<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
United Companies Financial Corporation (Debtors in Possession):
We have audited the accompanying consolidated balance sheets of United Companies
Financial Corporation (Debtors-in-Possession) and subsidiaries (the "Company")
as of December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express (or disclaim) an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our report.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations, changes in
stockholders' equity and cash flows of United Companies Financial Corporation
and subsidiaries for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2, on March 1, 1999, United Companies Financial Corporation
and certain of its subsidiaries have filed for reorganization under Chapter 11
of the Federal Bankruptcy Code. The accompanying consolidated financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such consolidated financial statements do
not purport to show (a) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (b) as to prepetition
liabilities, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Company; or (d) as to
operations, the effect of any changes that may be made in its business.
The accompanying 1999 and 1998 consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2, the Company suffered significant net losses for the years
ended December 31, 1999 and 1998 and has a stockholders' capital deficiency.
These circumstances and the matters discussed in the preceding paragraph raise
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 2. The
1999 and 1998 financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Because of the possible material effects of the uncertainties discussed in the
two preceding paragraphs, we are unable to express, and we do not express, an
opinion on the accompanying 1999 and 1998 consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
August 25, 2000
<PAGE> 2
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
ASSETS (IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 105,893 $ 192,212
Interest-only and residual certificates -- net ................................. 355,127 462,504
Loans -- net ................................................................... 343,793 191,282
Investment securities - available for sale ..................................... -- 1,918
Accrued interest receivable and servicer advances .............................. 215,240 191,762
Property -- net ................................................................ 32,206 45,883
Capitalized mortgage servicing rights .......................................... -- 40,148
Other assets ................................................................... 6,778 29,448
Net assets of discontinued operations .......................................... -- 85,403
----------- -----------
Total assets ......................................................... $ 1,059,037 $ 1,240,560
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise:
Other liabilities ............................................................ $ 114,268 --
-----------
Total liabilities not subject to compromise .......................... 114,268 --
-----------
Liabilities subject to compromise:
Notes payable ................................................................ 1,216,832 $ 1,219,025
Other liabilities ............................................................ 29,707 135,694
----------- -----------
Total liabilities subject to compromise .............................. 1,246,539 1,354,719
----------- -----------
Stockholders' deficit:
Preferred stock, $2 par value;
Authorized -- 20,000,000 shares; Issued -- 1,514,164 and 1,657,770
shares of 6 3/4% PRIDES(sm) ($44 per share liquidation preference) ...... 3,028 3,315
Common stock, $2 par value;
Authorized -- 100,000,000 shares; Issued -- 30,515,010 and
30,353,033 shares ....................................................... 61,030 60,706
Additional paid-in capital ................................................... 186,427 186,614
Accumulated other comprehensive income ....................................... -- 113
Retained deficit ............................................................. (535,896) (345,703)
Treasury stock ............................................................... (7,409) (7,409)
ESOP debt .................................................................... (8,950) (11,795)
----------- -----------
Total stockholders' deficit .......................................... (301,770) (114,159)
----------- -----------
Total liabilities and stockholders' deficit ........................ $ 1,059,037 $ 1,240,560
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Loan sale gains (losses) ...................................... $ (4,714) $ 191,383 $ 247,022
Finance income, fees earned and other loan income ............. 77,510 128,599 139,029
Writedown of Interest-only and residual certificates - net
and accrued interest receivable and servicer advances ....... (106,274) (605,562) --
Investment income ............................................. 35,014 39,509 24,230
Other ......................................................... 2,703 15,336 8,312
--------- --------- ---------
Total ................................................. 4,239 (230,735) 418,593
--------- --------- ---------
Expenses:
Personnel ..................................................... 54,915 141,505 120,800
Interest ...................................................... 16,844 72,710 54,865
Advertising ................................................... 15,221 48,559 36,490
Restructuring ................................................. 2,982 6,368 --
Other operating ............................................... 97,598 128,823 79,590
--------- --------- ---------
Total ................................................. 187,560 397,965 291,745
--------- --------- ---------
Income (loss) from continuing operations
before income taxes .......................................... (183,321) (628,700) 126,848
Provision (benefit) for income taxes ............................ 6,872 (84,769) 44,661
--------- --------- ---------
Income (loss) from continuing operations ........................ (190,193) (543,931) 82,187
Loss from discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $0, $830 and
$2,698, respectively ...................................... -- (1,541) (7,587)
Loss on disposal, net of income tax benefit of $0, $5,550,
and $0 ..................................................... -- (38,424) --
--------- --------- ---------
Total .................................................... -- (39,965) (7,587)
--------- --------- ---------
Net income (loss) ............................................... $(190,193) $(583,896) $ 74,600
--------- --------- ---------
Comprehensive (loss) income, net of tax:
Unrealized holding gains (losses) arising during period ........ (113) 15 51
--------- --------- ---------
Comprehensive (loss) income .................................... $(190,306) $(583,881) $ 74,651
========= ========= =========
Basic earnings (loss) per share:
(Loss) income from continuing operations ...................... $ (6.61) $ (19.32) $ 2.63
Loss from discontinued operations ............................. -- (1.42) (.24)
--------- --------- ---------
Net income (loss) ............................................. $ (6.61) $ (20.74) $ 2.39
========= ========= =========
Diluted earnings (loss) per share:
(Loss) income from continuing operations ...................... $ (6.61) $ (19.32) $ 2.53
Loss from discontinued operations ............................. -- (1.42) (.23)
--------- --------- ---------
Net income (loss) ............................................. $ (6.61) $ (20.74) $ 2.30
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Income (loss) from continuing operations ..................................... $ (190,193) $ (543,931) $ 82,187
Adjustments to reconcile income (loss) from continuing operations
to net cash used by continuing operating activities:
Increase in accrued interest receivable and servicer advances ... (22,516) (106,504) (23,822)
Decrease (increase) in other assets ............................. 22,720 3,001 (12,961)
Increase (decrease)in other liabilities ......................... (2,335) 80,720 33,826
Decrease (increase) in interest-only and residual
certificates--net ............................................. 107,377 419,611 (277,642)
Increase in capitalized mortgage servicing rights ........................ -- (25,513) (34,226)
Amortization of capitalized mortgage servicing rights .................... 40,148 34,125 9,272
Investment gains ......................................................... -- (15,511) --
Loan loss provision on owned loans ....................................... 15,001 26,924 3,462
Amortization and depreciation ............................................ 6,877 6,779 6,945
Provision for loss on loan to ESOP ....................................... 2,845 -- --
Deferred income taxes .................................................... -- (95,385) 43,796
Proceeds from sales and principal collections of loans ................... 547,772 3,349,460 2,807,849
Originations and purchases of loans held for sale ........................ (644,205) (3,373,670) (2,875,000)
Decrease from trading securities ......................................... -- -- 17,418
----------- ----------- -----------
Net cash used by continuing operating activities ....................... (116,509) (239,894) (218,896)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities ....................... 1,805 18,985 1,977
Proceeds from maturities of held to maturity securities .................... -- 4,236 --
Purchase of available-for-sale securities .................................. -- (125) (1,242)
Purchase of held to maturity securities .................................... -- (5,837) --
Proceeds from sale of real estate .......................................... 16,667 16,895 --
Capital (expenditures) proceeds-net ........................................ 10,215 (16,633) (22,573)
----------- ----------- -----------
Net cash provided (used) by investing activities ....................... 28,687 17,521 (21,838)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from construction and mortgage loans .............................. -- -- 3,846
Payments on construction and mortgage loans ................................ -- -- (12,612)
Payments on senior and subordinated debt ................................... -- (103,000) --
Proceeds from issuance of subordinated notes ............................... -- -- 146,855
Increase in revolving credit facilities .................................... -- 633,332 192,550
Decrease in debt with maturities of three months
or less .................................................................. (2,962) -- (47,100)
Decrease in warehouse loan facility ........................................ -- (1,703) (19,007)
Proceeds from ESOP debt .................................................... -- -- 850
Payments on ESOP debt ...................................................... -- (1,516) (1,517)
Cash dividends paid ........................................................ -- (12,235) (14,750)
Increase (decrease) in managed cash overdraft .............................. 4,811 (13,625) 13,625
Purchases of treasury stock ................................................ -- -- (629)
Decrease (increase) in unearned ESOP compensation .......................... -- 1,851 (2,514)
Proceeds from exercise of stock options and warrants ....................... -- 113 222
----------- ----------- -----------
Net cash provided (used) by financing activities ....................... 1,849 503,217 259,819
----------- ----------- -----------
Net cash flows from discontinued operations .................................. (346) (89,214) (33,013)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............................. (86,319) 191,630 (13,928)
Cash and cash equivalents at beginning of period ............................. 192,212 582 14,510
----------- ----------- -----------
Cash and cash equivalents at end of period ................................... $ 105,893 $ 192,212 $ 582
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED TREASURY TOTAL
ADDITIONAL OTHER RETAINED STOCK AND STOCKHOLDERS'
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS ESOP EQUITY
STOCK STOCK CAPITAL INCOME (DEFICIT) DEBT (DEFICIT)
--------- --------- ---------- ------------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ......... $ 3,910 $ 59,255 $ 184,397 $ 48 $ 190,579 $ (17,912) $ 420,277
Net income ......................... 74,600 74,600
Dividends declared ................. (14,750) (14,750)
Increase in ESOP debt .............. (2,514) (2,514)
Common stock options
exercised ........................ 500 2,928 3,428
Treasury shares acquired ........... (629) (629)
Release of ESOP shares ............. 167 167
Preferred stock converted .......... (114) 188 (74) --
Mark-to-market adjustment on
investments ........................ 50 50
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ......... 3,796 59,943 187,418 98 250,429 (21,055) 480,629
Net loss ........................... (583,896) (583,896)
Dividends declared ................. (12,236) (12,236)
Decrease in ESOP debt .............. 1,851 1,851
Restricted stock transactions ...... (66) 150 84
Common stock options
exercised ........................ 35 78 113
Release of ESOP shares ............. (719) (719)
Preferred stock converted .......... (481) 794 (313) --
Mark-to-market adjustment on
investments ...................... 15 15
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ......... 3,315 60,706 186,614 113 (345,703) (19,204) (114,159)
Net loss ........................... (190,193) (190,193)
Provision for loss on loan to
ESOP .............................. 2,845 2,845
Restricted stock transactions ...... (150) (150)
Preferred stock converted .......... (287) 474 (187) --
Mark-to-market adjustment on
investments ...................... (113) (113)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 ......... $ 3,028 $ 61,030 $ 186,427 $ -- $(535,896) $ (16,359) $(301,770)
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include the accounts and operations of United Companies Financial Corporation
and subsidiaries (the "Company" or "United Companies"), all of which are
wholly-owned. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
1.2 Loan Accounting. Prior to its disposition or closing of its lending
operations, the Company originated and purchased loans (which includes for
purposes hereof manufactured housing installment loan and installment sale
contracts) for its own portfolio and for sale and/or securitization in the
secondary market. Loans held for sale are carried at lower of cost or market.
1.2(a) Loan Sales. On and prior to December 31, 1998, the Company sold
substantially all loans which it originated or purchased as asset-backed
securities and, prior to the 1998 fourth quarter securitization transaction,
generally retained the servicing rights on loans sold. The Company has closed or
sold all of its loan origination operations. See Note 2. Under the
sales/servicing agreements, the buyer receives the principal collected on the
loan and an agreed upon rate of return on the outstanding principal balance, the
Company retains the excess of the interest at the contractual rate over the sum
of the rate paid to the buyer (the "pass-through" rate), a normal servicing fee,
and, where applicable, the trustee fee and surety bond fee. At the time of sale,
the Company allocated a portion of its basis in the loans to mortgage servicing
rights which was recorded as an asset (Capitalized mortgage servicing rights),
recorded as an asset the fair value of the excess interest retained by it
(Interest-only and residual certificates), made a provision for an allowance for
losses on the loans sold, and recognized the resulting loan sale gain as
revenue. At December 31, 1999, the Company determined the fair value of the home
equity and manufactured housing product Interest-only and residual certificates
and the Capitalized Mortgage Servicing Rights based on an amended agreement with
an independent third party. See Notes 2 and 3. At December 31, 1998, the fair
value of the Company's Interest-only and residual certificates, which is net of
the allowance for loan losses, was determined at the time of sale by the Company
by computing the present value of the cash flows of the excess interest retained
by the Company expected to be received by it (using the expected dates that such
interest is to be released from the related reserve accounts), discounted at an
interest rate that the Company believed an unaffiliated third-party purchaser
would require as a rate of return on a financial instrument comprised of such
cash flows. These amounts were calculated using prepayment, default and loss
severity assumptions based on the actual experience and anticipated losses of
the Company's serviced portfolio for home equity loans and comparable industry
prepayment statistics for manufactured housing contracts.
1.2(b) Nonrefundable Loan Fees. Loan origination fees and incremental
direct costs associated with loan originations are deferred and recognized over
the lives of the loans as an adjustment to yield, using the interest method.
Unamortized costs and fees are recognized upon sale of the loan or related
asset-backed securities to third parties.
1.2(c) Loan Servicing. On and prior to September 30, 1998, the Company
generally retained the right to service loans it originated or purchased and
subsequently sold or securitized in the secondary market. The Company did not
retain the servicing on its 1998 fourth quarter securitization transaction. Fees
for servicing loans are generally based on a stipulated percentage of the
outstanding principal balance of such loans. The Company recognizes rights to
service loans for others that have been acquired through either the purchase or
origination of such loans.
1.2(d) Allowance for Loan Losses. The Company's loan sale agreements for
home equity loans generally provide for the subordination to a limited extent of
cash in reserve accounts and excess interest spread retained relating to the
loans sold. The 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 the termination of the agreement pursuant to which the loans were sold.
In connection with the securitization of home equity loans and sale of the
asset-backed certificates backed by such loans, the excess interest retained by
the Company is generally subordinated to a limited extent to the sold
certificates and used to fund a
5
<PAGE> 7
reserve account, thereby providing additional credit enhancement to the holders
of the certificates. In connection with the securitization of manufactured
housing contracts and sale of asset-backed certificates backed by such
contracts, a senior/subordinated structure was generally utilized in which
credit enhancement is provided to the senior certificates by the subordinated
certificates. A senior/subordinated structure was utilized by the Company in its
1998 fourth quarter home equity securitization transaction. The
senior/subordinated structure does not utilize a reserve account. The 1998
fourth quarter securitization transaction, along with two earlier 1998 home
equity loan securitization transactions which have no reserve accounts and one
of the 1997 home equity loan securitization transactions which has a reserve
account, provides for an "overcollateralization" feature whereby the excess
interest spread retained by the Company, net of the portion thereof used to
cover losses on the securitized loans, is applied against the principal balance
of the asset-backed certificates backed by such loans. This application, in the
absence of losses, accelerates the amortization of the principal balance of the
asset-backed certificates relative to the amortization of the loans backing such
certificates, so that the principal balance of the loans will exceed the
principal balance of the certificates. This application, which is a part of the
credit enhancement provided in these securitization transactions, continues
until the level of overcollateralization equals the amount specified in the
related loan sale agreement, at which time such application ceases unless
necessary to maintain the level of overcollateralization at its required level.
Regardless of the structure of the loan sale transaction, the Company estimates
the amount of future losses under the loan sale agreements and provides a
reserve for such losses in determining the amount of gain recorded at the time
of the sale and the subsequent carrying value of the Interest-only and residual
certificates.
The Company provides for estimated loan losses on loans owned by the
Company by establishing an allowance for loan losses through a charge to
earnings. The Company conducts periodic reviews of the quality of the loan
portfolio and estimates the 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 adequacy
of the Company's allowance for loan losses. While management uses the best
information available in conducting its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in historical loss
experience, economic conditions, collateral value or other elements used in
conducting the review.
1.2(e) Other. Loans are placed on a nonaccrual status when they are past
due 150 days.
1.2(f) Property Acquired in Satisfaction of Debt. The Company records
properties received in settlement of loans ("real estate owned") at the lower of
their market value less estimated costs to sell ("market") or the outstanding
loan amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between market and cost. Market value is generally determined by
purchase agreements or property valuations performed either by Company personnel
or independent appraisers. The related adjustments are included in the Company's
provision for loan losses for owned loans.
1.3 Property. Property is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line and accelerated methods over the
estimated useful lives of the assets.
1.4 Income Taxes. The Company and its subsidiaries file a consolidated
federal income tax return. The Company allocates to its subsidiaries their
proportionate share of the consolidated tax liability under a tax allocation
agreement whereby each affiliate's federal income tax provision is computed on a
separate return basis. Deferred income taxes are provided for the effect of
revenues and expenses which are reported in different periods for financial
reporting purposes than for tax purposes. Such differences result primarily from
providing for loan losses, loan income, loan sale gains and depreciation.
1.5 Cash Equivalents. For purposes of the Statements of Cash Flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At December 31, 1999
and 1998, cash equivalents totaled $106 million and $192 million, respectively.
1.6 Accounting Standards. In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended, ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize, at fair value, all derivatives as either
assets or liabilities. The accounting for changes in the fair value of a
derivative is dependent upon the intended use of the
6
<PAGE> 8
derivative. SFAS No. 133 is effective for all periods beginning after June 15,
2000. Earlier application of the provisions of SFAS No. 133 is encouraged, but
is permitted only as of the beginning of any quarter that begins after issuance
of the Statement. Retroactive application is not allowed. The Company is
reviewing the provisions of this pronouncement but has not yet determined the
effect of its implementation on the Company's financial condition or results of
operations.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No. 134"), which was effective for the first fiscal quarter beginning
after December 15, 1998. SFAS No. 134 requires that, after the securitization of
mortgage loans held for sale, any retained investment in the related
mortgage-backed securities be classified in accordance with the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", based on the entity's ability and intent to sell or hold the
investment. Prior to SFAS No. 134, the Company was required to classify its
retained interests as a trading security even though it had no intent to dispose
of the security. In 1998 the Company had indicated its intent to classify its
Interest-only and residual certificates as "available-for-sale"; however, the
Company subsequently determined to continue to classify its retained interests
as a trading security, and therefore SFAS No. 134 had no impact on the Company's
1999 financial condition or results of operations.
1. 7 Financial Instruments. The Company from time to time entered into
interest rate hedge mechanisms to manage its exposure to interest rate changes
in connection with the securitization and sale of its loans. The Company closed
out the hedge position to coincide with the related loan sale and securitization
transactions and recognized the results of the hedge transaction in determining
the amount of the related loan sale gain. The Company did not have any open
hedge positions at December 31, 1999 or 1998 other than the interest rate caps
discussed in the following paragraph.
The hybrid loan product originated by the Company was securitized
using floating rate certificates with rates based on the one-month London
interbank offered rate ("LIBOR"). To hedge the interest rate exposure during the
fixed rate period of these loans, in 1998 the Company purchased floating
interest rate caps, also based on one-month LIBOR, in the aggregate notional
amount of $2.6 billion which limited the exposure to rising interest rates. Each
reporting period, the Company marked-to-market the value of these hedges. At
December 31, 1998, the fair market value of the Company's interest rate caps was
approximately $4.8 million. In February 1999, a $1.6 billion notional amount
interest rate cap owned by the Company was sold for $3.2 million resulting in a
loss of approximately $1.0 million. In December 1999, the seller of the
remaining $1.01 billion notional amount hedge notified the Company that the
filing for protection under the Bankruptcy Code was an act of default under the
hedge agreement. The hedge was subsequently redeemed for $1.05 million in
January, 2000. Effectively, the entire securitized hybrid loan portfolio of $1.3
billion at December 31, 1999 is no longer subject to a hedge.
1.8 Basic and Diluted Earnings (Loss) Per Common Share. Basic earnings
(loss) per share ("EPS") excludes dilution and is computed by dividing earnings
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings (loss) of the entity.
1.9 Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year presentation. Such reclassifications had no effect
on net income or net loss.
1.10 Use of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
2. BANKRUPTCY PROCEEDINGS UNDER CHAPTER 11.
On March 1, 1999, the Company and 11 of its wholly-owned subsidiaries
(collectively, the "Debtors") filed petitions for reorganization under Chapter
11 of Title 11 of the United States Code (the "Bankruptcy Code"). The petitions
were filed in the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") under
7
<PAGE> 9
case numbers 99450-461 (the "Chapter 11 Cases"). The Chapter 11 Cases have been
procedurally consolidated for administrative purposes. The Debtors continue to
manage their affairs and operate their businesses as debtors-in-possession while
the Chapter 11 Cases are pending. As debtors-in-possession, the Debtors may not
engage in transactions outside of the ordinary course of business without the
approval, after notice and hearing, of the Bankruptcy Court. As part of the
Chapter 11 Cases, the Debtors have developed and filed a plan of reorganization
that is discussed below and is subject to the approval of the Bankruptcy Court
in accordance with Section 1129 of the Bankruptcy Code.
Generally, actions to enforce or otherwise effect repayment of all
prepetition liabilities, as well as all pending litigation against the Debtors,
have been stayed while the Debtors have continued their business operations as
debtors-in-possession. Schedules have been filed by the Debtors with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the filing date as reflected in the Debtors' accounting records. Differences
between amounts reflected in such schedules and claims filed by creditors have
been investigated and have been or will be amicably resolved or adjudicated
before the Bankruptcy Court or such other court, tribunal or board of competent
jurisdiction. The ultimate amount and settlement terms for such liabilities are
subject to a plan of reorganization, and accordingly, are not presently
determinable.
Under the Bankruptcy Code, the Debtors may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition contracts, subject to Bankruptcy
Court review. The Company cannot presently determine or reasonably estimate the
ultimate liability that may result from rejecting leases or from the filing of
claims for any rejected contracts, and no provisions have been made for these
items in the accompanying consolidated financial statements of the Company.
Subsequent to the filing of the Chapter 11 Cases, the Debtors entered
into a Post Petition Loan and Security Agreement (the "Loan Agreement") with
Greenwich Capital Financial Products, Inc. and The CIT Group/Business Credit,
Inc. and a Post Petition Whole Loan Purchase Facility (the "Purchase Facility")
with Greenwich Capital Financial Products, Inc. to provide secured
debtor-in-possession financing. The Loan Agreement provided for borrowings, on a
revolving basis, dependent upon the Debtors' level of inventory of mortgage
loans and initially was established at $150 million with provisions to increase
the maximum amount to $300 million, with Bankruptcy Court approval. The Purchase
Facility provided for a commitment to purchase up to $500 million of qualifying
loans. The Purchase Facility was initially approved up to $75 million with
provisions to increase the maximum limit to $500 million at a later date. In
May, 1999, the Bankruptcy Court issued a final order confirming the
debtor-in-possession financing at the interim aggregate level of $225 million,
of which $150 million was available under the Loan Agreement and $75 million was
available under the Purchase Facility. At December 31, 1999, the Debtors had no
amounts outstanding under the Loan Agreement or the Purchase Facility. In
February 2000, the Loan Agreement and the Purchase Facility expired.
On March 22, 1999, the Company announced that it would close its
GINGER MAE subsidiary after efforts to sell that business were unsuccessful. As
of July 31, 1999, the closure of this unit, as well as the previously announced
closure of its correspondent (Unicor) and manufactured housing (United Companies
Funding) lending units, had been completed.
The Company also announced on March 22, 1999 its decision to market
for sale its home equity loan retail lending platform. On April 16, 1999, the
Company announced that it had accepted a bid from Aegis Mortgage Corporation
("Aegis") to purchase 127 retail branches, subject to Bankruptcy Court approval.
The Company also announced that it would close its remaining retail loan
origination branches, thereby exiting all loan origination channels. On April
26, 1999, the Company and certain of its affiliates (the "Sellers") entered into
an Asset Purchase Agreement (the "Asset Purchase Agreement") with Aegis and
Cerberus Partners, L.P., whereby the Sellers agreed to sell to Aegis certain
assets of their loan origination business for a purchase price of (i)
$3,000,000, plus (ii) certain agreed upon expenses incurred during the month of
May, 1999 equal to $7,300,000. The assets sold under the Asset Purchase
Agreement included (a) loans originated by the Sellers prior to the closing date
which had not been funded and closed as of such date, (b) all rights of the
Sellers under certain of the various contracts and leases relating to the loan
origination business, (c) certain of the computer software relating to such
business, and (d) the UC Lending(R) tradename. By order dated May 11, 1999, the
Bankruptcy Court approved the sale pursuant to the terms of the Asset Purchase
Agreement. The Aegis transaction closed on June 1, 1999. The net assets and
resulting loss relating to this sale were not material to the consolidated
financial statements of the Company.
8
<PAGE> 10
On December 29, 1999, the Company signed a letter agreement for the
sale of substantially all of the assets related to its mortgage servicing
business, whole loan portfolio and residual interests to EMC Mortgage
Corporation ("EMC"), a wholly-owned subsidiary of The Bear Stearns Companies,
Inc. ("Bear Stearns"). Cash on hand and certain other assets were not included
in the letter agreement. The letter agreement also provided that the Company
could bifurcate the transaction and sell its whole loan portfolio to another
bidder or accelerate the sale of the whole loan portfolio to EMC subject to
higher or better offers. The transaction was subject to the negotiation and
execution of definitive documentation, as well as to the approval of the
Bankruptcy Court and the submission of higher and better offers pursuant to
bidding procedures to be established by the Bankruptcy Court, as well as certain
other conditions. On May 26, 2000, the Debtors and Bear Stearns, EMC, and EMC
Acquisition Corp. (the "EMC Parties") entered into an Asset Purchase Agreement
and a Mortgage Loan and REO Purchase Agreement (see below), thus giving effect
to the letter of intent signed on December 29, 1999. Bidding procedures were
approved by the Bankruptcy Court on June 20, 2000 and June 8, 2000,
respectively.
Asset Purchase Agreement. This agreement provides for the sale of
substantially all of the Debtors' assets relating to the mortgage servicing
business and Interest-only and residual certificates (the "Purchased Assets"),
including, without limitation, certain mortgage pass-through certificates,
servicing and interest advances on home equity loans, prepayment penalty income,
all of the rights, interests and benefits of the Debtors in, to and under
certain pooling and service agreements and other executory contracts, insurance
policies, prepayment fees, penalties and other income from or with respect to
mortgage loans, certain claims relating to the performance of mortgage loans,
and servicing rights relating to certain securitization trusts, together with
associated cash flow owned by the Debtors for the period from and after January
1, 2000.
This agreement contemplates an effective date as of January 1, 2000.
Correspondingly, the agreement provides that cash flow associated with the
Purchased Assets during the period from and after the effective date and up to
and including the closing date shall be for the account of the EMC Parties. In
the event that there is a cash flow deficit during such period, the purchase
price shall be increased by the amount of such deficit and, at closing, EMC
shall pay the amount of such deficiency. In the event of a cash flow surplus
during such period, the purchase price shall be decreased by the amount of such
surplus. This agreement also provides for adjustments to the purchase price
based primarily on future movement of interest rates and loan delinquency rates
within the floor and ceiling price of $258,300,000 and $315,700,000. As of July
31, 2000, the purchase price had decreased by approximately $4,000,000.
The EMC Parties agreed, pursuant to this agreement, to assume and
discharge all liabilities and obligations associated with the Purchased Assets
arising from or related to the period from and after the closing date,
including, without limitation, all servicing obligations under the pooling and
servicing agreements, to which the Debtors are parties, related to the period
from and after the closing date.
Mortgage Loan and REO Purchase Agreement. This agreement provides for
the sale of substantially all of the Company's portfolio of owned mortgage loans
and REO properties totalling approximately $391 million at December 31, 1999,
together with the right to service such loans. The purchase price, set forth in
this agreement, is predicated upon applicable percentages of the unpaid
principal balance for the different types of assets: (1) performing mortgage
loans - 93.5%; (2) non-performing loans - 52.5%; and (3) REO Properties - 46.2%;
and will be measured as of the month end preceding the closing date. The sale
transaction pursuant to this agreement was subject to the submission of higher
and better offers pursuant to bidding procedures approved by the Bankruptcy
Court. No other offers were received. On August 15, 2000, the Bankruptcy Court
approved the sale transaction pursuant to this agreement. The December 31, 1999
carrying value of the assets subject to this agreement was adjusted down by
approximately $5 million to reflect the pricing method described herein and is
included in the statement of operations.
The EMC Parties caused letters of credit in the aggregate amount of
$20 million to be posted as down payments for the Purchased Assets and the
assets to be purchased pursuant to the Mortgage Loan and REO Purchase Agreement.
The Asset Purchase Agreement provides for payment to EMC of a breakup fee in the
event certain circumstances are satisfied. The agreements also provide for
termination provisions and expense reimbursements under certain circumstances.
9
<PAGE> 11
On August 10, 2000, the Company received a competing offer from
Goldman Sachs and UCF Acquisition Corp. (the "Goldman Sachs Group"). The offer
provided for the acquisition of all of the outstanding shares of certain of the
Company's subsidiaries which hold the Interest-only and residual certificates.
The offer covered substantially all of the Company's assets except owned loans
and manufactured housing residuals, with the exception of the 1996-2
manufactured housing securitization which was included in the offer. The offer
contained many of the provisions similar to those contained in the EMC Asset
Purchase Agreement.
On August 15, 2000, the Company conducted an auction in accordance
with bidding procedures approved by the Bankruptcy Court between the EMC Parties
for the Purchased Assets and the Goldman Sachs Group for the stock which was the
subject of the Goldman Sachs Group's offer. The EMC Parties were the successful
bidders for the assets covered by the EMC Asset Purchase Agreement. As of
December 31, 1999, the Company recorded the fair value of the home equity and
manufactured housing product Interest-only and residual certificates, the
Capitalized mortgage servicing rights, and the owned mortgage loans and REOs
based upon the value specified in the Mortgage Loan and REO Purchase Agreement
and in the EMC Asset Purchase Agreement, as amended by the EMC Parties' bid on
August 15, 2000.
On August 11, 2000, the Company filed a Third Amended Plan of
Reorganization for Debtors pursuant to Chapter 11 of the United States
Bankruptcy Code (as so amended, the "Plan"). The Plan incorporates a proposed
compromise and settlement of certain issues which are disputed by the Company
and other parties in interest. These issues related primarily to whether the
estates of each of the Debtors should be treated separately for purposes of
making payments to creditors, whether and to what extent proceeds from the
proposed sale transactions, discussed above, should be allocated among the
Debtors based upon their respective claims of ownership to certain assets sold
thereunder, and the amount and priority of certain intercompany claims. The
provisions of the Plan relating to substantive consolidation of the Debtors, the
cancellation of intercompany claims, and the treatment of each class of claims
under the Plan reflect this compromise and settlement which, with Bankruptcy
Court approval, shall be binding upon the Debtors, all creditors, and all
persons receiving any payments or other distributions under the Plan.
If the Plan becomes effective, the Chapter 11 Cases shall be deemed to
be substantively consolidated for purposes of the Plan. The assets and
liabilities of the Debtors shall be pooled and all claims shall be satisfied
from the assets of a single consolidated estate. Any claims against one or more
of the Debtors based upon a guaranty, indemnity, co-signature, surety or
otherwise, or claims against another Debtor shall be treated as a single claim
against the consolidated estate of the Debtors and shall be entitled to
distributions under the Plan only with respect to such single claim. A hearing
to consider confirmation of the Plan is currently scheduled for September 13,
2000. There is no assurance that such hearing shall proceed, be adjourned or
that the Plan shall not be amended.
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America which contemplate a going concern basis of accounting and do not
reflect any adjustments that might result if the Company is unable to continue
as a going concern. The Company's recent losses from operations and the related
Chapter 11 Cases raise substantial doubt about the Company's ability to continue
as a going concern. The use of the going concern basis of accounting is
appropriate until confirmation of a plan by the Bankruptcy Court.
A plan or plans of reorganization could materially change the amounts
currently recorded in the financial statements. The financial statements do not
give effect to any adjustment to the carrying value of assets or amounts and
classifications of liabilities that might be necessary as a result of the
Chapter 11 Cases.
10
<PAGE> 12
3. INTEREST-ONLY AND RESIDUAL CERTIFICATES -- NET
On and prior to December 31, 1998, the Company sold substantially all of
the loans it originated as asset-backed securities and generally retained the
servicing rights on loans sold as described in Note 1.2(a). In its
securitization transactions, the Company received, in addition to cash proceeds,
Interest-only and residual certificates created as a result of such
securitizations. In addition, the Company also recognized as an asset the
capitalized value of mortgage servicing rights. These assets constituted, and at
December 31, 1999, Interest-only and residual certificates continued to
constitute, a substantial portion of the Company's total assets, and loan sale
gains resulting from securitizations represented the largest component of the
Company's revenues during the quarters in which a securitization transaction
occurred.
Realization of the value of these Interest-only and residual certificates
and capitalized mortgage servicing rights is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate stream of
cash flows associated with such loans. At December 31, 1999, the Company
determined the fair value of the home equity and manufactured housing product
Interest-only and residual certificates and the Capitalized mortgage servicing
rights based on an executed purchase agreement, as amended on August 15, 2000,
with an independent third party. (See Note 2.) The Company believes that an
executed purchase agreement from an independent third party is the best
indication of these assets' fair value at December 31, 1999 based on the fact
that this purchase price was negotiated with a third party after an extensive
due diligence process which lasted several months and was revised pursuant to an
auction conducted in the Bankruptcy Court between the third party and a
competing offeror. Such process involved the solicitation of numerous interested
parties, many of whom expressed interest in the assets and performed their own
in-depth due diligence. This process culminated with the execution of a purchase
agreement with the EMC Parties for the purchase of the Company's Interest-only
and residual certificates, the receipt of a similar competing offer for the
purchase of the stock of certain of the Company's subsidiaries which hold the
Interest-only and residual certificates and an auction involving the interested
parties on August 15, 2000. (See Note 2.) During the performance of due
diligence by the third parties, the Company continued to value the Interest-only
and residual certificates and Capitalized mortgage servicing rights using cash
flow models historically employed by the Company. The Company's models indicated
that the remuneration provided by the purchase agreement with the EMC Parties
was indicative of fair value and the Company believes that its ability to
complete the execution of such agreement is the best indication of market
assumptions for such assets.
The Company is aware that different valuations have been prepared in
connection with the bankruptcy proceedings which contains a range of
significantly different valuations for such assets. However, based upon its
review of such valuations and additional analysis performed by the Company using
cash flow models historically employed by the Company, the Company believes that
the higher and lower ranges of these valuations are not indicative of fair value
and that the executed purchase agreement with the EMC Parties, as amended on
August 15, 2000, is the best indication of market assumptions for such assets.
In its determination of the fair value of the Interest-only and residual
certificates at December 31, 1998, the Company used prepayment, default and loss
severity assumptions based on the actual experience of the Company's serviced
portfolio for home equity loans, expected future performance, and comparable
industry prepayment statistics for manufactured housing contracts. The following
prepayment assumptions were used by the Company as of December 31, 1998, in the
valuation of its home equity Interest-only and residual certificates:
o A life-to-date prepayment speed (i.e., an average lifetime prepayment
speed) of 30.1%, based on a seasoning curve, for the Company's fixed
rate loan products. The curve begins at 4% in month one, increases to
34% in month fifteen and stays constant until month 26, ramps down to
30% in month 44 and remains constant at this rate until maturity. At
December 31, 1998, the Company had $3.7 billion in fixed rate home
equity loans in its servicing portfolio.
o A life-to-date prepayment speed of 33.3%, based on a seasoning curve,
for the Company's adjustable rate loan products ("ARMs"). The curve
begins at 14% in month one, peaks at 39% in month twelve, decreases to
38% in month 16 and remains at this rate until month 36, ramps down to
30% in month 44 and remains constant at this rate until maturity. At
December 31, 1998, the Company had $0.9 billion in ARMs in its
servicing portfolio.
11
<PAGE> 13
o Generally a life-to-date prepayment speed of 30.5%, based on a
seasoning curve, for the Company's hybrid loan products, i.e., loan
products that have coupon rates fixed for two or three years and that
become adjustable thereafter. The curve begins at 4% in month one,
ramps to 35% in month fifteen and stays constant until month 20, ramps
down to 30% in month 44 and remains constant at this rate until
maturity. At December 31, 1998, the Company had $1.8 billion in hybrid
loans in its servicing portfolio, of which $1.5 billion originally had
rates fixed for three years.
The other assumptions used by the Company in its valuation of its home
equity loan Interest-only and residual certificates as of December 31, 1998 were
as follows: the Company used an effective discount rate assumption of
approximately 22% on cash flows (net of the related allowance for loan losses)
from its home equity loan securitization transactions expected to be collected
and deposited in the related reserve accounts. Certain cash in the reserve
accounts was discounted at 15%. The Company used projected cumulative
undiscounted losses of approximately 770 basis points for all its home equity
loan products.
At December 31, 1999 and December 31, 1998 the Company had $651 million and
$721 million, respectively, of manufactured housing loans in its servicing
portfolio. The following information describes the assumptions used by the
Company as of December 31, 1998, in the valuation of its manufactured housing
product Interest-only and residual certificates.
The Company maintained its prepayment and loan loss assumptions while
increasing the discount rate assumption. The prepayment assumption used by the
Company assumed a life-to-date prepayment speed of 8.7%, based on a seasoning
curve that begins at 5.55% in month one, ramps up to 9.0% by month 24 and
remains constant at 9.0% until maturity. The effective discount rate assumption
used by the Company was approximately 18% at December 31, 1998 based on cash
flows (net of the related allowance for loan losses) expected to be received by
the Company from its manufactured housing product securitization transactions.
The Company used projected cumulative undiscounted losses of approximately 685
basis points for all its manufactured housing products at December 31, 1998.
The following table reflects the composition of finance income, fees earned
and other loan income for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing fees and excess interest collected ..... $ 242,091 $ 268,568 $ 193,369
Loan origination fees ............................ 17,101 145,191 110,348
Loan interest .................................... 55,034 40,504 23,579
Other loan income ................................ 6,728 5,171 13,229
Amortization of Interest-only and
residual certificates ......................... (120,712) (232,880) (182,709)
Amortization of Capitalized mortgage
servicing rights .............................. (40,148) (34,125) (9,272)
Additional provision for losses on serviced
loans and other ............................... (82,584) (63,830) (9,515)
--------- --------- ---------
Total .................................. $ 77,510 $ 128,599 $ 139,029
========= ========= =========
</TABLE>
12
<PAGE> 14
4. LOANS -- NET
4.1 Loans Owned. As discussed in Note 2, the Company has entered into a
whole loan agreement that provides for the sale of substantially all of the
Company's portfolio of owned mortgage loans and REO properties. The purchase
price set forth in the agreement was used to determine the carrying value of
loans owned at the lower of cost or market. The following schedule sets forth
the components of Loans owned by the Company at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total loans held for sale ......................... $ 387,449 $ 217,275
Real estate owned:
Home equity .................................. 10,548 4,482
Commercial and other ......................... 720 1,886
Nonrefundable loan fees ........................... (7,676) (4,896)
Other ............................................. -- (1,148)
--------- ---------
Total .................................. 391,041 217,599
--------- ---------
Less:
Allowance for loan losses (including valuation
adjustment) ................................ (47,248) (26,317)
--------- ---------
$ 343,793 $ 191,282
========= =========
</TABLE>
4.2 Loans Serviced. The following table sets forth the loans serviced by
the Company for third parties at December 31, 1999 and 1998, by type of loan.
The serviced portfolio at December 31, 1998 includes approximately $697.5
million of loans sold on a servicing released basis in the fourth quarter of
1998 on which the servicing was transferred in the first quarter of 1999.
Substantially all of these loans were originated by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Home equity ....................... $4,066,501 $6,352,920
Manufactured housing contracts .... 650,916 720,522
Other ............................. 15,290 22,657
---------- ----------
Total ................... $4,732,707 $7,096,099
========== ==========
</TABLE>
4.3 Loan Loss Allowances. The Company provides an estimate for future
credit losses in an Allowance for loan losses for loans owned by the Company and
for loans serviced for others at December 31, 1998. At December 31, 1999, the
Company recorded the fair value of the home equity and manufactured housing
product Interest-only and residual certificates and the Capitalized mortgage
servicing rights based on an agreement to purchase with an independent third
party. See Note 2. Since the estimate of fair value is based on an agreement to
purchase from an independent third party,
13
<PAGE> 15
use and estimation of estimated future credit losses on serviced loans is no
longer necessary. These allowance accounts are deducted in the Company's balance
sheet from the asset to which they apply.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,1999
----------------
OWNED
----------------
(IN THOUSANDS)
<S> <C>
Allowance for loan losses, beginning of period ... $ 26,317
Provision for loan losses ........................ 15,001
Decrease in allowance for loan losses related
to loans sold ............................. (21,810)
Net loans charged off ............................ (4,963)
Reclass from discontinued operations to continuing
operations (See Note 13) .................. 29,305
Other ............................................ 3,398
--------
Allowance for loan losses, end of period ......... $ 47,248
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------
OWNED SERVICED TOTAL
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses, beginning of period ........ $ 3,691 $ 106,563 $ 110,254
Provision for loan losses ............................. 4,369 150,016 154,385
Additional provision for loan losses - valuation
adjustment ..................................... 22,555 298,871 321,426
Net loans charged off (1) ............................. (4,298) (49,746) (54,044)
--------- --------- ---------
Allowance for loan losses, end of period .............. $ 26,317 $ 505,704 $ 532,021
========= ========= =========
</TABLE>
(1) Excludes accrued interest
As of December 31, 1999, approximately $4.1 billion of home equity
loans sold were serviced under agreements substantially all of which provide for
the subordination of cash and excess interest spread owned by the Company for
credit losses. The maximum recourse associated with sales of home equity loans
according to the terms of the loan sales agreements was approximately $1.4
billion at December 31, 1999, substantially all of which relates to the
subordinated cash and excess interest spread. At December 31, 1999, the maximum
recourse associated with the sale of approximately $651 million of manufactured
housing contracts in securitization transactions according to the related
contract sale agreements was approximately $50 million.
4.4 Concentration of Credit Risk. The Company's serviced portfolio is
geographically diversified. Although the Company serviced mortgage loans in 50
states and the District of Columbia, at December 31, 1999, a substantial portion
of home equity loans serviced were originated or acquired in California (8.6%),
Louisiana (8.1%), Florida (7.4%), Ohio (6.0%) and New York (5.1%), respectively,
and no other state accounted for more than 5.0% of the serviced portfolio. The
portfolio of manufactured housing contracts serviced were originated primarily
in South Carolina (16.8%), Texas (15.5%), and North Carolina (12.5%). 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.
14
<PAGE> 16
5. PROPERTY -- NET
Property is summarized as follows as of the indicated dates:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings .............. $ 22,064 $ 23,911
Furniture, fixtures and equipment 21,487 37,515
-------- --------
Total ................. 43,551 61,426
Less accumulated depreciation ... (11,345) (15,543)
-------- --------
Total ................. $ 32,206 $ 45,883
======== ========
</TABLE>
During 1998, the Company sold real estate investment property with a
carrying value of $24.3 million and recognized a gain of $8.3 million on the
sale of these assets. During 1999, investment property with a carrying value of
$2.1 million was sold and a loss of $382 thousand was recognized on this sale.
In addition, during 1999 the Company recognized a loss of approximately $3.7
million in connection with the liquidation of properties which it had previously
used in its lending operations.
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $5.2 million, $13.5 million and $11.8 million
during 1999, 1998 and 1997, respectively. Minimum annual commitments at December
31, 1999 under operating leases that are noncancellable, except those that may
be rejected in the Chapter 11 Cases (see Note 2), are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................. $ 471
2001.................................. 337
2002.................................. 126
2003.................................. 21
-----
Total....................... $ 955
=====
</TABLE>
6. CAPITALIZED MORTGAGE SERVICING RIGHTS
The following table summarizes the activity in Capitalized mortgage
servicing rights for 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year.................... $ 40,148 $ 48,760
Capitalized amount............................ -- 25,513
Amortization and valuation allowance.......... (40,148) (34,125)
-------- --------
Balance, end of year.......................... $ -- $ 40,148
======== ========
</TABLE>
Amortization in the year ended December 31, 1998 includes the impact of the
increase in the assumed prepayment speeds and the estimated costs of servicing
loans in the future. The Company adjusted the carrying value to the estimated
realizable value at December 31, 1999 based on an agreement to purchase with an
independent third party. See Note 2.
See Note 14 for a discussion of the contingencies relating to the Company's
servicing activities.
15
<PAGE> 17
7. NOTES PAYABLE
Notes payable consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior debt:
9.35% Senior unsecured notes due November, 1999 ...... $ 125,000 $ 125,000
7.7% Senior unsecured notes due January, 2004 ....... 100,000 100,000
Revolving credit facility ............................ 825,882 825,882
Warehouse facilities ................................. -- 2,962
ESOP debt ............................................ 8,950 8,950
---------- ----------
Total senior debt .............................. 1,059,832 1,062,794
---------- ----------
Subordinated debt:
8.375% Subordinated unsecured notes due July,2005 .... 150,000 149,231
Subordinated debentures .............................. 7,000 7,000
---------- ----------
Total .......................................... $1,216,832 $1,219,025
========== ==========
</TABLE>
Subsequent to the filing of the Chapter 11 Cases, the Debtors entered into
a Post Petition Loan and Security Agreement (the "Loan Agreement") with
Greenwich Capital Financial Products, Inc. and The CIT Group/Business Credit,
Inc. and a Post Petition Whole Loan Purchase Facility (the "Purchase Facility")
with Greenwich Capital Financial Products, Inc. to provide secured
debtor-in-possession financing. The Loan Agreement provided for borrowings, on a
revolving basis, dependent upon the Debtors' level of inventory of mortgage
loans and initially was established at $150 million with provisions to increase
the maximum amount to $300 million, with Bankruptcy Court approval. The Purchase
Facility provided for a commitment to purchase up to $500 million of qualifying
loans, The Purchase Facility was initially approved up to $75 million with
provisions to increase the maximum limit to $500 million at a later date. In
May, 1999, the Bankruptcy Court issued a final order confirming the
debtor-in-possession financing at the interim aggregate level of $225 million,
of which $150 million was available under the Loan Agreement and $75 million was
available under the Purchase Facility. At December 31, 1999, the Debtors had no
amounts outstanding under the Loan Agreement or the Purchase Facility. In
February 2000, the Loan Agreement and the Purchase Facility expired.
At December 31, 1999 and 1998 the Company was not in compliance with
certain of the financial covenants relating to its debt and, having not cured
such non-compliance within the applicable cure periods, is in default
thereunder.
In April 1997, the Company entered into an $800 million senior unsecured
revolving credit facility (the "Credit Facility") syndicated with a total of 22
participating lenders and, in July 1998, the Credit Facility was increased to
$850 million. The Company used a portion of the proceeds from this three-year
credit facility to refinance existing debt and used the remaining proceeds for
general corporate purposes, including interim funding of loan originations. A
portion of the amount available under the Credit Facility could be used to have
letters of credit issued for the Company's account. The Company deposited
letters of credit in lieu of depositing cash in the related reserve accounts in
certain securitization transactions. As of December 31, 1999 and December 31,
1998, the aggregate principal amount of loans outstanding under the Credit
Facility was $826 million and letters of credit in the maximum amount of
approximately $24 million, deposited in lieu of cash in the related reserve
accounts, were issued under the Credit Facility for the Company's account. As a
result, at December 31, 1999 and December 31, 1998, the commitment under the
Credit Facility was fully utilized. The amount of these letters of credit
outstanding as of December 31, 1998 are not included in Notes payable. However,
during January, 2000, the Trustee, of the applicable securitization
transactions, exercised its right to demand a draw on the letters of credit
which caused an increase in Other Liabilities of approximately $24 million, the
amount of the draw.
On February 3, 1999, the Company announced that it was experiencing
difficulties in generating the liquidity necessary to maintain home equity loan
production at levels contemplated by its previously announced restructuring
plan. As a result of the financial condition of the Company at the time, there
was also no availability under warehouse facilities that it had with First Union
National Bank ("First Union") and other lenders. As an interim measure, on
February 5,
16
<PAGE> 18
1999, the Company obtained a short term repurchase facility from First Union in
the amount of $40 million which was repaid on March 9, 1999, from proceeds under
the Company's debtor-in-possession financing. (See Note 2.)
In addition to the Credit Facility, the Company had maintained a warehouse
facility provided by United Companies Life Insurance Company ("UCLIC"). At
December 31, 1998, this facility, which was established upon the sale of UCLIC,
provided for the purchase of up to $150 million in first mortgage residential
loans and expired in July 1999. At December 31, 1998, the Company had the right
for a limited time to repurchase certain loans which were eligible for
securitization and as of December 31, 1998, $3.0 million in loans eligible for
securitization were funded under this facility. At December 31, 1998, UCLIC had
informed the Company that it would not honor any additional funding under this
facility.
In June 1997, the Company publicly sold $150 million of its subordinated
unsecured notes (the "Subordinated Notes"). The Subordinated Notes provide for
interest payable semi-annually and are not redeemable prior to their maturity on
July 1, 2005. The Subordinated Notes bear interest at 8.375% per annum and were
issued at a discount from par. Such discount is being amortized using the
effective interest method as an adjustment to yield over the life of the
Subordinated Notes resulting in an effective interest rate on the Subordinated
Notes of 8.48% per annum. The terms of the Subordinated Notes provide that they
rank subordinate and junior in right of payment to the prior payment of all
existing and future senior indebtedness of the Company.
In December 1996, the Company publicly sold $100 million of its senior
unsecured notes. The December 1996 notes matured and were paid in July of 1998.
The Company previously publicly sold $125 million and $100 million of its senior
unsecured notes with maturities in November 1999 and January 2004, respectively.
All of these notes provide for interest payable semi-annually and are not
redeemable prior to maturity. The terms of these notes provide that they rank on
a parity with other unsecured and unsubordinated indebtedness of the Company.
The net proceeds from the sale of these notes were used for working capital
purposes.
In May 1993, United Companies Lending Corporation, a wholly-owned subsidiary
of the Company, entered into a subordinated debenture agreement with UCLIC. In
connection with this agreement, this subsidiary borrowed $10 million from UCLIC,
$3 million of which matured and was paid in 1998, $3 million of which matures in
2000 and bears an interest rate of 6.64% per annum and $4 million of which
matures in 2003 and bears an interest rate of 7.18% per annum.
The Company made payments for interest of $18.4 million, $77.3 million and
$40.9 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company takes no position with respect to the accrual of interest, if
any, on its secured and unsecured claims in connection with the Chapter 11
Cases. See Note 2.
8. INCOME TAXES (BENEFIT)
The provision (benefit) for income taxes attributable to continuing
operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current ............... $ 6,872 $ 10,624 $ 7,337
Deferred .............. -- (95,393) 37,324
-------- -------- --------
Total ....... $ 6,872 $(84,769) $ 44,661
======== ======== ========
</TABLE>
17
<PAGE> 19
Reported income tax expense attributable to continuing operations differs
from the amount computed by applying the statutory federal income tax rate to
consolidated income from continuing operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rate ............... $ (64,162) $(220,405) $ 44,397
Differences resulting from:
Increase in valuation reserve (continuing operations) .... 64,820 127,785 --
State income taxes ....................................... -- 813 1,224
Tax on excess inclusion income, net ...................... 6,872 7,107 --
Other .................................................... (658) (69) (960)
--------- --------- ---------
Reported income tax provision (benefit) ...................... $ 6,872 $ (84,769) $ 44,661
========= ========= =========
</TABLE>
The significant components of the Company's net deferred income tax
liability at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Losses not currently deductible ... $ 75,329 63,245
Allowance for loan losses ......... 121,280 86,927
Nonrefundable loan fees ........... 2,653 2,631
Investments ....................... 504 504
Net operating loss carryforward 22,050 17,500
Other ............................. -- (31)
--------- ---------
Deferred income tax assets ............ 221,816 170,776
Valuation reserve ..................... (206,502) (142,222)
--------- ---------
Net deferred tax asset ................ 15,314 28,554
--------- ---------
Deferred income tax liabilities:
Mortgage servicing rights ......... 3,317 17,374
Real estate ....................... 5,503 3,780
Other ............................. 6,494 7,400
--------- ---------
15,314 28,554
--------- ---------
Net deferred income tax liability ..... $ -- $ --
========= =========
</TABLE>
Payments made for income taxes during the years ended December 31, 1999,
1998 and 1997 were $6.0 million, $5.5 million and $1.6 million, respectively.
At December 31, 1999 and 1998, the Company had a current income tax payable
(receivable) of $7.9 million and ($4.7) million, respectively, included in
"Other Liabilities" and "Other Assets", respectively. At December 31, 1999, the
Company had a net operating loss carryforward of approximately $63 million
which, if not utilized, will expire in the year 2018.
9. CAPITAL STOCK
The Company has authorization to issue up to 100,000,000 shares of its $2.00
par value common stock. There were 29,334,893 and 29,172,916 shares outstanding
at December 31, 1999 and 1998, respectively, excluding 1,180,117 treasury
shares. The Company also has authorization to issue 20,000,000 shares of
preferred stock of which 1,514,164 shares are currently issued (see discussion
of "PRIDES(SM)" below). Included in the authorized preferred stock are
18
<PAGE> 20
1,000,000 shares of Series A Junior Participating preferred stock and 800,000
shares of Cumulative Convertible preferred stock, none of which is outstanding.
In October, 1998, the Company suspended indefinitely payment of future dividends
on the Company's common and preferred stock.
On July 7, 2000, the Company filed a second Amended Plan of Reorganization,
and on August 11, 2000, a Third Amended Plan of Reorganization, with the
Bankruptcy Court which, if confirmed, could eliminate any equity interests in
the Company at the date of confirmation. See Note 2.
On June 16, 1995, the Company concluded the sale of 1,955,000 shares of its
Preferred Redeemable Increased Dividend Equity Securities(SM), 6 3/4%
PRIDES(SM), Convertible Preferred Stock, par value $2.00 per share
("PRIDES(SM)"), at a price per share of $44.00. The terms of the PRIDES(SM)
provide that dividends on them are cumulative and are payable quarterly in
arrears on each January 1, April 1, July 1 and October 1. Net proceeds to the
Company were approximately $83.3 million. During 1999 and 1998, 143,606 and
240,300 shares of PRIDES(SM) were converted into 237,377 and 397,205 shares of
the Company's common stock, respectively.
The terms of the PRIDES(SM) provide that they rank prior to the Company's
common stock as to payment of dividends and distribution of assets upon
liquidation. Such terms also provide that the shares of PRIDES(SM) mandatorily
convert into shares of common stock on July 1, 2000 (the "Mandatory Conversion
Date") on a two share to one share basis (as adjusted for the 100% common stock
dividend paid October 20, 1995), and that the shares of PRIDES(SM) are
convertible into shares of common stock at the option of the holder at any time
prior to the Mandatory Conversion Date on the basis of 1.652 of a share of
common stock for each share of PRIDES(SM), in each case subject to adjustment in
certain events. In addition, such terms provide that the Company has the option
to convert the shares of PRIDES(SM), in whole or in part, on or after July 1,
1998 until the Mandatory Conversion Date, into shares of its common stock
according to a formula. Due to the bankruptcy proceedings, the Prides did not
convert on July 1, 2000, but will convert to common stock at the confirmation
hearing scheduled for September 13, 2000. (See Note 2.)
During 1998, the Company paid cash dividends on its common stock in the
amount of $6.8 million, or $.24 per share. In addition, during 1998, the Company
paid cash dividends on its PRIDES(SM) in the amount of $4.2 million or $2.2275
per share. At December 31, 1999, the Company has dividends payable on its
PRIDES(SM) of $1.2 million. As discussed above, payment of cash dividends on the
Company's common and preferred stock have been suspended indefinitely.
At December 31, 1999 and 1998, 1,180,117 shares of the Company's common
stock, or 4% of the issued common stock, were held as treasury stock at a cost
of $7.4 million.
19
<PAGE> 21
10. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share
Income (loss) from continuing operations ................. $(190,193) $(543,931) $ 82,187
Less: Loss from discontinued operations .................. -- (39,965) (7,587)
--------- --------- ---------
Net income (loss) ........................................ $(190,193) $(583,896) $ 74,600
========= ========= =========
Weighted average number of common and common equivalent
shares:
Average common shares outstanding ...................... 28,763 28,148 28,013
Add: Dilutive effect of preferred stock after
application of "if converted" method .............. -- -- 3,211
--------- --------- ---------
28,763 28,148 31,224
Earnings (loss) per share:
Income (loss) from continuing operations ............... $ (6.61) $ (19.32) $ 2.63
Loss from discontinued operations ...................... -- (1.42) (.24)
--------- --------- ---------
Total ................................................ $ (6.61) $ (20.74) $ 2.39
========= ========= =========
Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations ................. $(190,193) $(543,931) $ 82,187
Less: Loss from discontinued operations .................. -- (39,965) (7,587)
--------- --------- ---------
Total ................................................ $(190,193) $(583,896) $ 74,600
========= ========= =========
Weighted average number of common and all dilutive shares:
Average common shares outstanding ...................... 28,763 28,148 28,013
Add: Dilutive effect of stock options after
application of treasury stock method .............. -- -- 596
Dilutive effect of preferred stock after
application of "if converted" method .............. -- -- 3,887
--------- --------- ---------
28,763 28,148 32,496
Earnings (loss) per share:
Income (loss) from continuing operations ............... $ (6.61) $ (19.32) $ 2.53
Loss from discontinued operations ...................... -- (1.42) (.23)
--------- --------- ---------
Total ................................................ $ (6.61) $ (20.74) $ 2.30
========= ========= =========
</TABLE>
The weighted average anti-dilutive shares that were excluded from the
computation of diluted earnings per share were 1,824,694, 1,777,448 and 546,275
for 1999, 1998 and 1997, respectively.
11. EMPLOYEE BENEFIT PLANS
11.1 Employee Stock Ownership Plan. All employees who meet minimum age and
service requirements participate in the Company's Employee Stock Ownership Plan
("ESOP"). On and prior to December 31, 1998, the Company made annual tax
deductible contributions to the ESOP to be used to purchase additional shares of
the Company's common stock or to pay debt service on shares acquired with the
proceeds of loans ("leveraged shares"). The ESOP's leveraged shares are
initially pledged as collateral for the debt incurred in connection with the
acquisition of such shares. As the debt was repaid, the shares were released
from collateral and allocated to plan participants. Contributions were allocated
among participants based on years of service and compensation. Upon retirement,
death or disability, the employee or a beneficiary receives the designated
common stock.
The Company's cash contributions to the ESOP were $2.3 million and $3.1
million for the years ended December 31, 1998 and 1997, respectively. There were
no contributions made by the Company to the ESOP during 1999. Shares
20
<PAGE> 22
held by the ESOP at December 31, 1999 and 1998 were approximately 3.5 million
and 3.6 million, respectively. During 1995, the ESOP was granted a $10 million
line of credit from a financial institution, which line of credit was increased
to $12 million during 1996. At December 31, 1999 and 1998, the ESOP had notes
payable with a balance of $9.0 million under this line of credit. Because the
source of the loan payments is primarily contributions received by the ESOP from
the Company, such debt is included in the Company's Notes payable with a
corresponding reduction of stockholders' equity. During 1997, the ESOP borrowed
$3.4 million from the Company to purchase shares of the Company's common stock.
The Company does not report the ESOP's notes payable or the Company's notes
receivable in its balance sheet. Accordingly, no interest cost or interest
income is recognized on the Company loans to the ESOP. At December 31, 1999, the
balance of the Company's loans to the ESOP were written off. In accordance with
Statement of Position 93-6 ("SOP 93-6"), leveraged shares purchased subsequent
to December 31, 1992 are, upon release, reflected as compensation expense based
on the then current market price of the shares. Shares which have not been
committed to be released are not considered outstanding for purposes of the
computation of earnings (loss) per share. Under the terms of the loan agreement
and the provisions of SOP 93-6 shares of the Company's common stock are
generally released from pledge and allocated to participant's accounts upon the
payment of the principal and interest on the loan. The Company did not make any
principal or interest payments during on the loans to the ESOP. At December 31,
1999, the ESOP had approximately 656,000 leveraged shares. On July 7, 2000, the
Company filed an amended plan of reorganization with the Bankruptcy Court which,
if confirmed, would cancel the common stock owned by the ESOP. (See Note 2.)
During February and June 2000, three lawsuits were filed by participants in
the United Companies Financial Corporation Employee Stock Ownership Plan (the
"Plan"). Two suits were filed against the Plan Trustee and others alleging that
the named defendants breached their fiduciary responsibilities and failed to
maintain the Plan on a sound financial basis. The third suit was filed against
the Plan Trustee and alleges that the defendant breached its fiduciary duties in
its management and investment decisions as Trustee.
Although the Company has no current plans to terminate its employee benefit
plans, the Company will continue to liquidate its assets and will eventually
terminate its employee benefit plans.
11.2 Stock Option Plans. At December 31, 1999, the Company had four
stock-based compensation plans for employees. The Company has filed a plan of
reorganization which, if confirmed, could eliminate any equity interests in the
Company that existed prior to the dates of confirmation. (See Note 2.) Because
the Company's common stock has been trading in year 2000 in the over-the-counter
market at approximately $.05 or less per share, management of the Company does
not believe that any outstanding stock options, which at December 31, 1999, had
a weighted average exercise price of $13.31 per share, will ever be exercised.
A summary of the status of the Company's stock option plans (excluding the
restricted stock awards and as adjusted for stock dividends) as of December 31,
1999, 1998 and 1997 and changes during the periods ending on those dates is
present below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------ ----- ---------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ....... 3,220,286 $13.11 2,390,023 $17.60 1,571,230 $13.27
Granted .......................... -- -- 1,184,625 6.70 892,650 25.31
Exercised ........................ -- -- (17,472) 6.49 (28,294) 7.77
Canceled ......................... (2,295,208) -- (336,890) 22.59 (45,563) 25.43
---------- ---------- ----------
Outstanding at end of year ............. 925,078 13.31 3,220,286 13.11 2,390,023 17.60
========== ========== ==========
Weighted-average fair value of
options granted during the year ...... -- $ 4.72 $ 23.35
</TABLE>
21
<PAGE> 23
The following table summarizes information (as adjusted for stock
dividends) about fixed stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -----------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ----------- ------------------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 to $4.00 247,706 7.83 $ 3.64 109,720 $ 3.59
$4.01 to $17.50 321,322 3.79 8.66 287,622 8.07
$18.00 to $24.00 255,450 6.50 22.16 218,150 21.85
$25.00 to $34.00 100,600 6.96 29.57 41,000 33.35
------- -------
Total 925,078 5.96 13.31 656,492 13.48
======= =======
</TABLE>
Restricted Stock Awards. The Company has awarded restricted stock to
selected executives and other key employees.
The following table summarizes information about restricted stock
awards during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
---------------------
RESTRICTED STOCK AWARDS SHARES SHARES
----------------------- ------ ------
<S> <C> <C>
Outstanding at beginning
of year .................... 98,400 131,400
Granted .................... -- 10,000
Lapse of restriction ....... -- (9,000)
Cancelled .................. (83,400) (34,000)
-------- --------
Outstanding at end
of year ..................... 15,000 98,400
======== ========
</TABLE>
As of December 31, 1999, the 15,000 shares of restricted stock
outstanding had a purchase price of zero and a weighted-average remaining
contractual life of two months. As of March 1, 2000, the restricted stock was
cancelled as the market price of the Company's stock did not reach the required
price to remove the restriction.
11.3 Employees' Savings Plan. The United Companies Financial Corporation
Employees' Savings Plan is designed to be a qualified plan under Sections 401(a)
and 401(k) of the Internal Revenue Code. Under the plan, employees are allowed
to defer income on a pre-tax basis through contributions to the plan and the
Company matches a portion of such contributions. The Company's matching
contributions totaled $561 thousand, $3.3 million and $1.6 million during 1999,
1998 and 1997, respectively. Employees have ten investment options; the one to
invest in the Company's common stock is no longer available. The plan held
436,005 shares and 1,069,244 shares of the Company's common stock at December
31, 1999 and 1998, respectively.
11.4 Deferred Compensation Plans. Postretirement benefits were provided to
eligible executive and senior officers of the Company under a non-qualified,
deferred compensation plan. The cost of this plan during 1999 and 1998 was $40
thousand and $.3 million, respectively. The Company calculated its
postretirement benefit obligation as of
22
<PAGE> 24
December 31, 1999 using a weighted average discount rate of 5.95%. A
reconciliation of the funded status of the deferred compensation plan as of
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NET DECEMBER 31,
1999 CHANGE 1998
----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit cost .... $ 1,278 $ (571) $ 1,849
Plan assets ................................ -- -- --
------- ------- -------
Funded status .............................. 1,278 (571) 1,849
Unrecognized transition obligation ......... (42) 611 (653)
------- ------- -------
Accrued postretirement benefit cost ........ $ 1,236 $ 40 $ 1,196
======= ======= =======
</TABLE>
The Company's obligation to pay the postretirement benefits is unsecured
and subject to rejection in the Chapter 11 Cases.
12. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107")
requires that the Company disclose the estimated fair values of its financial
instruments, both assets and liabilities recognized and not recognized in its
financial statements.
SFAS No. 107 defines financial instruments as cash and contractual rights
and obligations that require settlement in cash or by exchange of financial
instruments. Fair value is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties other than in a
forced or liquidation sale.
The carrying value and fair value of the Company's financial assets and
liabilities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998
----------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents .................... $ 105,893 $ 105,893 $ 192,212 $ 192,212
Loans ........................................ 338,151 338,151 186,555 186,555
Interest-only and residual certificates ...... 355,127 355,127 462,504 462,504
Capitalized mortgage servicing rights ........ -- -- 40,148 44,465
Financial liabilities:
Notes payable ................................ 1,216,832 --(1) 1,219,025 --(1)
Managed cash overdraft ....................... 4,811 4,811 -- --
</TABLE>
(1) See discussion under Notes payable below.
The above fair values do not reflect any premium or discount from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates are made at a specific point in time based on
relevant market information, if available. Because no market exists for certain
of the Company's financial instruments, fair value estimates for these assets
and liabilities were based on subjective estimates of market conditions and
perceived risks of the financial instruments. At December 31, 1999, the Company
recorded the fair value of the home equity Interest-only and residual
certificates and the mortgage servicing rights based on an agreement to purchase
with an independent third party.
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments:
Cash and cash equivalents. The carrying amount of cash and cash equivalents
approximates their fair values because these assets generally mature in 90 days
or less and do not present any significant credit concerns.
23
<PAGE> 25
Loans. The fair value of the Company's loan portfolio at December 31, 1999
is based on the whole loan purchase agreement that provides for the sale of
substantially all of the Company's portfolio of owned mortgage loans and REO
properties, together with the right to service such loans. The purchase price,
set forth in the whole loan purchase agreement, is predicated upon applicable
percentages of the unpaid principal balance for the different types of assets:
(1) performing mortgage loans - 93.5%; (2) non- performing loans - 52.5%; and
(3) REO Properties - 46.2%. The fair value of the Company's loan portfolio at
December 31, 1998 was determined by segregating the portfolio by its performing
and non-performing components. Performing loans were further segregated into
loans which were sold subsequent to year end and all other remaining saleable
loans at December 31, 1998. Performing loans which were sold subsequent to year
end were valued at the actual sales price of the loans. All other remaining
saleable loans were valued either based upon competitive bids received or based
upon the estimated fair value of the loans given market conditions as of the
applicable period end. Non-performing loans were valued based upon competitive
bids received. Real estate owned property is excluded from this disclosure
because it is not considered a financial instrument.
Interest-only and residual certificates. In accordance with the
requirements of SFAS No. 125, the Interest-only and residual certificates are
carried at fair value. For a discussion of the assumptions used by the Company
in determining the fair value of this asset, see Notes 2 and 3.
Capitalized mortgage servicing rights. At December 31, 1999, the Company
recorded the fair value based on an agreement to purchase with an independent
third party. See Note 2. At December 31, 1998, the fair value of Capitalized
mortgage servicing rights was based on the present value of estimated future
cash flows related to servicing income. In estimating the fair value of these
rights, at December 31, 1998 the Company made assumptions which included the
cost of servicing per loan, the discount rate, an inflation rate, ancillary
income per loan and prepayment rates.
Notes payable. Because of the circumstances described in Note 2, a
determination of the fair value of the Company's Notes payable cannot be made as
of December 31, 1999 or 1998.
The fair values presented herein are based on pertinent information
available to management as of December 31, 1999. Such amounts have not been
comprehensively revalued for events discussed in Note 2 and current estimates of
fair value may differ significantly from the amounts presented herein.
13. DISCONTINUED OPERATIONS
United Companies Funding, Inc. On October 27, 1998, the Company made a
decision to discontinue the operations of United Companies Funding, Inc.
("UCFI"), a wholly owned subsidiary of the Company. UCFI was organized in 1995
to originate manufactured housing loan products made primarily to finance the
purchase of new or used manufactured homes. In reaching the decision to
discontinue the operations of UCFI, the Company considered the less than
anticipated results of UCFI's operations and the funding required if UCFI were
to continue operating, and the impact thereof on the Company's liquidity. The
Company estimated the loss that will occur from the discontinuance, and the
operating losses that will occur during phase out, of UCFI and, accordingly,
accrued for such loss in its financial statements for the year ended December
31, 1998. The 1998 results of operations of UCFI have been classified as
discontinued operations and the prior year financial statements were restated
accordingly.
The Company recorded a net loss of $40.0 million and $1.6 million in its
financial statements for the year ended December 31, 1998 and 1997,
respectively. Based on the sale of a large portion of the manufactured housing
loan inventory subsequent to December 31, 1998, management provided a $29
million valuation allowance against the carrying value of the manufactured
housing loan inventory at December 31, 1998. Total revenues of UCFI for 1998 and
1997 were $31.3 million and $24.7 million, respectively. Total assets of UCFI at
December 31, 1998 and 1997 were $91.1 million and $37.1 million, respectively.
The Company's assets related to manufactured housing contracts previously sold
in public asset-backed securitization transactions, consisting primarily of
Interest-only and residual certificates totaling approximately $50.5 million, at
December 31, 1998, have been retained by the Company, and therefore, are
excluded from "Net assets of discontinued operations" on the Company's
consolidated balance sheet as of December 31, 1998.
In late 1999, management partially reversed its decision to discontinue the
operations of UCFI. The production operations were discontinued and the separate
servicing operations were consolidated in Baton Rouge. Management decided to
retain the owned notes receivable in order to improve the efficiency of
servicing the serviced portfolio. The
24
<PAGE> 26
remaining assets of approximately $91 million was reclassified from net assets
of discontinued operations into the 1999 balance sheet account.
Foster Mortgage Corporation. The remaining affairs of the Company's
subsidiary, Foster Mortgage Corporation ("FMC"), a discontinued operation, which
had been conducted under the supervision of a bankruptcy court were concluded in
1997. The claims of the institutional lenders under FMC's primary credit
facility (the "FMC Institutional Lenders") relating to the Company's alleged
failure to remit all sums due FMC regarding federal income taxes under a tax
agreement among the Company and its subsidiaries, including FMC, was settled.
The Company recorded a $5.6 million charge in the fourth quarter of 1997
resulting from the settlement. The claims of the FMC Institutional Lenders
against the Company seeking avoidance of certain payments alleged to be
preferences or fraudulent conveyances were dismissed after a trial before the
bankruptcy court.
14. CONTINGENCIES
The nature of the Company's business is such that it is routinely involved
in litigation and is a party to or subject to other items of pending or
threatened litigation. As a result of the Chapter 11 Cases discussed in Note 2
above, litigation pending against the Company and certain of its subsidiaries
has been stayed. It is unclear what effect, if any, such litigation would have
on the Company's financial condition or how such litigation will be treated
pursuant to a plan or plans of reorganization.
One financial institution serves as trustee of substantially all of the
Company's home equity and manufactured housing contract securitization
transactions and two monoline insurers insure the publicly issued asset-backed
securities in substantially all of the Company's home equity loan securitization
transactions (other than the 1998 fourth quarter transaction which was
structured on a senior/subordinated basis without monoline insurance and for
which the Company did not retain the servicing). Because of the distressed
condition of the Company, the filing of the Chapter 11 Cases and the performance
of the securitized loans, one or more of these entities may seek relief from the
automatic stay in the Chapter 11 Cases in order to involuntarily terminate the
servicing of these securitized loans and contracts by the Company's subsidiary
and to transfer the servicing to another servicer. The Company intends to oppose
vigorously any such efforts. An involuntary termination of the Company's
servicing of the loans and contracts it has securitized will have a material
adverse effect on the Company and its efforts to reorganize in the Chapter 11
Cases.
In a class action lawsuit pending in Alabama state district court involving
910 home equity loans alleged to be subject to the Alabama Mini Code, Autrey v.
United Companies Lending Corporation, the Alabama Supreme Court, acting on an
interlocutory appeal by the Company, upheld the ruling of the trial court on a
pre-trial motion that retroactive application of the 1996 amendments to the
Alabama Mini Code would be unconstitutional as applied to the plaintiff's class.
The 1996 amendments, which in general limited the remedy for finance charges in
excess of the maximum permitted by the Alabama Mini Code, were expressly made
retroactive by the Alabama legislature. The Company strenuously disagreed with
this holding and sought a rehearing by the Alabama Supreme Court. The request
for a rehearing was denied by the Alabama Supreme Court and the matter was
returned to the trial court for a trial on the merits. On August 17, 2000, the
Company and counsel for the plaintiffs reached a settlement of this matter
subject to approval of the Bankruptcy Court. The settlement plan calls for the
Company to acknowledge a $2.28 million unsecured claim. No amounts have been
recorded in the Company's financial records pending approval by the Bankruptcy
Court.
In August of 1998, the U.S. Department of Justice ("DOJ") and the U.S.
Department of Housing and Urban Development ("HUD") issued a letter to the
Company and its subsidiary United Companies Lending Corporation indicating that
they were initiating a joint investigation of their lending and pricing
practices, initially in Philadelphia, PA-NJ PMSA. The investigation focuses on
compliance by the Company and its subsidiary with the federal Fair Housing Act
and Equal Credit Opportunity Act and the federal Real Estate Settlement
Procedures Act ("RESPA"). Specifically, DOJ seeks to determine whether the
lending and pricing practices of the Company and its subsidiary discriminate
against applicants based on race, national origin, sex, or age. The Company
believes this investigation by DOJ is part of an overall initiative by that
agency to review the practices of several large subprime lenders and does not
stem from any findings of wrongdoing by the Company. HUD will be investigating
whether relationships of the Company and its subsidiary with mortgage brokers,
home improvement dealers or other third parties may violate the anti-kickback
and anti-referral fee prohibitions of RESPA. While the Company has provided
certain information in
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connection with the investigation, the Company has taken the position that the
investigation is stayed by section 362(a) of the Bankruptcy Code.
In October 1998, UC Lending reached a settlement in an enforcement action
commenced by the Massachusetts Attorney General on behalf of the Commonwealth of
Massachusetts in Massachusetts state court alleging violations by UC Lending of
certain regulations promulgated by the Massachusetts Attorney General relating
to, among other things, loan origination fees, also known as "points", with
respect to loans originated in Massachusetts. The settlement, involving payments
and other terms by UC Lending aggregating approximately $1.2 million, followed a
decision by a federal district court in Massachusetts upholding the validity of
the regulations and finding violations thereof by UC Lending. UC Lending had
maintained that the Massachusetts regulations were void because they conflicted
with the efforts of the Massachusetts legislature to supplant the strict
regulation of points with disclosure requirements, and were inconsistent with
the policies and interpretations of the Federal Trade Commission as to what
constitutes unfair and deceptive trade practices. The federal district court
found that the Attorney General's regulations did not contravene the intent of
the Massachusetts legislature and are not inconsistent with applicable federal
law.
The Company, operating through its subsidiaries (collectively, the
"Companies"), services loans in 50 states and the District of Columbia, subject
to licensing or exemption from licensing requirements granted by the states. In
some of these states, the Companies are exempt from the requirement to obtain a
state license by result of their holding licenses or approvals from federal
agencies, including the U.S. Office of Housing and Urban Development ("HUD").
The applicable licensing statutes in virtually all of these states and the
applicable HUD regulations require that an authorized mortgage loan servicer
submit annual audited financial statements to the regulatory authorities and
maintain a minimum net worth requirement. The Companies failed to timely submit
their audited financial statements for the year ending December 31, 1998 and
December 31, 1999 in those jurisdictions where required and will not meet the
minimum net worth requirements as of December 31, 1998 or December 31, 1999 in
those jurisdictions where required. A number of state agencies and HUD have
initiated action to terminate, revoke, suspend or deny renewal of the Companies'
licenses or exemption from licensing because of the failure to meet these
requirements. It is the Companies' position that section 525 and other sections
of the Bankruptcy Code prohibit and stay a governmental unit (state or federal)
from denying, revoking, suspending, or refusing to renew a license or other
similar grant to a debtor in bankruptcy because, among other things, such debtor
is a debtor under the Bankruptcy Code, or has been insolvent before the
commencement of its bankruptcy case or during the case. On July 23, 1999, the
United States Bankruptcy Court for the District of Delaware entered its Order
granting a preliminary injunction against the Attorney General of the State of
Arkansas and the Commissioner of the Arkansas Securities Department enjoining
those parties and others working under their supervision from taking any action
against United Companies Financial Corporation, United Companies Lending
Corporation and/or Ginger Mae, Inc. "with respect to their servicing rights in
Arkansas and their rights to do business in Arkansas as a servicer of loans,
including revoking, refusing to renew, suspending, terminating the exemption
from registration, conditioning, or otherwise interfering with or impairing
Debtors' rights to service Arkansas loans." The Companies plan to attempt to
obtain similar injunctive relief against other state or federal agencies as may
be necessary to protect their right to continue to service loans in each of the
jurisdictions where they currently service loans. The Plan should provide the
Reorganized Debtors with sufficient net worth to meet all regulatory
requirements.
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