554
Investment income................................................. 25,011 18,221
Loan servicing income............................................. 3,484 3,689
Net insurance premiums............................................ 2,102 3,068
------- -------
Total................................................... $88,119 $74,817
======= =======
</TABLE>
Interest, charges and fees on loans increased $3.5 million for the first
three months of 1995 compared to the same period of 1994. This line item
includes interest on mortgage loans owned by the mortgage and life insurance
divisions and loan origination fees earned by the mortgage division. Loan
origination fees in excess of direct origination costs on loans held by the
Company are recognized over the life of the loan and are recognized at the time
of sale on loans sold to third parties. During the three months ended March 31,
1995 and 1994, the Company sold approximately $275 million and $198 million,
respectively, in home equity loans and recognized approximately $8.2 million and
$7.0 million, respectively, in net loan origination fees in connection with
these sales. Other loan income includes primarily prepayment fees, late charges,
and insurance commissions.
19
<PAGE> 47
The following table presents the composition of interest, charges and fees
on loans for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Loan origination fees............................................. $15,502 $12,465
Mortgage loan interest............................................ 10,650 11,258
Other loan income................................................. 4,636 3,562
------- -------
Total................................................... $30,788 $27,285
======= =======
</TABLE>
The Company estimates that non-accrual loans reduced mortgage loan interest
for the first three months of 1995 and 1994 by approximately $2.9 million and
$2.5 million, respectively. During the three months ended March 31, 1995 the
average amount of non-accrual loans owned by the Company was $21.5 million
compared to approximately $28.7 million during the same period of 1994. In
addition, the average balance of loans serviced for third parties which were on
a non-accrual basis or in foreclosure was $69.3 million and $50.8 million during
the first three months of 1995 and 1994, respectively, representing 3.9% and
4.5%, respectively, of the average amount of loans serviced for third parties.
The Company is generally obligated to advance interest on delinquent loans which
have been sold until satisfaction of the note, liquidation of the collateral or
charge off of the delinquent loan. At March 31, 1995, the Company owned
approximately $10.5 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $8.2
million at March 31, 1994. The Company evaluates each of these commercial loans
to estimate its risk of loss in the investment and provides for such loss
through a charge to earnings.
Loan sale gains increased $4.2 million during the first three months of
1995 over the same period in 1994. Loan sale gains approximate the present value
over the estimated lives of the loans of the excess of the contractual rates on
the loans sold, over the sum of the pass-through rate paid to the buyer, a
normal servicing fee, a trustee fee, a surety bond fee, if any, in
mortgage-backed securitization transactions, and an estimate of future credit
losses. The increase in the amount of loan sale gains was due primarily to a $76
million increase in the amount of loans sold which offset a decline in excess
servicing income retained by the Company (i.e., the stated interest rate on the
loan less the pass-through rate and the normal servicing fee and other
applicable recurring fees). Interest spread retained by the Company on loans
sold includes the normal servicing fee. During 1994, guidelines were published
by Standard & Poor's defining a normal servicing fee as 50 basis points for
servicing "B" and "C" quality home equity loans, such as those originated by the
Company. As the result of this industry data, the servicing fee rate used by the
Company in its securitization transactions subsequent to July 1, 1994 has been
50 basis points compared to previous securitizations which include a servicing
fee rate of 75 basis points.
The following table presents information regarding home equity loan sale
transactions for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Home equity loans sold......................................... $274,653 $198,332
Average coupon on home equity loans sold....................... 12.65% 11.67%
Interest spread retained on home equity loans sold............. 4.42% 5.61%
Home equity loan sale gains.................................... $ 26,734 $ 22,554
</TABLE>
20
<PAGE> 48
In comparison to the first quarter of 1994, market interest rates were
higher in the first quarter of 1995, and, as a result, the Company experienced a
decrease in the weighted average interest spread retained on home equity loans
sold from 5.61% in 1994 to 4.42% in 1995. Fluctuations in and the level of
market interest rates will impact the interest spread retained by the Company on
loans sold, and, potentially, the amount of its loan sale gains. An increase in
the level of market interest rates will generally adversely affect the interest
spread on loans sold, whereas such interest spread generally widens during a
declining interest rate environment. Although actions have been taken by the
Company during a rising interest rate environment to mitigate the impact on
earnings of fluctuations in market rates, such as increasing the coupon rate
charged on its loan products, the effect of such actions will generally lag the
impact of market rate fluctuations. The weighted average interest spread
retained by the Company on loan sales during the first quarter of 1995 increased
to 4.42% from 4.10% during the fourth quarter of 1994. This increase is
primarily attributable to an increase in the weighted average coupon on loans
sold which offset an increase in the pass-through rates attributable to such
loans.
Historically, the Company has not entered into commercial interest rate
hedge transactions in connection with future loan securitizations; however,
during the first quarter of 1995 the Company entered into a hedge with respect
to a portion of the home equity mortgage loan securitization transaction which
closed during the quarter. In addition, the Company has used a prefunding
feature in connection with recent loan securitization transactions. The
prefunding feature "locks in" the pass-through rate that the Company will pay to
the investors on a prefunded amount which will be used to acquire loans at a
future date. The Company is obligated for the difference between the earnings on
such prefunded amount and the pass-through interest paid to the investors during
the period from the date of the closing of the securitization transaction until
the date of delivery of the loans. In connection with the home equity loan
securitization transaction which closed in the first quarter of 1995,
approximately $79 million was held in a prefunding account for purchase of the
Company's home equity loans during the second quarter of 1995. Pursuant thereto,
home equity loans with a remaining principal balance of approximately $79
million were delivered in May 1995.
Investment income totaled $25.0 million on average investments of
approximately $1.2 billion for the first three months of 1995 compared to
investment income of $18.2 million on average investments of approximately $977
million during the same period of 1994. At March 31, 1995 the amortized cost of
the fixed income portfolio totaled $1.1 billion and was comprised principally of
$789 million in investment grade mortgage-backed securities and $337 million in
investment grade bonds. At March 31, 1995, the weighted average rating of the
publicly traded bond portfolio according to nationally recognized rating
agencies was "AA". During 1994, the Company established a trading account for a
portion of its investment portfolio invested in common stocks. At March 31,
1995, the carrying value of investments in the Company's trading account was
$0.8 million reflecting an $88,000 net unrealized gain which is included in
investment income for the first quarter of 1995.
Loan servicing income declined $0.2 million for the three months ending
March 31, 1995 compared to the same period of 1994. Loan servicing income was
negatively affected by a $1 million increase in the amortization of prior loan
sale gains as the result of an adjustment in the estimated prepayment
assumptions of certain mortgage loans serviced by the Company, primarily
adjustable rate mortgage loans. This adjustment was made in connection with the
Company's evaluation of capitalized excess servicing income which is performed
as of each balance sheet date. This evaluation includes an analysis of the
prepayment assumptions used in calculating loan sale gains in relation to the
current rate of prepayment, and if necessary, revising the estimate using the
original discount rate. Any losses arising from adverse prepayment experience
are recognized immediately while favorable experience is recognized
prospectively. This adjustment offset the impact of a $700 million increase in
the average amount of home equity loans serviced by the Company for third
parties during the first quarter of 1995 compared to the same period of 1994. In
addition, the reduction in the normal servicing fee from 75 to 50 basis points
as discussed above has the impact of increasing current
21
<PAGE> 49
revenues (loan sale gains) while reducing future revenues (loan servicing
income). The following table reflects the components of loan servicing income
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Servicing fees earned........................................... $ 16,951 $11,870
Amortization of capitalized excess servicing income............. (13,467) (8,181)
-------- -------
Total................................................. $ 3,484 $ 3,689
======== =======
</TABLE>
Net insurance premiums declined $1.0 million for the first three months of
1995 compared with the same period of 1994. Net insurance premiums reflect the
recognition of credit life premiums on policies sold in prior years. The
decrease in premium income is primarily the result of UC Life's decision in 1993
to discontinue sales of credit insurance products.
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest on annuity policies..................................... $19,526 $17,793
Personnel........................................................ 17,071 13,507
Interest......................................................... 5,894 2,425
Loan loss provision.............................................. 4,064 3,996
Insurance commissions............................................ 3,548 3,423
Insurance benefits............................................... 2,429 3,008
Other operating.................................................. 16,038 9,833
------- -------
Total.................................................. $68,570 $53,985
======= =======
</TABLE>
Interest on annuity policies increased $1.7 million for the first three
months of 1995 when compared to the same period of 1994 primarily as the result
of an increase in annuity reserves. Average annuity reserves were $1.4 billion
during the first quarter of 1995, an increase of approximately $127 million from
the same period of 1994.
Personnel expenses increased approximately $3.6 million primarily because
of costs associated with the expansion of the Company's mortgage operations and
an increase in incentive bonuses based on loan production.
Interest expense for the first three months of 1995 increased $3.5 million
from the same period of 1994 primarily as the result of an increase in the
weighted average interest rate on debt outstanding.
The provision for estimated losses on the commercial mortgage portfolio
during the first quarter of 1995 declined approximately $0.8 million when
compared to the same period of 1994 due to a reduction in the amount of loans
serviced and an improved commercial real estate environment. The positive effect
of this reduction on net income was offset by an increase in the provision for
estimated losses on home equity loans when compared to the first quarter of
1994.
Insurance commissions for the first three months of 1995 were $3.5 million
compared to $3.4 million for the same period of 1994. Commissions paid on
issuance of the Company's single premium deferred annuity products are generally
capitalized as deferred policy acquisition costs and amortized over the
estimated life of the policy. During the three months ended March 31, 1995, the
Company capitalized approximately $3.9 million in commissions paid on sales of
annuities compared to $3.5 million during the same period of
22
<PAGE> 50
1994. Amortization of commission expense on annuities capitalized in prior
periods was $2.6 million during the three months ended March 31, 1995, compared
to $2.2 million during the same period of 1994.
Other operating expenses for the three months ended March 31, 1995
increased approximately $6.2 million when compared to the same period of 1994
primarily as the result of expansion of the Company's mortgage operations,
including a $2.0 million increase in advertising expenses, a $0.8 million
increase in loan purchase premiums and a $0.6 million increase in occupancy
expenses.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 was $49.5 million ($3.48 per share based on 14,245,325
weighted average shares outstanding) compared to net income of $11.6 million for
1993 ($.97 per share based on 11,852,764 weighted average shares outstanding).
The increase in net income in 1994 resulted primarily from an increase in the
gain on sale of loans and an improved interest margin earned on annuities. In
addition, as previously discussed in "-- Discontinued Operations," net income
for 1994 and 1993 was reduced by a $5.0 million and $16.7 million loss,
respectively, recognized in connection with the Company's decisions to divest UG
Title and FMC.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................................. $314,694 $260,013
Total expenses................................................. 230,620 216,952
Income from continuing operations before income taxes.......... 84,074 43,061
Income from continuing operations.............................. 54,582 28,317
</TABLE>
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the year ended December 31, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest, charges and fees on loans............................ $116,747 $ 96,284
Loan sale gains................................................ 86,735 59,441
Investment income.............................................. 84,666 75,527
Loan servicing income.......................................... 15,173 10,077
Net insurance premiums......................................... 11,373 18,684
-------- --------
Total................................................ $314,694 $260,013
======== ========
</TABLE>
Interest, charges and fees on loans increased $20.5 million for 1994. This
line item includes interest on mortgage loans owned by the mortgage and
insurance divisions and loan origination fees earned by the mortgage division.
Loan origination fees in excess of direct origination costs on each loan held by
the Company are recognized over the life of the loan or earlier at the time of
sale on a loan sold to third parties. During 1994 and 1993, the Company sold
approximately $978 million and $463 million, respectively, in home equity loans
and recognized approximately $32.5 million and $18.9 million, respectively, in
net loan origination fees in connection with these sales. Other loan income
includes primarily prepayment fees, late charges and insurance commissions.
23
<PAGE> 51
The following table presents the composition of interest, charges and fees
on loans for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Loan origination fees........................................... $ 56,576 $35,987
Mortgage loan interest.......................................... 47,996 51,763
Other loan income............................................... 12,175 8,534
-------- -------
Total................................................. $116,747 $96,284
======== =======
</TABLE>
The Company estimates that nonaccrual loans reduced mortgage loan interest
for 1994 and 1993 by approximately $10.3 million and $9.5 million, respectively.
During 1994 the average amount of nonaccrual loans owned by the Company was
$25.5 million compared to approximately $31.7 million during 1993. In addition,
the average balance of loans serviced for third parties which were on a
nonaccrual basis or in foreclosure was $55.6 million and $43.4 million during
1994 and 1993, respectively, representing 4.1% and 4.5%, respectively, of the
average amount of loans serviced for third parties. The Company is generally
obligated to advance interest on delinquent loans to the investor or holder of
the mortgage-backed security, as the case may be, at the pass-through rate until
satisfaction of the note, liquidation of the collateral or charge off of the
delinquent loan. At December 31, 1994, the Company owned approximately $7.8
million of commercial loans which were on an accrual status, but which the
Company considers as potential problem loans, compared to $8.1 million at
December 31, 1993. The Company evaluates each of these commercial loans to
estimate its risk of loss in the investment and provides for such loss through a
charge to earnings.
Loan sale gains recognized by the Company's mortgage division increased
$27.1 million during 1994 over 1993. Loan sale gains approximate the present
value over the estimated lives of the loans of the excess of the contractual
rates on the loans sold, over the sum of the pass-through rate paid to the
buyer, a normal servicing fee, a trustee fee, a surety bond fee, if any, in
mortgage-backed securitization transactions, and an estimate of future credit
losses. The increase in the amount of loan sale gains was due primarily to a
$515 million increase in the amount of loans sold which offset a decrease in
excess servicing income retained by the Company (i.e., the stated interest rate
on the loan less the pass-through rate and the normal servicing fee and other
applicable recurring fees). Interest spread retained by the Company on loans
sold includes the normal servicing fee. During 1994, guidelines were published
by Standard & Poor's defining a normal servicing fee as 50 basis points for
servicing "B" and "C" quality home equity loans, such as those originated by the
Company. As the result of this industry data, the servicing fee rate used by the
Company in its 1994 third and fourth quarter loan securitization transactions
was 50 basis points. This resulted in an increase in the amount of loan sale
gain recognized on the home equity loans sold in the 1994 third and fourth
quarters compared to previous securitization transactions which include a
servicing fee rate of 75 basis points.
The following table presents information regarding home equity loan sale
transactions for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Home equity loans sold......................................... $977,653 $462,873
Average coupon on home equity loans sold....................... 11.80% 12.00%
Weighted interest spread retained on home equity loans sold.... 4.49% 6.06%
Home equity loan sale gains.................................... $ 86,735 $ 59,220
</TABLE>
In comparison to 1993, market interest rates were higher in 1994, and, as a
result, the Company experienced a decrease in the weighted average interest
spread retained on home equity loans sold from 6.06% in 1993 to 4.49% in 1994.
Fluctuations in and the level of market interest rates will impact the interest
spread retained by the Company on loans sold, and, potentially, the amount of
its loan sale gains. An increase in the
24
<PAGE> 52
level of market interest rates will generally adversely affect the interest
spread on loans sold, whereas such interest spread generally widens during a
declining interest rate environment. Although actions have been taken by the
Company during a rising interest rate environment to mitigate the impact on
earnings of fluctuations in market rates, such as increasing the coupon rate
charged on its loan products, the effect of such action will generally lag the
impact of market rate fluctuations. The weighted average interest spread
retained by the Company on loan sales during the fourth quarter of 1994 declined
to 4.10% from 4.63% retained on loan sales during the first nine months of 1994.
This decrease is primarily attributable to increases in the pass-through rates
on mortgage backed securities sold under the Company sponsored shelf
registration statement due to increases in market rates. Historically, the
Company has not entered into commercial interest rate hedge transactions in
connection with warehousing loans for future loan securitizations. The Company
has used a prefunding feature in connection with recent loan securitization
transactions. Such prefunding feature "locks in" the pass-through rate that the
Company will pay to the investor on a predetermined amount of loans for future
delivery. The Company is obligated for the difference between the earnings on
such prefunded amount and the pass-through interest paid to the investor during
the period from the date of the closing of the securitization transaction until
the date of delivery of the loans. In connection with the home equity loan
securitization transaction which closed in the fourth quarter of 1994,
approximately $53 million was held in a prefunding account for purchase of the
Company's home equity loans during the first quarter of 1995.
Investment income totaled $84.7 million on average investments of
approximately $1.1 billion for 1994 compared to investment income of $75.5
million on average investments of approximately $872 million during the same
period of 1993. The impact on revenue of the increased asset base in 1994 was
partially offset by lower weighted average investment yields than those obtained
during 1993. Investment income for 1994 and 1993 includes investment gains of
$0.2 million and $0.6 million, respectively. At December 31, 1994, the amortized
cost of the fixed income portfolio totaled $1.1 billion and was comprised
principally of $790 million in investment grade mortgage-backed securities and
$281 million in investment grade bonds. At December 31, 1994, the weighted
average rating of the publicly traded bond portfolio according to nationally
recognized statistical rating agencies was "AA". During 1994, the Company
established a trading account for a portion of its investment portfolio invested
in common stocks. At December 31, 1994, the carrying value of investments in the
Company's trading account was $679,000 reflecting a $22,751 unrealized gain
which is included in investment income for 1994.
Loan servicing income increased $5.1 million for 1994 compared to 1993,
reflecting the impact of an increased amount of home equity loans serviced for
third parties offset by an increase in the amortization of capitalized excess
servicing income. The reduced normal servicing fee rate from 75 to 50 basis
points as discussed above has the impact of increasing current revenues (loan
sale gains) while reducing future revenues (loan servicing income) with respect
to the loan sale transactions occurring on and after the reduction. The
following table reflects the components of loan servicing income for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Servicing fees earned.......................................... $ 55,428 $ 31,621
Amortization of capitalized excess servicing income............ (40,255) (21,544)
-------- --------
Total................................................ $ 15,173 $ 10,077
======== ========
</TABLE>
Net insurance premiums declined $7.3 million for 1994 compared with 1993.
Net insurance premiums reflect revenues associated primarily with credit
insurance underwritten by UC Life. The decrease in premium income is primarily
the result of the impact of UC Life's decision to discontinue sales of credit
insurance products.
25
<PAGE> 53
Expenses. The following table presents the components of the Company's
expenses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest on annuity policies................................... $ 73,065 $ 76,086
Personnel...................................................... 57,380 40,784
Interest....................................................... 14,563 10,158
Insurance commissions.......................................... 14,264 13,920
Loan loss provision............................................ 13,457 17,343
Insurance benefits............................................. 12,654 18,200
Other operating................................................ 45,237 40,461
-------- --------
Total................................................ $230,620 $216,952
======== ========
</TABLE>
Interest on annuity policies declined $3.0 million in 1994 when compared to
1993 as the result of a reduction in the average interest crediting rate on the
Company's annuity policies offset by the impact of an increase in annuity
reserves. Average annuity reserves were $1.4 billion during 1994, an increase of
approximately $117 million from 1993.
Personnel expenses increased approximately $16.6 million primarily because
of costs associated with the expansion of the Company's mortgage operations,
loan production related incentives and an increase in the cost of the Company's
employee benefit and incentive plans.
Insurance commissions for 1994 increased by approximately $.3 million over
commissions for 1993. Commissions paid on issuance of the Company's deferred
annuity products are generally capitalized as deferred policy acquisition costs
and amortized over the estimated life of the policy. During 1994, the Company
capitalized approximately $20.7 million in commissions paid on sales of
annuities compared to $13.7 million during 1993. Amortization of commission
expense on annuities capitalized in prior periods was $9.5 million during 1994,
compared to $5.6 million during 1993.
Insurance benefits for 1994 declined $5.5 million compared to 1993
primarily as the result of a reduction in benefits associated with ordinary life
and credit insurance products.
The Company's loan loss provision was $13.5 million and $17.3 million for
1994 and 1993, respectively. The decrease in the provision resulted from a
decrease in the provision for losses on home equity loans due to a reduction in
the amount of loans owned by the Company, a decrease in the amount of property
placed into foreclosure and a lower incidence of loss per property sold.
Interest expense for 1994 increased approximately $4.4 million compared to
1993 primarily as the result of an increase in the weighted average interest
rate charged on debt.
Other operating expenses for 1994 increased approximately $4.8 million when
compared to 1993 primarily as the result of costs associated with the expansion
of the Company's mortgage operations, including a $2.3 million increase in
advertising expenses and a $1.3 million increase in occupancy and equipment
expenses. Other operating expenses in 1993 included a $2.3 million accrual for
the estimated cost of a legal settlement and $1.4 million in estimated losses in
connection with termination of a third party administrative contract for credit
insurance.
ASSET QUALITY AND RESERVES
The quality of the Company's loan and bond portfolios and of the loan
portfolio serviced for third parties significantly affects the profitability of
the Company. The values of and markets for these assets are dependent on a
number of factors, including general economic conditions, interest rates and
governmental regulations. Adverse changes in such factors, which become more
pronounced in periods of economic decline, may affect the quality of these
assets and the Company's resulting ability to sell these assets for acceptable
prices.
26
<PAGE> 54
General economic deterioration can result in increased delinquencies on existing
loans, reductions in collateral values and declines in the value of investments
resulting from a reduced capacity of issuers to repay the bonds.
Loans. Substantially all of the loans owned by the Company were originated
through the Company's branch (i.e., retail) network or wholesale loan programs.
In connection with its origination of home equity loans, the Company relies on
thorough underwriting and credit review procedures, a mortgage on the borrower's
residence and, in some cases, other security, and, in its retail origination
program, contact with borrowers through its branch office system to manage
credit risk on its loans. In addition to servicing the loans owned by the
Company, the mortgage division serviced approximately $1.9 billion in loans for
third parties at March 31, 1995, $1.7 billion of which are home equity loans.
Substantially all of the home equity loans serviced for third parties were
publicly sold as mortgage backed securities ("pass-through certificates"). The
purchasers of the pass-through certificates receive a credit enhanced security
which is generally achieved in part by subordinating the excess interest spread
retained by the Company to the payment of scheduled principal and interest on
the certificates. Such subordination relates to credit losses which may occur
after the sale of the loans and continues until the earlier of the payment in
full of the loans or termination of the agreement pursuant to which the loans
were sold. If cumulative payment defaults exceed the amount subordinated, a
third party insurer is obligated to pay any further losses experienced by the
owners of the pass-through certificates.
The Company is also obligated to cure, repurchase or replace loans which
may be determined after the sale to violate representations and warranties
relating to them and which are made by the Company at the time of the sale. The
Company regularly evaluates the quality of the loan portfolio and estimates its
risk of loss based upon historical loss experience, prevailing economic
conditions, estimated collateral value and such other factors which, in
management's judgment, are relevant in estimating the credit risk in owned
and/or serviced loans. Estimated losses on the owned portfolio are provided for
by an increase in the allowance for loan losses through a charge to current
operating income. At March 31, 1995, the Company's allowance for loan losses was
$16.8 million. For loans sold, the Company reduces the amount of gain recognized
on the sale by the estimated amount of credit losses, and records such amount on
its balance sheet in the allowance for loss on loans serviced. At March 31,
1995, the allowance for loss on loans serviced was $29.6 million. The maximum
recourse associated with sales of home equity loans according to terms of the
loan sale agreements totaled approximately $323 million, of which amount
approximately $312 million relates to the subordinated cash and excess interest
spread. Should credit losses on loans sold materially exceed the Company's
estimates for such losses, such consequence will have a material adverse effect
on the Company's operations.
At March 31, 1995, the contractual balance of loans serviced was
approximately $2.2 billion comprised of approximately $387 million serviced for
the Company and approximately $1.9 billion serviced for investors. The portfolio
is geographically diversified. Although the Company services loans in 46 states,
at March 31, 1995 a substantial portion of the loans serviced were originated in
Florida (13.4%), Ohio (11.5%) and Louisiana (10.1%), respectively, and no other
state accounted for more than 8.0% of the serviced portfolio. Included in the
serviced portfolio are commercial loans originated by the Company, a substantial
portion of which were originated in Florida (27.4%) and Georgia (16.8%) and no
other state accounted for more than 8.5% of the commercial loans serviced. The
risk inherent in such concentrations is dependent not only upon regional and
general economic stability which affects property values, but also the financial
well-being and creditworthiness of the borrower.
27
<PAGE> 55
The following table provides a summary of loans owned and/or serviced which
are past due 30 days or more, foreclosed properties and loans charged off as of
the dates indicated.
<TABLE>
<CAPTION>
FORECLOSED
PROPERTIES
-------------------
SERVICED
FOR NET
CONTRACTUAL DELINQUENCIES % OF OWNED THIRD LOANS % OF
BALANCE CONTRACTUAL CONTRACTUAL BY THE PARTY CHARGED AVERAGE
PERIOD ENDED OF LOANS BALANCE BALANCE COMPANY INVESTORS OFF LOANS*
- ------------------------ ----------- ------------- ----------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MARCH 31, 1995
Home equity........... $1,895,955 $134,514 7.09% $ 7,527 $13,187 $ 3,470 0.76%
Commercial............ 267,291 5,208 1.95% 21,509 10,738 210 0.32%
Conventional.......... 70,986 2,634 3.71% 285 -- 36 0.20%
--------- -------- ------- ------- -------
Total......... $2,234,232 $142,356 6.37% $29,321 $23,925 $ 3,716
========= ======== ======= ======= =======
DECEMBER 31, 1994
Home equity........... $1,683,698 $129,203 7.67% $ 8,791 $11,837 $11,694 0.84%
Commercial............ 274,413 5,377 1.96% 22,131 8,784 5,658 1.83%
Conventional.......... 74,294 2,672 3.60% 35 -- 100 0.16%
--------- -------- ------- ------- -------
Total......... $2,032,405 $137,252 6.75% $30,957 $20,621 $17,452
========= ======== ======= ======= =======
DECEMBER 31, 1993
Home equity........... $1,125,139 $ 92,974 8.26% $17,014 $ 8,355 $ 8,548 0.88%
Commercial............ 345,365 19,292 5.59% 20,871 9,275 3,579 0.95%
Conventional.......... 98,277 3,747 3.81% 148 -- 77 0.09%
--------- -------- ------- ------- -------
Total......... $1,568,781 $116,013 7.40% $38,033 $17,630 $12,204
========= ======== ======= ======= =======
</TABLE>
- ---------------
* Annualized for the three months ended March 31, 1995.
Management continues to focus on reducing the level of non-earning assets
owned and/or serviced by expediting the foreclosure process. The balance of
foreclosed home equity loans owned and/or serviced totaled $20.7 million at
March 31, 1995 compared to $22.0 million at March 31, 1994.
The above delinquency and loan loss experience represents the Company's
recent experience. However, the delinquency, foreclosure and net loss
percentages may be affected by the increase in the size and relative lack of
seasoning of the portfolio. In addition, the Company can neither quantify the
impact of property value declines, if any, on the home equity loans nor predict
whether or to what extent or how long such declines may exist. In a period of
such declines, the rates of delinquencies, foreclosures and losses on the home
equity loans could be higher than those theretofore experienced in the mortgage
lending industry in general. Adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the home equity loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses. As a
result, the information in the above tables should not be considered as the only
basis for assessing the likelihood, amount or severity of delinquencies or
losses in the future on home equity loans and no assurance can be given that the
delinquency and loss experience presented in the tables will be indicative of
such experience on home equity loans.
28
<PAGE> 56
A summary analysis of the changes in the Company's allowance for loan
losses for the indicated periods is as follows.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $16,508 $21,017 $21,017 $15,842 $15,962
Loans charged to allowance
Home equity........................... (3,827) (4,029) (12,745) (9,114) (5,511)
Commercial............................ (210) -- (5,767) (3,579) (4,805)
Conventional.......................... (36) (15) (149) (142) (158)
------- ------- ------- ------- -------
Total......................... (4,073) (4,044) (18,661) (12,835) (10,474)
Recoveries on loans previously charged
to allowance.......................... 357 276 1,209 631 1,085
------- ------- ------- ------- -------
Net loans charged off................... (3,716) (3,768) (17,452) (12,204) (9,389)
------- ------- ------- ------- -------
Loan loss provisions.................... 4,064 3,996 13,457 17,343 10,027
Reserve reclassification................ (14) (61) (514) 36 (758)
------- ------- ------- ------- -------
Balance at end of period................ $16,842 $21,184 $16,508 $21,017 $15,842
======= ======= ======= ======= =======
Specific reserves....................... $ 6,353 $ 8,429 $ 6,571 $ 8,500 $ 7,067
Unallocated reserves.................... 10,489 12,755 9,937 12,517 8,775
------- ------- ------- ------- -------
Total reserves................ $16,842 $21,184 $16,508 $21,017 $15,842
======= ======= ======= ======= =======
</TABLE>
Specific reserves are provided for foreclosures in which the carrying value
of the loan exceeds the market value of the collateral. Unallocated reserves are
provided for loans not in foreclosure and are calculated primarily using
objective measurement techniques. Unallocated reserves also include reserves for
active loans which have been modified or indicate potential problems as well as
reserves for a $32.5 million subordinated position the Company acquired in
connection with the securitization and sale of approximately $230 million in
commercial real estate mortgage loans in 1990. At March 31, 1995, the Company
owned $29.3 million of property acquired in settlement of loans, excluding the
specific reserves attributed to these properties. These balances are included in
the loans owned by the Company. The specific reserve in the table above is
provided to reduce the carrying value of these properties to their market value.
A summary of the allowances for future credit losses on loans and
foreclosed properties owned by the Company and loans sold with recourse
(including for purposes hereof loans sold with limited guarantees and
subordination of cash and excess interest spread owned by the Company) as of the
dates indicated is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
(Applicable to loans and foreclosed
properties owned by the Company)........ $16,842 $21,184 $16,508 $21,017 $15,842
Allowance for loss on loans serviced
(Applicable to loans sold with recourse)... 29,580 16,393 26,822 12,938 7,015
------- ------- ------- ------- -------
Total.............................. $46,422 $37,577 $43,330 $33,955 $22,857
======= ======= ======= ======= =======
</TABLE>
As of March 31, 1995, approximately $1.7 billion of home equity loans sold
were serviced by UC Lending under agreements substantially all of which provide
for the subordination of cash and excess interest spread owned by the Company
for credit losses ("loans sold with recourse"). The maximum recourse associated
with sales of home equity loans according to terms of the loan sales agreements
was approximately $323 million at
29
<PAGE> 57
March 31, 1995, of which $312 million relates to the subordinated cash and
excess interest spread. The Company's estimate of its losses, based on
historical loan loss experience, was approximately $29.6 million at March 31,
1995 and is recorded in the Company's allowance for loss on loans serviced.
Should credit losses on loans sold with limited recourse, or subordination of
cash and excess interest spread owned by the Company, materially exceed the
Company's estimate for such losses, such consequence will have a material
adverse impact on the Company's operations.
Recent legal developments related to mortgage loans. On March 21, 1994, the
United States Court of Appeals for the Eleventh Circuit held, in part, that a
lender improperly disclosed the collection of the Florida state intangible tax
from the borrower, thereby subjecting the loan to rescission under the TILA by
the borrower for three years after it was made. Subsequent to the court's
initial decision and prior to its refusal to reconsider its decision, the
Florida legislature amended the language of the intangible tax to clarify the
legislature's previous intention that the intangible tax be disclosed for
purposes of the TILA in the manner that had been followed by most lenders in
Florida, including the Company. Although the Florida legislature intended this
legislation to apply retroactively, no final court decision has been rendered as
to the effect of this legislation on loans originated prior to its effective
date. This court decision may also apply to a similar intangible tax imposed by
other states. To its knowledge, as of May 12, 1995, no claims have been filed
against the Company under this court decision (other than as a defense in
foreclosure proceedings) and no notice of a breach of a representation has been
received under the Company's loan sale agreements requesting it to repurchase,
cure or substitute other loans for the loans sold. If the intent of the Florida
legislature is not upheld and if a substantial number of claims are filed by
borrowers against the Company resulting in rescission or repurchase, the
Company's financial statements and operations will be materially adversely
affected. As the financial impact, if any, of this contingency cannot presently
be reasonably estimated, the Company has made no accrual therefor.
Amendments to the TILA which may become effective on October 1, 1995,
impose additional disclosure requirements and prohibit certain prepayment
penalty charges, among other requirements, on loans with a specified level of
origination fees or a specified interest rate level. A significant percentage of
the Company's loans originated after the effective date could be subject to the
requirements of this legislation. The Company is currently reviewing this
legislation in its final form to determine the impact of its provisions on the
Company's business or results of operations.
Investment securities. The Company's investment portfolio consists
primarily of mortgage backed securities and corporate bonds, comprising 66% and
29% of the portfolio at March 31, 1995, respectively. At March 31, 1995,
approximately 93% of the Company's portfolio of investment securities were
classified in an available-for-sale category and the carrying value adjusted to
fair value by means of an adjustment to stockholders' equity. The remainder of
the portfolio consists primarily of private placements made either directly or
through an investment partnership and are classified as held-to-maturity and
valued at cost. At March 31, 1995, the Company owned $0.8 million in equity
securities classified as trading securities. The net unrealized loss in the debt
securities portfolio (amortized cost over fair value) at March 31, 1995 was
$32.7 million compared to an unrealized loss of $73.9 million at December 31,
1994. At March 31, 1995, the weighted average rating of UC Life's publicly
traded bond portfolio was "AA", the amortized cost of assets allocated to
investments in investment grade fixed maturity securities was $337 million or
29.4% of the portfolio and in investment grade mortgage-backed securities was
$789 million or 68.8% of the portfolio. At March 31, 1995 the amortized cost of
UC Life's holdings of non-investment grade publicly traded bonds was $21.1
million or 1.8% of the portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding loan
originations in its mortgage operations and the payment of policyholder claims
and surrenders incurred in its insurance operations. The Company's mortgage
operations require continued access to short and long-term sources of debt
financing, the sale of loans to UC Life and the sale of loans and asset-backed
securities in the secondary market. The liquidity requirements for the Company's
insurance operations are generally met by funds provided from the sale of
annuities and cash flow from its investments in fixed income securities and
mortgage loans.
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The Company's primary debt facility has been a revolving credit facility
(the "Bank Facility") dated as of October 11, 1988. On November 2, 1994 the
Company publicly sold $125 million of its senior unsecured notes (the "Senior
Notes"). The net proceeds from the sale of the Senior Notes were used to repay a
portion of the principal amount of the indebtedness outstanding under the Bank
Facility. The Senior Notes bear interest at the rate of 9.35% per annum, provide
for interest payable semi-annually, mature on November 1, 1999 and are not
redeemable prior to maturity. The Senior Notes rank on a parity with other
unsecured and unsubordinated indebtedness of the Company. An amendment to the
Bank Facility became effective upon the consummation of the sale of the Senior
Notes which (i) extended the maturity of the Bank Facility from December 31,
1995 to December 31, 1996, (ii) released liens on the stock of the Company's
subsidiaries and other collateral, (iii) reduced the amount available under the
Bank Facility from $200 million to $113.6 million and (iv) permitted the
non-insurance subsidiaries of the Company to have one or more warehouse lines of
credit with an aggregate amount outstanding of up to $300 million.
The following discussion reflects the primary sources of liquidity and
capital for each of the Company's primary operating divisions.
Mortgage. The principal cash requirements of the Company's mortgage
operations arise from loan originations, deposits to reserve accounts,
repayments of inter-company debt borrowed under the Bank Facility, debt service
relating to the Senior Notes, payments of operating and interest expenses and
income taxes related to loan sale transactions. Loan originations are funded
principally through the Bank Facility and short-term bank facilities pending
loan sales to UC Life and in the secondary market. In addition, at March 31,
1995, UC Lending had available a secured warehouse facility provided by the
investment bank that acted as sole underwriter of the Company's first quarter
public loan securitization transaction. The warehouse facility was directly
related to this securitization transaction and initially provided funding for up
to $200 million of eligible home equity loans for such securitization and will
mature with the closing of the last delivery of loans under the prefunding
account relative to this securitization.
UC Lending and other mortgage lending subsidiaries of the Company entered
into a credit agreement dated as of May 23, 1995 with First Union National Bank
of North Carolina and certain other lenders signatory thereto (the "Warehouse
Facility"). Under the Warehouse Facility, UC Lending and the other mortgage
lending subsidiaries may borrow up to $150,000,000 on a revolving basis secured
by home equity loans eligible thereunder. Loans under the Warehouse Facility are
subject to the satisfaction of certain borrowing conditions, including a minimum
borrowing base and will bear interest at a floating rate. Borrowings under the
Warehouse Facility are required to be repaid from the proceeds of the sale or
other disposition of the home equity loan collateral. The lenders' commitment
under the Warehouse Facility is scheduled to terminate on May 23, 1997. As of
May 23, 1995, no amounts were outstanding under the Warehouse Facility.
Substantially all of the loans originated or acquired by UC Lending are
sold. Net cash from operating activities of the Company in 1994 and 1993 and for
the first quarter of 1995 and 1994 reflects approximately $948 million, $596
million, $321 million and $202 million, respectively, in cash used for loan
originations and acquisitions. The primary source of funding for loan
originations is derived from the reinvestment of proceeds from the ultimate sale
of loans in the secondary market which totaled approximately $978 million and
$463 million in 1994 and 1993, respectively, and $275 million and $198 million
in the three months ended March 31, 1995 and 1994, respectively. In connection
with the loan sale transactions in the secondary market, third-party surety
bonds and cash deposits by the Company as credit enhancements were provided. The
loan sale transactions required the subordination of certain cash flows payable
to UC Lending and its subsidiaries to the payment of principal and interest due
to certificate holders. In connection with these transactions, UC Lending was
required, in some instances, to fund an initial deposit, and thereafter, in each
transaction, a portion of the amounts receivable by UC Lending and its
subsidiaries from the excess interest spread is required to be placed and
maintained in a reserve account to the extent of the subordination requirements.
The subordination requirements generally provide that the excess interest spread
is payable to a reserve account until a specified level of cash, which is less
than the maximum subordination amount, is accumulated therein. The capitalized
excess servicing income of the Company is subject to being utilized first to
replenish cash paid from the reserve account to fund shortfalls in collections
from borrowers who default on the payment of principal or interest on the loans
underlying the pass-through certificates issued until the total of the
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Company's deposits into the reserve account equal the maximum subordination
amount. In connection with the issuance and sale of approximately $1.8 billion
of pass-through certificates through March 31, 1995 under the Company sponsored
shelf-registration statement, the subordination amounts aggregate approximately
$273 million. After the Company's deposits into the reserve account equal the
maximum subordination amount for a transaction, the subordination of the related
excess interest spread (including the guarantee fee payable therefrom) for these
purposes is terminated. The excess interest spread required to be deposited and
maintained in the respective reserve accounts will not be available to support
the cash flow requirements of the Company until such amount exceeds the maximum
subordinated amount (other than amounts, if any, in excess of the specified
levels required to be maintained in the reserve accounts, which may be
distributed periodically to the Company). At March 31, 1995, the amounts on
deposit in such reserve accounts totaled $97.8 million.
The expansion of the Company's mortgage division and the increase in the
amount of loans originated are capital intensive operations; therefore, adequate
credit facilities and other sources of funding, including the ability of the
Company to sell loans in the secondary market and to UC Life, are essential for
the continuation of and the growth in the Company's loan operations. At March
31, 1995, the Company's debt facilities available to fund general operating
needs totaled $276 million, of which $236 million was outstanding, resulting in
available, but unfunded debt capacity for general operating needs of $40
million. During the first quarter of 1995, peak borrowings under such credit
facilities reached $262 million and rose to $273 million subsequent to quarter
end. At December 31, 1994, the Company had $266 million in such debt facilities
available with $212 million outstanding, resulting in $54 million in available,
but unfunded debt capacity. The Company continues to evaluate its current
resources and to explore the feasibility of additional capital market
transactions.
Life insurance. The principal cash requirement of UC Life consists of
contractual obligations to policyholders, principally through policy claims and
surrenders. The primary sources of funding these obligations, in addition to
cash flow from investments, are the sale of annuities. Net cash flow from
annuity operations is used to build an investment portfolio, which in turn
produces future cash flows from investment income and provides a secondary
source of liquidity for this division. Net cash provided by operating activities
of the insurance division in 1994 and 1993 was approximately $64 million and $78
million, respectively, and in the first quarter of 1995 and 1994 was
approximately $24.2 million and $19.5 million, respectively, resulting primarily
from cash earnings on investments. The Company monitors available cash and cash
equivalents to maintain adequate balances for current payments while maximizing
cash available for longer term investment activities. The Company's financing
activities during 1994 and 1993 reflect approximately $250 million and $208
million, respectively and in the first quarter of 1995 and 1994 reflect
approximately $48.6 million and $45.0 million, respectively, in cash received
primarily from sales by UC Life of its annuity products. As reflected in the net
cash used by investing activities during the same periods, investment purchases
were approximately $300 million, $293 million, $81.6 million and $106.5 million,
respectively, reflecting the investment of these funds and the reinvestment of
proceeds from maturities of investments. Cash used by financing activities
during these periods also reflects payments of $192 million, $136 million, $53.8
million and $39.9 million, respectively, primarily on annuity products resulting
from policyholder surrenders and claims. The increase in annuity surrenders
during 1994 and the first quarter of 1995 was expected, due in part to an
increase in the amount of annuity policies which were beyond the surrender
penalty period. The interest margin on the Company's annuity liabilities during
the first quarter of 1995 was 2.38% compared to 2.61% during the same period of
1994. UC Life's investments at March 31, 1995 included approximately $337
million in residential and commercial mortgage loans, and the amortized cost of
its bond portfolio included $358 million in corporate and government bonds and
private debt placements and $789 million in mortgage-backed securities.
The investment portfolio is also managed to provide a secondary source of
liquidity as investments can be sold, if necessary, to fund abnormal levels of
policy surrenders, claims and expenses. An unanticipated increase in surrenders
would impact the Company's liquidity, potentially requiring the sale of certain
assets, such as bonds and loans prior to their maturities, which may be at a
loss.
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As a Louisiana domiciled insurance company, UC Life is subject to certain
regulatory restrictions on the payment of dividends. UC Life had the capacity at
March 31, 1995 to pay dividends of $8.2 million. UC Life did not pay any
dividends to the Company during 1992, 1993 or 1994 in order to retain capital in
UC Life.
ACCOUNTING STANDARDS
In May 1993 and in October 1994, the FASB issued Statements of Financial
Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118") which address
the accounting by creditors for impairment of loans and specify how allowances
for credit losses related to certain loans should be determined. The statements
also address the accounting by creditors for all loans that are restructured in
a troubled debt restructuring involving modification of the terms of a
receivable. The implementation of the provisions of SFAS 114 and SFAS 118 in the
first quarter of 1995 did not have a material effect on the financial statements
of the Company.
DESCRIPTION OF SECURITIES
GENERAL
The following description of the terms of the Securities sets forth certain
general terms and provisions of the Securities to which any Prospectus
Supplement may relate. The particular terms of the Securities offered by any
Prospectus Supplement and the extent, if any, to which such general provisions
may apply to the Securities so offered will be described in the Prospectus
Supplement relating to such Securities.
DEBT SECURITIES
The Senior Debt Securities are to be issued under an indenture to be dated
as of a date prior to the first issuance of Senior Debt Securities, as
supplemented from time to time (the "Senior Indenture"), between the Company and
The First National Bank of Chicago, as Trustee (the "Senior Trustee"), and the
Subordinated Debt Securities are to be issued under an indenture to be dated as
of a date prior to the first issuance of Subordinated Debt Securities, as
supplemented from time to time (the "Subordinated Indenture"), between the
Company and State Street Bank and Trust Company, as Trustee (the "Subordinated
Trustee"). The term "Trustee" as used herein shall refer to either the Senior
Trustee or the Subordinated Trustee, as appropriate, for Senior Debt Securities
or Subordinated Debt Securities. The form of the Senior Indenture and the form
of the Subordinated Indenture (being referred to herein collectively as the
"Indentures" and individually as an "Indenture") are filed as exhibits to the
Registration Statement. The Indentures are subject to and governed by the Trust
Indenture Act of 1939, as amended (the "TIA"). The statements made under this
heading relating to the Debt Securities and the Indentures are summaries of the
provisions thereof, do not purport to be complete and are qualified in their
entirety by reference to the Indentures, including the definitions of certain
terms therein and in the TIA. Certain capitalized terms used below but not
defined herein have the meanings ascribed to them in the applicable Indenture.
Unless otherwise noted below, section references below are to both Indentures.
The particular terms of the Debt Securities being offered (the "Offered
Debt Securities"), any modifications of or additions to the general terms of the
Debt Securities as described herein that may be applicable in the case of the
Offered Debt Securities and any applicable Federal income tax considerations
will be described in the Prospectus Supplement relating to the Offered Debt
Securities. Accordingly, for a description of the terms of the Offered Debt
Securities, reference must be made both to the Prospectus Supplement relating
thereto and the description of Debt Securities set forth in this Prospectus.
General
The Debt Securities will be direct, unsecured obligations of the Company.
The indebtedness represented by the Senior Debt Securities will rank equally
with all other unsecured and unsubordinated indebtedness of the Company. The
indebtedness represented by the Subordinated Debt Securities will be
subordinated in right of payment to the prior payment in full of the Senior
Indebtedness of the Company (including the Senior
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Debt Securities) as described under "-- Subordination" below. The Debt
Securities may be issued in one or more series.
The Company primarily conducts its operations through its Subsidiaries. The
rights of the Company and its creditors, including the Holders of the Debt
Securities, to participate in the assets of any Subsidiary upon the latter's
liquidation or reorganization will be subject to the prior claims of the
Subsidiary's creditors except to the extent that the Company may itself be a
creditor with recognized claims against the Subsidiary.
The accompanying Prospectus Supplement will set forth the terms of the
Offered Debt Securities, which may include the following:
(1) The title of the Offered Debt Securities and whether they are
Senior Debt Securities or Subordinated Debt Securities.
(2) The aggregate principal amount of the Offered Debt Securities and
any limit on the aggregate principal amount of the Offered Debt Securities.
(3) The percentage of the principal amount at which the Offered Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the Maturity thereof or the method by which such portion
shall be determined.
(4) The date or dates on which or periods during which the Offered
Debt Securities may be issued, and the date or dates, or the method by
which such date or dates will be determined, on which the principal of (and
premium, if any, on) the Offered Debt Securities will be payable.
(5) The rate or rates at which the Offered Debt Securities will bear
interest, if any, or the method by which such rate or rates shall be
determined, the date or dates from which such interest, if any, shall
accrue or the method by which such date or dates shall be determined, the
interest payment dates on which such interest will be payable and, if the
Offered Debt Securities are Registered Securities, the regular record
dates, if any, for the interest payable on such interest payment dates,
and, if the Offered Debt Securities are floating rate securities, the
notice, if any, to Holders regarding the determination of interest and the
manner of giving such notice.
(6) The place or places where the principal of (and premium, if any)
and interest on the Offered Debt Securities shall be payable; the extent to
which, or the manner in which, any interest payable on any Global Note (as
defined below) on an interest payment date will be paid, and the manner in
which any principal of, or premium, if any, on, any Global Note will be
paid.
(7) The obligation, if any, of the Company to redeem, repay or
purchase the Offered Debt Securities pursuant to any mandatory redemption,
sinking fund or analogous provisions or at the option of the Holder thereof
and the period or periods within which, or the dates on which, the prices
at which and the terms and conditions upon which the Offered Debt
Securities shall be redeemed, repaid or purchased, in whole or in part,
pursuant to such obligation.
(8) The right, if any, of the Company to redeem the Offered Debt
Securities at its option and the period or periods within which, or the
date or dates on which, the price or prices at which, and the terms and
conditions upon which Offered Debt Securities may be redeemed, if any, in
whole or in part, at the option of the Company or otherwise.
(9) If the coin or currency in which the Offered Debt Securities
shall be issuable is U.S. dollars, the denominations of the Offered Debt
Securities if other than denominations of $1,000 and any integral multiple
thereof.
(10) Whether the Offered Debt Securities are to be issued as original
issue discount securities ("Discount Securities") and the amount of
discount at which such Offered Debt Securities may be issued and, if other
than the principal amount thereof, the portion of the principal amount of
Offered Debt Securities which shall be payable upon declaration of
acceleration of the Maturity thereof upon an Event of Default.
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(11) Provisions, if any, for the defeasance of Offered Debt Securities
or certain of the Company's obligations with respect to the Offered Debt
Securities.
(12) Whether the Offered Debt Securities are to be issued as
Registered Securities or Bearer Securities or both, and, if Bearer
Securities are issued, whether any interest coupons appertaining thereto
("Coupons") will be attached thereto, whether such Bearer Securities may be
exchanged for Registered Securities and the circumstances under which, and
the place or places at which, any such exchanges, if permitted, may be
made.
(13) Whether provisions for payment of additional amounts or tax
redemptions shall apply and, if such provisions shall apply, such
provisions; and, if any of the Offered Debt Securities are to be issued as
Bearer Securities, the applicable procedures and certificates relating to
the exchange of temporary Global Notes for definitive Bearer Securities.
(14) If other than U.S. dollars, the currency, currencies or currency
units (the term "currency" as used herein will include currency units) in
which the Offered Debt Securities shall be denominated or in which payment
of the principal of (and premium, if any) and interest on the Offered Debt
Securities may be made, and particular provisions applicable thereto and,
if applicable, the amount of Offered Debt Securities which entitles the
Holder of an Offered Debt Security or its proxy to one vote for purposes of
voting at a meeting of Holders of the Offered Debt Securities.
(15) If the principal of (and premium, if any) or interest on the
Offered Debt Securities are to be payable, at the election of the Company
or a Holder thereof, in a currency other than that in which the Debt
Securities are denominated or payable without such election, in addition to
or in lieu of the applicable provisions of the Indentures, the period or
periods within which and the terms and conditions upon which, such election
may be made and the time and the manner of determining the exchange rate or
rates between the currency or currencies in which the Offered Debt
Securities are denominated or payable without such election and the
currency or currencies in which the Offered Debt Securities are to be paid
if such election is made.
(16) The date as of which any Offered Debt Securities shall be dated.
(17) If the amount of payments of principal of (and premium, if any)
or interest on the Offered Debt Securities may be determined with reference
to an index, including, but not limited to, an index based on a currency or
currencies other than that in which the Offered Debt Securities are
denominated or payable, or any other type of index, the manner in which
such amounts shall be determined.
(18) If the Offered Debt Securities are denominated or payable in
foreign currency, any other terms concerning the payment of principal of
(and premium, if any) or any interest on the Offered Debt Securities
(including the currency or currencies of payment thereof).
(19) The designation of the original Currency Determination Agent, if
any.
(20) The applicable Overdue Rate, if any.
(21) If the Offered Debt Securities do not bear interest, the
applicable dates upon which the Company will furnish or cause to be
furnished to the Trustee a list of the names and addresses of the
Registered Holders of the Offered Debt Securities.
(22) Any addition to, or modification or deletion of, any Events of
Default or covenants provided for in the applicable Indenture with respect
to the Offered Debt Securities.
(23) If any of the Offered Debt Securities are to be issued as Bearer
Securities, (x) whether interest in respect of any portion of a temporary
Debt Security in global form (representing all of the Outstanding Bearer
Securities of the series) payable in respect of any interest payment date
prior to the exchange of such temporary Offered Debt Security for
definitive Offered Debt Securities shall be paid to any clearing
organization with respect to the portion of such temporary Offered Debt
Security held for its account and, in such event, the terms and conditions
(including any certification requirements) upon which any such interest
payment received by a clearing organization will be credited to the Persons
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entitled to interest payable on such interest payment date, (y) the terms
upon which interests in such temporary Offered Debt Security in global form
may be exchanged for interests in a permanent Global Note or for definitive
Offered Debt Securities and the terms upon which interests in a permanent
Global Note, if any, may be exchanged for definitive Offered Debt
Securities and (z) the cities in which the Authorized Newspapers designated
for the purposes of giving notices to Holders are published.
(24) Whether the Offered Debt Securities shall be issued in whole or
in part in the form of one or more Global Notes and, in such case, the
depositary or any common depositary for such Global Notes; and if the
Offered Debt Securities are issuable only as Registered Securities, the
manner in which and the circumstances under which Global Notes representing
Offered Debt Securities may be exchanged for Registered Securities in
definitive form.
(25) The designation, if any, of any depositaries, trustees (other
than the applicable Trustee), paying agents, authenticating agents,
security registrars (other than the Trustee) or other agents with respect
to the Offered Debt Securities.
(26) If the Offered Debt Securities are to be issuable in definitive
form only upon receipt of certain certificates or other documents or upon
satisfaction of certain conditions, the form and terms of such
certificates, documents or conditions.
(27) If the Offered Debt Securities are Subordinated Debt Securities,
whether they will be convertible or exchangeable into shares of Common
Stock and, if so, the terms and conditions, which may in addition to or in
lieu of the provisions contained in the Subordinated Indenture, upon which
such Offered Debt Securities will be so convertible or exchangeable,
including the conversion or exchange price and the conversion or exchange
period.
(28) Any other terms of the Offered Debt Securities not specified in
the Indenture under which such Offered Debt Securities are to be issued
(which other terms shall not be inconsistent with the provisions of such
Indenture).
Each Indenture provides that the aggregate principal amount of Debt
Securities that may be issued thereunder is unlimited. The Debt Securities may
be issued in one or more series thereunder, in each case as authorized from time
to time by the Board of Directors of the Company, or any committee thereof or
any duly authorized officer or pursuant to any modification of an Indenture.
(Section 3.01)
In the event that Discount Securities are issued, the Federal income tax
consequences and other special considerations applicable to such Discount
Securities will be described in the Prospectus Supplement relating thereto.
The general provisions of the Indentures do not contain any provisions that
would limit the ability of the Company or its Subsidiaries to incur indebtedness
or that would afford holders of Debt Securities protection in the event of a
highly leveraged or similar transaction involving the Company or its
Subsidiaries. Reference is made to the accompanying Prospectus Supplement for
information with respect to any deletions from, modifications of or additions,
if any, to the Events of Default or covenants of the Company described below
that are applicable to the Offered Debt Securities, including any addition of
covenants or other provisions providing event risk or similar protection.
All of the Debt Securities of a series need not be issued at the same time,
and may vary as to denomination, interest rate, maturity and other provisions
and unless otherwise provided, a series may be reopened for issuance of
additional Debt Securities of such series. (Section 3.01)
Denominations, Registration and Transfer
Unless specified in the Prospectus Supplement, the Debt Securities of any
series shall be issuable only as Registered Securities in denominations of
$1,000 and any integral multiple thereof and shall be payable only in U.S.
dollars. (Section 3.02) The Indentures also provide that Debt Securities of a
series may be issuable in
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global form. See "-- Book-Entry Debt Securities." Unless otherwise indicated in
the Prospectus Supplement, Bearer Securities (other than in global form) will
have Coupons attached. (Section 2.01)
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of like aggregate principal amount and
of like Stated Maturity and with like terms and conditions. If so specified in
the Prospectus Supplement, at the option of the Holder thereof, to the extent
permitted by law, any Bearer Security of any series which by its terms is
registrable as to principal and interest may be exchanged for a Registered
Security of such series of like aggregate principal amount and of a like Stated
Maturity and with like terms and conditions, upon surrender of such Bearer
Security at the corporate trust office of the applicable Trustee or at any other
office or agency of the Company designated for the purpose of making any such
exchanges. Subject to certain exceptions, any Bearer Security issued with
Coupons surrendered for exchange must be surrendered with all unmatured Coupons
and any matured Coupons in default attached thereto. (Section 3.05)
Notwithstanding the foregoing, the exchange of Bearer Securities for
Registered Securities will be subject to the provisions of United States income
tax laws and regulations applicable to Debt Securities in effect at the time of
such exchange. (Section 3.05)
Except as otherwise specified in the Prospectus Supplement, in no event may
Registered Securities, including Registered Securities received in exchange for
Bearer Securities, be exchanged for Bearer Securities. (Section 3.05)
Upon surrender for registration of transfer of any Registered Security of
any series at the office or agency of the Company maintained for such purpose,
the Company shall deliver, in the name of the designated transferee, one or more
new Registered Securities of the same series of like aggregate principal amount
of such denominations as are authorized for Registered Securities of such series
and of a like Stated Maturity and with like terms and conditions. No service
charge will be made for any transfer or exchange of Debt Securities, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Section 3.05)
The Company shall not be required (i) to register, transfer or exchange
Debt Securities of any series during a period beginning at the opening of
business 15 days before the day of the transmission of a notice of redemption of
Debt Securities of such series selected for redemption and ending at the close
of business on the day of such transmission, or (ii) to register, transfer or
exchange any Debt Security so selected for redemption in whole or in part,
except the unredeemed portion of any Debt Security being redeemed in part.
(Section 3.05)
Events of Default
Under the Indentures, "Event of Default" with respect to the Debt
Securities of any series means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law, pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body): (1) default in the payment of any interest upon any Debt
Security or any payment with respect to the Coupons, if any, of such series when
it becomes due and payable, and continuance of such default for a period of 30
days; (2) default in the payment of the principal of (and premium, if any, on)
any Debt Security of such series at its Maturity; (3) default in the deposit of
any sinking fund payment, when and as due by the terms of a Debt Security of
such series; (4) default in the performance, or breach of any covenant or
warranty in the applicable Indenture (other than a covenant or warranty a
default in whose performance or whose breach is elsewhere in the applicable
Indenture specifically dealt with or which expressly has been included in the
applicable Indenture solely for the benefit of Debt Securities of a series other
than such series), and continuance of such default or breach for a period of 60
days after there has been given to the Company by the applicable Trustee or to
the Company and the applicable Trustee by the Holders of at least 25% in
principal amount of the Outstanding Debt Securities of such series, a written
notice specifying such default or breach and requiring it to be remedied; (5)
certain events of bankruptcy, insolvency or reorganization with respect to the
Company; or (6) any other
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Event of Default provided with respect to Debt Securities of that series
pursuant to the applicable Indenture. (Section 5.01)
Each Indenture requires the Company to file with the applicable Trustee,
annually, an officers' certificate as to the Company's compliance with all
conditions and covenants under the applicable Indenture. (Section 12.02) Each
Indenture provides that the applicable Trustee may withhold notice to the
Holders of a series of Debt Securities of any default (except payment defaults
on such Debt Securities) if it considers such withholding to be in the interest
of the Holders of such series of Debt Securities to do so. (Section 6.02)
If an Event of Default with respect to Debt Securities of any series at the
time outstanding occurs and is continuing, then in every case the applicable
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Debt Securities of such series may declare the principal amount (or,
if any Debt Securities of such series are Discount Securities, such portion of
the principal amount of such Discount Securities as may be specified in the
terms of such Discount Securities) of the Debt Securities of such series to be
due and payable immediately, by a notice in writing to the Company (and to the
applicable Trustee if given by Holders), and upon any such declaration such
principal amount (or specified amount), plus accrued and unpaid interest (and
premium, if any) shall become immediately due and payable. Upon payment of such
amount in the currency in which such Debt Securities are denominated (except as
otherwise provided in the applicable Indenture or specified in the Prospectus
Supplement), all obligations of the Company in respect of the payment of
principal of the Debt Securities of such series shall terminate. (Section 5.02)
Subject to the provisions of each Indenture relating to the duties of the
applicable Trustee, in case an Event of Default with respect to Debt Securities
of a particular series shall occur and be continuing, the applicable Trustee
shall be under no obligation to exercise any of its rights or powers under such
Indenture at the request, order or direction of any of the Holders of Debt
Securities of that series, unless such Holders shall have offered to the
applicable Trustee reasonable indemnity against the expenses and liabilities
which might be incurred by it in compliance with such request. (Section 5.07)
Subject to such provisions for the indemnification of the applicable Trustee,
the Holders of a majority in principal amount of the Outstanding Debt Securities
of such series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee
under such Indenture, or exercising any trust or power conferred on the
applicable Trustee with respect to the Debt Securities of that series provided
that such direction does not conflict with law or with the applicable Indenture.
(Section 5.12)
At any time after such a declaration of acceleration with respect to Debt
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee as provided
in the Indentures, the Holders of a majority in principal amount of the
Outstanding Debt Securities of such series, by written notice to the Company and
the applicable Trustee, may rescind and annul such declaration and its
consequences if (1) the Company has paid or deposited with the applicable
Trustee a sum in the currency in which such Debt Securities are denominated
(except as otherwise provided in the applicable Indenture or specified in the
Prospectus Supplement) sufficient to pay (A) all overdue installments of
interest on all Debt Securities or all overdue payments with respect to any
Coupons of such series, (B) the principal of (and premium, if any, on) any Debt
Securities of such series which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate or rates prescribed
therefor in such Debt Securities, (C) to the extent that payment of such
interest is lawful, interest upon overdue installments of interest on each Debt
Security of such series or upon overdue payments on any Coupons of such series
at a rate established for such series, and (D) all sums paid or advanced by the
applicable Trustee and the reasonable compensation, expenses, disbursements and
advances of the applicable Trustee, its agents and counsel; and (2) all Events
of Default with respect to Debt Securities of such series, other than the
nonpayment of the principal of Debt Securities of such series which have become
due solely by such declaration of acceleration, have been cured or waived as
provided in the applicable Indenture. No such rescission and waiver will affect
any subsequent default or impair any right consequent thereon. (Section 5.02)
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Modification or Waiver
Without prior notice to or consent of any Holders, the Company and the
applicable Trustee, at any time and from time to time, may modify the applicable
Indenture for any of the following purposes: (1) to evidence the succession of
another corporation to the rights of the Company and the assumption by such
successor of the covenants and obligations of the Company in the applicable
Indenture and in the Debt Securities and Coupons, if any, issued thereunder; (2)
to add to the covenants of the Company for the benefit of the Holders of all or
any series of Debt Securities and the Coupons, if any, appertaining thereto (and
if such covenants are to be for the benefit of less than all series, stating
that such covenants are expressly being included solely for the benefit of such
series), or to surrender any right or power conferred in the applicable
Indenture upon the Company; (3) to add any additional Events of Default (and if
such Events of Default are to be applicable to less than all series, stating
that such Events of Default are expressly being included solely to be applicable
to such series); (4) to add or change any of the provisions of the applicable
Indenture to such extent as shall be necessary to permit or facilitate the
issuance thereunder of Debt Securities of any series in bearer form, registrable
or not registrable, and with or without Coupons, to permit Bearer Securities to
be issued in exchange for Registered Securities, to permit Bearer Securities to
be issued in exchange for Bearer Securities of other authorized denominations or
to permit the issuance of Debt Securities of any series in uncertificated form,
provided that any such action shall not adversely affect the interests of the
Holders of Debt Securities of any series or any related Coupons in any material
respect; (5) to change or eliminate any of the provisions of the applicable
Indenture, provided that any such change or elimination will become effective
only when there is no Outstanding Debt Security issued thereunder or Coupon of
any series created prior to such modification which is entitled to the benefit
of such provision and as to which such modification would apply; (6) to secure
the Debt Securities issued thereunder; (7) to supplement any of the provisions
of the applicable Indenture to such extent as is necessary to permit or
facilitate the defeasance and discharge of any series of Debt Securities,
provided that any such action will not adversely affect the interests of the
Holders of Debt Securities of such series or any other series of Debt Securities
issued under such Indenture or any related Coupons in any material respect; (8)
to establish the form or terms of Debt Securities and Coupons, if any, as
permitted by the applicable Indenture; (9) to evidence and provide for the
acceptance of appointment thereunder by a successor Trustee with respect to one
or more series of Debt Securities and to add to or change any of the provisions
of the applicable Indenture as is necessary to provide for or facilitate the
administration of the trusts thereunder by more than one Trustee; or (10) to
cure any ambiguity, to correct or supplement any provision in the applicable
Indenture which may be defective or inconsistent with any other provision
therein, to eliminate any conflict between the terms of the applicable Indenture
and the Debt Securities issued thereunder and the TIA or to make any other
provisions with respect to matters or questions arising under the applicable
Indenture which will not be inconsistent with any provision of the applicable
Indenture; provided such other provisions shall not adversely affect the
interests of the Holders of Outstanding Debt Securities or Coupons, if any, of
any series created thereunder prior to such modification in any material
respect. (Section 11.01)
With the written consent of the Holders of not less than a majority in
principal amount of the Outstanding Debt Securities of each series affected by
such modification voting separately, the Company and the applicable Trustee may
modify the applicable Indenture for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the applicable
Indenture or of modifying in any manner the rights of the Holders of Debt
Securities and Coupons, if any, under the applicable Indenture; provided,
however, that no such modification may, without the consent of the Holder of
each Outstanding Debt Security of each such series affected thereby (1) change
the Stated Maturity of the principal of, or any installment of interest on, any
Debt Security, or reduce the principal amount thereof or the interest thereon or
any premium payable upon redemption thereof, or change the Stated Maturity of or
reduce the amount of any payment to be made with respect to any Coupon, or
change the currency or currencies in which the principal of (and premium, if
any) or interest on such Debt Security is denominated or payable, or reduce the
amount of the principal of a Discount Security that would be due and payable
upon a declaration of acceleration of the Maturity thereof, or adversely affect
the right of repayment or repurchase, if any, at the option of the Holder, or
reduce the amount of, or postpone the date fixed for, any payment under any
sinking fund or analogous provisions for any Debt Security, or impair the right
to institute suit for the enforcement of any payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or limit
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the obligation of the Company to maintain a paying agency outside the United
States for payments on Bearer Securities, or adversely affect the right to
convert any Subordinated Debt Security into shares of Common Stock as may be set
forth in the Prospectus Supplement; (2) reduce the percentage in principal
amount of the Outstanding Debt Securities of any series, the consent of whose
Holders is required for any such modification, or the consent of whose Holders
is required for any waiver of compliance with certain provisions of the
applicable Indenture or certain defaults or Events of Default thereunder and
their consequences provided for in such Indenture; (3) modify any of the
provisions of the applicable Indenture relating to modifications and waivers of
defaults and covenants, except to increase any such percentage or to provide
that certain other provisions of the applicable Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Debt Security of
each series affected thereby; provided, however, that certain of such
modifications may be made without the consent of any Holder of any Debt
Security; or (4) in the case of the Subordinated Indenture, modify any of the
provisions relating to the subordination of the Subordinated Debt Securities in
a manner adverse to the Holders thereof. (Section 11.02)
A modification which changes or eliminates any covenant or other provision
of the applicable Indenture with respect to one or more particular series of
Debt Securities and Coupons, if any, or which modifies the rights of the Holders
of Debt Securities and Coupons of such series with respect to such covenant or
other provision, shall be deemed not to affect the rights under the applicable
Indenture of the Holders of Debt Securities and Coupons, if any, of any other
series. (Section 11.02)
In the case of the Subordinated Indenture, no modification may adversely
affect the rights of any holder of Senior Indebtedness under the subordination
provisions of the Subordinated Indenture without the consent of such holder.
(Section 11.08 of the Subordinated Indenture)
The Holders of not less than a majority in principal amount of the
Outstanding Debt Securities of any series may on behalf of the Holders of all
the Debt Securities of any such series waive, by notice to the applicable
Trustee and the Company, any past default or Event of Default under the
applicable Indenture with respect to such series and its consequences, except a
default (1) in the payment of the principal of (or premium, if any) or interest
on any Debt Security of such series, or in the payment of any sinking fund
installment or analogous obligation with respect to the Debt Securities of such
series, or (2) in respect of a covenant or provision hereof which pursuant to
the second paragraph under "-- Modification or Waiver" cannot be modified or
amended without the consent of the Holder of each Outstanding Debt Security of
such series affected. Upon any such waiver, such default will cease to exist,
and any Event of Default arising therefrom will be deemed to have been cured,
for every purpose of the Debt Securities of such series under the applicable
Indenture, but no such waiver will extend to any subsequent or other default or
Event of Default or impair any right consequent thereon. (Section 5.13)
The Company may omit in any particular instance to comply with certain
covenants in the applicable Indenture (including, if so specified in the
Prospectus Supplement, any covenant not set forth in the applicable Indenture
but specified in the Prospectus Supplement to be applicable to the Debt
Securities of any series issued thereunder, except as otherwise specified in the
Prospectus Supplement, and including the covenants relating to the maintenance
by the Company of its existence, rights and franchises), if before the time for
such compliance the Holders of at least a majority in principal amount of the
Outstanding Debt Securities of such series either waive such compliance in such
instance or generally waive compliance with such provisions, but no such waiver
may extend to or affect any term, provision or condition except to the extent
expressly so waived, and, until such waiver becomes effective, the obligations
of the Company and the duties of the applicable Trustee in respect of any such
provision will remain in full force and effect. (Section 12.09 of the Senior
Indenture; Section 12.07 of the Subordinated Indenture)
Subordination
Upon any distribution of assets of the Company upon the dissolution,
winding up, liquidation or reorganization of the Company, the payment of the
principal of (and premium, if any) and interest on the Subordinated Debt
Securities will be subordinated to the extent provided in the Subordinated
Indenture in right of payment to the prior payment in full of all Senior
Indebtedness, including Senior Debt Securities
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(Sections 16.01 and 16.02 of the Subordinated Indenture), but the obligation of
the Company to make payment of principal (and premium, if any) or interest on
the Subordinated Debt Securities will not otherwise be affected. (Section 16.02
of the Subordinated Indenture) No payment on account of principal (or premium,
if any), sinking funds or interest may be made on the Subordinated Debt
Securities (including, without limitation, payment of any Coupons) unless full
payment of amounts then due for principal, premium, if any, sinking funds and
interest on Senior Indebtedness has been made or duly provided for. (Section
16.03 of the Subordinated Indenture) In the event that, notwithstanding the
foregoing, any payment by the Company described in the foregoing sentence is
received by the Trustee under the Subordinated Indenture, any Paying Agent or
the Holders of any of the Subordinated Debt Securities before all Senior
Indebtedness is paid in full, such payment or distribution shall be paid over to
the holders of such Senior Indebtedness or on their behalf for application to
the payment of all such Senior Indebtedness remaining unpaid until all such
Senior Indebtedness shall have been paid in full, after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness.
Subject to payment in full of Senior Indebtedness, the Holders of the
Subordinated Debt Securities will be subrogated to the rights of the holders of
the Senior Indebtedness to the extent of payments made to the holders of such
Senior Indebtedness out of the distributive share of the Subordinated Debt
Securities. (Section 16.02 of the Subordinated Indenture)
By reason of such subordination, in the event of a distribution of assets
upon insolvency, certain general creditors of the Company may recover more,
ratably, than Holders of the Subordinated Debt Securities. The Subordinated
Indenture provides that the subordination provisions thereof shall not apply to
money and securities held in trust pursuant to the satisfaction and discharge
and the legal defeasance provisions of the Subordinated Indenture. (Sections
4.02 and 15.02 of the Subordinated Indenture)
If this Prospectus is being delivered in connection with the offering of a
series of Subordinated Debt Securities, the accompanying Prospectus Supplement
or the information incorporated by reference therein will set forth the
approximate amount of Senior Indebtedness outstanding as of a recent date.
Discharge, Legal Defeasance and Covenant Defeasance
The applicable Indenture with respect to the Debt Securities of any series
may be discharged, subject to certain terms and conditions, when (1) either (A)
all Debt Securities and the Coupons, if any, of such series have been delivered
to the applicable Trustee for cancellation, or (B) all Debt Securities and the
Coupons, if any, of such series not theretofore delivered to the applicable
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable at their Stated Maturity within one year, or (iii) are to be called
for redemption within one year under arrangements satisfactory to the applicable
Trustee for the giving of notice by the applicable Trustee, and the Company, in
the case of (i), (ii) or (iii) of subclause (B), has irrevocably deposited or
caused to be deposited with the applicable Trustee as trust funds in trust for
such purpose an amount in the currency in which such Debt Securities are
denominated sufficient to pay and discharge the entire indebtedness on such Debt
Securities for principal (and premium, if any) and interest to the date of such
deposit (in the case of Debt Securities which have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be; provided, however,
in the event a petition for relief under the applicable Federal or state
bankruptcy, insolvency or other similar law is filed with respect to the Company
within 91 days after the deposit and the applicable Trustee is required to
return the deposited money to the Company, the obligations of the Company under
the applicable Indenture with respect to such Debt Securities will not be deemed
terminated or discharged; (2) the Company has paid or caused to be paid all
other sums payable under the applicable Indenture by the Company; (3) the
Company has delivered to the applicable Trustee an officers' certificate and an
opinion of counsel each stating that all conditions precedent therein provided
relating to the satisfaction and discharge of the applicable Indenture with
respect to such series have been complied with; and (4) the Company has
delivered to the applicable Trustee an opinion of counsel or a ruling of the
Internal Revenue Service to the effect that such deposit and discharge will not
cause the Holders of the Debt Securities of the series to recognize income, gain
or loss for Federal income tax purposes. (Section 4.01)
If provision is made for the defeasance of Debt Securities of a series, and
if the Debt Securities of such series are Registered Securities and denominated
and payable only in U.S. dollars, then the provisions of each
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Indenture relating to defeasance shall be applicable except as otherwise
specified in the Prospectus Supplement for Debt Securities of such series.
Defeasance provisions, if any, for Debt Securities denominated in a foreign
currency or currencies or for Bearer Securities may be specified in the
Prospectus Supplement. (Section 15.01)
At the Company's option, either (a) the Company shall be deemed to have
been Discharged (as defined below) from its obligations with respect to Debt
Securities of any series (including, in the case of Subordinated Debt
Securities, the provisions described under "-- Subordination" herein) ("legal
defeasance option") or (b) the Company shall cease to be under any obligation to
comply with any obligation of the Company in the applicable Indenture including
any restrictive covenants described in the accompanying Prospectus Supplement
and any other covenants applicable to the Debt Securities which are subject to
covenant defeasance (including, in the case of Subordinated Debt Securities, the
provisions described under "-- Subordination" herein) ("covenant defeasance
option") at any time after the applicable conditions set forth below have been
satisfied: (1) the Company shall have deposited or caused to be deposited
irrevocably with the applicable Trustee as trust funds in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of
the Debt Securities of such series (i) money in an amount, or (ii) U.S.
Government Obligations which through the payment of interest and principal in
respect thereof in accordance with their terms will provide, not later than one
day before the due date of any payment, money in an amount, or (iii) a
combination of (i) and (ii), sufficient, in the opinion (with respect to (i) and
(ii)) of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the applicable
Trustee, to pay and discharge each installment of principal (including any
mandatory sinking fund payments) of and premium, if any, and interest on, the
Outstanding Debt Securities of such series on the dates such installments of
interest or principal and premium are due; (2) such deposit shall not cause the
applicable Trustee with respect to the Debt Securities of that series to have a
conflicting interest with respect to the Debt Securities of any series; (3) such
deposit will not result in a breach or violation of, or constitute a default
under, the applicable Indenture or any other agreement or instrument to which
the Company is a party or by which it is bound; (4) if the Debt Securities of
such series are then listed on any national securities exchange, the Company
shall have delivered to the applicable Trustee an opinion of counsel or a letter
or other document from such exchange to the effect that the Company's exercise
of its legal defeasance option or the covenant defeasance option, as the case
may be, would not cause such Debt Securities to be delisted; (5) no Event of
Default or event (including such deposit) which, with notice or lapse of time or
both, would become an Event of Default with respect to the Debt Securities of
such series shall have occurred and be continuing on the date of such deposit
and, with respect to the legal defeasance option only, no Event of Default under
the provisions of the applicable Indenture relating to certain events of
bankruptcy or insolvency or event which with the giving of notice or lapse of
time, or both, would become an Event of Default under such bankruptcy or
insolvency provisions shall have occurred and be continuing on the 91st day
after such date; and (6) certain other opinions, officers' certificates and
other documents specified in the applicable Indenture, including an opinion of
counsel or a ruling of the Internal Revenue Service to the effect that such
deposit, defeasance or Discharge will not cause the Holders of the Debt
Securities of such series to recognize income, gain or loss for Federal income
tax purposes. Notwithstanding the foregoing, if the Company exercises its
covenant defeasance option and an Event of Default under the provisions of the
Indentures relating to certain events of bankruptcy or insolvency or event which
with the giving of notice or lapse of time, or both, would become an Event of
Default under such bankruptcy or insolvency provisions shall have occurred and
be continuing on the 91st day after the date of such deposit, the obligations of
the Company referred to under the definition of covenant defeasance option with
respect to such Debt Securities shall be reinstated in full. (Section 15.02)
Payment and Paying Agents
If Debt Securities of a series are issuable only as Registered Securities,
the Company will maintain in each Place of Payment for such series an office or
agency where Debt Securities of that series may be presented or surrendered for
payment, where Debt Securities of that series may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Debt Securities of that series and the applicable
Indenture may be served. (Section 12.03)
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If Debt Securities of a series are issuable as Bearer Securities, the
Company will maintain (A) in the Borough of Manhattan, The City and State of New
York, an office or agency where any Registered Securities of that series may be
presented or surrendered for payment, where any Registered Securities of that
series may be surrendered for registration of transfer, where Debt Securities of
that series may be surrendered for exchange or redemption, where Subordinated
Debt Securities of that series that are convertible may be surrendered for
conversion, where notices and demands to or upon the Company in respect of the
Debt Securities of that series and the applicable Indenture may be served and
where Bearer Securities of that series and related Coupons may be presented or
surrendered for payment in the circumstances described in the following
paragraph (and not otherwise), (B) subject to any laws or regulations applicable
thereto, in a Place of Payment for that series which is located outside the
United States, an office or agency where Debt Securities of that series and
related Coupons may be presented and surrendered for payment (including payment
of any additional amounts payable on Debt Securities of that series, if so
provided in such series; provided, however, that if the Debt Securities of that
series are listed on The Stock Exchange of the United Kingdom and the Republic
of Ireland, the Luxembourg Stock Exchange or any other stock exchange located
outside the United States and such stock exchange shall so require, the Company
will maintain a Paying Agent for the Debt Securities of that series in London,
Luxembourg or any other required city located outside the United States, as the
case may be, so long as the Debt Securities of that series are listed on such
exchange, and (C) subject to any laws or regulations applicable thereto, in a
Place of Payment for that series located outside the United States an office or
agency where any Registered Securities of that series may be surrendered for
registration of transfer, where Debt Securities of that series may be
surrendered for exchange or redemption, where Subordinated Debt Securities of
that series that are convertible may be surrendered for conversion and where
notices and demands to or upon the Company in respect of the Debt Securities of
that series and the applicable Indenture may be served. The Company will give
prompt written notice to the applicable Trustee of the locations, and any change
in the locations, of such offices or agencies. If at any time the Company shall
fail to maintain any such required office or agency or shall fail to furnish the
applicable Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the corporate trust office of the
applicable Trustee, except that Bearer Securities of that series and the related
coupons may be presented and surrendered for payment at the offices specified in
the applicable Debt Security and the Company has appointed the applicable
Trustee (or in the case of Bearer Securities may appoint such other agent as may
be specified in the applicable Prospectus Supplement) as its agent to receive
all presentations, surrenders, notices and demands. (Section 12.03)
No payment of principal, premium or interest on Bearer Securities shall be
made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States; provided, however, that, if
the Debt Securities of a series are denominated and payable in U.S. dollars,
payment of principal of and any premium and interest on Bearer Securities of
such series, if specified in the applicable Prospectus Supplement, shall be made
at the office of the applicable Trustee or the Company's Paying Agent in the
Borough of Manhattan, the City and State of New York, if (but only if) payment
in U.S. dollars of the full amount of such principal, premium, interest or
additional amounts, as the case may be, at all offices or agencies outside the
United States maintained for the purpose by the Company in accordance with the
applicable Indenture is illegal or effectively precluded by exchange controls or
other similar restrictions. (Section 12.03)
Book-Entry Debt Securities
The Debt Securities of a series may be issued in whole or in part in global
form that will be deposited with, or on behalf of, a depositary identified in
the Prospectus Supplement. Global Notes may be issued in either registered or
bearer form and in either temporary or permanent form (each a "Global Note").
Payments of principal of (and premium, if any) and interest on Debt Securities
represented by a Global Note will be made by the Company to the applicable
Trustee and then by such Trustee to the depositary.
If specified in the applicable Prospectus Supplement, any Global Notes will
be deposited with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC"), as depositary, or such other depositary as may be specified in the
applicable Prospectus Supplement. In the event that DTC acts as
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depositary with respect to any Global Notes, the Company anticipates that such
Global Notes will be registered in the name of DTC's nominee, and that the
following provisions will apply to the depositary arrangements with respect to
any such Global Notes. Additional or differing terms of the depositary
arrangements, if any, applicable to the Offered Debt Securities, will be
described in the accompanying Prospectus Supplement.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or its nominee, as the case may be, will be considered the sole Holder of the
Debt Securities represented by such Global Note for all purposes under the
applicable Indenture. Except as provided below, owners of beneficial interests
in a Global Note will not be entitled to have Debt Securities represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery or Debt Securities in certificated form and will not
be considered the owners or Holders thereof under the applicable Indenture. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in certificated form; accordingly, such laws may
limit the transferability of beneficial interests in a Global Note.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the Company
will issue individual Debt Securities in certificated form in exchange for the
Global Notes. In addition, the Company may at any time, and in its sole
discretion, determine not to have any Debt Securities represented by one or more
Global Notes and, in such event, will issue individual Debt Securities in
certificated form in exchange for the relevant Global Notes. If Registered
Securities of any series shall have been issued in the form of one or more
Global Notes and if an Event of Default with respect to the Debt Securities of
such series shall have occurred and be continuing, the Company will issue
individual Debt Securities in certificated form in exchange for the relevant
Global Notes. (Section 3.04)
The following is based on information furnished by DTC:
DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a "banking organization" within the meaning of the
Banking Law of the State of New York, a member of the Federal Reserve System, a
clearing corporation within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC holds securities that its participants ("Participants")
deposit with DTC. DTC also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations ("Direct
Participants"). DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Debt Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Debt Securities
on DTC's records. The ownership interest of each actual purchaser of each Debt
Security ("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participants' records. A Beneficial Owner does not receive written confirmation
from DTC of its purchase, but such Beneficial Owner is expected to receive a
written confirmation providing details of the transaction, as well as periodic
statements of its holdings, from the Direct or Indirect Participant through
which such Beneficial Owner entered into the transaction. Transfers of ownership
interests in Debt Securities are accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners do not
receive certificates representing their ownership interests in Debt Securities,
except in the event that use of the book entry system for the Debt Securities is
discontinued.
To facilitate subsequent transfers, the Debt Securities are registered in
the name of DTC's partnership nominee, Cede & Co. The deposit of the Debt
Securities with DTC and their registration in the name of Cede & Co. effects no
change in beneficial ownership. DTC has no knowledge of the actual Beneficial
Owners of the
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Debt Securities; DTC records reflect only the identity of the Direct
Participants to whose accounts Debt Securities are credited, which may or may
not be the Beneficial Owners. The Participants remain responsible for keeping
account of their holdings on behalf of their customers.
Delivery of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners are governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Debt
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy")
to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Debt Securities are credited on the record date (identified
on a list attached to the Omnibus Proxy).
Principal and interest payments on the Debt Securities will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the payable date in
accordance with their respective holdings as shown on DTC's records unless DTC
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Paying Agent
or the Company, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to DTC is the
responsibility of the Company or the Paying Agent, disbursement of such payments
to Direct Participants is the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners will be the responsibility of Direct and
Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to the Debt Securities at any time by giving reasonable notice to the
Company or the Paying Agent. Under such circumstances, in the event that a
successor securities depositary is not appointed, Debt Security certificates are
required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depositary). In that event,
Debt Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources (including DTC) that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
Unless stated otherwise in the applicable Prospectus Supplement, the
underwriters or agents with respect to a series of Debt Securities issued as
Global Notes will be Direct Participants in DTC.
None of the Company, any underwriter or agent, the applicable Trustee or
any applicable Paying Agent will have the responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
interests in a Global Note, or for maintaining, supervising or reviewing any
records relating to such beneficial interests.
Conversion or Exchange Rights
The terms and conditions, if any, upon which Subordinated Debt Securities
being offered are convertible or exchangeable into Common Stock will be set
forth in the Prospectus Supplement relating thereto. Such terms will include the
conversion or exchange price, the conversion or exchange period, provisions as
to whether conversion or exchange will be at the option of the Holder or the
Company, the events requiring an adjustment of the conversion or exchange price
and provisions affecting conversions or exchanges in the event of the redemption
of such Subordinated Debt Securities.
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Concerning the Trustees
The Company may from time to time maintain deposit accounts and conduct
other banking transactions with The First National Bank of Chicago or State
Street Bank and Trust Company and their affiliated entities in the ordinary
course of business.
Certain Definitions
Set forth below is summary of certain defined terms used in the applicable
Indenture. Reference is made to the applicable Indenture for the full definition
of all such terms.
"Discharged" means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by, and obligations under, the
Debt Securities of such series and to have satisfied all the obligations under
the applicable Indenture relating to the Debt Securities of such series, except
(i) the right of Holders of Debt Securities of such series to receive, from the
trust fund described under "Discharge, Legal Defeasance and Covenant Defeasance"
above, payment of the principal of (and premium, if any) and interest on such
Debt Securities when such payments are due, (ii) the Company's obligations with
respect to the Debt Securities of such series under the provisions relating to
exchanges, transfers and replacement of Debt Securities, the maintenance of an
office or agency of the Company and the defeasance trust fund, the provisions
relating to compensation and reimbursement of the applicable Trustee and (iii)
the rights, powers, trusts, duties and immunities of the applicable Trustee
thereunder. (Section 15.02)
"Indebtedness" means (i) any liability of any Persons (a) for borrowed
money, or (b) evidenced by a bond, note, debenture or similar instrument
(including purchase money obligations but excluding trade payables), or (c) for
the payment of money relating to a lease that is required to be classified as a
capitalized lease obligation in accordance with generally accepted accounting
principles, or (d) preferred or preference stock of a Subsidiary of the Company
held by Persons other than the Company or a Subsidiary of the Company; (ii) any
liability of others described in the preceding clause (i) that the Person has
guaranteed, that is recourse to such Person or that is otherwise its legal
liability; and (iii) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses (i)
and (ii) above. (Section 1.01)
"Senior Indebtedness" means the principal of (and premium, if any) and
unpaid interest on (i) Indebtedness of the Company, whether outstanding on the
date of the Subordinated Indenture or thereafter created, incurred, assumed or
guaranteed, for money borrowed (other than the Indebtedness evidenced by the
Subordinated Debt Securities of any series), unless in the instrument creating
or evidencing the same or pursuant to which the same is outstanding it is
provided that such Indebtedness is not senior or prior in right of payment to
the Subordinated Debt Securities or is pari passu or subordinate by its terms in
right of payment to the Subordinated Debt Securities and (ii) renewals,
extensions and modifications of any such Indebtedness. (Section 1.01 of the
Subordinated Indenture)
"Subsidiary" means any Corporation of which at least a majority of the
outstanding stock having by the terms thereof ordinary voting power to elect a
majority of the directors of such Corporation, irrespective of whether or not at
the time stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency, is at the
time, directly or indirectly, owned or controlled by the Company or by one or
more Subsidiaries thereof, or by the Company and one or more Subsidiaries
thereof. (Section 1.01)
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States for the timely payment of which its full faith
and credit is pledged, or (ii) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States the payment
of which is unconditionally guaranteed as a full faith and credit obligation by
the United States, which, in either case under clauses (i) or (ii), are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Obligation or a specific payment of interest
on (or principal of) any such U.S. Government Obligation held by such custodian
for the account of the holder of a depository receipt; provided that (except
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as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of interest on or principal of the U.S. Government Obligation
evidenced by such depository receipt. (Section 15.02)
PREFERRED STOCK
The description of certain provisions of the Preferred Stock set forth
below and in any Prospectus Supplement does not purport to be complete and is
subject to and qualified in its entirety by reference to the Company's Articles
of Incorporation and the Articles of Amendment relating to each such series of
Preferred Stock, which will be filed with the Commission in connection with the
offering of such series of Preferred Stock.
General
Under the Company's Articles of Incorporation, the Board of Directors may,
by resolution, establish series of Preferred Stock having such voting powers,
and such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as the Board of Directors may determine.
The Preferred Stock offered hereby will have the dividend, liquidation and
voting rights set forth below unless otherwise provided in the Prospectus
Supplement relating to a particular series of Preferred Stock. Reference is made
to the Prospectus Supplement relating to the particular series of Preferred
Stock offered thereby for specific terms, including: (1) the designation and
stated value per share of such Preferred Stock and the number of shares offered;
(2) the amount of liquidation preference per share; (3) the price at which such
Preferred Stock will be issued; (4) the dividend rate (or method of
calculation), the dates on which dividends will be payable, whether such
dividends will be cumulative or noncumulative and, if cumulative, the dates from
which dividends will commence to cumulate; (5) any redemption or sinking fund
provisions; (6) any terms by which such series of Preferred Stock may be
convertible into or exchanged for Common Stock or Debt Securities; and (7) any
additional or other rights, preferences, privileges, limitations and
restrictions relating to such series of Preferred Stock.
The Preferred Stock offered hereby will be issued in one or more series.
The holders of Preferred Stock will have no preemptive rights. Preferred Stock
will be fully paid and nonassessable upon issuance against full payment of the
purchase price therefor. Unless otherwise specified in the Prospectus Supplement
relating to a particular series of Preferred Stock, each series of Preferred
Stock will, with respect to dividend rights and rights on liquidation,
dissolution and winding up of the Company, rank prior to the Common Stock (the
"Junior Stock") and on a parity with each other series of Preferred Stock
offered hereby (the "Parity Stock").
Dividend Rights
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefor, cash dividends at such rates and on such dates as
are set forth in the Prospectus Supplement relating to such series of Preferred
Stock. Such rate may be fixed or variable or both. Each such dividend will be
payable to the holders of record as they appear on the stock books of the
Company on such record dates as will be fixed by the Board of Directors of the
Company. Dividends on any series of the Preferred Stock may be cumulative or
noncumulative, as provided in the Prospectus Supplement relating thereto. If the
Board of Directors of the Company fails to declare a dividend payable on a
dividend payment date on any series of Preferred Stock for which dividends are
noncumulative, then the right to receive a dividend in respect of the dividend
period ending on such dividend payment date will be lost, and the Company will
have no obligation to pay the dividend accrued for that period, whether or not
dividends are declared for any future period. Dividends on shares of each series
of Preferred Stock for which dividends are cumulative will accrue from the date
set forth in the applicable Prospectus Supplement.
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The Preferred Stock of each series will include customary provisions (1)
restricting the payment of dividends or the making of other distributions on, or
the redemption, purchase or other acquisition of, Junior Stock unless full
dividends, including, in the case of cumulative Preferred Stock, accruals, if
any, in respect of prior dividend periods, on the shares of such series of
Preferred Stock have been paid and (2) providing for the pro rata payment of
dividends on such series and other Parity Stock when dividends have not been
paid in full upon such series and other Parity Stock.
Rights Upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock will be
entitled to receive out of assets of the Company available for distribution to
stockholders, before any distribution of assets is made to holders of Junior
Stock, liquidating distributions in the amount set forth in the Prospectus
Supplement relating to such series of Preferred Stock plus an amount equal to
accrued and unpaid dividends. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Preferred Stock of any series and any Parity Stock are not paid in full, the
holders of the Preferred Stock of such series and of such Parity Stock will
share ratably in any such distribution of assets of the Company in proportion to
the full respective preferential amounts (which may include accumulated
dividends) to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of such series
of Preferred Stock will have no right or claim to any of the remaining assets of
the Company. Neither the sale of all or a portion of the Company's assets nor
the merger or consolidation of the Company into or with any other corporation
shall be deemed to be a dissolution, liquidation or winding up, voluntarily or
involuntarily, of the Company.
Voting Rights
The holders of Preferred Stock of a series offered hereby will not be
entitled to vote except as indicated in the Prospectus Supplement relating to
such series of Preferred Stock or as required by applicable law. Unless
otherwise specified in the Prospectus Supplement relating to a particular series
of Preferred Stock, when and if any such series is entitled to vote, each share
in such series will be entitled to one vote.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Set forth below is a description of the material terms and provisions of
the equity securities of the Company. The following description does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Articles of Incorporation, as amended, of the Company (the "Articles of
Incorporation") and the By-Laws, as amended, of the Company (the "By-Laws") and
the Rights Plan of the Company dated as of July 27, 1994 between the Company and
Chemical Bank, as Rights Agent (the "Rights Plan"). The Articles of
Incorporation is an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, as amended by Amendment No. 1 on Form 10-K/A, the
By-Laws is an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, and the Rights Plan is an exhibit to Company's
Registration Statement on Form 8-A.
The Company is authorized to issue (i) 100,000,000 shares of Common Stock,
par value $2.00 per share and (ii) 20,000,000 shares of Preferred Stock, par
value $2.00 per share, which may be issued in one or more series with such
voting powers, designations, preferences, rights, qualifications, limitations
and restrictions as shall be specified by the Board of Directors. The Board of
Directors may issue one or more series of preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock and the holders of other series of Preferred Stock, and which
could, among other things, have the effect of delaying, deferring or preventing
a change in control of the Company. In connection with the Rights Plan, the
Board of Directors authorized the issuance of 1,000,000 shares of Series A
Junior Participating Preferred Stock to holders of rights issued under the
Rights Plan. See "-- Rights Plan" below.
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As of May 10, 1995, 13,908,931 shares of Common Stock were issued and
outstanding, excluding 579,841 treasury shares.
COMMON STOCK
Dividends
Holders of the Company's Common Stock are entitled to receive such
dividends as may be legally declared by the Board of Directors. The declaration
and amount of future dividends may depend, in part, on restrictive covenants
contained in certain loan agreements and certain state regulations regarding
minimum capitalization requirements for insurance companies that have the effect
of limiting dividends from UCLIC and UG Title to the Company.
Voting Rights
Holders of Common Stock are entitled to one vote for each share held of
record. Except as discussed below, action of the stockholders may generally be
taken by the affirmative vote of a majority of the shares present or represented
at a duly called meeting at which a quorum is present or represented.
Other Rights
Holders of Common Stock have no preemptive or subscription rights and have
no liability for further calls or assessments. All shares of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation.
The transfer agent and registrar for the Common Stock is Chemical Bank of
New York, New York.
SPECIAL CHARTER, BY-LAW AND LOUISIANA LAW PROVISIONS
Certain provisions of the Company's Articles of Incorporation, the
Company's By-Laws, Louisiana law, and the Company's Rights Plan, may have the
effect of delaying, deterring or discouraging, among other things, a
non-negotiated tender or exchange offer for the Company's Common Stock or a
proxy contest for control of the Company.
Anti-Takeover Provisions in the Company's Articles of Incorporation and
By-Laws
On January 31, 1995, the Company's Board of Directors adopted several
amendments to the Company's By-Laws, to be effective as of January 31, 1995,
which amendments, among other things: (1) authorize the Board of Directors
exclusively to fix the number of directors by no less than a 66 2/3% vote and
classify the Board into three classes with staggered terms; (2) provide
procedures for the removal of directors and for filling vacancies on the Board;
(3) provide advance notice procedures for shareholder nominations and proposals;
and (4) provide procedures for the calling of a special meeting of the
shareholders.
In addition, the Company has recently submitted several proposed amendments
to its Articles of Incorporation for a vote of its shareholders at the Company's
Annual Meeting of Shareholders to be held on June 14, 1995 (the "1995 Annual
Meeting"). One of the proposed amendments to the Company's Articles of
Incorporation would require the affirmative vote of the holders of not less than
80% of the total voting power of the Company to alter, amend or repeal the
foregoing amendments to the Company's By-Laws that were adopted by the Board of
Directors on January 31, 1995, are in effect, and are being submitted to the
shareholders solely to make it more difficult for shareholders to change them.
The other amendments to the Company's Articles of Incorporation which have
been adopted by the Board of Directors, and which are being submitted to the
shareholders for approval at the 1995 Annual Meeting are: (a) to provide that no
action may be taken by the shareholders except at an annual or special meeting;
(b) to provide that a special meeting of the shareholders may be called only by
a written request signed by the holders of no less than 66 2/3% of the total
voting power of the Company; (c) to provide that amendments (a) and (b) may not
be amended, altered or repealed except by the affirmative vote of the
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holders of no less than 80% of the total voting power of the Company; and (d) to
eliminate the right of a director absent from a meeting of the Board or any
committee thereof to give a proxy to another director or to a shareholder. These
amendments to the Articles of Incorporation are not presently in effect and will
become effective only if approved by the shareholders.
The Board of Directors has unanimously adopted the aforedescribed
amendments to the Company's Articles of Incorporation, has determined that such
amendments are advisable and has unanimously voted to recommend them to the
Company's shareholders for approval.
Taken together, the amendments to the Articles of Incorporation and By-Laws
of the Company (which amendments, under the proposed amendment to the Articles,
may not be amended, altered or repealed without the 80% shareholder vote) will
make more difficult, and thus may discourage, any attempt to gain control of the
Company through a proxy contest or through the acquisition of the Company's
Common Stock, and as a result, will tend to perpetuate the control of present
management. The 80% voting requirements in certain provisions of the proposed
amendments could allow the holders of just over 20% of the total voting power of
the Company to defeat proposed actions that might be supported by persons
holding a majority of the total voting power of the Company. As of March 31,
1995, the directors and executive officers of the Company were the beneficial
owners of 10.893% of the outstanding shares of Common Stock.
The Company's Articles of Incorporation presently contain provisions that
have intended "anti-takeover" effects. The Articles of Incorporation of the
Company include certain provisions (the "Special Vote Provisions") requiring the
affirmative vote of 80% of the outstanding shares of the Company's voting stock
before the Company may enter into (i) a merger or consolidation with any other
corporation, (ii) a sale or lease of substantially all of the assets of the
Company to any other corporation, person or entity, or (iii) a sale or lease to
the Company by any other corporation, person or other entity of assets having a
value greater than $1 million in exchange for voting stock of the Company, in
each case if such other corporation, person or other entity, directly or
indirectly, owns or controls 10% or more of the Company's voting stock prior to
any such transaction. The Special Vote Provisions apply only to the
above-described transactions which do not receive prior approval of the Board of
Directors.
The Articles of Incorporation of the Company also contain certain
provisions (the "Takeover Consideration Provisions") authorizing the Board of
Directors, in evaluating an offer from a third party to merge with or acquire
the shares or assets of the Company, to give due consideration to certain
factors not directly related either to the price per share offered for or the
then market price of the Company's Common Stock. The factors that the Board of
Directors is authorized to consider under the Takeover Consideration Provisions
include, without limitation: (i) the consideration being offered in the
acquisition proposal as it relates to the then current value of the Company in a
freely negotiated transaction, and to the Board of Directors' then estimate of
the future value of the Company as an independent entity; (ii) the social, legal
and economic effects of the acquisition proposal on the Company and its
subsidiaries, and the franchisees, employees, suppliers, customers, creditors
and business of the Company and its subsidiaries; (iii) the financial condition
and earnings prospects of the potential offeror, including but not limited to,
debt service and other existing or likely financial obligations of the potential
offeror, and the possible effect of such condition upon the Company and its
subsidiaries and other elements of the communities in which the Company and its
subsidiaries operate or are located; and (iv) the competence, experience and
integrity of the potential offeror.
Pursuant to Section 92G of the Louisiana Business Corporation Law (the
"LBCL"), the Board of Directors is also authorized to consider the factors set
forth therein (which are generally comparable to those set forth in the Takeover
Consideration Provisions) and any other factors which it deems relevant in
evaluating a tender offer or an offer to make a tender or exchange offer or to
effect a merger or consolidation.
The Special Vote Provisions and the Takeover Consideration Provisions may
be altered only by the affirmative vote of 80% of the outstanding shares of the
Company's voting stock.
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Directors' and Officers' Exculpation and Indemnification
The Articles of Incorporation provide that no director or officer of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director or officer except
for liability (i) for breach of the director's or officer's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 92D of the LBCL, which specifies certain corporate transactions, such as
certain dividend declarations and dispositions of assets, as unlawful, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit. With the exception of the items noted in (i) through (iv)
above, the effect of this provision of the Articles of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director or officer for breach of his or her fiduciary duty as a director or
officer. This provision does not limit or eliminate the rights of the Company or
any stockholders to seek non-monetary relief, such as an injunction or
rescission in the event of a breach of a director's or officer's fiduciary duty.
Pursuant to Section 83 of the LBCL, the Company has adopted provisions in
its Articles of Incorporation which require the Company to indemnify its
directors and officers to the fullest extent permitted by Louisiana law.
The Company has also entered into indemnification agreements with its
directors and certain of its officers.
Louisiana Fair Price and Control Share Acquisition Statutes
As a Louisiana corporation, the Company is subject to the provisions of the
LBCL which contain "fair price" and "control share acquisition" provisions. Each
of these provisions imposes significant restrictions on the ability of an
acquiror of a large block of voting stock of a Louisiana corporation to exercise
control over the corporation.
The "fair price" provisions are set forth in Sections 132-134 of the LBCL
and are designed to restrict the ability of a Louisiana corporation to enter
into mergers or other extraordinary corporate transactions with certain
stockholders. These provisions require that certain business combinations
between a Louisiana corporation and "interested stockholders" must be approved
by (i) the corporation's Board of Directors, (ii) the affirmative vote of at
least 80% of the voting stock of the corporation, and (iii) the affirmative vote
of two-thirds of the voting stock of the corporation (excluding stock held by
the interested stockholders), unless the business combination satisfies certain
"fair price" tests regarding the payments to be made to stockholders and meets
certain other procedural requirements. An "interested stockholder" is defined as
any person (other than the corporation, any subsidiary of the corporation or any
employee benefit plan of the corporation or any subsidiary) that is the
beneficial owner of 10% or more of the voting stock of the corporation. In
general, the "fair price" tests measure the value stockholders receive for their
stock from an interested stockholder in transactions within a two year period.
The "control share acquisition" provisions of the LBCL are set forth in
Sections 135-140.2. In general, these provisions provide that persons who, after
May 4, 1987, acquire stock that would normally entitle them to exercise 20% or
more of the voting power of the corporation will not be able to vote the shares
acquired by them in excess of 20% of such voting power unless their ability to
vote is reinstated by the stockholders of the corporation at a meeting held
after the acquiring person requests such a vote. A corporation is required to
call such a meeting only if the person proposing to make a control share
acquisition (an "acquiring stockholder") has demonstrated a financial ability to
make a successful acquisition and such proposed acquisition is lawful. At such a
meeting, the voting rights of the acquiring stockholder will be reinstated for
shares held by the acquiring stockholder in excess of 20% of the Company's
voting power if approved by the affirmative vote of (i) a majority of all shares
of the Company then entitled to vote and (ii) a majority of all shares of the
Company then entitled to vote (excluding shares beneficially owned by the
acquiring stockholder, its officers and its directors who are also its
employees). If the voting rights of the acquiring stockholder are reinstated,
such stockholder can acquire additional voting shares within certain threshold
levels, without obtaining additional stockholder approval. However, if the
acquiring stockholder acquires additional shares in an
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acquisition that places such stockholder above the threshold ownership levels of
one-third and one-half of all voting shares, the additional shares acquired in
such an acquisition in excess of such ownership levels will not have voting
rights unless reinstated by the stockholders pursuant to the voting procedures
described above. A corporation must call a stockholders' meeting within 50 days
of the date that both the corporation and the proposed acquiring stockholder
file definitive proxy materials with the Commission.
Louisiana Insurance Code
UCLIC is a Louisiana chartered life insurance company. Section 731 of the
Louisiana Insurance Code (La.R.S. 22:731) provides that a Louisiana insurer may
merge or consolidate with or acquire control of another insurer, or a person may
acquire control of a Louisiana insurance company only if the plan of merger or
consolidation or acquisition of control is submitted to or receives advance
approval from the Louisiana Commissioner of Insurance after a public hearing
thereon. Section 731 provides that the Louisiana Commissioner of Insurance may
disapprove any such merger, consolidation or other acquisition of control for
any of the following reasons: (i) the effect thereof would be substantially to
lessen competition in insurance in Louisiana or tend to create a monopoly
therein; (ii) the financial condition of any acquiring party is such as might
jeopardize the financial stability of the insurer, or prejudice the interests of
its policyholders or the interests of any remaining security holders who are
unaffiliated with such acquiring party; (iii) the terms of the offer, request,
invitation, agreement or acquisition are unfair and unreasonable to the security
holders of the insurer; (iv) the plans or proposals which the acquiring party
has to liquidate the insurer, sell its assets or consolidate or merge it with
any person, or to make any other material change in its business or corporate
structure or management are unfair and unreasonable to policyholders of the
insurer and not in the public interest; or (v) the competence, experience and
integrity of those persons who would control the operation of the insurer are
such that it would not be in the interest of policyholders of the insurer and of
the public to permit the merger, consolidation or other acquisition of control.
Louisiana's Insurance Holding Company System Regulatory Law, constituting
Part XXI-A of the Louisiana Insurance Code (La.R.S. 22:1001-1015), requires the
filing of periodic registration statements by the Company with the Louisiana
Commissioner of Insurance and regulates transactions among members of an
insurance holding company system such as that of the Company. Any change of
control (10% or more of voting securities is presumed to constitute control for
purposes of this legislation) requires notification to hearing before and
approval of the Louisiana Commissioner of Insurance.
RIGHTS PLAN
On July 27, 1994, the Board of Directors of the Company redeemed the rights
issued under the rights plan adopted in February 1989, adopted the Rights Plan,
declared a dividend of one preferred stock purchase right (a "Right") for each
outstanding share of Common Stock on August 6, 1994, and authorized the issuance
of one Right with respect to each share of Common Stock issued after August 6,
1994, and before the earliest of the Distribution Date, the Redemption Date and
the Final Expiration Date (as such terms are hereinafter defined). The Rights
have anti-takeover effects. The Rights will cause substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Board of Directors, except pursuant to an offer conditioned on a substantial
number of Rights being acquired.
Each Right entitles the registered holder upon exercise on and after the
Distribution Date to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $2.00 per share (the
"Preferred Shares"), of the Company at a price of $240.00 per one one-hundredth
of a Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights, and the Preferred Shares into which such
Rights are exercisable, are set forth in the Rights Plan.
The "Distribution Date" occurs on the earliest of the close of business on
(i) the tenth day following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the outstanding shares of Common Stock, (ii) the
tenth day (or such later date as may be determined by action of the Board of
Directors of the Company prior to such time as any person becomes an Acquiring
Person) following the commencement of, or announcement of an
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<PAGE> 80
intention to make, a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 25% or more of
the outstanding shares of Common Stock, or (iii) 10 days after the Board of
Directors shall declare any person to be an "Adverse Person," upon a
determination that such person, alone or together with its affiliates and
associates, has become the beneficial owner of 10% or more of the outstanding
shares of Common Stock and a determination by at least a majority of the Board
of Directors who are not officers of the Company, after reasonable inquiry and
investigation, including consultation with such persons as such directors shall
deem appropriate, that (a) such beneficial ownership by such person is intended
to cause, is reasonably likely to cause or will cause the Company to repurchase
the shares of Common Stock beneficially owned by such person or to cause
pressure on the Company to take action or enter into a transaction or series of
transactions intended to provide such person with short-term financial gain
under circumstances where the Board of Directors determines that the best
long-term interests of the Company and its stockholders would not be served by
taking such action or entering into such transactions or series of transactions
at that time or (b) such beneficial ownership is causing or is reasonably likely
to cause a material adverse impact (including, but not limited to, impairment of
relationships with customers or impairment of the Company's ability to maintain
its competitive position) on the business or prospects of the Company. However,
the Board of Directors may not declare a person to be an Adverse Person if,
prior to the time that the person acquired 10% or more of the shares of Common
Stock then outstanding, such person provided to the Board of Directors in
writing a statement of the person's purpose and intentions in connection with
the proposed acquisition of Common Stock, together with any other information
reasonably requested of the person by the Board of Directors, and the Board of
Directors, based on such statement and reasonable inquiry and investigation as
it deems appropriate, determines to notify and notifies such person in writing
that it will not declare the person to be an Adverse Person; provided, however,
that the Board of Directors may expressly condition in any manner a
determination not to declare a person an Adverse Person on such conditions as
the Board of Directors may select, including without limitation, such person not
acquiring more than a specified amount of stock and/or such person not taking
actions inconsistent with the purposes and intentions disclosed by such person
in the statement provided to the Board of Directors. In the event that the Board
of Directors should at any time determine, upon reasonable inquiry and
investigation, that such person has not met or complied with any conditions
specified by the Board of Directors, the Board of Directors may at any time
thereafter declare the person to be an Adverse Person. Until the Distribution
Date, the Rights will be transferred with and only with shares of Common Stock.
The Rights will expire on July 31, 2004 (the "Final Expiration Date"), unless
the Rights are earlier redeemed or exchanged by the Company.
The Purchase Price payable, and the number of Preferred Shares or other
securities of property issuable, on exercise of the Rights are subject to
adjustment from time to time to prevent dilution in the event of a stock
dividend on the Preferred Shares or other events described in the Rights Plan.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of Common Stock.
In the event of liquidation, the holders of the Preferred Shares will be
entitled to a minimum preferential liquidation payment of $100.00 per share but
will be entitled to an aggregate payment of 100 times the payment made per share
of Common Stock. Each Preferred Share will have 100 votes, voting together with
the Common Stock. Finally, in the event of merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each Preferred Share
will be entitled to receive 100 times the amount received per share of Common
Stock. The Rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
share of Common Stock.
The Rights Plan contains a "flip-over" feature allowing the exercise of the
Rights so that the holder thereof (except those Rights held by the Acquiring
Person) will receive shares of Common Stock of the Acquiring Person at half
price, causing substantial dilution to the Acquiring Person. In general, this
"flip-over" feature provides that in the event that the Company is acquired by
an Acquiring Person in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold to
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<PAGE> 81
an Acquiring Person, proper provision will be made so that each holder of a
Right, other than Rights that are or were beneficially owned by the Acquiring
Person after the date upon which the Acquiring Person became such (which will
thereafter be void), will thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price, that number of shares of
common stock of the Acquiring Person which at the time of such transaction will
have a market value of two times the Purchase Price.
The Rights Plan also contains a "flip-in" feature allowing holders of
Rights (except those held by an Acquiring Person) to purchase Common Stock of
the Company at half price, causing substantial dilution to the Acquiring Person.
In general, this "flip-in" feature provides that in the event that (i) any
person becomes the beneficial owner of 25% or more of the outstanding Common
Stock (unless such person first acquires 25% or more of the outstanding Common
Stock by a purchase pursuant to a tender offer for all of the Common Stock which
the independent directors determine to be fair to and otherwise in the best
interests of the Company and its stockholders, employees, customers and
communities in which the Company does business), (ii) any person is declared by
the Board of Directors to be an Adverse Person, (iii) an Acquiring Person
engages in one or more "self-dealing" transactions as set forth in the Rights
Plan, or (iv) during such time as there is an Acquiring Person, there shall be a
reclassification of securities or a recapitalization or reorganization of the
Company or other transaction or series of transactions involving the Company
which has the effect of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities of the Company or any
of its subsidiaries beneficially owned by the Acquiring Person, proper provision
shall be made so that each holder of a Right, other than Rights that are or were
beneficially owned by the Acquiring Person after the date upon which the
Acquiring Person became such (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common Stock
(or, in the event that there are insufficient authorized shares of Common Stock,
substitute consideration such as cash, property, or other securities of the
Company) having a market value of two times the Purchase Price.
At any time after the acquisition by an Acquiring Person of beneficial
ownership of 20% or more of the outstanding Common Stock and prior to the
acquisition by such person of 25% or more of the outstanding Common Stock, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by such person which have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, or one one-hundredth of a Preferred
Share (or of a share of a class or series of the Company's preferred stock
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).
At any time prior to the tenth day following a public announcement that an
Acquiring Person has acquired beneficial ownership of 20% or more of the
outstanding Common Stock, the Board of Directors of the Company may redeem the
Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption
Price"). Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holder of the Rights will be
to receive the Redemption Price. The date on which the redemption of the Rights
occurs pursuant to the foregoing provisions is referred to herein as the
"Redemption Date."
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to lower certain thresholds described above to not less than the greater of (i)
any percentage greater than the largest percentage of the outstanding shares of
the Common Stock then known to the Company to be beneficially owned by any
Acquiring Person and (ii) 10%, except that from and after such time as any
person becomes an Acquiring Person no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder of a Right will not, by reason of
being such a holder, have rights as a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends.
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<PAGE> 82
PLAN OF DISTRIBUTION
The Company may offer and sell the Offered Securities in one or more of the
following ways: (i) through underwriters or dealers; (ii) through agents; or
(iii) directly by the Company to one or more purchasers. The Prospectus
Supplement with respect to a particular offering of a series of Offered
Securities will set forth the terms of the offering of such Offered Securities,
including the name or names of any underwriters or agents with whom UCFC has
entered into arrangements with respect to the sale of such Offered Securities,
the public offering or purchase price of such Offered Securities and the
proceeds to the Company from such sales, and any underwriting discounts, agency
fees or commissions and other items constituting underwriters' compensation, the
initial public offering price, any discounts or concessions to be allowed or
reallowed or paid to dealers and any securities exchange, if any, on which such
Offered Securities may be listed. Dealer trading may take place in certain of
the Offered Securities, including Offered Securities not listed on any
securities exchange.
If underwriters are used in the offer and sale of Offered Securities, the
Offered Securities will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The Offered Securities may be offered to the
public either through underwriting syndicates represented by managing
underwriters, or by underwriters without a syndicate, all of which underwriters
in either case will be designated in the applicable Prospectus Supplement.
Unless otherwise set forth in the applicable Prospectus Supplement, under the
terms of the underwriting agreement, the obligations of the underwriters to
purchase Offered Securities will be subject to certain conditions precedent and
the underwriters will be obligated to purchase all the Offered Securities if any
are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Offered Securities may be offered and sold directly by the Company or
through agents designated by the Company from time to time. Any agent involved
in the offer or sale of the Offered Securities with respect to which this
Prospectus is delivered will be named in, and any commissions payable by the
Company to such agent will be set forth in or calculable from, the applicable
Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement,
any such agent will be acting on a best-efforts basis for the period of its
appointment.
The Offered Securities will be new issues of securities with no established
trading market. Any underwriters to whom Offered Securities are sold by the
Company for public offering and sale may make a market in such Offered
Securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for any Offered Securities.
Any underwriter, dealer or agent participating in the distribution of the
Offered Securities may be deemed to be an underwriter, as that term is defined
in the Securities Act, of the Offered Securities so offered and sold, and any
discounts or commissions received by it from UCFC and any profit realized by it
on the sale or resale of the Offered Securities may be deemed to be underwriting
discounts and commissions under the Securities Act.
Under agreements entered into with the Company, underwriters, dealers and
agents may be entitled to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
Underwriters, dealers and agents also may be customers of, engage in
transactions with, or perform other services for the Company in the ordinary
course of business.
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<PAGE> 83
LEGAL OPINIONS
The legality of the Debt Securities will be passed upon for the Company by
Stroock & Stroock & Lavan, New York, New York. The legality of the Common Stock
and Preferred Stock will be passed upon for the Company by Kantrow, Spaht,
Weaver & Blitzer (A Professional Law Corporation), Baton Rouge, Louisiana.
Certain legal matters in connection with any offering of Securities involving
any underwriters or dealers will be passed upon for such underwriters or dealers
by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York. As to matters governed by the laws of the
State of Louisiana, Stroock & Stroock & Lavan and Simpson Thacher & Bartlett
will rely upon Kantrow, Spaht, Weaver & Blitzer (A Professional Law
Corporation). As of March 31, 1995, individual stockholders of the firm of
Kantrow, Spaht, Weaver & Blitzer (A Professional Law Corporation) owned,
directly or indirectly, approximately 25,000 shares of the Company's Common
Stock.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this Prospectus by reference from UCFC's Annual Report
on Form 10-K for the year ended December 31, 1994, as amended by Amendment No. 1
on Form 10-K/A, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended March 31, 1995 and 1994, which is incorporated herein by reference,
Deloitte & Touche LLP have applied limited procedures in accordance with
professional standards for a review of such information. However, as stated in
their reports included in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated by reference herein, they did not
audit and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
Deloitte & Touche LLP are not subject to the liability provisions of Section 11
of the Securities Act for their reports on the unaudited interim financial
information because those reports are not "reports" or a "part" of the
registration statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Securities Act.
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or by the Underwriters. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or the solicitation of an offer to buy any
securities other than the securities described in this Prospectus Supplement or
an offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder or thereunder shall, under any circumstances, create any implication
that the information contained herein or therein is correct as of any time
subsequent to the date of such information.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary.............. S-3
Selected Financial and Other Data.......... S-8
Use of Proceeds............................ S-11
Capitalization............................. S-11
Price Range of Common Stock and
Dividends................................ S-12
Description of PRIDES...................... S-14
Certain Federal Income Tax
Considerations........................... S-22
Underwriting............................... S-26
PROSPECTUS
Incorporation of Certain Documents by
Reference................................ 2
Available Information...................... 3
The Company................................ 4
Use of Proceeds............................ 10
Ratios of Earnings......................... 11
Selected Financial and Other Data.......... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 15
Description of Securities.................. 33
Description of Capital Stock............... 48
Plan of Distribution....................... 55
Legal Opinions............................. 56
Experts.................................... 56
</TABLE>
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1,700,000 SHARES
UNITED COMPANIES
FINANCIAL CORPORATION
[LOGO]
6 3/4% PRIDESSM
CONVERTIBLE PREFERRED STOCK
PAR VALUE $2.00 PER SHARE
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INCORPORATED
JUNE 12, 1995
SMSERVICE MARK OF MERRILL LYNCH & CO., INC.
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