<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1996
REGISTRATION NO. 333-1119
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PIONEER FINANCIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 36-2479273
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
(847) 995-0400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER W. NAUERT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1750 EAST GOLF ROAD
SCHAUMBURG, ILLINOIS 60173
(847) 995-0400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
STANLEY H. MEADOWS, P.C. WILLIAM R. KUNKEL
MCDERMOTT, WILL & EMERY SKADDEN, ARPS, SLATE, MEAGHER & FLOM
227 WEST MONROE STREET 333 WEST WACKER DRIVE, SUITE 2100
CHICAGO, ILLINOIS 60606-5096 CHICAGO, ILLINOIS 60606
(312) 372-2000 (312) 407-0700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 21, 1996
PROSPECTUS
$65,000,000
LOGO PIONEER FINANCIAL SERVICES, INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2003
-------------
The % Convertible Subordinated Notes Due 2003 (the "Notes") will mature
on , 2003, unless previously redeemed. Interest on the Notes is
payable on and of each year, commencing , 1996. The
Notes are convertible into shares of Common Stock of the Company, at any time
prior to maturity, unless previously redeemed, at a conversion price of
$ per share, subject to adjustment in certain events as described
herein.
The Notes are subordinated in right of payment to all Senior Indebtedness (as
defined herein) of the Company. The Indenture (as defined herein) will not
restrict the incurrence of Senior Indebtedness or other indebtedness by the
Company or any of its subsidiaries. Senior Indebtedness was approximately $57.3
million at March 15, 1996. After giving effect to the incurrence of additional
Senior Indebtedness in connection with the acquisition of Universal Fidelity
Life Insurance Company and the expected use of the estimated proceeds of this
offering, at March 15, 1996, Senior Indebtedness would have been approximately
$25.0 million. See "Capitalization." The Company is a holding company and,
accordingly, the Notes will also be subordinated to all existing and future
liabilities of the Company's subsidiaries. See "Description of the Notes--
Subordination." The Notes are redeemable, in whole or in part, at the option of
the Company at any time on or after , 1999, at the redemption
prices set forth herein plus accrued and unpaid interest. No sinking fund is
provided for the Notes. Subject to certain conditions, following the occurrence
of a Change of Control (as defined herein), each holder has the right to cause
the Company to repurchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of such repurchase. See
"Description of the Notes."
On March 11, 1996, the last reported sale price of the Common Stock on the
New York Stock Exchange ("NYSE"), where it is traded under the symbol "PFS,"
was $15 7/8 per share. See "Price Range of Common Stock and Dividend Policy."
Application has been made to list the Notes on the NYSE under the symbol
"PFS03."
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................... % % %
- ---------------------------------------------------------------------------------------------------
Total(4)................................... $65,000,000 $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $500,000.
(4) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional $9,750,000
aggregate principal amount of Notes, on the same terms as set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The Notes are being offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by them, subject to approval of certain
legal matters by their counsel and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify this offering and
to reject any order in whole or in part. It is expected that delivery of the
Notes will be made against payment therefor on or about , 1996,
at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.
-------------
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
For North Carolina Investors: The Commissioner of Insurance of the State of
North Carolina has not approved or disapproved this offering, nor has such
Commissioner passed upon the adequacy or accuracy of this Prospectus.
The Company owns, directly or indirectly, all of the shares of stock of
certain life and health insurance companies domiciled principally in Illinois.
Illinois insurance regulatory laws require prior approval by the Illinois
Director of Insurance of any acquisition of control of an Illinois insurance
company or of any company which controls an Illinois insurance company. Under
Illinois insurance regulatory laws, "control" is presumed to exist through the
ownership of 10% or more of the voting securities of a domestic insurance
company or of any company which controls a domestic insurance company. Any
purchaser of 10% or more of the shares of Common Stock of the Company, whether
by conversion or otherwise, will be presumed to have acquired control of the
Illinois domestic insurance subsidiaries unless the Illinois Director of
Insurance, following application by such purchaser, determines otherwise.
Accordingly, any purchase, whether by conversion or otherwise, of 10% or more
of the Common Stock of the Company, would require prior action by the Illinois
Director of Insurance.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are incorporated herein by reference: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995, as amended by Form 10-K/A, (ii) the
description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A for such securities, including any
amendments or reports filed for the purpose of updating such description and
(iii) the Company's description of its Rights to Purchase Series A Junior
Preferred Stock contained in the Company's Registration Statement on Form 8-A
dated December 14, 1990.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in this Prospectus,
or in a document incorporated or deemed to be incorporated by reference herein,
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference herein (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should
be directed to the Director of Investor Relations, Pioneer Financial Services,
Inc., 1750 East Golf Road, Schaumburg, Illinois 60173, telephone number (847)
995-0400.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless otherwise indicated, all information
contained herein assumes no exercise of the Underwriters' over-allotment
option. Unless the context requires otherwise, all references herein to the
"Company" mean Pioneer Financial Services, Inc. and its subsidiaries,
collectively. For a discussion of certain factors that should be considered by
prospective purchasers of the Notes offered hereby, see "Risk Factors."
THE COMPANY
The Company underwrites and markets health insurance, life insurance and
annuities and provides medical utilization management services throughout the
United States. In the nine years since it became public, the Company's total
revenue has grown from $75.2 million in 1986 to $800.1 million in 1995; total
assets have increased from $165.0 million at December 31, 1986 to over $1.5
billion at December 31, 1995; and stockholders' equity has increased from $33.5
million at December 31, 1986 to $144.6 million at December 31, 1995. The
Company sells its products and services through four marketing divisions:
Senior Health and Life Division, Group Medical Division, Life Insurance
Division and Medical Utilization Management Division.
OPERATIONS
Senior Health and Life Division. The Senior Health and Life Division markets
a wide range of specialty health insurance and life insurance and annuities for
individuals age 65 and older. Products which are underwritten by this division
include Medicare supplement, long-term care, home health care and specialty
health. In addition, this division markets cash burial life policies and
annuities which are underwritten by the Company's Life Insurance Division. The
Company's Medicare supplement policies provide coverage for many of the
expenses which the federal Medicare program does not fully cover and its long-
term care and home health care policies provide coverage, within various
prescribed benefit limits, for nursing home and in-home care. During 1995, the
Company issued over 47,000 senior health insurance policies and over 35,000
senior life insurance policies, increases of 21% and 137%, respectively,
compared to the number of policies issued in 1994.
The Company is the fourth largest issuer of individual Medicare supplement
insurance in the nation, excluding Blue Cross and Blue Shield-related entities,
based on direct premiums earned. The Company sells products designed for senior
citizens through a distribution network which has grown from approximately
15,000 agents at the end of 1994 to nearly 22,000 agents at the end of 1995.
This growth was primarily the result of the formation, in mid-1995, of Markman
International, a 50/50 joint venture with Markman Company, which, prior to the
joint venture, had established itself as a leading independent marketer of
long-term care policies. Markman International serves as the national marketing
and distribution arm of the Senior Health and Life Division.
Group Medical Division. The Group Medical Division underwrites and markets
hospital and medical policies, primarily to self-employed individuals and small
business owners. In 1995, approximately 82% of this division's business was
sold through a sales force of approximately 1,700 career agents and the
remaining 18% was sold through a brokerage system of 6,000 independent agents.
This division uses the services provided by the Medical Utilization Management
Division, unaffiliated preferred provider organizations ("PPOs") and other
managed care operations to help control claims costs. In 1995, approximately
70% of hospital stays covered by
3
<PAGE>
policies issued by the Group Medical Division used PPO facilities, an increase
from 32% in 1993 and 54% in 1994. The Company believes that the Group Medical
Division's use of managed care services, provided by both the Medical
Utilization Management Division and unaffiliated companies, resulted in
significant claims savings for the Company in 1995, with most of these savings
being passed on to customers in the form of more competitive premium rates.
Life Insurance Division. The Life Insurance Division underwrites and markets
traditional life (term and whole life), universal life, and interest sensitive
life insurance and annuities targeted primarily to the middle income market.
The Life Insurance Division sells its products through a nationwide network of
brokerage general agents ("BGAs") and managing general agents ("MGAs") who in
turn contract with multiple brokers and general agents. This division grew
significantly when the Company acquired Connecticut National Life Insurance
Company ("CNL") in January 1995. This division also underwrites, issues and
administers the life insurance products marketed by the Senior Health and Life
Division.
Medical Utilization Management Division. The Medical Utilization Management
Division provides health care coordination services to assist in the management
of medical costs for insurance companies, government agencies, self-insured
businesses, unions, third-party administrators, health maintenance
organizations ("HMOs") and PPOs, as well as for the Group Medical Division.
Such services include precertification of inpatient and outpatient medical
care, case management, and the development and management of provider networks.
During 1995, approximately 81% of this division's revenues were derived from
services provided to unaffiliated organizations.
Investment Portfolio. The Company has maintained and intends to continue to
maintain a diversified portfolio of medium-term investment-grade fixed income
securities. As of December 31, 1995, 83% of the Company's invested assets were
fixed income securities and the weighted average quality of the fixed income
portfolio was "AA."
STRATEGY
Senior Health and Life Division. The Company believes it has an opportunity
to expand its position as a leading provider of health and life insurance
products to the growing senior market. Demographic trends indicate that the
number of Americans age 65 and over will increase significantly. According to
the U.S. Census Bureau, the age 65 and over population group is estimated to
grow from approximately 33 million in 1994 to approximately 37 million by the
year 2005 and to over 53 million by 2020. Industry sources estimate that
currently approximately 10% of persons age 65 and over own long-term care
insurance, while approximately 43% of such individuals are expected to require
the use of nursing care at least once in their lives. These same sources also
estimate that the number of long-term care policies sold industry-wide has
increased at a rate of approximately 27% per year since 1987, to a total of
approximately 3.4 million long-term care policies sold through 1994. The
Company believes the growth of this senior health insurance market could be
enhanced if future government regulation continues to move toward more personal
financial responsibility, with less reliance on government payments, possibly
in the form of additional reductions in Medicare benefits and/or the
establishment of tax deductibility for long-term care insurance premiums.
The Company intends to expand its position in the growing senior market by
increasing the number of agents who sell its senior products, and by increasing
the number of products agents sell to each customer through cross-selling.
Through Markman International, the Company has increased its agency force by
nearly 45% since the end of 1994 and expects further increases in 1996. In
1995, approximately 2.5% of the Senior Health and Life Division's Medicare
supplement policyholders owned one of the Company's long-term care or home
health care policies. Through increased training of its agents as to the full
range of products offered by the Company and the development of pre-approved
(already underwritten for issue) add-on products that can easily be coupled
4
<PAGE>
with certain existing products, the Company intends to increase its cross-
selling efforts and thereby increase the number of its products owned by each
customer. Additionally, the Company believes that the market for senior managed
care products will grow as health care expenditures continue to grow. It is
estimated that approximately 10% of Medicare beneficiaries in the nation
participate in HMOs. There are many states with very low penetration of managed
care in the senior market, including states with a high concentration of
Medicare beneficiaries. The Company intends to take advantage of this
opportunity by utilizing its position in the senior market and its managed care
capability, to market managed care products to senior citizens.
Group Medical Division. The Group Medical Division intends to focus its
efforts on increasing administrative efficiency and claims-cost containment on
its existing block of business through, among other things, increased use of
the Medical Utilization Management Division's services, continued development
of medical provider networks and continued migration of its fee-for-service
indemnity health insurance customers to managed care products. As the
regulatory environment evolves, the Company will evaluate growth opportunities
in this market.
Life Insurance Division. The Life Insurance Division's strategy is to expand
its distribution channels and products and to continue to lower its
administrative unit costs. The acquisition of CNL in 1995 has given the Company
the opportunity to initiate new distribution strategies, including consumer-
direct sales over the Internet. Also, at year-end 1995, the Company entered
into an agreement with a national marketing organization to market a new term
life insurance product with an income benefit rider. With 25,000 agents
nationwide, this marketing organization gives the Company the potential to
increase significantly the sales of life insurance.
Medical Utilization Management Division. The Medical Utilization Management
Division intends to grow through cross-selling additional managed care services
to existing clients. In addition, this division is currently developing PPOs,
exclusive provider organizations ("EPOs") and HMOs in selected market areas.
Acquisitions. The Company believes that current trends in the life and health
insurance industry will continue to provide the Company with opportunities for
additional acquisitions and consolidations. The Company further believes that
its ability to integrate acquisitions into its existing operations and its
flexibility in developing and marketing new products should enable it to
capitalize on these opportunities.
The Company was organized in Delaware in 1982 as a successor to an Illinois
holding company formed in 1957. The executive offices of the Company are
located at 1750 East Golf Road, Schaumburg, Illinois 60173 and its telephone
number is (847) 995-0400.
5
<PAGE>
THE OFFERING
Securities Offered.............. $65,000,000 principal amount ($74,750,000 if
the over-allotment option is exercised in
full) of % Convertible Subordinated
Notes Due 2003 to be issued under an
indenture (the "Indenture") between the
Company and The First National Bank of
Chicago, as trustee (the "Trustee").
Maturity Date................... , 2003
Interest Payment Dates.......... and of each year
commencing, , 1996
Conversion Rights............... The Notes are convertible, at the holder's
option, into shares of Common Stock, at any
time at or prior to maturity unless
previously redeemed, at a conversion price of
$ per share, subject to adjustment in
certain events as described herein.
Accordingly, each $1,000 in principal amount
of Notes is convertible into shares of
Common Stock, subject to adjustment.
Redemption at the Option of the The Notes are not redeemable prior to
Company......................... , 1999. Thereafter, the Notes are
redeemable, in whole or in part, at the
option of the Company, at the redemption
prices set forth herein, plus accrued and
unpaid interest to the date of redemption.
Redemption at the Option of the In the event that a Change of Control (as
Holders......................... defined herein) occurs, subject to certain
conditions, each holder of a Note shall have
the right, at the holder's option, to require
the Company to repurchase all or any part of
such holder's Notes at 101% of the principal
amount thereof, plus accrued and unpaid
interest to the date of repurchase.
Subordination...................
The Notes will be general unsecured
obligations of the Company and will be
subordinated in right of payment to all
Senior Indebtedness (as defined herein) of
the Company. Senior Indebtedness was
approximately $57.3 million at March 15,
1996. After giving effect to the incurrence
of additional Senior Indebtedness in
connection with the acquisition of Universal
Fidelity Life Insurance Company ("Universal
Fidelity") and the expected use of the
estimated net proceeds of this offering, at
March 15, 1996, Senior Indebtedness would
have been approximately $25.0 million. See
"Capitalization." The Company is a holding
company and, accordingly, the Notes will also
be subordinated to all existing and future
liabilities of the Company's subsidiaries.
The Indenture will not restrict the Company
or any of its subsidiaries from incurring
additional Senior Indebtedness or other
obligations.
Use of Proceeds................. The net proceeds from the sale of the Notes
offered hereby are estimated to be
$62,062,500 ($71,446,875 if the Underwriters'
over-allotment option is exercised in full).
The Company intends to use a portion of the
net proceeds to redeem its $2.125 Cumulative
Exchangeable Convertible Preferred Stock
6
<PAGE>
(the "$2.125 Preferred Stock"). As of
December 31, 1995, approximately $21.9
million ($25.85 per share of $2.125 Preferred
Stock) would have been required to redeem all
of the outstanding shares of the $2.125
Preferred Stock (assuming no shares of $2.125
Preferred Stock are converted prior to
redemption). The remaining net proceeds will
be used to repay borrowings under the
Company's March 1995 Term Loan and the August
1995 Term Loan and to reduce, or, to the
extent available, repay borrowings under the
Credit Facility (each as defined herein). Any
remaining net proceeds will be used for
working capital and general corporate
purposes, including, without limitation, the
contribution of capital to the Company's
insurance subsidiaries and future
acquisitions. Other than the purchase of
Universal Fidelity, the Company has no
commitments or agreements with respect to any
such acquisitions as of the date of this
Prospectus. Pending application, the net
proceeds will be invested in short-term
interest-bearing obligations. See "Use of
Proceeds" and "Business--Acquisitions."
Listing......................... Application has been made to list the Notes
on the NYSE under the symbol "PFS03"
Common Stock Symbol............. "PFS"
Rating..........................
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Premiums and policy charges:
Accident and health.......... $593,236 $559,894 $601,684 $659,180 $625,951
Life and annuity............. 33,321 35,219 39,282 44,929 61,092
-------- -------- -------- -------- --------
Total premiums and policy
charges................... 626,557 595,113 640,966 704,109 687,043
Net investment income......... 47,974 43,555 40,242 42,786 70,975
Other income.................. 26,310 17,352 19,256 27,643 38,073
Realized investment gains
(losses)..................... 7,897 (47) (1,336) (383) 3,993
-------- -------- -------- -------- --------
Total revenues............. 708,738 655,973 699,128 774,155 800,084
Benefits:
Accident and health.......... 376,820 368,046 397,963 407,249 398,971
Life and annuity............. 46,128 47,622 39,419 42,947 76,846
-------- -------- -------- -------- --------
Total benefits............. 422,948 415,668 437,382 450,196 475,817
Insurance and general expense. 173,806 162,837 162,831 192,810 218,388
Interest expense.............. 2,916 2,189 3,276 5,054 4,958
Amortization of deferred
policy acquisition costs(1).. 95,748 100,715 76,875 100,073 69,199
-------- -------- -------- -------- --------
Total benefits and
expenses.................. 695,418 681,409 680,364 748,133 768,362
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................ 13,320 (25,436) 18,764 26,022 31,722
Income taxes (benefit)........ 4,448 (8,477) 6,619 8,873 10,754
-------- -------- -------- -------- --------
Net income (loss)............. 8,872 (16,959) 12,145 17,149 20,968
Preferred stock dividends..... 2,039 2,039 2,021 1,904 1,805
-------- -------- -------- -------- --------
Income (loss) applicable to
common stockholders.......... $ 6,833 $(18,998) $ 10,124 $ 15,245 $ 19,163
======== ======== ======== ======== ========
PER SHARE DATA:
Net income (loss) per common
share:
Primary...................... $ 1.02 $ (2.85) $ 1.51 $ 2.36 $ 2.44
Fully diluted................ 1.02 (2.85) 1.26 1.58 1.85
Average common and common
equivalent shares outstanding
(in thousands):
Primary...................... 6,699 6,660 6,724 6,459 7,839
Fully diluted................ 8,234 8,195 10,731 12,734 12,608
Ratio of earnings to fixed
charges(2)................... 5.0x -- 5.7x 5.3x 6.1x
</TABLE>
- --------
(1) Includes the effect of a write-off of deferred policy acquisition costs in
1992 and 1994 of approximately $30.0 million and $16.7 million,
respectively. See "Risk Factors--Recoverability of Deferred Policy
Acquisition Costs" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Deferred Policy Acquisition Costs." The
write-offs were primarily related to certain major medical policies.
(2) Fixed charges consist of interest expense on indebtedness, amortization of
debt issuance costs and the portion of operating leases that are
representative of the interest factor. Fixed charges do not include
interest on annuities and financial products. Earnings are computed by
adding interest expense on indebtedness, amortization of debt issuance
costs and the interest portion of rent expense to pre-tax earnings from
continuing operations. The earnings were inadequate to cover fixed charges
by $25.4 million in 1992.
8
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1995
1991 1992 1993 1994 ACTUAL AS ADJUSTED(1)
-------- -------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments....... $528,725 $568,349 $ 674,206 $ 723,837 $1,042,592 $1,055,642
Deferred policy
acquisition costs...... 313,453 269,674 260,432 225,618 219,874 219,874
Total assets............ 969,190 978,689 1,108,271 1,075,700 1,558,921 1,574,909
Policy liabilities...... 776,571 805,696 903,105 868,608 1,214,465 1,214,465
Short-term notes
payable................ 6,371 12,931 5,575 20,093 13,534 4,191
Long-term notes payable. 21,600 25,170 1,125 2,520 21,504 3,779
8% Convertible
Subordinated
Debentures............. -- -- 57,477 57,427 9,695 9,695
Convertible Subordinated
Notes Due 2003......... -- -- -- -- -- 65,000
$2.125 Preferred Stock.. 23,990 23,990 23,675 21,682 21,222 --
Stockholders' equity.... 75,470 62,732 68,872 68,328 144,574 143,852
Book value per share.... 11.39 9.21 10.86 11.55 14.35 14.28
Debt and preferred stock
as a percentage of
total capitalization
(2).................... 40.8% 49.7% 56.1% 59.8% 31.3% 36.5%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1991 1992 1993 1994 1995
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Statutory capital &
surplus (3)............ $ 72,600 $ 82,432 $ 106,567 $ 124,284 $ 115,423
Risk based capital
ratios (3)(4)
Pioneer Life Insurance
Company of Illinois... -- -- 336% 342% 287%
National Group Life.... -- -- 386% 410% 350%
Manhattan National
Life.................. -- -- 566% 866% 571%
Connecticut National
Life.................. -- -- 449% 984% 943%
Accident & Health Ratios
(5)
Major Medical:
Loss ratio............. 59.9% 66.3% 67.1% 63.0% 63.1%
Expense ratio.......... 42.3 48.9 34.5 41.4 38.0
---------- ----------- ----------- ----------- ----------
Total Major Medical.. 102.2% 115.2% 101.6% 104.4% 101.1%
Senior:
Loss ratio............. 67.1% 66.5% 63.5% 61.1% 65.9%
Expense ratio.......... 33.4 33.0 34.5 36.5 34.1
---------- ----------- ----------- ----------- ----------
Total Senior......... 100.5% 99.5% 98.0% 97.6% 100.0%
Collected cash premium
Major Medical.......... $ 289,622 $ 298,015 $ 349,050 $ 426,117 $ 393,450
Senior................. 308,496 270,915 258,145 234,595 226,489
Life & Annuity......... 47,305 41,679 47,201 71,310 80,493
Gross life insurance in-
force (3).............. 9,141,000 10,339,000 11,823,000 12,582,000 17,743,000
Pre-tax operating income
(loss) (6)............. 9,223 (25,389) 20,100 26,404 32,889
</TABLE>
- --------
(1) Adjusted to give effect to the sale of the Notes offered hereby and the use
of the estimated net proceeds therefrom. See "Use of Proceeds." Does not
give effect to the acquisition of Universal Fidelity. See "Use of Proceeds"
and "Capitalization."
(2) Debt represents the aggregate of long-term notes payable, short-term notes
payable and the 8% Convertible Subordinated Debentures and, as adjusted,
the Notes. Total capitalization represents debt, preferred stock and
stockholders' equity. On a pro forma basis, after giving effect to the sale
of the Notes offered hereby, the use of the estimated proceeds therefrom
and the incurrence of indebtedness in connection with the acquisition of
Universal Fidelity, debt and preferred stock as a percentage of total
capitalization at December 31, 1995 would have been 39.9%. See
"Capitalization."
(3) Calculated at the end of the period shown.
(4) Risk based capital rules were adopted for annual reporting beginning
December 31, 1993. The calculated ratios are based on the authorized
control level as filed in the Company's individual insurance subsidiaries'
annual statutory financial statements.
(5) Expense amounts include principally renewal commissions, amortization of
deferred policy acquisition costs, general insurance expenses and premium
taxes. The expense and loss ratios are calculated based on earned premium
and exclude the effects of net investment income, realized investment gains
(losses), policy fees and the financial results of the Company's non-
insurance subsidiaries.
(6) Represents the Company's income or loss before income taxes calculated on a
GAAP basis excluding the effects of realized investment gains and losses.
The 1995 amount also excludes approximately $5.2 million in payments made
to converting bondholders and other expenses relating to the conversion of
the 8% Convertible Subordinated Debentures. The 1991 amount excludes $3.8
million of additional life and annuity deferred policy acquisition cost
amortization caused by higher than expected investment gains.
9
<PAGE>
RISK FACTORS
In addition to the information contained elsewhere in this Prospectus, a
prospective purchaser of the Notes should carefully consider, among other
things, the following risk factors before making an investment in the Notes
offered hereby.
HOLDING COMPANY STRUCTURE
The Company is an insurance holding company whose assets principally consist
of the capital stock of its operating subsidiaries. The ability of the Company
to redeem or make interest payments on the Notes, to pay dividends on its
Common Stock and $2.125 Preferred Stock and to make required debt service
payments, is dependent upon the ability of its subsidiaries to pay cash
dividends or make other cash payments to the Company. The Company's insurance
subsidiaries are subject to state laws and regulations which restrict their
ability to pay dividends and make other payments to the Company. Certain of
the Company's credit arrangements also limit its ability to pay dividends. The
total amount of dividends that could be paid by the Company's insurance
subsidiaries in 1996 without regulatory approval is approximately $3.7
million. Liquidity requirements of the holding company have historically been
met through dividends from the non-insurance subsidiaries which receive
payments primarily from fees charged for administrative and marketing services
provided to the Company's insurance subsidiaries and other unaffiliated
companies. The Company intends to use a portion of the net proceeds of this
offering to redeem all of the outstanding shares of $2.125 Preferred Stock.
See "Use of Proceeds," "Price Range of Common Stock and Dividend Policy,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," "Business--Government Regulation" and Notes to Consolidated
Financial Statements.
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including all indebtedness under
the Company's Credit Facility and other credit agreements. By reason of such
subordination, in the event of an insolvency, liquidation or other
reorganization of the Company, the Senior Indebtedness must be paid in full
before the Company may make any payments with respect to the principal of,
premium, if any, and interest on the Notes (and any other obligations ranking
pari passu with the Notes, including, without limitation, the 8% convertible
subordinated debentures due 2000 (the "8% Debentures")). Senior Indebtedness
was approximately $57.3 million at March 15, 1996. After giving effect to the
incurrence of additional Senior Indebtedness in connection with the
acquisition of Universal Fidelity and the expected use of the estimated net
proceeds from this offering, at March 15, 1996, Senior Indebtedness would have
been approximately $25.0 million. See "Capitalization." Because the Company's
operations are conducted through subsidiaries, claims of the creditors of the
subsidiaries (including policyholders) will have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of
the Company, including holders of the Notes, even though such obligations do
not constitute Senior Indebtedness. The Company's subsidiaries had
indebtedness for borrowed money of approximately $8.4 million at March 15,
1996.
The Notes will not be secured by any of the assets of the Company or its
subsidiaries. In addition, certain obligations of the Company are secured by
pledges of certain assets of the Company or its subsidiaries. The Indenture
will not restrict the ability of the Company or any of its subsidiaries to
incur additional Senior Indebtedness or to pledge their assets in the future.
See "Description of the Notes" and Notes to Consolidated Financial Statements.
INSURANCE REGULATION
The Company and its insurance subsidiaries are subject to extensive
governmental regulation and supervision in each of the jurisdictions in which
it or its subsidiaries conduct business. Such regulation vests in governmental
agencies broad regulatory, supervisory and administrative power with respect
to the Company's
10
<PAGE>
business, including premium rate levels, premium rate increases, policy forms,
minimum loss ratios, dividend payments, claims settlement, licensing of
insurers and their agents, capital adequacy, transfer of control, and the
amount and type of investments the Company may have. Such regulations are
primarily intended to protect policyholders and not investors. Further, the
states in which the Company is licensed have the authority to change the
minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. In the event the Company is not in
compliance with minimum statutory loss ratios mandated by regulatory
authorities with respect to certain policies, the Company may be required to
reduce or refund premiums, which could have a material adverse effect upon the
Company. See "Business--Government Regulation."
From time to time there are also significant federal and state legislative
developments with respect to group, long-term care and Medicare coverage. Most
legislative proposals at the state level are specifically directed at the
small group health care market, a significant portion of the Company's health
business. A number of states have passed or are considering legislation that
would limit the differentials in rates that insurers could charge between new
business and renewal business with respect to similar demographic groups.
State legislation also has been adopted or is being considered that would make
health insurance available to all small groups by requiring coverage of all
employees and their dependents, limiting the applicability of pre-existing
conditions exclusions, requiring insurers to offer a basic plan exempt from
certain mandated benefits as well as a standard plan and establishing a
mechanism to spread the risk of high risk employees to all small group
insurers. Among the proposals currently pending in the U.S. Congress are the
implementation of certain minimum consumer protection standards for inclusion
in all long-term care policies, including guaranteed renewability, protection
against inflation and limitations on waiting periods for pre-existing
conditions. These proposals would also prohibit "high pressure" sales tactics
in connection with long-term care insurance and would guarantee consumers
access to information regarding insurers, including lapse and replacement
rates for policies and the percentage of claims denied. In addition, the
National Association of Insurance Commissioners (the "NAIC") has recently
adopted model long-term care policy language providing nonforfeiture benefits
and has proposed a rate stabilization standard for long-term care policies.
The Company cannot predict with certainty the effect any proposals, if
adopted, or legislative developments could have on its business and
operations. Health care reform may require the Company to make significant
changes to the way it conducts its health insurance business and could impose
limitations on the profitability of certain of the Company's insurance
products, which could have a material adverse effect on the Company. See
"Business--Health Care Reform."
IMPORTANCE OF RATINGS
The Company's ability to expand and attract new business is affected by the
ratings assigned to its insurance subsidiaries by various independent
insurance rating agencies including A.M. Best Company, Inc. ("A.M. Best") and
Duff & Phelps Credit Rating Company ("Duff & Phelps"). A.M. Best ratings for
the industry currently range from "A++ (Superior)" to "C- (Fair)" and some
companies are not rated. Four of the Company's insurance subsidiaries are
currently rated by A.M. Best: Pioneer Life Insurance Company ("Pioneer Life")
is rated "B+ (Very Good);" Manhattan National Life Insurance Company is rated
"A- (Excellent);" National Group Life Insurance Company ("National Group
Life") is rated "B (Good)"; and CNL is rated "A- (Excellent)." Duff & Phelps
ratings for the industry currently range from "AAA" to "DD." Three of the
Company's insurance subsidiaries are currently rated by Duff & Phelps: Pioneer
Life is rated "A;" Manhattan National Life is rated "A+;" and CNL is rated
"A+." In evaluating a company's financial and operating performance, the
rating agencies review the company's profitability, leverage and liquidity as
well as the company's book of business, the adequacy and soundness of its
reinsurance, the quality and estimated market value of its assets, the
adequacy of its reserves and the experience and competency of its management.
Such ratings are based upon factors primarily relevant to policyholders,
agents, insurance brokers and intermediaries and are not directed to the
protection of investors. If the ratings of the Company's insurance
subsidiaries were downgraded from their current levels, sales of their
products could be adversely affected.
11
<PAGE>
COMPETITION
The Company operates in a highly competitive industry. The Company competes
with large national insurers, regional insurers and specialty insurers, many
of which are larger, have substantially greater financial resources or higher
A.M. Best ratings than the Company. In addition to claims paying ratings,
insurers compete on the basis of price, breadth and flexibility of coverage,
ability to attract and retain agents and brokers and the quality and level of
agent and policyholder services provided. See "--Insurance Regulation."
RECOVERABILITY OF DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a deferred policy
acquisition cost ("DAC") asset is established to match properly the costs of
writing new business against the expected future revenues and profits from
those policies. The amortization schedule is generally based on the expected
pattern of future revenues or gross profits and on the expected persistency of
the policies. The Company continues to monitor the profitability and
persistency of its policies on a monthly basis. In reviewing the
recoverability of DAC related to medical insurance products, the Company has
made assumptions relative to future rate increases, medical claim trends,
lapse rates, expenses and investment income. Although there is significant
variability inherent in these estimates, management believes these assumptions
are reasonable. Increased lapses or revised estimates of profitability
anticipating future losses could result in an increase in the amortization
rate or a write-off of DAC, which would adversely impact earnings. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition--Deferred Policy Acquisition Costs."
MEDICAL COST INFLATION
Inflationary trends in health care costs may cause the defined benefits
provided by the Company's policies to cover less of the actual costs of such
health care. This may require the Company to increase policy benefits under
new policies to remain competitive in marketing its products and to implement
corresponding increases in premiums. The Company's future growth may be
limited to the extent that state or federal regulations restrict premium rate
increases or increased premium rates make its policies less attractive to
prospective customers.
ADEQUACY OF LOSS RESERVES
The reserves for losses established by the Company are estimates of amounts
needed to pay reported and unreported claims based on facts and circumstances
known at the time the reserves are established. Reserves are based on
historical claims information, industry statistics and other factors. The
establishment of appropriate reserves is an inherently uncertain process, and
there can be no assurance that the ultimate liability will not materially
exceed the Company's claim reserves and have a material adverse effect on the
Company's results of operations and financial condition. Due to the inherent
uncertainty of estimating reserves, it has been necessary, and may over time
continue to be necessary, to revise estimated future liabilities as reflected
in the Company's reserves for claims. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
INVESTMENT PORTFOLIO
The Company's investment portfolio primarily consists of fixed income
securities such as investment grade publicly traded debt securities and
mortgage-related securities, including collateralized mortgage obligations. At
December 31, 1995, 83.3% of the Company's invested assets was invested in
fixed maturity obligations and approximately 39.1% was invested in mortgage-
related securities. Certain risks are inherent in connection with fixed income
securities, including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Certain additional risks
are inherent with mortgage-related securities, including the risks associated
with reinvestment of proceeds due to prepayments of such obligations. See
"Business--Investments."
12
<PAGE>
DEPENDENCE UPON MANAGEMENT
The success of the Company is dependent to a significant degree upon its
senior management, including Peter W. Nauert, Chairman and Chief Executive
Officer of the Company. Mr. Nauert is also the beneficial owner of 16.4% of
the outstanding Common Stock. Although the Company believes it has established
its own reputation in the industry, the loss of members of its senior
management could have a material adverse effect on the Company's business. See
"Management and Directors."
PROVISIONS LIMITING CHANGES IN CONTROL
Certain provisions in the Company's Certificate of Incorporation, By-laws
and Rights Agreement could discourage potential acquisition proposals and
could delay or prevent a change in control. See "Description of Capital
Stock."
ABSENCE OF PUBLIC MARKET
There is currently no public market for the Notes and there can be no
assurance that an active public market for the Notes will develop. Application
will be made to list the Notes on the NYSE under the symbol "PFS03."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to
be $62,062,500 ($71,446,875 if the Underwriters' over-allotment option is
exercised in full). The Company intends to use a portion of the net proceeds
to redeem its $2.125 Preferred Stock. As of December 31, 1995, approximately
$21.9 million ($25.85 per share of $2.125 Preferred Stock) would have been
required to redeem all of the outstanding shares of $2.125 Preferred Stock
(assuming no shares of the $2.125 Preferred Stock are converted prior to
redemption). Each share of $2.125 Preferred Stock is convertible into 1.6
shares of the Company's Common Stock. The remaining net proceeds will be used
to (i) repay borrowings under the Company's March 1995 Term Loan (as defined
below) which were incurred primarily in connection with the acquisition of CNL
in 1995; (ii) repay borrowings under the Company's August 1995 Term Loan (as
defined below) which were incurred primarily to fund payments made to
converting bondholders and other expenses relating to the conversion of $46.9
million of the Company's 8% Debentures; and (iii) reduce, or, to the extent
available, repay borrowings incurred under the Company's Credit Facility (as
defined below). As of March 15, 1996, an aggregate of approximately $43.0
million was outstanding under the March 1995 Term Loan, the August 1995 Term
Loan and the Credit Facility. The Company estimates that it will borrow an
additional $7.8 million to refinance certain intercompany indebtedness
incurred to complete the Universal Fidelity acquisition. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources."
The Company's $15.0 million term loan, incurred in March 1995 (the "March
1995 Term Loan"): (i) bore interest at 5% per annum at March 1, 1995; (ii)
requires principal payments of $0.5 million plus interest per quarter; and
(iii) matures on December 31, 1999. The Company's $11.1 million term loan,
incurred in August 1995 (the "August 1995 Term Loan"): (i) bore interest at
the rate of 8.25% per annum at March 1, 1996; (ii) requires principal payments
of $0.9 million plus interest per quarter; and (iii) matures on August 31,
1998. The Company's line of credit arrangement (the "Credit Facility") bore
interest at the rate of 8.25% per annum at March 1, 1996 and matures in April
1996. The Company expects that the Credit Facility will be extended at
maturity. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."
Any net proceeds remaining after the redemption of the $2.125 Preferred
Stock and the repayment of indebtedness described above will be used by the
Company for working capital and general corporate purposes, including, without
limitation, the contribution of capital to the Company's insurance
subsidiaries and future acquisitions. Other than the purchase of Universal
Fidelity, the Company has no commitments or agreements with respect to any
such acquisitions as of the date of this Prospectus. Pending application, the
net proceeds will be invested in short-term interest-bearing obligations.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the NYSE and the Chicago Stock Exchange under
the symbol "PFS." The following table sets forth for the fiscal periods
indicated the high and low last reported sale prices per share of the Common
Stock, as reported by the NYSE and the dividends declared per share of the
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
1994
First Quarter.................................. $14 3/4 $11 1/8 $.0375
Second Quarter................................. 12 10 .0375
Third Quarter.................................. 10 1/2 8 3/4 .0375
Fourth Quarter................................. 10 8 3/4 .0375
1995
First Quarter.................................. 11 1/4 8 7/8 .045
Second Quarter................................. 15 1/2 10 3/4 .045
Third Quarter.................................. 15 3/8 13 1/8 .045
Fourth Quarter................................. 18 1/2 13 7/8 .045
1996
First Quarter (through March 11, 1996)......... 18 3/8 15 5/8 .055
</TABLE>
On March 11, 1996, the last reported sale price of the Common Stock on the
NYSE was $15 7/8 per share.
All cumulative dividends on the $2.125 Preferred Stock have been paid by the
Company when due. The ability of the Company to pay dividends will depend
primarily on the receipt of cash dividends and other cash payments from its
subsidiaries. The Company's insurance subsidiaries are subject to state laws
and regulations which limit their ability to pay dividends or make other
payments to the Company. Certain of the Company's credit arrangements also
limit its ability to pay dividends. Furthermore, the Company's Certificate of
Incorporation prohibits the Company from paying dividends on the Common Stock
if the Company is not current in its dividend payments on the Preferred Stock.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term indebtedness and
capitalization of the Company (i) at December 31, 1995, actual, (ii) pro forma
to give effect to the acquisition of Universal Fidelity and the incurrence of
all indebtedness related thereto, and (iii) pro forma, as adjusted to give
effect to the sale of the Notes offered hereby and the use of the estimated
net proceeds therefrom. See "Use of Proceeds" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources." The following table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
----------------------------
PRO
PRO FORMA AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Short term notes payable.................... $ 13,534 $ 36,534 $ 7,191
Long-term debt:
Long-term notes payable..................... 21,504 24,504 13,729
8% Convertible Subordinated Debentures due
2000....................................... 9,695 9,695 9,695
% Convertible Subordinated Notes due 2003... -- -- 65,000
-------- -------- --------
Total debt................................ 44,733 70,733 95,615
Redeemable preferred stock, without par value:
5,000,000 shares authorized;
$2.125 Preferred Stock; 848,900 issued and
outstanding................................ 21,222 21,222 --
-------- -------- --------
Total debt and $2.125 Preferred Stock..... 65,955 91,955 95,615
Stockholders' equity:
Common stock, $1 par value; 20,000,000
shares authorized; 11,207,591 shares issued
and outstanding, including shares in
treasury(1)................................ 11,208 11,208 11,208
Additional paid-in capital.................. 72,198 72,198 72,198
Unrealized appreciation of available-for-
sale securities............................ 4,518 4,518 4,518
Retained earnings........................... 66,870 66,870 66,148
Less treasury stock at cost (1,132,300
shares).................................... (10,220) (10,220) (10,220)
-------- -------- --------
Total stockholders' equity................ 144,574 144,574 143,852
-------- -------- --------
Total capitalization...................... $210,529 $236,529 $239,467
======== ======== ========
</TABLE>
- --------
(1) Does not include (a) 1,358,240 shares which are issuable upon conversion
of the $2.125 Preferred Stock, (b) 1,892,935 shares reserved for issuance
pursuant to outstanding options granted under the Company's stock option
plans, (c) shares reserved for issuance pursuant to future grants of
options under the Company's Omnibus Stock Incentive Program, Employee
Stock Purchase Plan and Career Agent Stock Purchase Plan and (d) shares
which are issuable upon conversion of the 8% Debentures or the Notes
offered hereby. The Company intends to use a portion of the net proceeds
of this offering to redeem all of the outstanding shares of $2.125
Preferred Stock. See "Use of Proceeds."
16
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected operating statement and balance sheet data set forth below for
each of the years in the five-year period ended December 31, 1995 are derived
from the audited consolidated financial statements of the Company. The
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and Management's Discussion and
Analysis of Results of Operations and Financial Condition included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Premiums and policy charges:
Accident and health.......... $593,236 $559,894 $601,684 $659,180 $625,951
Life and annuity............. 33,321 35,219 39,282 44,929 61,092
-------- -------- -------- -------- --------
Total premiums and policy
charges................... 626,557 595,113 640,966 704,109 687,043
Net investment income......... 47,974 43,555 40,242 42,786 70,975
Other income.................. 26,310 17,352 19,256 27,643 38,073
Realized investment gains
(losses)..................... 7,897 (47) (1,336) (383) 3,993
-------- -------- -------- -------- --------
Total revenues............. 708,738 655,973 699,128 774,155 800,084
Benefits:
Accident and health.......... 376,820 368,046 397,963 407,249 398,971
Life and annuity............. 46,128 47,622 39,419 42,947 76,846
-------- -------- -------- -------- --------
Total benefits............. 422,948 415,668 437,382 450,196 475,817
Insurance and general expense. 173,806 162,837 162,831 192,810 218,388
Interest expense.............. 2,916 2,189 3,276 5,054 4,958
Amortization of deferred
policy acquisition costs(1).. 95,748 100,715 76,875 100,073 69,199
-------- -------- -------- -------- --------
Total benefits and
expenses.................. 695,418 681,409 680,364 748,133 768,362
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................ 13,320 (25,436) 18,764 26,022 31,722
Income taxes (benefit)........ 4,448 (8,477) 6,619 8,873 10,754
-------- -------- -------- -------- --------
Net income (loss)............. 8,872 (16,959) 12,145 17,149 20,968
Preferred stock dividends..... 2,039 2,039 2,021 1,904 1,805
-------- -------- -------- -------- --------
Income (loss) applicable to
common stockholders.......... $ 6,833 $(18,998) $ 10,124 $ 15,245 $ 19,163
======== ======== ======== ======== ========
PER SHARE DATA:
Net income (loss) per common
share:
Primary...................... $ 1.02 $ (2.85) $ 1.51 $ 2.36 $ 2.44
Fully diluted................ 1.02 (2.85) 1.26 1.58 1.85
Average common and common
equivalent shares outstanding
(in thousands):
Primary...................... 6,699 6,660 6,724 6,459 7,839
Fully diluted................ 8,234 8,195 10,731 12,734 12,608
Ratio of earnings to fixed
charges(2)................... 5.0x -- 5.7x 5.3x 6.1x
</TABLE>
- --------
(1) Includes the effect of a write-off of DAC in 1992 and 1994 of
approximately $30.0 million and $16.7 million, respectively. See "Risk
Factors--Recoverability of Deferred Policy Acquisition Costs" and
"Management's Discussion and Analysis of Results of Operations and
Financial Condition--Deferred Policy Acquisition Costs." The write-offs
were primarily related to certain major medical policies.
(2) Fixed charges consist of interest expense on indebtedness, amortization of
debt issuance costs and the portion of operating leases that are
representative of the interest factor. Fixed charges do not include
interest on annuities and financial products. Earnings are computed by
adding interest expense on indebtedness, amortization of debt issuance
costs and the interest portion of rent expense to pre-tax earnings from
continuing operations. The earnings were inadequate to cover fixed charges
by $25.4 million in 1992.
17
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1995 1995
1991 1992 1993 1994 ACTUAL AS ADJUSTED(1)
-------- -------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments....... $528,725 $568,349 $ 674,206 $ 723,837 $1,042,592 $1,055,642
Deferred policy
acquisition costs...... 313,453 269,674 260,432 225,618 219,874 219,874
Total assets............ 969,190 978,689 1,108,271 1,075,700 1,558,921 1,574,909
Policy liabilities...... 776,571 805,696 903,105 868,608 1,214,465 1,214,465
Short-term notes
payable................ 6,371 12,931 5,575 20,093 13,534 4,191
Long-term notes payable. 21,600 25,170 1,125 2,520 21,504 3,779
8% Convertible
Subordinated
Debentures............. -- -- 57,477 57,427 9,695 9,695
Convertible Subordinated
Notes Due 2003......... -- -- -- -- -- 65,000
$2.125 Preferred Stock.. 23,990 23,990 23,675 21,682 21,222 --
Stockholders' equity.... 75,470 62,732 68,872 68,328 144,574 143,852
Book value per share.... 11.39 9.21 10.86 11.55 14.35 14.28
Debt and preferred stock
as a percentage of
total
capitalization(2)...... 40.8% 49.7% 56.1% 59.8% 31.3% 36.5%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1991 1992 1993 1994 1995
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Statutory capital &
surplus(3)............. $ 72,600 $ 82,432 $ 106,567 $ 124,284 $ 115,423
Risk based capital
ratios(3)(4)
Pioneer Life Insurance
Company of Illinois... -- -- 336% 342% 287%
National Group Life.... -- -- 386% 410% 350%
Manhattan National
Life.................. -- -- 566% 866% 571%
Connecticut National
Life.................. -- -- 449% 984% 943%
Accident & Health
Ratios(5)
Major Medical:
Loss ratio............. 59.9% 66.3% 67.1% 63.0% 63.1%
Expense ratio.......... 42.3 48.9 34.5 41.4 38.0
---------- ----------- ----------- ----------- -----------
Total Major Medical.. 102.2% 115.2% 101.6% 104.4% 101.1%
Senior:
Loss ratio............. 67.1% 66.5% 63.5% 61.1% 65.9%
Expense ratio.......... 33.4 33.0 34.5 36.5 34.1
---------- ----------- ----------- ----------- -----------
Total Senior......... 100.5% 99.5% 98.0% 97.6% 100.0%
Collected Cash Premium:
Major Medical.......... $ 289,622 $ 298,015 $ 349,050 $ 426,117 $ 393,450
Senior................. 308,496 270,915 258,145 234,595 226,489
Life & Annuity......... 47,305 41,679 47,201 71,310 80,493
Gross life insurance in-
force(3)............... 9,141,000 10,339,000 11,823,000 12,582,000 17,743,000
Pre-tax operating income
(loss)(6).............. 9,223 (25,389) 20,100 26,404 32,889
</TABLE>
- --------
(1) Adjusted to give effect to the sale of the Notes offered hereby and the use
of the estimated net proceeds therefrom. See "Use of Proceeds." Does not
give effect to the acquisition of Universal Fidelity. See "Use of Proceeds"
and "Capitalization."
(2) Debt represents the aggregate of long-term notes payable, short-term notes
payable and the 8% Debentures, and, as adjusted, the Notes. Total
capitalization represents debt, preferred stock and stockholders' equity.
On a pro forma basis, after giving effect to the sale of the Notes offered
hereby, the use of the estimated proceeds therefrom and the incurrence of
indebtedness in connection with the acquisition of Universal Fidelity, debt
and preferred stock as a percentage of total capitalization at December 31,
1995 would have been 39.9%. See "Capitalization."
(3) Calculated at the end of the period shown.
(4) Risk based capital rules were adopted for annual reporting beginning
December 31, 1993. The calculated ratios are based on the authorized
control level as filed in the Company's individual insurance subsidiaries'
annual statutory financial statements.
(5) Expense amounts include principally renewal commissions, amortization of
DAC, general insurance expenses and premium taxes. The expense and loss
ratios are calculated based on earned premium and exclude the effects of
net investment income, realized investment gains (losses), policy fees and
the financial results of the Company's non-insurance subsidiaries.
(6) Represents the Company's income or loss before income taxes calculated on a
GAAP basis excluding the effect of realized investment gains and losses.
The 1995 amount also excludes approximately $5.2 million in payments made
to converting bondholders and other expenses relating to the conversion of
the 8% Debentures. The 1991 amount excludes $3.8 million of additional life
and annuity deferred policy acquisition cost amortization caused by higher
than expected investment gains.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
Fiscal Year 1995 Compared to Fiscal Year 1994
The information set forth below is based on the Company's major product
lines.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Group Medical (1)........................................ $457,633 $430,885
Senior Health and Life (2)............................... 235,031 236,556
Life Insurance........................................... 71,075 115,545
Medical Utilization Management........................... 10,416 17,098
-------- --------
Total.................................................. $774,155 $800,084
======== ========
Pre-tax operating income (3)
Group Medical (1)........................................ $ 12,065 $ 20,344
Senior Health and Life (2)............................... 12,469 11,604
Life Insurance........................................... 8,695 7,669
Medical Utilization Management........................... 2,026 739
-------- --------
Total pre-tax operating income before corporate expense
and interest (3)...................................... 35,255 40,356
Corporate expense and interest........................... (8,851) (7,467)
-------- --------
Total (3).............................................. $ 26,404 $ 32,889
======== ========
</TABLE>
- --------
(1) Excludes revenues from life insurance products marketed by the Group
Medical Division but issued by the Life Insurance Division. For purposes
of the discussion set forth herein, the Company has included the revenue
and pre-tax income generated from the sale of a policy in the results of
operation of the division which issued the policy.
(2) Excludes revenues from life insurance products marketed by the Senior
Health and Life Division but issued by the Life Insurance Division. For
purposes of the discussion set forth herein, the Company has included the
revenue and pre-tax income generated from the sale of a policy in the
results of operations of the division which issued the policy.
(3) Represents the Company's income before taxes, excluding the effects of
realized investment gains and losses. The 1995 amount also excludes
approximately $5.2 million in payments made to converting bondholders and
other expenses relating to the conversion of the 8% Debentures.
Group Medical Division
Revenue. Total revenue in the Group Medical Division decreased $26.7
million, or 6%, from $457.6 million to $430.9 million. The decrease was
primarily due to a reduction of premium revenue on the Company's major medical
products of $26.9 million, or 6%, from $431.8 million to $404.9 million. A
major portion of the decrease in major medical premium revenue was due to the
Company's decision to market unaffiliated companies' HMO products in states
such as California, where competitive pressures and state reforms made it
difficult to underwrite the Company's indemnity products on a profitable
basis. In connection with the Company's decision to cease selling new products
in these states, the Company's career agency force submitted $28.2 million of
19
<PAGE>
annualized HMO premiums to unaffiliated companies during 1995. While these
premiums are not received by the Company, the Company receives marketing
commission overrides from the unaffiliated companies for this production. The
remaining decrease in major medical premium revenue was due to lower average
premiums on new issues due to the increased use of managed care products.
Net investment income decreased $2.7 million, or 26%, from $10.4 million to
$7.7 million, due to a reduction in invested assets caused by the decrease in
major medical in-force business and the general decline in interest rates.
Total realized investment losses decreased $0.6 million or 50% from $1.2
million to $0.6 million.
Other income increased $1.9 million, or 11%, from $16.6 million to $18.5
million, due to marketing commission overrides received from the sale of HMO
products of unaffiliated companies.
Benefits. The following table sets forth the earned premium, benefits, and
loss ratios for products issued by the Group Medical Division:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Earned premium (1).................................... $443,599 $414,160
Benefits (1).......................................... 279,419 261,336
Loss ratio............................................ 63.0% 63.1%
</TABLE>
- --------
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
The Company has historically held reserve margins in its accident and health
claims reserve to provide for potential adverse deviation. Based on a review
of prior year reserve developments, the Company reduced margins in the major
medical claims reserves in 1994 by approximately $10.4 million. Excluding the
reduction in claim reserve margins, the 1994 major medical loss ratio was
65.3%. Improvement in the loss ratio in 1995 was due to continued increases in
PPO penetration and higher claim costs in 1994.
Insurance and General Expenses. Insurance and general expenses increased
$2.6 million, or 2%, from $116.9 million to $119.5 million. The expense ratio
increased in 1995 due to system development costs, consolidation of claim
operations, and the 6% drop in premium revenue.
The amortization of DAC decreased $24.3 million, or 39%, from $62.3 million
to $38.0 million. The decrease was due to a $16.7 million write-off of DAC in
1994, the lower 1995 new business levels, and the decline in first-year
commission rates.
Senior Health and Life Division
Revenue. Total revenue in the Senior Health and Life Division remained
relatively constant. Senior health premium decreased $6.3 million, or 3%, from
$227.3 million to $221.0 million. While the total new Medicare supplement
business and new long-term care business increased, these increases were
offset by a decrease in the total senior health premium due to lapses from the
current in-force block of business and the fact that a greater percentage of
the in-force block of business consisted of standardized Medicare supplement
products on which the average premium per policy was lower due to benefit and
agent compensation changes.
Net investment income increased $3.2 million, or 57%, from $5.6 million to
$8.8 million, primarily due to a 10-basis point improvement in yields and
increased invested assets. The total realized gains increased $4.2 million
from $0.9 million to $5.1 million.
20
<PAGE>
Benefits. The following table sets forth the earned premium, benefits, and
loss ratios for senior health products:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Earned premium (1).................................... $225,604 $217,382
Benefits (1).......................................... 137,853 143,226
Loss ratio............................................ 61.1% 65.9%
</TABLE>
- --------
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
The loss ratio on the Senior Health and Life Division's major products,
Medicare supplement policies, was higher during the first two quarters of 1995
due to increased utilization on the standardized Medicare supplement products.
Insurance and General Expenses. The expense ratio remained relatively
unchanged. The decline in administrative expense levels was offset by an
increase in marketing expenses associated with new marketing initiatives. See
"Business--Products and Services."
The amortization of DAC decreased $8.2 million, or 28%, from $29.8 million
to $21.6 million. The decreased level of amortization was due to a decline in
the level of first-year costs deferred due to lower agent compensation levels
and improved persistency on the in-force Medicare supplement business.
Life Insurance Division
Revenue. Total revenue in the Life Insurance Division increased $44.4
million, or 62%, from $71.1 million to $115.5 million. The increase was due
primarily to the acquisition of CNL in the first quarter of 1995 which added
$5.8 million in premium and $23.2 million in investment income. The remaining
increase was due to increased sales of the senior life insurance product
marketed in conjunction with Medicare supplement and long-term care policies.
Net investment income increased $27.5 million, or 102%, from $26.9 million
to $54.4 million. This increase was primarily due to the acquisition of CNL.
Benefits. Total life and annuity policy benefits increased $33.9 million, or
79%, from $42.9 million to $76.8 million. Approximately $24.4 million of this
increase was due to the acquisition of CNL and the remaining amount was due to
increased senior life insurance in-force. The senior life mortality experience
exceeded that which was developed in pricing and the Company has initiated
rate increases and modification to underwriting procedures to improve
profitability. The mortality experience on the remaining block of business was
less than projected.
Insurance and General Expenses. Insurance and general expenses increased
$10.4 million, or 90%, from $11.6 million to $22.0 million. The increase in
general expenses and commissions was primarily due to the increase in the in-
force block of business, legal fees associated with reinsurance litigation
which was settled in 1995, and the acquisition of CNL. The unit cost of
administration per policy in-force remained relatively constant in 1995.
The amortization of DAC remained relatively unchanged, with the increase in
senior life amortization offsetting a decrease in the amortization on the
traditional term life block of business.
21
<PAGE>
Medical Utilization Management Division
Total revenue increased $6.7 million, or 64%, from $10.4 million to $17.1
million. The increase in revenue was primarily due to expanded sales and the
acquisition of ACMG in the third quarter of 1995.
Pre-tax income decreased $1.3 million, or 65%, from $2.0 to $0.7 million.
The decrease in profitability was due to expenses related to the development
of PPOs and HMOs in selected states. The division expects continued pressure
on earnings during 1996 as it continues development of these managed care
programs. The Company has targeted its managed care development efforts in
geographic locations where it already has high concentrations of policyholders
and sales agents.
Corporate Expenses
Corporate expenses decreased $1.4 million, or 16%, from $8.9 million to $7.5
million (excluding the $5.2 million paid to holders of the Company's 8%
Debentures and other expenses in connection with the conversion of the 8%
Debentures, in the third quarter of 1995). Interest expense decreased $0.3
million, or 6%, from $4.9 million to $4.6 million, primarily due to the
utilization of a portion of the Company's Credit Facility beginning in the
fourth quarter of 1994, offset in part by a decrease in interest expense due
to the conversion of the Company's 8% Debentures.
Consolidated Financial Condition and Results of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994
Net income. The Company's consolidated net income increased $3.9 million, or
23%, from $17.1 million to $21.0 million. This increase was due primarily to
improved profitability in the Group Medical Division as a result of improved
loss ratios and a lower level of DAC amortization.
Premiums and policy charges. Total premiums and policy charges decreased
$17.1 million, or 2%, from $704.1 million to $687.0 million. This decrease was
due primarily to the decrease in accident and health premiums of $33.2
million, or 5%, which was due primarily to a decrease in premiums from major
medical products of $26.9 million, or 6%. The decrease in premiums was
primarily due to the Company's decision to market unaffiliated companies' HMO
products in states such as California, where competitive pressures and state
reforms made it difficult to underwrite the Company's indemnity products on a
profitable basis. Total health insurance premiums attributable to Medicare
supplement and long-term care products remained relatively constant. Life
insurance premiums increased $16.2 million, or 36%, primarily due to the
acquisition of CNL and new business sales.
Net investment income. Net investment income increased $28.2 million, or
66%, from $42.8 million to $71.0 million. Invested assets increased 44% to
$1,043 million and annualized investment yields increased from 6.3% to 7.0%.
These increases were primarily due to the acquisition of CNL.
Other revenue. Other income and realized investment gains and losses
increased $14.8 million, or 54%, from $27.3 million to $42.1 million. The
increase in other income was due to increased sales by the Medical Utilization
Management Division and the acquisition of ACMG in July 1995. The remaining
other income generated by the Company's non-insurance subsidiaries remained
relatively unchanged.
Benefits. Total benefits increased $25.6 million, or 6%, from $450.2 million
to $475.8 million. Accident and health benefits, which include the change in
unearned premiums, decreased $8.2 million, or 2%, from $407.2 million to
$399.0 million. Life and annuity benefits increased $33.9 million, or 79%.
This increase was due to the acquisition of CNL and increased senior life
insurance in-force.
Insurance and general expenses. Insurance and general expenses (which
includes non-deferred commission compensation to agents) increased $25.6
million, or 13%, from $192.8 million to $218.4 million. Expenses for
22
<PAGE>
the Medical Utilization Management Division increased due to the increase in
sales and the acquisition of ACMG. Expenses in the insurance divisions
increased due to the development of new marketing and sales incentive
programs, system development costs, and the acquisition of CNL. Corporate
expenses increased $4.0 million primarily due to $5.2 million in payments made
to converting bondholders and other expenses relating to the August 1995
conversion of the Company's 8% Debentures.
Amortization of DAC. Amortization of DAC decreased $30.9 million, or 31%,
from $100.1 million to $69.2 million. The decrease was primarily due to an
adjustment in 1994 to the DAC asset related to certain group and individual
medical business, a lower level of group major medical new business and
improved persistency on Medicare supplement business.
Income tax rate. The effective federal income tax rate was 34% due to the
increased investment in tax-exempt securities included in the Company's
portfolio.
Other. Investments, premiums and other receivables, amounts on deposit and
due from reinsurers, accrued investment income and other assets increased
principally due to the acquisition of CNL. The decrease in short-term notes
payable and the increase in long-term notes payable resulted from the
conversion of the Company's line of credit agreement at December 31, 1994 to a
term loan during the first quarter of 1995. General expenses and other
liabilities, and amounts due to reinsurers increased due primarily to the
acquisition of CNL. The remaining balance sheet amounts remained relatively
consistent with the amounts at December 31, 1994.
Fiscal Year 1994 Compared to Fiscal Year 1993
Net income. The Company's net income increased $5.0 million, or 41%, from
$12.1 million to $17.1 million. The increase was due to profits from
Continental Life & Accident Company ("CLAC"), improved health loss ratios in
the Senior Health and Life Division, expense reductions and improved spreads
in the Life Insurance Division, and increased revenue and margins in the
Medical Utilization Management Division. Total revenues increased $75.0
million, or 11%. The increase in revenue was primarily due to the increase in
premiums and policy charges of $63.1 million.
Premiums and policy charges. Accident and health insurance premiums
increased $57.5 million, or 10%. Premiums from major hospital plans increased
$81.5 million, primarily due to the acquisition of CLAC completed in August
1993. Total premiums attributable to the remaining mix of Medicare supplement
and long-term care products decreased $24.0 million, or 10%.
Net investment income. Net investment income increased $2.5 million, or 6%.
Annualized investment yields decreased from 6.8% to 6.3%. The decrease in the
investment yield was principally due to the shortening of the Company's
average duration and the increased emphasis on tax-exempt securities included
in the Company's portfolio.
Other revenue. Other income and realized investment gains and losses
increased $9.3 million, or 52%. The increase in other income was due to the
acquisitions of Healthcare Review Corporation ("HRC") and CLAC in August 1993.
In addition, the Company realized increased sales to unaffiliated customers by
the Medical Utilization Management Division and by its marketing subsidiaries.
Realized investment losses decreased $0.9 million, or 69%, from $1.3 million
to $0.4 million. The remaining other income generated by the Company's other
non-insurance subsidiaries remained relatively unchanged.
Benefits. Total benefits increased $12.8 million, or 3%. Life and annuity
benefits increased $3.5 million, or 9%, due to higher mortality on a closed
block of universal life and an increase in in-force business. Accident and
health benefits, which include the change in unearned premiums, increased $9.3
million, or 2%. The increase was due primarily to the increased amount of
collected premiums. The accident and health loss ratios decreased to 62% from
66%. The improved loss ratios were due primarily to a reduction in the group
medical claim reserve margins.
23
<PAGE>
Insurance and general expenses. General expenses as a percent of premiums
decreased due to the continued emphasis on cost reduction in the Senior Health
and Life Division, the Group Medical Division and the Life Insurance Division.
However, insurance and general expenses (which includes non-deferred
commission compensation to agents) increased $30.0 million, or 18%. The
increase was primarily caused by the increase in premium and policy charges
and the acquisitions of HRC and CLAC.
Interest expense. Interest expense increased due to the issuance of the 8%
Debentures in July 1993 and the increase in other notes payable in 1994.
Amortization of DAC. Amortization of DAC increased $23.2 million, or 30%.
The increase was due primarily to a write-down in the DAC asset on certain
group and individual medical business issued in recent years. Future losses
were projected on these blocks of business due primarily to mandated state
healthcare reforms. The Company continues to monitor the profitability of its
business. Increased lapses or unprofitability on the business could result in
an increase in the amortization rate of DAC, which would adversely impact
future earnings.
Income tax rate. The effective tax rate of the Company decreased to
approximately 34% from 35%. The decrease was due to the increased investment
in tax-exempt securities included in the Company's portfolio.
Other. The Company acquired the building containing its corporate
headquarters in Schaumburg, Illinois, in January 1994 resulting in the
increase in investment real estate. Cash decreased due to increased investment
in short-term investments. Reinsurance receivables decreased due to the timing
of payments due from reinsurers. DAC decreased as a result of a write-down in
the asset for certain medical business and the decrease in new business issued
in 1994. General expenses and other liabilities decreased due to the timing of
payments for federal income taxes and amounts due to reinsurers. Notes payable
increased due to the utilization of the line of credit by the Company.
DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a DAC asset is established
to match properly the costs of writing new business against the expected
future revenues or gross profits from the policies. The costs which are
capitalized and amortized consist of first-year commissions in excess of
renewal commissions and certain home office expenses related to selling,
policy issue, and underwriting.
The deferred acquisition costs for accident and health policies and
traditional life policies are amortized over future premium revenues of the
business to which the costs are related. The rate of amortization depends on
the expected pattern of future premium revenues for the block of policies. The
scheduled amortization for a block of policies is established when the
policies are issued. However, the actual amortization of DAC will reflect the
actual persistency and profitability of the business. For example, if actual
policy terminations are higher than expected or if future losses are
anticipated, DAC could be amortized more rapidly than originally scheduled or
written-off, which would reduce earnings in the applicable period. See "Risk
Factors--Recoverability of Deferred Policy Acquisition Costs."
EFFECT OF INFLATION
In pricing its insurance products, the Company gives effect to anticipated
levels of inflation; however, the Company believes that the high rate of
medical cost inflation during recent years has had an adverse impact on its
major hospital accident and health claims experience. The Company continues to
implement rate increases, as permitted by state regulations, in response to
this experience.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and met
primarily by operations of its subsidiaries. The insurance subsidiaries'
primary sources of cash are premiums, investment income, and investment sales
and maturities. The insurance subsidiaries' primary uses of cash are operating
costs, policy acquisition costs, payments to policyholders and investment
purchases. In addition, liquidity requirements of the holding company are
created by the dividend requirements of the $2.125 Preferred Stock, Common
Stock dividends, interest payments on the 8% Debentures and other debt service
requirements. The Company intends to use a portion of the net proceeds of this
offering to redeem all of the outstanding shares of $2.125 Preferred Stock.
The ability of the insurance subsidiaries to pay dividends and make other
payments to the Company is subject to state insurance department regulations
which generally permit dividends and other payments to be paid for any twelve
month period in amounts equal to the greater of (i) net gain from operations
in the case of a life insurance company or net income in the case of all other
insurance companies for the preceding calendar year or (ii) 10% of surplus as
of the preceding December 31st. Any dividends in excess of these levels
require the prior approval of the Director or Commissioner of the applicable
state insurance department. The amount of dividends that the Company's
insurance subsidiaries could pay in 1996 without prior approval is
approximately $3.7 million. The liquidity requirements of the holding company
have historically been met through dividends from the non-insurance
subsidiaries which receive payments primarily from fees charged for
administrative and marketing services provided to the Company's insurance
subsidiaries and other unaffiliated companies. Dividends from the insurance
subsidiaries could be required in the future to meet such liquidity
requirements.
Notwithstanding the foregoing, if insurance regulators otherwise determine
that payment of a dividend or any other payment to an affiliate would be
detrimental to an insurance subsidiary's policyholders or creditors because of
the financial condition of the insurance subsidiary or otherwise, the
regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval.
The Company's insurance subsidiaries require capital to fund acquisition
costs incurred in the initial year of policy issuance and to maintain adequate
surplus levels for regulatory purposes. These capital requirements have been
met principally from internally generated funds, including premiums and
investment income, and capital contributions from the holding company.
The Company has offered commission advances to certain of its agents and
marketing organizations which consist primarily of annualization of first year
commissions. This means that when the first year premium is paid in
installments, the Company will advance a percentage of the commissions that
the agent would otherwise receive over the course of the first policy year.
The Company, through a subsidiary, has entered into agreements with an
unaffiliated corporation to provide financing for a portion of its agent
commission advance program through the sale of agent receivables. Proceeds
from such sales for 1995 and 1994 were $20.9 million and $24.4 million,
respectively. The termination date of the current program is December 31,
1997, subject to extension or termination as provided therein. The Company has
retained approximately $13.8 million of agent advances at December 31, 1995.
In July 1993, the Company issued $57.5 million of its 8% Debentures. Net
proceeds from the offering totaled approximately $54.0 million. Interest on
the 8% Debentures is payable semi-annually on July 15 and January 15 of each
year. The 8% Debentures are convertible into the Company's Common Stock at any
time prior to maturity, unless previously redeemed, at a conversion price of
$11.75 per share. In August 1995, the Company accepted the conversion of $46.9
million of the outstanding 8% Debentures. The effect of the conversion was an
increase in stockholders' equity of $45.3 million and a charge to income of
$3.5 million, net of taxes, for payments made to converting bondholders and
other expenses relating to the conversion. The 8% Debentures are not
redeemable prior to August 15, 1996. After August 15, 1996, the 8% Debentures
are redeemable, in whole or in part, at the Company's option, at 100% of the
principal amount thereof plus accrued and unpaid interest to the redemption
date, if the closing sale price of the Company's Common Stock on the
25
<PAGE>
NYSE is greater than or equal to 135% of the then effective conversion price
for the 8% Debentures for the 30 consecutive days immediately preceding the
date of the notice of the redemption. In addition, the 8% Debentures are
redeemable, in whole or in part, at the Company's option, after July 15, 1998
at a rate of 104% of the principal amount thereof and after July 15, 1999 at a
rate of 103%, in each case, plus accrued and unpaid interest to the redemption
date. The terms and conditions of the 8% Debentures are set forth in full in
the Indenture between the Company and Harris Trust and Savings Bank, as
Trustee, a copy of which was filed as an exhibit to the Company's Registration
Statement on Form S-2 relating thereto.
In August 1993, a non-insurance subsidiary of the Company borrowed $1.5
million from a commercial bank to finance the acquisition of HRC. Interest on
the unsecured note is payable quarterly at the lending bank's prime rate of
interest. The note requires principal repayments of $0.08 million per quarter
plus interest through July 31, 1998.
In December 1994, a non-insurance subsidiary of the Company borrowed $0.4
million from a commercial bank to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at the
lending bank's prime rate of interest and is payable quarterly, with principal
payments of $0.02 million, through December 1, 1999.
In January 1995, an insurance subsidiary of the Company issued a note in the
amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL.
Interest is payable on the note at the average earnings rate of these
investments, currently 8%.
Under the March 1995 Term Loan, the Company borrowed $15.0 million from a
group of banks to repay amounts borrowed under the Company's Credit Facility
in conjunction with the acquisition of CNL. Interest on the March 1995 Term
Loan is payable quarterly and is based upon either a prime rate, LIBOR or a CD
rate, plus a margin. The March 1995 Term Loan bore interest at 5% per annum at
March 1, 1996. The March 1995 Term Loan is unsecured and requires principal
payments of $0.5 million plus interest per quarter with a final payment on
December 31, 1999.
In June 1995, a non-insurance subsidiary of the Company borrowed $1.2
million from a commercial bank in order to fund HMO development. Interest on
this secured facility is payable monthly at a fixed rate of 8.8%, with
principal due at maturity. This facility matures in June, 1996.
In June 1995 a non-insurance subsidiary of the Company entered into a $1.0
million line of credit arrangement with a commercial bank in order to finance
the subsidiary's working capital needs. Interest on this secured facility is
payable monthly at the lending bank's prime rate of interest. This facility
matures in June 1996.
Under the August 1995 Term Loan, the Company borrowed $11.1 million from a
group of banks to repay amounts borrowed under the Company's Credit Facility
to, among other things, fund payments to converting bondholders and other
expenses relating to the conversion of the 8% Debentures. Interest on the
August 1995 Term Loan is based on either a prime rate, LIBOR or a CD rate,
plus a margin. The August 1995 Term Loan bore interest at 8.25% per annum at
March 1, 1996. The unsecured note requires principal repayments of $0.9
million plus interest per quarter through August 31, 1998.
In September 1995, a non-insurance subsidiary of the Company borrowed $3.3
million from a finance company to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at a
fixed rate of 7.81% and has principal and interest payments of $0.04 million
payable monthly through August 2005.
The Company's Credit Facility provides a line of credit arrangement for
short-term borrowings of up to $27.0 million through April 1996, of which $3.5
million was used at December 31, 1995. Amounts borrowed under the Credit
Facility accrue interest at a rate per annum based upon either a prime rate,
LIBOR or a CD rate,
26
<PAGE>
plus a margin. At March 1, 1996, the Credit Facility bore interest at 8.25%
per annum. The line of credit arrangement can be terminated, in accordance
with the agreement, at the Company's option. The Company expects that the
Credit Facility will be extended at its maturity.
The Company's debt agreements include provisions requiring maintenance of
minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.
In March, June, September and December 1995, the Company's Board of
Directors announced a quarterly Common Stock dividend of $.045 per share, for
a total of 18 cents per share in 1995. In February 1996, the Board of
Directors announced a quarterly stock dividend of $.055 per share.
Management believes that the diversity of the Company's investment portfolio
and the liquidity attributable to the large concentration of investments in
highly liquid United States government agency securities provide sufficient
liquidity to meet foreseeable cash requirements. See "Business--Investments."
Because the Company's insurance subsidiaries experience strong positive cash
flows, including monthly cash flows from mortgage-backed securities, the
Company does not expect its insurance subsidiaries to be forced to sell the
held to maturity investments prior to their maturities and realize material
losses or gains. Although the Company has the ability and intent to hold those
securities to maturity, there could occur infrequent and unusual conditions
under which it would sell certain of these securities. Those conditions would
include a significant deterioration of the issuer's creditworthiness,
significant changes in tax law affecting the taxation of securities, a
significant business acquisition or disposition, and changes in regulatory
capital requirements or permissible investments.
Life insurance and annuity liabilities are generally long-term in nature
although subject to earlier surrender as a result of the policyholder's
ability to withdraw funds or surrender the policy, subject to surrender and
withdrawal penalties. The Company believes its policyholder liabilities should
be backed by an investment portfolio that generates predictable investment
returns. The Company seeks to limit exposure to risks associated with interest
rate fluctuations by concentrating its invested assets principally in high
quality, readily marketable debt securities of intermediate duration and by
attempting to balance the duration of its invested assets with the estimated
duration of benefit payments arising from contract liabilities. See
"Business--Investments."
In March 1996 the Company acquired all of the outstanding stock of Universal
Fidelity for a total purchase price of approximately $26.0 million. In order
to finance the acquisition, the Company incurred $26 million of additional
indebtedness, including $7.8 million of intercompany indebtedness and $5.8
million of notes issued to the sellers. The Company expects to refinance the
intercompany indebtedness after completion of this offering. The seller notes
bear interest at an annual rate of 6%, are due in two equal installments on
the first and second anniversary of the closing and are backed by letters of
credit. Universal Fidelity's business is primarily senior health insurance,
including Medicare supplement, long-term care and other supplemental
insurance.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of a new long-lived assets accounting standard, a new
stock-based employee compensation accounting standard and the impact of these
standards on the financial statements of the Company, see Note 2 of Notes to
Consolidated Financial Statements.
27
<PAGE>
BUSINESS
PRODUCTS AND SERVICES
The Company markets and underwrites health insurance, life insurance and
annuities and provides medical utilization management services throughout the
United States. The Company sells products and provides its services through
four marketing divisions: Senior Health and Life Division, Group Medical
Division, Life Insurance Division and Medical Utilization Management Division.
The Company's distribution systems for its products have increased from
approximately 12,000 agents in 1986 to nearly 45,000 agents at the end of
1995.
Senior Health and Life Division
The products marketed by the Senior Health and Life Division include
Medicare supplement, long-term care, home health care, various specialty
health coverages, life insurance and annuities. This division markets these
products to individuals age 65 and older and underwrites and issues all such
products, except the life insurance and annuity products which are
underwritten and issued by the Life Insurance Division.
The following table sets forth the earned premium, losses and loss
adjustment expenses incurred and loss ratios for the Company's senior health
products. Senior health premiums have been impacted by federally mandated
standardization of Medicare supplement policies. This standardization began in
1992 and included fixed benefits and reductions in agent commissions,
especially in the case of replacement of an existing Medicare supplement
policy. During this same period, the Company altered its marketing emphasis,
reducing the number of products available for sale in selected states until
new products were developed and priced. The combination of these changes had
the effect of decreasing new sales revenue for these policies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Earned premium (1)................................ $243,482 $225,604 $217,382
Benefits (1)...................................... 154,561 137,853 143,226
Loss ratio........................................ 63.5% 61.1% 65.9%
</TABLE>
- --------
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
In the Senior Health and Life Division, the Company may adjust health
insurance premium rates by class, policy form and state in which the policy is
issued, subject to applicable regulation, in order to maintain anticipated
loss ratios. Since premium rate increases can increase policy lapses,
conservation and customer service activities are emphasized. The Senior Health
and Life Division follows a proactive approach involving the examination of
health premium rates on a monthly basis, including comparisons of pricing
structure to actual claims experience by product line and state. This ongoing
analysis provides lead time for the orderly adjustment of premiums.
Medicare Supplement. Since the inception of the federal Medicare program in
1966, the Company has offered policies designed to supplement Medicare
benefits and is now the fourth largest issuer of individual Medicare
supplement insurance in the nation, excluding Blue Cross and Blue Shield-
related entities, based on direct premiums earned. Medicare supplement
policies provide coverage for many of the medical expenses which the Medicare
program does not cover, such as deductible and coinsurance costs and specified
losses which exceed the federal program's maximum benefits.
28
<PAGE>
In 1991, the NAIC defined ten model Medicare supplement policies. In states
which have adopted the NAIC model, only those ten policies can be sold. In
most states, the Company markets eight of the ten model policies-- those which
the Company believes are most applicable to its target market. All states have
adopted either the NAIC model or similar legislation which specifically
defines policy models. Sales of the Company's Medicare supplement products
increased 20% in 1995 on an annualized premium basis.
The federal government began a test program in 1992, allowing 15 specified
states to participate in a "Medicare Select" program. Medicare Select policies
combine the cost advantages of a preferred provider organization with a
Medicare supplement policy to provide a reduced premium cost for
policyholders. Utilization of specified hospitals, which waive certain
deductibles covered by the Medicare supplement policy, allows the Company to
reduce the premium charged. In 1995, the federal government expanded the
Medicare Select program to all states. Although the market for this product is
just developing, the Company sells Medicare Select policies in a number of
states and has plans to expand sales nationally.
Long-Term Care and Home Health Care. The Senior Health and Life Division
also offers long-term care and home health care products designed principally
for senior citizens. Long-term care policies generally provide specified per
day benefits for nursing home confinements, within prescribed limits. Home
health care policies provide specified per day benefits for required health
services received in the home and comprehensive coverages which provide
benefits for all levels of nursing home care, home health care and adult day
care. In 1995, the Company developed and introduced a new series of
"Independent Choice" long-term care and home health care plans which provide
greater flexibility of benefit use and include care coordination features to
help lower benefit costs. In 1995, annualized sales of the Company's long-term
care and home health care products increased by nearly 288% from $3.4 million
to $13.2 million. The Company's strategy is to cross-sell these products to
customers who have already purchased the Company's Medicare supplement
product.
The Company believes that the market for long-term care and home health care
insurance could increase if the federal government were to enact proposed tax
legislation to provide tax deductibility for long-term care insurance
premiums. While these changes have been proposed, the Company cannot predict
if or when they will be enacted. See "--Health Care Reform."
Specialty Health and Other. The Senior Health and Life Division offers
various specialty health products which typically are sold in conjunction with
the Company's principal health products. These policies include hospital
indemnity, private duty nursing and cancer plans. Additionally, the Company
intends to develop and market managed care organizations for seniors as the
demand for such products expands. The Company believes that the market for
senior managed care products will grow as health care costs continue to grow.
It is estimated that approximately 10% of Medicare beneficiaries in the nation
participate in HMOs. There are many states with very low penetration of
managed care in the senior market, including states with a high concentration
of Medicare beneficiaries. The Company intends to take advantage of this
opportunity by utilizing its position in the senior market and its managed
care capability to market managed care products to senior citizens.
Life Insurance and Annuities. The Senior Health and Life Division markets
life insurance and annuities which are issued by the Life Insurance Division
to individuals age 65 and over. In 1994, the Company began selling smaller
face-amount whole life insurance policies specifically designed to cover final
expenses for senior citizens, including funeral expenses and other expenses
that otherwise would be paid by the insured's family. During 1995, sales of
these products increased 121% on an annualized premium basis to $16.8 million
from $7.6 million. As part of its cross-selling strategy, the Company
automatically offers a pre-approved (already underwritten for issue) cash
burial life insurance policy with all Medicare supplement policies issued to
customers age 66-79. The Company also offers annuity products specifically
designed for seniors. These products provide an attractive investment
alternative to seniors, offering higher interest rates than bank savings
accounts and certificates of deposit and the ability to receive monthly
payouts during retirement years.
29
<PAGE>
Marketing. The Senior Health and Life Division markets its products and
services primarily to individuals age 65 and older through a distribution
system which, in 1995, grew from approximately 15,000 agents to nearly 22,000
agents, primarily as a result of the formation in mid-1995 of Markman
International, a 50/50 joint venture with Markman Company, which, prior to the
joint venture, had established itself as a leading independent marketer of
long-term care policies. Markman International serves as the national
marketing and distribution arm of the Senior Health and Life Division. The
Company intends to increase further the number of agents used by the Senior
Health and Life Division in 1996 and to enhance the Company's cross-selling
capabilities through increased agent training and packaging of products. The
agents receive extensive product and marketing information from the Company.
They also have access, through the Company, to lists of prospective customers
turning age 65 in their respective geographic areas and to a direct-mail lead-
generation system. By providing its agents with training, sales materials,
lead-generation programs and a full range of health and life insurance
products designed for senior citizens, the Company intends to increase both
sales to new customers and cross-sales to existing policyholders. The agents
receive commissions on each sale based on the type of product sold.
Group Medical Division
The Group Medical Division underwrites and markets small group and
individual hospital and medical products, including major hospital and
specialty health insurance policies, individually underwritten and issued. For
1993, 1994 and 1995, this division produced health insurance premium revenue
of approximately $357.8 million, $431.8 million, and $404.9 million,
respectively. This division also derives marketing commission revenue and
other fee income through marketing insurance and other products of
unaffiliated companies and associations with whom the Company has a marketing
relationship. This division's products and services are targeted primarily to
self-employed individuals and small business owners. The insureds in this
division also become prospects for the Senior Health and Life Division--when
they reach age 65, the Company automatically provides for conversion to a
Medicare supplement policy.
Pre-tax income increased in this division in 1995, as the Company continued
to make improvements in its management of the division's block of business
through close monitoring of claims costs, increased use of medical provider
networks and case management and the implementation of premium rate
adjustments as necessary.
The following table sets forth the earned premium, losses and loss
adjustment expenses incurred and loss ratios for the Group Medical Division's
products. The Company's loss ratios have varied over the years reflecting
changes in medical claim costs and the frequency of benefit utilization by its
insureds.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Earned premium (1)............................ $375,275 $443,599 $414,160
Benefits (1).................................. 251,955 279,419 261,336
Loss ratio.................................... 67.1% 63.0% 63.1%
</TABLE>
- --------
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
As in the Senior Health and Life Division, the Company may, in the Group
Medical Division, adjust health insurance premium rates by class, policy form
and state in which the policy is issued, subject to applicable regulation, in
order to maintain anticipated loss ratios. Since premium rate adjustments can
have the tendency to increase policy lapses, conservation and customer service
activities are emphasized. As with the Senior Health and Life Division, the
Group Medical Division follows a proactive approach involving the examination
of health
30
<PAGE>
premium rates on a monthly basis. The matching of pricing structure with
actual claims experience varies by product line and state. This ongoing
analysis provides lead time for the orderly adjustment of premiums.
The Group Medical Division intends to focus its efforts on increasing
administrative efficiency and claims-cost containment on its existing block of
business through, among other things, increased use of the Medical Utilization
Management Division's services, continued development of medical provider
networks and continued migration of its fee-for-service indemnity health
insurance customers to managed care products. As the regulatory environment
evolves, the Company will evaluate growth opportunities in this market.
Major Hospital. The Company offers major hospital insurance plans on an
individual basis and on a group trust (multiple employer trust) and
association basis and has issued master policies for such plans to several
trusts and associations. These plans are designed to cover in-hospital
expenses for self-employed individuals, small business owners, employees and
their families. Hospital, surgical and other medical expenses are covered on
an expense incurred basis with certain benefit limits after a prescribed
deductible. The Company provides products with alternatives such as increased
deductibles and different benefit structures designed to enable policyholders
to maintain insurance protection without increased premium rates. In 1994, the
Company introduced "ChoicePlus," a product which combines HMO-type wellness
features within a specific provider network along with in-network and out-of-
network indemnity benefits.
In December 1991, the NAIC adopted the Small Employers Availability Act (the
"SEA Act"). The SEA Act affects the rating and underwriting methodology that
can be applied to insurance coverage sold to small employers, generally
categorized as those employing 25 people or less. In response to the SEA Act,
the Company has modified and continues to modify its new products for sale in
those states that have adopted or are adopting the SEA Act or other health
care reforms.
Other. The Group Medical Division also derives revenue through sales of
products of unaffiliated insurance companies and other associations with whom
the Company has a marketing relationship. These products include medical
insurance for medium-sized groups (50 or more), employer self-funded plans,
flexible premium universal life insurance, disability income protection and
annuities. The Group Medical Division also markets HMO products in areas where
these products have a significant competitive advantage over traditional
indemnity insurance products. The HMO products are sold in selected states
through marketing relationships with regional HMOs. In addition to commission
revenue, sales of these HMOs provide the sales force with opportunities to
cross-sell the Company's other products. This division also markets membership
benefit packages to various national associations. These packages include
discounts on dental services, hotels/motels, airfares, prescription drugs,
vision and hearing aid equipment and other services.
Marketing. The Group Medical Division markets its products and services
primarily to self-employed individuals and small business owners. In 1995,
approximately 82% of this division's products was sold through a sales force
of approximately 1,700 career agents, and the remaining 18% was sold through a
brokerage system of 6,000 independent agents. These agents receive leads
through the Company's telemarketing subsidiary and compensation in the form of
commissions.
The Company's acquisition of Continental Marketing Corporation in connection
with the 1993 acquisition of CLAC added an efficient broker-to-broker
telemarketing distribution system to the Group Medical Division. This system
utilizes experienced sales representatives who contact brokers by phone to
promote the Company's products and provide the brokers with sales and
marketing assistance. The brokers are compensated for their sales through
commissions; the telemarketing representatives receive salaries from the
Company and bonuses based on meeting certain sales objectives.
Life Insurance Division
The Life Insurance Division's products include traditional life (term and
whole life), universal life and interest sensitive insurance and annuities.
Substantially all of the Company's life insurance policies are individually
underwritten and issued. This division's products and services are targeted
primarily to the middle
31
<PAGE>
income market. In addition, this division underwrites, issues and administers
the life insurance and annuity products marketed by the Senior Health and Life
Division. This division grew significantly when the Company acquired CNL in
January 1995.
The following table sets forth the breakdown of collected premium (computed
on a statutory-basis) among traditional life policies, interest sensitive and
universal life policies and annuities for the years shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Traditional............................................. $26,353 $32,238 $44,276
Interest Sensitive and
Universal Life Policies................................ 16,300 17,590 21,215
Annuities............................................... 10,004 22,807 19,639
------- ------- -------
Total............................................... $52,657 $72,635 $85,130
======= ======= =======
</TABLE>
For the fiscal year 1993, premiums collected from the Company's life
insurance products were approximately 24% first year and 76% renewal, the
fiscal year 1994 premiums were approximately 28% first year and 72% renewal,
and the fiscal year 1995 premiums collected were approximately 32% first year
and 68% renewal.
The Company's gross life insurance in force was as follows at the dates
shown:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Traditional............................................. $10,320 $10,803 $14,863
Interest Sensitive and
Universal Life Policies................................ 1,503 1,779 2,880
------- ------- -------
Total............................................... $11,823 $12,582 $17,743
======= ======= =======
</TABLE>
Traditional Life. The largest portion of the Life Insurance Division's
business is in term life insurance. The Company specializes in face amounts of
$100,000 to $500,000, sold to middle income families. Marketed under the name
"Super Saver Term," this series features low cost 5-, 10- and 15-year term
life insurance products.
For a number of years, the Company has offered individually underwritten
insurance on lives of persons who, to varying degrees, do not meet the
requirements of standard insurability. Higher premiums are charged for these
"impaired" or "substandard" lives, and, where the amount of insurance is large
or the risk is significant, a portion of the risk is reinsured. Approximately
10% of the Company's in-force life insurance could be categorized as "impaired
risk."
Interest Sensitive Life and Universal Life. The Company's interest sensitive
and universal life insurance products provide life insurance with rates of
return which are adjusted in relation to prevailing interest rates. The
policies permit the Company to change the rate of interest credited to the
policy from time to time, subject to certain minimum guaranteed rates.
Universal life insurance products credit current interest rates to cash value
accumulations, permit adjustments in benefits and premiums at the
policyholder's option, and deduct mortality and expense charges monthly. Under
other interest sensitive policies, premiums are flexible, allowing the
policyholders to vary the frequency and amount of premium payments, but
typically death benefit changes are not made by the policyholders. Some
universal life products offer lower premiums for non-smokers in good health.
For both universal life and other interest sensitive policies, surrender
charges, if any, are deducted from the policyholder's account value at the
time of surrender. No surrender charges are deducted if death benefits are
paid or if the policy remains in-force for a specified period.
32
<PAGE>
The Company's "Interest Sensitive Series" includes whole life policies
ideally suited for the impaired risk market. This product series provides
permanent protection with a fixed, guaranteed level premium and an interest
rate persistency bonus. The "Financial Lifestyle II" is a highly flexible
back-load universal life policy providing low-cost protection with tax-
deferred cash accumulation.
Annuities. The Company offers single and flexible premium deferred
annuities. An annuity contract generally involves the accumulation of premiums
at a compound interest rate until the maturity date, at which time the
policyholder can choose one of the various payment options. Options include
periodic payments during the annuitant's lifetime or the lifetime of the
annuitant and spouse, with or without a guaranteed minimum period; periodic
payments for a fixed period regardless of the survival of the annuitant; or
lump sum cash payment of the accumulated value. The Company's annuities
typically provide for the crediting of interest at rates set from time to time
by the Company, subject to certain minimum guaranteed rates.
Marketing. The Life Insurance Division markets its products primarily to
individuals in middle income levels through a nationwide network of
approximately 100 BGAs and MGAs who in turn contract with approximately 15,000
brokers and general agents. In addition, at the end of 1995, the Company
signed a marketing agreement with a national marketing company with
approximately 25,000 agents to distribute a new term insurance product with an
income benefit rider. The Company's BGAs, MGAs and agents receive compensation
through sales commissions.
Medical Utilization Management Division
The Medical Utilization Management Division provides a number of health care
coordination services to assist in the management of medical costs for
insurance companies, government agencies, self-insured businesses, unions,
third-party administrators, HMOs and PPOs, as well as the Company's Group
Medical Division. The services provided by this division include
precertification of inpatient and outpatient medical care, case management,
high-risk maternity review, long-term care case management and the development
and management of HMOs and PPOs. These services are designed to provide
negotiated medical provider rates along with close review of utilization in
order to impact positively total medical costs without adversely affecting the
quality of care.
The July 1995 purchase of ACMG, an Ohio-based healthcare management company,
increased revenues by $5.2 million in 1995 and provided the Company with the
capacity and expertise to develop and manage PPOs, HMOs and EPOs. During 1996,
the Company currently expects to have a limited number of HMOs and EPOs
operational in selected states where the Company has significant
concentrations of policyholders and the market for managed care is
undeveloped, although no assurance to that effect can be given. These HMOs and
EPOs will be marketed by the Company's Group Medical Division as part of the
Company's strategy to migrate its fee-for-service indemnity insurance
customers to managed care products. In addition, the Company will use a
similar strategy to develop PPOs and HMOs (Medicare risk contracts) for the
Senior Health and Life Division.
This division also provided significant claims expense savings for the Group
Medical Division in 1995 through programs such as utilization review and case
management. These savings were primarily passed on to customers in the form of
more competitive premium rates.
Revenues for this division increased 64% to $17.1 million in 1995, compared
to $10.4 million in 1994, due primarily to the July 1995 acquisition of ACMG
as well as to increased sales.
Marketing. This division markets its services to insurance companies,
government agencies, self-insured businesses, unions, third-party
administrators, HMOs and PPOs. Utilization management professionals conduct
direct selling activities and respond to requests for proposals from insurance
companies, large employers and consulting companies.
33
<PAGE>
PREMIUM DISTRIBUTION
The Company's insurance subsidiaries collectively are licensed to sell
insurance in 49 states and the District of Columbia. The importance to the
Company of particular states may vary over time as the composition of its
agency network changes. The geographic distribution of collected premiums
(before reinsurance) of the Company's subsidiaries in 1995 was as follows:
<TABLE>
<CAPTION>
TOTAL PERCENT
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Texas.................................................... $ 71,127 9.4%
Florida.................................................. 67,149 8.9
California............................................... 51,935 6.9
Illinois................................................. 51,615 6.8
North Carolina........................................... 33,617 4.5
New Jersey............................................... 24,802 3.3
Ohio..................................................... 24,072 3.2
Georgia.................................................. 23,911 3.2
Pennsylvania............................................. 23,782 3.1
Mississippi.............................................. 23,670 3.1
Other (1)................................................ 359,427 47.6
-------- -----
Total................................................ $755,107 100.0%
======== =====
</TABLE>
- --------
(1) Includes 39 other states, the District of Columbia, and certain U.S.
territories and foreign countries, each of which accounts for less than 3%
of collected premiums.
UNDERWRITING
A major portion of the Company's insurance coverages are individually
underwritten to assure that policies are issued by the Company's insurance
subsidiaries based upon the underwriting standards and practices established
by the Company. Applications for insurance are reviewed to determine if any
additional information is required to make an underwriting decision, which
depends on the amount of insurance applied for and the applicant's age and
medical history. Such additional information may include medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. If deemed necessary, the Company uses
investigative services to supplement and substantiate information. For certain
coverages, the Company may verify information with the applicant by telephone.
After reviewing the information collected, the Company either issues the
policy as applied for, issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain
conditions for a period of time or rejects the application. For certain of its
coverages, the Company has adopted simplified policy issue procedures in which
the applicant submits a simple application for coverage typically containing
only a few health related questions instead of a complete medical history.
In common with other life and health insurance companies, the Company may be
exposed to the risk of claims based on AIDS. The Company's AIDS claims to date
have been insignificant. Because of its emphasis on policies written for the
senior citizen market and its underwriting procedures and selection processes,
the Company believes its risk of AIDS claims is less than the risk to the
industry in general.
REINSURANCE
The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and co-insurance basis. Co-insurance generally transfers a
fixed percentage of the Company's risk on specified coverages to the
reinsurer. Excess of loss insurance generally transfers the Company's risk on
coverages above a specified retained amount. Under its excess of loss
reinsurance agreements, the maximum risk retained by the Company on one
individual in the case of life insurance and accident and health insurance is
$250,000.
34
<PAGE>
Reinsurance agreements are intended to limit an insurer's maximum loss on the
specified coverages. The ceding of reinsurance does not discharge the primary
liability of the original insurer to the insured, but it is the practice of
insurers (subject to certain limitations of state insurance statutes) to
account for risks which have been reinsured with other approved companies, to
the extent of the reinsurance, as though they are not risks for which the
original insurer is liable. See Note 7 of Notes to Consolidated Financial
Statements.
The Company has occasionally used assumption reinsurance to acquire blocks of
business from other insurers. In addition, the Company has from time to time
entered into agreements to assume certain insurance business from companies for
which it is marketing insurance products. The Company intends to continue these
programs if they assist in expanding product lines and marketing territories
and contribute to profitability.
ACQUISITIONS
The Company believes that current trends in the life and health insurance
industry will provide opportunities for continued acquisitions and
consolidations. Larger companies are reducing administrative costs by divesting
divisions and blocks of life and health insurance business which do not fit
their overall strategies and are focusing on two or three core product lines to
improve efficiency and gain competitive advantage. Additionally, smaller, less
efficient companies with less capital at their disposal are experiencing
increasing difficulty in remaining competitive; regulatory requirements add
significant costs which may not be able to be absorbed by smaller companies;
capital requirements have increased due to the imposition of risk-based capital
ratios by regulatory agencies; state healthcare reform programs are squeezing
health insurance profit margins; the costs of necessary information processing
systems have increased; and smaller companies cannot access capital markets to
finance additional growth.
The following table summarizes the recent significant acquisitions made by
the Company:
<TABLE>
<CAPTION>
DATE OF
ACQUISITIONS ACQUISITION TYPE OF BUSINESS
------------ ------------ ----------------
<C> <C> <S>
Continental Life & Accident Company.................... August 1993 Small group medical
insurance; became part
of the Group Medical
Division.
Healthcare Review Corporation.......................... August 1993 Health care management
company; became part of
the Medical Utilization
Management Division.
Connecticut National Life Insurance Company............ January 1995 Interest sensitive and
universal life
insurance; became part
of the Life Insurance
Division.
Western Fidelity Insurance Company (block of business). July 1995 Major medical products;
became part of the Group
Medical Division.
ACMG, Inc. ............................................ July 1995 Health care management
company; became part of
the Medical Utilization
Management Division.
Universal Fidelity Life Insurance Company.............. March 1996 Medicare supplement
carrier; to become part
of the Senior Health and
Life Division.
</TABLE>
In August 1993, the Company acquired, and added to the Group Medical
Division, CLAC, a small group medical insurer. In 1994 and 1995, the
administration of this subsidiary was consolidated with the Company's other
health insurance operations. In addition to CLAC, this acquisition included the
purchase of Continental Marketing Corporation which added an efficient broker-
to-broker telemarketing distribution system to the Group Medical Division.
35
<PAGE>
In August 1993, the Company also acquired, and added to the Medical
Utilization Management Division, HRC, a health care management company
headquartered in Louisville, Kentucky. HRC's largest client is the Kentucky
Medicaid program. In addition to adding to the revenue and client base of the
Medical Utilization Management Division, HRC's Louisville facility has become
the division's headquarters.
In January 1995, the Company acquired, and added to the Life Insurance
Division, CNL, a $386 million asset company, which had issued primarily
interest sensitive and universal life insurance products. This acquisition
increased the distribution system of the Life Insurance Division.
In July 1995, the Company acquired, and consolidated into the Group Medical
Division's administrative facility in Dallas, Western Fidelity Insurance
Company's $42 million block of major medical policies. The Company was able to
integrate substantially all of this business into its operations within one
month.
In July 1995, the Company also acquired, and added to the Medical
Utilization Management Division, ACMG, an Ohio-based health care management
company. This acquisition is expected to increase the annual revenue of the
Medical Utilization Management Division and to enhance the Company's capacity
to establish HMOs and EPOs. See "--Products and Services."
In March 1996, the Company acquired Universal Fidelity, a company which
markets and underwrites primarily Medicare supplement products to senior
citizens in Oklahoma and Texas. Universal Fidelity generated approximately $33
million in premium revenue in 1995 (on a statutory basis). The approximately
30,000 Universal Fidelity Medicare supplement policyholders also provide
potential for increased profitability through cross-selling of long-term care,
home health care and other products.
INVESTMENTS
The Company's investment policy is to balance its portfolio between long-
term and short-term investments so as to achieve investment returns consistent
with preservation of capital and maintenance of liquidity adequate to meet
payment of policy benefits and claims. Current policy is to invest primarily
in fixed income securities of the U.S. government and its agencies and
authorities, and in fixed income corporate securities with investment grade
ratings of Baa3 and/or BBB- or better. At December 31, 1995, less than 1.3% of
the Company's total investment portfolio and less than 1.2% of its statutory
admitted assets were below investment grade or unrated. The Company has a
policy to invest no more than 4% of its statutory admitted assets in fixed
income securities below investment grade or unrated. At December 31, 1995, the
Company had invested assets of $1,042.6 million, compared to $723.8 million at
December 31, 1994. The Company manages all of its investments internally with
resource and evaluation assistance provided by independent investment
consultants.
36
<PAGE>
The following table provides information on the Company's investments as of
December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-------------------------------------
CARRYING VALUE (1) FAIR VALUE (1)
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF INVESTMENT:
Fixed maturities to be held to
maturity:
U.S. Treasury........................ $ 26,897 3% $ 27,172 3%
States and political subdivisions.... 4,669 * 4,896 *
Corporate securities................. 51,608 5 53,386 5
Mortgage-backed securities........... 162,867 16 167,274 16
---------- --- ---------- ---
Total fixed maturities to be held
to maturity....................... 246,041 24 252,728 24
Fixed maturities available for sale:
U.S. Treasury........................ 34,084 3 34,084 3
States and political subdivisions.... 26,976 3 26,976 3
Foreign governments.................. 3,018 * 3,018 *
Corporate securities................. 313,501 30 313,501 30
Mortgage-backed securities........... 245,087 23 245,087 23
---------- --- ---------- ---
Total fixed maturities available
for sale.......................... 622,666 59 622,666 59
---------- --- ---------- ---
Total fixed maturities............. 868,707 83 875,394 83
Equity securities...................... 15,570 1 15,570 1
Real estate............................ 18,250 2 18,250 2
Mortgage loans......................... 9,253 1 9,253 1
Policy loans........................... 79,122 8 78,230 8
Short-term investments................. 51,690 5 51,690 5
---------- --- ---------- ---
Total Investments.................. $1,042,592 100% $1,048,387 100%
========== === ========== ===
</TABLE>
- --------
* less than one percent
(1) Carrying value for fixed maturity investments designated as available for
sale equals fair value.
37
<PAGE>
The following table provides information on the credit quality and average
lives of the Company's fixed maturity portfolio as of December 31, 1995.
FIXED MATURITY PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
----------------
CARRYING
VALUE PERCENT
-------- -------
<S> <C> <C>
Credit Quality--S&P (or equivalent) rating:
AAA...................................................... $411,128 48%
AA+, AA, AA-............................................. 67,408 8
A+, A, A-................................................ 262,837 30
BBB+, BBB, BBB-.......................................... 113,815 13
Below investment grade................................... 12,719 1
In default............................................... 800 *
-------- ---
Total................................................ $868,707 100%
======== ===
Average Lives
One year or less......................................... $ 58,048 7%
Over one year through five years......................... 301,657 35
Over five years through ten years........................ 437,209 50
Over ten years........................................... 71,793 8
-------- ---
Total................................................ $868,707 100%
======== ===
</TABLE>
- --------
* Less than one percent.
Fixed Maturity Investments. With the adoption of risk-based capital rules
and consumer concerns over insurance company solvency and financial stability,
the asset quality of insurance companies' investment portfolios has become of
greater concern to policyholders and has come under closer scrutiny by
insurance regulators and investors. The investment objectives of the Company
are to maximize investment yield without sacrificing high investment quality
and matched liquidity.
Investments in below-investment grade fixed maturity securities generally
have greater risks (and potentially greater returns) than other corporate
fixed maturity investments. Risk of loss upon default by the issuer is
significantly greater for these securities because they are often unsecured
and are often subordinated to other creditors of the issuer, and because these
issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. Also, the market for below-investment grade
securities is less liquid and not as actively traded as the market for
investment grade securities.
The Company continually evaluates the creditworthiness of each issuer of
securities held in its portfolio. When the fair value of an individual
security declines materially, or when the Company's ongoing evaluation
indicates that it may be likely that the Company will be unable to realize the
carrying value of its investment, a determination is made as to the extent to
which such declines are attributable to changing market expectations regarding
general interest rates and inflation and other factors, such as a perceived
increase in the credit risk of the issuer, a general decrease in a particular
industry sector or an overall economic decline. If the decline in value is
other than temporary, and the carrying amount of the investment is reduced to
its fair value based principally on available market prices, the amount of the
reduction is reported as a realized loss on investments and the net fair value
becomes the new cost basis of the investment. In addition, the Company
reverses any accrued interest income previously recorded for the investment
and records future interest income only when cash is received.
38
<PAGE>
Yields recognized in future periods on such investments may be less than
yields recognized on other investments and will be less than the yield
expected when the fixed maturity security was originally purchased. The effect
on net income from declines in interest income and portfolio yield from
impaired securities in future periods will depend on many factors, including,
for life insurance business, the level of interest rates credited to
policyholder account balances. In as much as interest rates credited to the
Company's policyholders are typically only guaranteed for one year, the
Company does not expect any material adverse effect on net income in future
periods from declines in yields from impaired securities.
Mortgage-Related Securities. At December 31, 1995, the Company had $408.0
million (or 47% of its fixed maturities portfolio) in mortgage-related
securities compared to $288.7 million at December 31, 1994 (or 48% of its
fixed maturities portfolio). The mortgage-related securities are invested
primarily in U.S. government agency and non-agency pass-through certificates
and various components of U.S. government agency and non-agency collateralized
mortgage obligations ("CMOs"). CMOs are bonds that are collateralized by U.S.
government agency or non-agency whole loan mortgages and mortgage pass-through
securities. The yield characteristics of mortgage-related securities differ
from those of traditional fixed income securities. The major differences
typically include more frequent interest and principal payments, usually
monthly, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and
a variety of economic, geographic, social and other factors and cannot be
predicted with certainty. The yields to maturity of the mortgage-related
securities will be affected by the actual rate of payment (including
prepayments) of principal of the underlying mortgage loans. In general,
prepayments on the underlying mortgage loans, and subsequently the mortgage-
related securities backed by these loans, increases when the level of
prevailing interest rates declines significantly below the interest rates on
such loans. When declines in interest rates occur, the proceeds from the
prepayment of such securities may be reinvested at lower rates than the
Company was earning on such securities.
The Company's mortgage-related securities portfolio is diversified as to
collateral, maturity, duration and other characteristics. The majority of the
mortgage-related securities portfolio has the guarantee or backing of agencies
of the United States government. Generally, the mortgage-related securities
consist of pools of single-family, residential mortgages. At December 31,
1995, the Company's mortgage-related securities portfolio included $136.9
million of CMOs and pass-through certificates issued by non-government
agencies (33.6% of total mortgage-backed securities) compared to $83.9 million
at December 31, 1994 (29.1% of total mortgage-backed securities). The majority
of these holdings are senior securities in the CMO structures which are
collateralized by first mortgage liens on single family residences and which
have investment grade ratings of Baa3 and/or BBB- or higher. The
creditworthiness of these securities is based solely on the underlying
mortgage loan collateral and credit enhancements in the form of
senior/subordinated structures, letters of credit, mortgage insurance or
surety bonds. The underlying mortgage loan collateral principally consists of
whole loan mortgages that exceed the maximum imposed by both the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Therefore, the collateral tends to be concentrated in states with the greatest
number of higher priced single family residences, including California, New
York, New Jersey, Maryland, Virginia and Illinois.
At December 31, 1995, the Company held $10.3 million carrying value ($10.3
million fair value) of inverse floater and interest-only tranches of CMOs.
These derivative securities were acquired to protect the Company in the event
of adverse interest rate fluctuations. The yields and fair values of these
securities are generally more sensitive to changes in interest rates and
prepayments than other mortgage-related securities.
39
<PAGE>
The following table summarizes the components of the Company's mortgage-
related securities portfolio at December 31, 1994, and December 31, 1995:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1994 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inverse floaters and interest-only CMO
tranches.................................. $ 14,961 $ 8,940 $ 10,258 $ 10,258
Other CMOs:
U.S. government agency................... 148,366 137,138 207,637 211,507
Non-agency............................... 29,299 27,404 73,784 73,793
-------- -------- -------- --------
Total other CMOs....................... 177,665 164,542 281,421 285,300
U.S. government agency pass-through........ 41,444 39,414 53,136 53,664
Non-agency pass-through.................... 54,601 50,555 63,139 63,139
-------- -------- -------- --------
Total mortgage-backed securities....... $288,671 $263,451 $407,954 $412,361
======== ======== ======== ========
</TABLE>
POLICY LIABILITIES
The Company records reserves for future policy benefits to meet future
obligations under outstanding policies. These reserves are amounts which are
calculated to be sufficient to meet policy and contract obligations as they
mature. The amount of reserves for insurance policies is calculated using
assumptions for interest, mortality and morbidity, expenses and withdrawals.
Reserves are established at the time the policy is issued and adjusted
periodically based on reported and unreported claims or other information. See
Note 2 of Notes to Consolidated Financial Statements. See "Risk Factors--
Adequacy of Loss Reserves."
COMPETITION
The insurance business is highly competitive and includes a large number of
insurance companies, many of which have substantially greater financial
resources and larger and more experienced staffs than the Company. The Company
competes with other insurers to attract and retain the allegiance of its
independent agents and marketing organizations who at this time are
responsible for a significant portion of the Company's premiums. Methods of
competition include the Company's ability to offer competitive products and to
service these programs efficiently. Other competitive factors applicable to
the Company's business include policy benefits, service to policyholders and
premium rates.
HEALTH CARE REFORM
Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Most of these proposals
are specifically directed at the small group health care market, a significant
portion of the Company's health business. At present, most health care reform,
other than that related to the Medicare program, is taking place at the state
level. A number of states have passed or are considering legislation that
would limit the differentials in rates that insurers could charge between new
business and renewal business with respect to similar demographic groups.
State legislation also has been adopted or is being considered that would make
health insurance available to all small groups by requiring coverage of all
employees and their dependents, by limiting the applicability of pre-existing
conditions exclusions, by requiring insurers to offer a basic plan exempt from
certain mandated benefits as well as a standard plan and by establishing a
mechanism to spread the risk of high risk employees to all small group
insurers.
At the federal level, the current focus of healthcare reform is on the
federal Medicare program and efforts to control expenditures. From time to
time there are significant federal legislative developments with respect to
long-term care and Medicare coverage. The Federal Omnibus Budget
Reconciliation Act of 1990 ("COBRA
40
<PAGE>
'90") required that Medicare supplement policies provide for guaranteed
renewability and waivers of pre-existing condition coverage limitations under
certain circumstances. In addition, the NAIC has recently adopted model long-
term care policy language providing nonforfeiture benefits and has proposed a
rate stabilization standard for long-term care policies. Various bills are
pending in the U.S. Congress which would provide for the implementation of
certain minimum consumer protection standards for inclusion in all long-term
care policies, including guaranteed renewability, protection against inflation
and limitations on waiting periods for pre-existing conditions. These
proposals would also prohibit "high pressure" sales tactics in connection with
long-term care insurance and would guarantee consumers access to information
regarding insurers, including lapse and replacement rates for policies and the
percentage of claims denied. Other pending legislation would permit premiums
paid for long-term care insurance to be treated as tax-deductible medical
expenses, with the amount of the deduction increasing with the age of the
taxpayer. The Company cannot predict with certainty the effect any such
proposals, if adopted, or legislative developments could have on its business
and operations. It is likely that health care reform at the federal and state
levels will require the Company to make significant changes to the way it
conducts its health insurance business. See "Risk Factors--Insurance
Regulation." The Company has already initiated activity to prepare for
expected legislation. For example, the Company has begun to establish HMOs for
Medicare managed care programs which are expected to be included in federal
Medicare reform programs.
GOVERNMENT REGULATION
The Company and its insurance subsidiaries are subject to extensive
governmental regulation and supervision in each of the jurisdictions in which
it or its subsidiaries conduct business. Such regulation vests in governmental
agencies broad regulatory, supervisory and administrative power with respect
to the Company's business, including premium rate levels, premium rate
increases, policy forms, minimum loss ratios, dividend payments, claims
settlement, licensing of insurers and their agents, capital adequacy, transfer
of control, the amount and type of investments the Company may have, reserve
requirements, solvency standards, trade practices and periodic examinations.
Such regulations are primarily intended to protect policyholders and not
investors. The Company's accident and health coverages generally are subject
to rate regulation by state insurance departments which in certain cases
require that certain minimum loss ratios be maintained.
The states in which the Company is licensed have the authority to change the
minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined
as incurred claims and increases in policy reserves divided by earned
premiums. Most states in which the Company writes insurance have adopted the
loss ratios recommended by the NAIC. The Company is unable to predict the
impact of (i) any changes in the mandatory statutory loss ratios for
individual or group policies to which the Company may become subject, (ii) any
changes in the minimum loss ratios for individual, group or Medicare
supplement policies, or (iii) any change in the manner in which these minimums
are computed or enforced in the future. The Company has not been informed by
any state that it does not meet mandated minimum ratios, and the Company
believes that it is in compliance with all such minimum ratios. In the event
the Company is not in compliance with minimum statutory loss ratios mandated
by regulatory authorities with respect to certain policies, the Company may be
required to reduce or refund premiums, which could have a material adverse
effect upon the Company.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such laws
and are registered as controlled insurers in those jurisdictions in which such
registration is required. Such laws vary from state to state but typically
require periodic disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporation, and prior notice
to, or approval by, the state insurance department of intercorporate transfers
of assets and other transactions (including payments of dividends in excess of
specified amounts by the insurance subsidiary) within the holding company
system.
41
<PAGE>
EMPLOYEES
As of December 31, 1995, the Company employed approximately 1,830 persons on
a full-time basis. The Company considers its employee relations to be good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are named as defendants in various legal
actions, some claiming significant damages, arising primarily from claims
under insurance policies, disputes with agents, and other matters. The
Company's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on the
Company's financial position.
PROPERTIES
The principal executive offices of the Company are located in Schaumburg,
Illinois in a building purchased by the Company in January 1994. The Company,
through a subsidiary, owns three buildings in Rockford, Illinois and, through
another subsidiary, also owns a building in the Dallas, Texas metropolitan
area which currently serves as the main administrative office for the Group
Medical Division. The Company leases the offices of its other regional service
centers. The executive and administrative offices of Manhattan National Life
are located in Cincinnati, Ohio in leased space. The headquarters of the
Company's Medical Utilization Management Division are located in Louisville,
Kentucky in leased space. The Company believes these facilities will
adequately serve its needs for the foreseeable future and could accommodate
expansion of the Company's business.
MANAGEMENT AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<S> <C> <C>
Peter W. Nauert......... 52 Chairman, Chief Executive Officer and Director
Charles R. Scheper...... 43 President--Life Insurance Operations and Director
Thomas J. Brophy........ 60 President--Health Insurance Operations and Director
Ernest T. Giambra, Jr... 48 Executive Vice President and Chief Marketing Officer
William B. Van Vleet.... 71 Director and General Counsel Emeritus
Anthony J. Pino......... 48 Executive Vice President
Philip J. Fiskow........ 39 Senior Vice President and Chief Investment Officer
David I. Vickers........ 34 Vice President, Treasurer and Chief Financial Officer
Mark S. Fischer......... 39 Vice President
Michael A. Cavataio..... 52 Director and Vice Chairman
Richard R. Haldeman..... 53 Director
R. Richard Bastian, III. 49 Director
Karl-Heinz Klaeser...... 64 Director
Michael K. Keefe........ 51 Director
Robert F. Nauert........ 71 Director
Carl A. Hulbert......... 73 Director
</TABLE>
All executive officers are elected annually and serve at the pleasure of the
Board of Directors. Certain of the executive officers have employment
agreements with the Company. The Company's Board of Directors is divided into
three classes, each of which serves for a three-year term.
Peter W. Nauert has been Chief Executive Officer and a director of the
Company since its incorporation in 1982. He was President of the Company from
1982 to 1988 and 1991 to 1995, and became Chairman of the Company in 1988.
Since 1968, Mr. Nauert has been employed in an executive capacity by one or
more of the Company's insurance subsidiaries.
42
<PAGE>
Charles R. Scheper was elected President--Life Insurance Operations of the
Company in March 1995. He was Vice President of the Company from 1991 to March
1995 and was Chief Financial Officer from May 1993 to December 1993. In March
1992, he was elected Executive Vice President. Since February 1992, he has
been President and Vice Chairman of the Board of Manhattan National Life, a
subsidiary of the Company. Prior to the Company's acquisition of Manhattan
National Life, Mr. Scheper was Manhattan National Life's Senior Vice President
and Chief Financial Officer, a position which he held from May 1987 until the
acquisition. Prior to joining Manhattan National Life, Mr. Scheper was with
Union Central Life Insurance Company from 1979, having served as Vice
President and Controller since 1985.
Thomas J. Brophy was elected President--Health Insurance Operations of the
Company in March 1995. He was Senior Vice President since joining the Company
in November 1993. Prior to joining the Company, Mr. Brophy was President and
Chief Operating Officer of Southwestern Life Insurance Company from June 1990
to September 1993. Mr. Brophy also held senior executive positions with
various I.C.H. Corporation (now known as Southwestern Life Corp.) subsidiaries
from March 1974 to his joining the Company in November 1993.
Ernest T. Giambra, Jr. was elected Executive Vice President of the Company
in May 1994. Prior to joining the Company as Chief Marketing Officer in June
1993, Mr. Giambra had been with Bankers Life Holding Corporation since 1969
where he had served as Vice President of Sales since 1988.
William B. Van Vleet has been Executive Vice President of the Company since
1986 and a director of the Company since 1982. He was General Counsel of the
Company from 1982 to 1988. In June 1991, he was again elected General Counsel
and served until his retirement from that position in 1995. He now serves as
the Company's General Counsel Emeritus. Mr. Van Vleet had served Pioneer Life
Insurance Company, a subsidiary of the Company, from 1948 until 1995 as
General Counsel and a director. Mr. Van Vleet also serves as a director of
other subsidiaries of the Company.
Anthony J. Pino was elected Executive Vice President of the Company in May
1993. He was Senior Vice President of the Company from March 1992 to May 1993
and was President of National Group Life Insurance Company, a subsidiary of
the Company, from July 1991 to June 1992. Mr. Pino has served as President of
National Health Services, a subsidiary of the Company, since 1992. Prior to
joining the Company, Mr. Pino was Chief Operating Manager of American Postal
Workers' Union Health Plan, a position which he held from October 1982.
Philip J. Fiskow has been Senior Vice President since May 1993 and the Chief
Investment Officer since joining the Company in 1991. He was Vice President of
the Company from June 1991 until May 1993. He is also an officer of other
subsidiaries of the Company. Mr. Fiskow was with Asset Allocation and
Management Company as an Investment Advisory Portfolio Manager from January
1989 to June 1991. From May 1987 to December 1988 he was an Investment Advisor
with Van Kampen Merritt and a Portfolio Manager with Aon Corporation from May
1981 to May 1987.
David I. Vickers has been with the Company since June 1992 and has been a
Vice President of the Company since December 1992, Treasurer since May 1993
and Chief Financial Officer since January 1994. He is also an officer and
director of several subsidiaries of the Company. Prior to joining the Company,
he was with the public accounting firm of Ernst & Young LLP since 1983 where
he was a Senior Manager in the Insurance Division.
Mark S. Fischer has been a Vice President of the Company since December 1994
and has been a Vice President of one of the Company's subsidiaries since May
1993. Prior to joining the Company, he had been a consultant to the Company
and was with the public accounting firm of Ernst & Young LLP from May 1978 to
October 1992 where he was a Senior Manager in the Insurance Division.
Michael A. Cavataio has been a director of the Company since 1986 and Vice
Chairman since December 1995. Mr. Cavataio is a real estate developer in
Northern Illinois and Southern Wisconsin. His business experience also
includes 25 years as an owner and manager of a regional clothing store chain.
He has also been a member of the board of directors of Today's Bank East since
1987.
43
<PAGE>
Richard R. Haldeman has been a director of the Company since 1986 and was
Secretary from 1988 to June 1990. Mr. Haldeman has been a partner of Haldeman
& Associates, a law firm, since June 1990. He was a partner of Williams &
McCarthy, P.C., a law firm, from 1975 to May 1990.
R. Richard Bastian, III has been a director of the Company since December
1994. Mr. Bastian is a management consultant, specializing in strategic
planning and organizational development. Mr. Bastian's career includes over 28
years in the financial services industry, most recently as President and Chief
Executive Officer of Heritage Bank & Trust of Racine, Wisconsin. Prior to
Heritage, he served as Chairman, President and Chief Executive Officer of Bank
One, Rockford and its predecessor, First Community Bancorp, an $800 million
multi-bank holding company. He has also held management positions at banks in
Tulsa and Philadelphia where his banking career began in 1966.
Karl-Heinz Klaeser has been a director of the Company since 1986. Mr.
Klaeser has also been a director of LSW Holding Corporation and Insurance
Investors Life Insurance Company and the Chairman of the Board of Life
Insurance Company of the Southwest since 1989 and a director of Personal
Assurance Company PLC (United Kingdom) since 1991.
Michael K. Keefe has been a director of the Company since March 1994. Mr.
Keefe has been Chief Executive Officer and Chairman of the Board of Keefe Real
Estate, Inc., a family owned real estate brokerage operation since 1982. Mr.
Keefe has also been Chairman of the Board of Southern Wisconsin Bankshares,
Inc. since 1988.
Robert F. Nauert has been a director of the Company since November 1991. Mr.
Nauert is also a director and officer of various subsidiaries of the Company.
Mr. Nauert is the brother of Peter W. Nauert.
Carl A. Hulbert was elected director of the Company in March 1995. Mr.
Hulbert is a management consultant, specializing in the insurance industry.
Mr. Hulbert is a past Insurance Commissioner of the state of Utah. He has also
been a director for numerous insurance companies during his 49 year business
career.
44
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of March 5, 1995, information with
respect to the beneficial ownership of Common Stock and $2.125 Preferred Stock
of the Company by (i) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each of the Company's directors and certain of its executive officers and
(iii) all of the Company's directors and executive officers as a group. Unless
otherwise indicated, the address of each stockholder listed is at the
Company's principal place of business.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP(1) PERCENT OF CLASS
---------------------------------- ----------------
COMMON PREFERRED COMMON PREFERRED
NAME OF BENEFICIAL OWNER STOCK STOCK STOCK STOCK
- ------------------------ --------- --------- ------ ---------
<S> <C> <C> <C> <C>
Peter W. Nauert............ 1,702,635(2) -- 16.4% --
U.S. Bancorp............... 582,510(3) -- 5.8 --
Charles R. Scheper......... 81,035(4)(5) -- * --
Thomas J. Brophy........... 35,381(4)(5)(7) 400 * *
Ernest T. Giambra, Jr...... 19,069(4)(5) -- * --
William B. Van Vleet....... 54,269(4) -- * --
Anthony J. Pino............ 25,907(4)(5) -- * --
Michael A. Cavataio........ 216,759(4)(6) 7,482 2.1 *
Richard R. Haldeman........ 17,300(4) -- * --
R. Richard Bastian, III.... 31,846(4) -- * --
Karl-Heinz Klaeser......... 61,271(4) -- * --
Michael K. Keefe........... 37,200(4) -- * --
Robert F. Nauert........... 18,212(4)(5) -- * --
Carl A. Hulbert............ 25,000(4) -- * --
All directors and executive
officers as a group
(16 persons).............. 2,341,006(2)(4)(5)(6)(7) 7,882 21.6 *
</TABLE>
- --------
* Less than 1.0%
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to all such shares. Shares of Common Stock underlying
options exercisable within 60 days are deemed to be outstanding for the
purposes of calculating the percentage owned by the holder.
(2) Includes (i) 86,000 shares held by Mr. Nauert's children or by Mr. Nauert
as custodian or as trustee for his children and 2,000 shares held of
record by Mr. Nauert's wife, (ii) 215,000 shares which may be acquired
pursuant to presently outstanding stock options, (iii) shares held in
Employee Savings and Stock Ownership Plan accounts and (iv) shares which
are issuable upon conversion of 8% Debentures.
(3) The address for this stockholder is 111 S.W. Fifth Avenue, Suite 3500,
Portland, Oregon 97204. U.S. Bancorp has sole voting power with respect to
579,210 shares, sole power to dispose of 549,816 shares and shared power
to dispose of 32,694 shares. This information is based upon a Schedule 13G
dated February 13, 1996.
(4) Includes shares of Common Stock which such directors and executive
officers have the right to acquire within 60 days upon the exercise of
stock options as follows: Mr. Scheper, 70,000 shares; Mr. Brophy,
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<PAGE>
25,000 shares; Mr. Giambra 10,000 shares; Mr. Van Vleet, 50,000 shares; Mr.
Pino, 15,000 shares; Mr. Cavataio, 116,354 shares; Mr. Haldeman, 14,500
shares; Mr. Bastian, 27,923 shares; Mr. Keefe 33,000 shares; Mr. Klaeser,
55,500 shares; Mr. Robert Nauert, 15,000 shares; Mr. Hulbert, 25,000
shares.
(5) Includes shares of Common Stock held in Employee Savings and Stock
Ownership Plan accounts.
(6) Includes 11,971 shares of Common Stock issuable upon conversion of 7,482
shares of $2.125 Preferred Stock held by Mr. Cavataio and members of Mr.
Cavataio's immediate family.
(7) Includes 640 shares of Common Stock issuable upon conversion of 400 shares
of $2.125 Preferred Stock held by Mr. Brophy.
CERTAIN TRANSACTIONS
In July 1994, the Company loaned $75,000 to Mr. Pino to finance moving
expenses. The principal amount of the loan accrues interest at a rate of 7%
per annum and interest and principal are due in July 1998.
In 1995, a marketing subsidiary of the Company paid rent of approximately
$78,054 to a partnership in which Mr. Peter Nauert held a 50% interest. The
lease for this property expired during 1995 and was not renewed. The Company
believes that the rates charged to the Company's subsidiary were the same as
those charged to unaffiliated third parties.
In 1995, Mr. Cavataio was engaged by the Company as an investment advisor to
help manage the Company's investment portfolio. Pursuant to this arrangement,
Mr. Cavataio received compensation of $100,000 in 1995.
In 1995, Mr. Van Vleet was engaged by the Company as a consultant. Mr. Van
Vleet is to receive compensation of $75,000 per year. The engagement commenced
on July 31, 1995 and will continue through June 30, 1997.
Effective September 1, 1995, Mr. Peter Nauert entered into an employment
agreement (the "Nauert Employment Agreement") with the Company. The Nauert
Employment Agreement superseded Mr. Nauert's then existing employment
agreements except that a loan which was extended to Mr. Nauert under the
previous agreements was continued under the Nauert Employment Agreement. This
loan is in the amount of $1.3 million, matures on December 31, 1996 and
accrues interest at an annual rate of 3.71%. Up to 50% of the principal amount
of this loan may be forgiven if certain corporate performance goals are
achieved. If the Company has aggregate fully diluted net income per common
share of $4.50 during the period from January 1, 1994 to December 31, 1996,
then $325,000 in principal amount of the loan shall be forgiven. If, during
this same period, the Company has aggregate fully diluted net income per
common share in excess of $4.50, then, in addition to the $325,000 to be
forgiven, an amount of the loan equal to the amount by which net income per
common share exceeds $4.50, divided by $3.00 and multiplied by $975,000 shall
be forgiven, provided that in no event shall more than $650,000 of the loan be
forgiven.
Any future transactions between the Company and its officers, directors,
principal stockholders or the affiliates of any of them will be on negotiated
terms no less favorable to the Company than could be obtained from
unaffiliated parties.
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<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture to be dated as of ,
1996 (the "Indenture"), between the Company and The First National Bank of
Chicago, as Trustee (the "Trustee"), a copy of the form of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The terms of the Notes include those set forth in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain
capitalized terms used below and not otherwise defined herein. As used in this
Section, the "Company" refers to Pioneer Financial Services, Inc., exclusive
of its subsidiaries.
GENERAL
The Notes will be unsecured, subordinated obligations of the Company, will
be limited to $65.0 million aggregate principal amount ($74.75 million if the
Underwriters' over-allotment option is exercised in full) and will mature on
, 2003. See "--Subordination." The Notes will bear interest at the
rate of % per annum from the date of issuance, or from the most recent
interest payment date to which interest has been paid or provided for, payable
semi-annually on and of each year to the person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the preceding and , as the case may be
(each a "Record Date"). Interest will be computed on the basis of a 360-day
year of twelve 30-day months. Principal of, premium, if any, and interest on
the Notes will be payable, the Notes will be convertible and the transfer of
Notes will be registrable, at the office or agency maintained for such purpose
in the Borough of Manhattan, City of New York. In addition, payment of
interest may, at the option of the Company, be made by check mailed to the
address of the person entitled thereto as it appears in the register of
Noteholders. Until otherwise designated by the Company, the Company's office
or agency in New York will be the office of the Trustee maintained for such
purpose.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
CONVERSION RIGHTS
The Notes will be convertible (in denominations of $1,000 and any integral
multiple thereof) into Common Stock of the Company, at the option of the
holder, at any time on or prior to the redemption date or , 2003,
at the conversion price then in effect. The conversion price is set forth on
the cover page of this Prospectus, subject to adjustments as described below.
The right to convert Notes called for redemption will terminate at the close
of business on the date prior to the date fixed for such redemption, unless
the Company shall default on payment of the redemption price. For information
as to notices of redemptions, see "--Optional Redemption."
The registered holders of Notes at the close of business on a Record Date
will be entitled to receive the interest payable on the Notes on the
corresponding interest payment date notwithstanding the conversion of the
Notes after the Record Date or, subject to certain provisions applicable to
defaulted interest, the Company's default in payment of the interest due on
the interest payment date. Notwithstanding the foregoing, Notes surrendered
for conversion during the period from the close of business on any Record Date
to the opening of business on the corresponding interest payment date (except
Notes or portions thereof called for redemption on a redemption date during
such period) must be accompanied by payment of an amount equal to the interest
payable on that interest payment date. The interest payment with respect to a
Note called for redemption on a redemption date during the period from the
close of business on any Record Date to the opening of business on any
corresponding interest payment date will be payable on that corresponding
interest payment date to the registered holder at the close of business on
that Record Date (notwithstanding the conversion of such Note before such
corresponding interest payment date) and the Noteholder who elects to convert
need not include funds equal to
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<PAGE>
the interest paid. Noteholders on a Record Date who convert Notes on or after
the corresponding interest payment date will receive the interest payable by
the Company on that date and need not include payment in the amount of such
interest payable by the Company on that date and need not include payment in
the amount of such interest upon surrender of those Notes for conversion.
Except as described above, no payment or adjustment is to be made on
conversion for interest accrued on the Notes or for dividends on the Common
Stock issued on conversion.
The Company will not issue fractional shares of Common Stock upon conversion
of Notes and, in lieu thereof, will pay a cash adjustment based upon the
current market price of the Common Stock (determined as set forth in the
Indenture) on the close of business on the day prior to the date of
conversion.
The conversion price is subject to adjustment upon the occurrence of certain
events, including (i) the issuance of Common Stock as a dividend or as a
distribution on any class of the capital stock of the Company, or a
subdivision, combination or reclassification of Common Stock; (ii) the
issuance to all holders of Common Stock of certain rights, warrants or other
securities convertible into Common Stock entitling them to subscribe for
Common Stock at less than the then current market price per share (as
determined in the manner set forth in the Indenture); (iii) the distribution
to all holders of Common Stock of any shares of capital stock or evidences of
indebtedness of the Company or cash or other assets (excluding any dividend
paid out of current or retained earnings payable solely in cash); (iv) the
issuance of Common Stock to an Affiliate at less than the current market
price, other than pursuant to an employee benefit plan approved by the
Company's board of directors; and (v) the purchase of Common Stock pursuant to
a tender offer made by the Company or any of its subsidiaries which involves
an aggregate consideration that, together with (x) any cash and the fair
market value of any other consideration payable in any other tender offer by
the Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding the expiration of such tender offer in respect of which no
adjustment has been made and (y) the aggregate amount of dividends paid out of
current or retained earnings referred to in clause (iii) above to all holders
of Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization on the expiration of such tender offer.
Notwithstanding the foregoing (i) if the rights, warrants or other securities
described in clause (ii) of the preceding paragraph are exercisable only upon
the occurrence of certain triggering events, then the conversion price will
not be adjusted until such triggering events occur; (ii) the distribution to
holders of Common Stock of separate certificates representing Rights (as
described below) will not require an adjustment in the conversion price until
the Rights become exercisable as described under "Description of Capital
Stock--Rights to Purchase Series A Junior Preferred Stock;" (iii) if rights or
warrants expire unexercised or securities are not converted, the conversion
price shall be readjusted to take into account only the actual number of such
rights, warrants or other securities which were exercised or converted; and
(iv) in the event of a distribution to holders of Common Stock generally of
shares of capital stock or rights to acquire capital stock (in either case,
other than Common Stock), the Company may, instead of making any adjustment in
the conversion price, make proper provision so that each holder of a Note who
converts such Note (or any portion hereof) after the record date for such
distribution and prior to the expiration or redemption of such rights, if
applicable, shall be entitled to receive upon such conversion, in addition to
the shares of Common Stock issuable upon such conversion, the kind and amount
of such shares of capital stock or rights which the holder would have been
entitled to receive had such Note (or portion thereof) been converted
immediately prior to such record date. No adjustment in the conversion price
will be required unless such adjustment would require an increase or decrease
of at least one percent of the conversion price, but any adjustment that would
otherwise be required to be made shall be carried forward and taken into
account in any subsequent adjustment.
In case of any reclassification or change of outstanding shares of Common
Stock (with certain exceptions) or the Company's consolidation with, or merger
with or into, any other entity that results in a reclassification, change,
conversion, exchange or cancellation of outstanding shares of Common Stock
(with certain exceptions) or any sale, transfer or lease of all or
substantially all the assets of the Company, the holder of any Note after such
reclassification, change, consolidation, merger, sale, transfer or lease will
have the right to convert such Notes only into the kind and amount of
securities, cash and other property which the holder would have been entitled
to receive upon such reclassification, change, consolidation, exchange,
merger, sale, transfer or lease if
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<PAGE>
the holder had held the Common Stock issuable upon the conversion of such
Notes immediately before the effective date of such transaction. See "Certain
Federal Income Tax Consequences."
The Company from time to time may to the extent permitted by law reduce the
conversion price by any amount for any period of at least 20 business days, in
which case the Company shall give at least 15 days' notice of such decrease,
if the Board of Directors has made a determination that such decrease would be
in the best interests of the Company, which determination shall be conclusive.
The Company may, at its option, make such reductions in the conversion price,
in addition to those set forth above, as the Company deems advisable to avoid
or diminish any income tax to its stockholders resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes
will, to the extent set forth in the Indenture, be subordinated in right of
payment to the prior payment in full of all existing or future Senior
Indebtedness. Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, in an assignment for the benefit of creditors or any marshalling of
the Company's assets and liabilities, the holders of all Senior Indebtedness
will first be entitled to receive payment in full of all amounts due or to
become due thereon before the Noteholders will be entitled to receive any
payment in respect of the principal of or premium, if any, or interest on the
Notes or on account of the redemption or repurchase provisions of the Notes
(except that holders of Notes may receive securities that are subordinated at
least to the same extent as the Notes to Senior Indebtedness and any
securities issued in exchange for Senior Indebtedness).
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities) if (a) a default in the payment of
the principal of, premium, if any, or interest on Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (b) any other
default occurs and is continuing with respect to Senior Indebtedness that
permits holders of the Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the representative or representatives of
holders of at least a majority in principal amount of Senior Indebtedness then
outstanding. Payments on the Notes may and shall be resumed, (i) in the case
of a payment default, upon the date on which such default is cured or waived;
or (ii) in the case of a nonpayment default, 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity of any
Senior Indebtedness has been accelerated. No new period of payment blockage
may be commenced within 360 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No nonpayment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice unless such
default shall have been cured or waived for a period of not less than 180
days.
A significant portion of the Company's operations are conducted through
subsidiaries. The rights of the Company and its creditors, including the
holders of Notes, to participate in the assets of any such subsidiary upon any
liquidation or reorganization of such subsidiary or otherwise will be subject
to prior claims of creditors of such subsidiary, including policyholders,
except to the extent that the Company may itself be a creditor with recognized
claims against the subsidiary. At March 15, 1996, indebtedness of the
Company's subsidiaries was approximately $8.4 million. The Company's ability
to pay principal and interest on the Notes will be dependent upon the payment
to it of dividends, interest and other amounts by its subsidiaries. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Risk Factors--Holding Company Structure."
Because of these subordination provisions, in the event of a liquidation,
bankruptcy or insolvency of the Company, Noteholders may recover less,
ratably, than the holders of Senior Indebtedness. Senior Indebtedness was
approximately $57.3 million at March 15, 1996. After giving effect to the
incurrence of additional Senior Indebtedness in connection with the
acquisition of Universal Fidelity and the expected use of the estimated net
proceeds from this offering, at March 15, 1996, Senior Indebtedness would have
been approximately $25.0 million. See "Capitalization."
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"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred or created:
(a) indebtedness, matured or unmatured, whether or not contingent, of the
Company for money borrowed, (b) any interest rate contract, interest rate swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its subsidiaries against fluctuations in interest rates, (c)
indebtedness, matured or unmatured, whether or not contingent, of the Company
evidenced by notes, debentures, bonds or similar instruments or letters of
credit (or reimbursement agreements in respect thereof), (d) obligations of
the Company as lessee under capitalized leases and under capitalized leases of
property made as part of any sale and leaseback transactions, (e) indebtedness
of others of any of the kinds described in the preceding clauses (a) through
(d) assumed or guaranteed by the Company and (f) renewals, extensions,
modifications, amendments and refundings of, and indebtedness and obligations
of a successor person issued in exchange for or in replacement of,
indebtedness or obligations of the kinds described in the preceding clauses
(a) through (e), unless the agreement pursuant to which any such indebtedness
described in clauses (a) through (e) is created, issued, assumed or guaranteed
expressly provides that such indebtedness is not senior or superior in right
of payment to the Notes; provided, however, that the following shall not
constitute Senior Indebtedness: (i) any indebtedness or obligation of the
Company in respect of the Notes; (ii) the 8% Debentures; (iii) any
indebtedness of the Company to any of its subsidiaries or other affiliates;
(iv) any indebtedness of the Company that is subordinated or junior in any
respect to any other indebtedness of the Company other than Senior
Indebtedness; (v) any indebtedness of the Company incurred for the purchase of
goods or materials in the ordinary course of business; and (vi) indebtedness
of the Company that by its terms is pari passu with or subordinate or subject
in right of payment to the Notes.
The Company expects from time to time to incur indebtedness constituting
Senior Indebtedness. The Indenture does not prohibit or limit the incurrence
of additional indebtedness, including Senior Indebtedness, by the Company or
its subsidiaries.
OPTIONAL REDEMPTION
The Notes are to be redeemable, for cash, at the option of the Company, at
any time on or after , 1999, in whole or in part, upon not less
than 30 or more than 60 days' notice, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid
interest to the date fixed for redemption if redeemed during the 12-month
period beginning:
<TABLE>
<CAPTION>
REDEMPTION
DATE PRICE
---- ----------
<S> <C>
, 1999............................................... %
, 2000............................................... %
, 2001............................................... %
, 2002............................................... %
</TABLE>
If less than all of the outstanding Notes are to be redeemed, the Trustee
will select those to be redeemed pro rata or by a method the Trustee considers
fair and appropriate. Any Notes for which a notice of redemption has been
given may be converted into shares of Common Stock at any time before the
close of business on the date prior to the date fixed for redemption.
Except as set forth under "--Change of Control" the Company will not be
required to make mandatory redemption payments with respect to the Notes.
There are no sinking fund payments with respect to the Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at a purchase price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company shall
publish a notice in the Wall Street Journal, notify the Trustee and mail a
notice via first class mail, postage prepaid to each holder stating: (a) that
the Change of Control Offer is being made pursuant to the covenant entitled
"Offer
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to Repurchase Upon Change of Control" and that all Notes tendered will be
accepted for payment; (b) the purchase price and the purchase date, which will
be a business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date"); (c) that any
Note not tendered will continue to accrue interest; (d) that, unless the
Company defaults in the payment of the Change of Control Payment, all Notes
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control Payment Date; (e) that holders
electing to have any Notes purchased pursuant to a Change of Control Offer
will be required to surrender the Notes, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (f) that
holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased; and (g) that holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof. The Company will comply with the requirements of Rule 13e-4
and 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes in connection with a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer; (b) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof
so tendered; and (c) deliver or cause to be delivered to the Trustee the Notes
so accepted together with an Officers' Certificate stating the Notes or
portions thereof tendered to the Company. The Paying Agent shall promptly mail
to each holder of Notes so accepted the Change of Control Payment for such
Notes, and the Trustee shall promptly authenticate and mail to each holder a
new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided, that each such new Note shall be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
"Change of Control" means an event or series of events in which (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) acquires "beneficial ownership" (as determined in accordance
with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than
50% of the total Voting Stock of the Company at an Acquisition Price (each
terms as defined herein) less than 105% of the conversion price then in effect
with respect to the Notes; and (ii) the holders of the Common Stock receive
consideration which is not all or substantially all common stock that is (or
upon consummation of or immediately following such event or events will be)
listed on a United States national securities exchange or approved for
quotation on the Nasdaq National Market or any similar United States system of
automated dissemination of quotations of securities prices; provided, however,
that any such person or group shall not be deemed to be the beneficial owner
of, or to beneficially own, any Voting Stock tendered in a tender offer until
such tendered Voting Stock is accepted for purchase under the tender offer.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency). "Acquisition Price" means the weighted average
per share price paid by the person or group in acquiring the Voting Stock.
The Change of Control purchase feature of the Notes may in certain
circumstances make it more difficult or discourage a takeover of the Company,
and thus the removal of incumbent management, and may have an
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adverse impact on the market value of the Common Stock. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of debt outstanding at such time
or otherwise affect the Company's capital structure, credit ratings or Common
Stock price.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under
Senior Indebtedness as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provision of the Notes. See "--
Subordination." Failure of the Company to repurchase the Notes when required
would result in an Event of Default with respect to the Notes whether or not
such repurchase is permitted by the subordination provisions. There can be no
assurance that the Company will have sufficient resources to purchase Notes
upon a Change of Control.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING INSURANCE
SUBSIDIARIES
The Company will not, and will not permit any of its insurance subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction on the ability of
any insurance subsidiary of the Company to (i) pay dividends or make any other
distributions on its capital stock or with respect to any other interest or
participation in, or measured by, its profits, or pay any indebtedness owed
to, the Company or any subsidiary of the Company; (ii) make loans or advances
to the Company or any subsidiary of the Company; or (iii) transfer any of its
properties or assets to the Company, except for such encumbrances or
restrictions existing under or by reason of (q) the Term Loan dated August 30,
1995 between the Company and American National Bank and Trust Company of
Chicago, Firstar Bank Milwaukee, Bank One, Rockford and LaSalle National Bank
as in effect on the date the Indenture is executed; (r) the Term Loan dated
March 22, 1995 between the Company and American National Bank and Trust
Company of Chicago, Firstar Bank Milwaukee and Bank One, Rockford as in effect
on the date the Indenture is executed; (s) the Credit Facility dated March 22,
1995 between the Company and American National Bank and Trust Company of
Chicago, Firstar Bank Milwaukee, Bank One, Rockford and Fleet National Bank of
Connecticut; (t) any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings of the
agreements described in clauses (q), (r) and (s) hereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in such
agreements as in effect on the date the Indenture is executed; (u) bank credit
facilities of any insurance subsidiary of the Company, as in effect from time
to time; (v) any instrument governing indebtedness of any insurance subsidiary
of the Company evidenced by industrial revenue bonds (provided that such
encumbrances or restrictions set forth in the agreements or instruments
described in clauses (u) and (v) hereof are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
agreements described in clauses (q), (r) and (s) hereof as in effect on the
date the Indenture is executed); (w) customary provisions restricting the
transfer of property or assets contained in any conditional sales contract or
capitalized lease of any insurance subsidiary of the Company; (x) applicable
law; (y) customary provisions restricting subletting or assignment of any
lease governing a leasehold interest of the Company or any insurance
subsidiary of the Company which lease was entered into in the ordinary course
of business and consistent with past practice; (z) arrangements relating to
the sale of agent debit balances by the Company or its Subsidiaries; or (aa)
any instrument governing indebtedness of a person acquired by the Company or
any insurance subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any person, or the properties
or assets of any person, other than the person, or the property or assets of
the person, so acquired.
MERGERS AND CONSOLIDATIONS
The Indenture will provide that the Company may not, in a single transaction
or series of transactions, consolidate with or merge with or into, or sell,
lease, convey or otherwise dispose of all or substantially all of its assets
to, another corporation, person or entity unless (i) the entity or the person
formed by or surviving any
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<PAGE>
such consolidation or merger (if other than the Company), or to which such
sale, lease, conveyance or other disposition shall have been made, is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (ii) the corporation formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, lease, conveyance or other disposition shall have been made,
assumes all the obligations of the Company pursuant to a supplemental
indenture under the Notes and the Indenture; and (iii) immediately after such
transaction no Default or Event of Default exists. The Company must deliver to
the Trustee prior to the consummation of the proposed transaction an Officers'
Certificate to the foregoing effect and an opinion of counsel stating that the
proposed transaction and such supplemental indenture comply with the
Indenture.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of or premium, if any, on any Note when due at maturity, upon
redemption or otherwise, including failure by the Company to purchase the
Notes when required as described under "Change of Control" (whether or not
such payment shall be prohibited by the subordination provisions of the
Indenture); (b) failure to pay any interest on any Note when due, continued
for 30 days (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture); (c) failure to perform any other
covenant or agreement of the Company in the Notes or the Indenture for 60 days
after written notice as provided in the Notes or the Indenture; (d) certain
events of bankruptcy, insolvency or reorganization with respect to the Company
and its significant subsidiaries; (e) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company or any of its
subsidiaries (or the payment of which is guaranteed by the Company or any of
its subsidiaries) whether such indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (i) is caused by a
failure to pay principal or interest on such indebtedness prior to the
expiration of the grace period provided in such indebtedness (a "Payment
Default") or (ii) results in the acceleration of such indebtedness prior to
its expressed maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $10 million or more; and (f) final
judgments or decrees shall be entered against the Company or any subsidiary
involving liabilities of $10 million or more (singly or in the aggregate)
(after deducting the portion of such liabilities accepted by a reputable
insurance company) and such final judgments or decrees shall not have been
vacated, discharged, satisfied or stayed pending appeal within 60 days from
the entry thereof. Subject to the provisions of the Indenture relating to the
duties of the Trustee in case an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Noteholders, unless such Noteholders shall have offered to the Trustee
reasonable security or indemnity. The holders of a majority in aggregate
principal amount of the outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee
(subject to certain exceptions).
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization with respect to the Company) occurs
and is continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Notes may declare the principal
of and premium, if any, on the Notes to be due and payable immediately. In the
event of a declaration of acceleration because an Event of Default under
clause (e) of the preceding paragraph has occurred and is continuing, such
declaration of acceleration shall be automatically annulled if the holders of
the indebtedness which is the subject of such Event of Default have rescinded
their acceleration in respect of such indebtedness within 30 days thereof and
no other Event of Default has occurred during such 30-day period which has not
been cured or waived. The holders of a majority in principal amount of the
Notes then outstanding may rescind an acceleration and its consequences if
certain conditions are met and all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due
solely because of acceleration. In case an Event of Default resulting from
bankruptcy, insolvency or reorganization of the Company shall occur, all
unpaid principal of, premium, if any, and accrued interest on the Notes then
outstanding will be due and payable immediately without any
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declaration or other act on the part of the Trustee or the holders of Notes.
The Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the Trustee will be required, in the exercise of its own
powers, to use the degree of care of a prudent person in the conduct of his or
her own affairs.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy under the Indenture unless the
holder previously has given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes have made written request, and
offered reasonable indemnity to the Trustee to institute proceedings as
trustee, and the Trustee has not received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with the request and has failed to institute such proceeding within 60 days.
However, these limitations do not apply to a suit instituted by a holder of a
Note for the enforcement of payment of the principal of and premium, if any,
or interest on such Note on or after the respective due dates expressed in
such Note or of the right to convert the Notes in accordance with the
Indenture.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in the performance of the obligations.
The Indenture will provide that the Trustee will, within 90 days after the
occurrence of default, mail to all Noteholders notice of all defaults known to
it; but, except in the case of a default in the payment of the principal or
premium, if any, or interest on any of the Notes, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of such holders.
MODIFICATION AND WAIVER
The Indenture will contain provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority of the
aggregate principal amount of the Notes then outstanding, to execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture or modify in any manner the rights
of the holders of the Notes; provided that no such supplemental indenture may,
among other things, (i) extend the time for payment of principal of, premium,
if any, or interest on any Note or reduce the principal amount thereof,
premium, if any, or interest thereon or any amount payable upon the redemption
or required purchase thereof or impair the right of any holder to institute
suit for payment of the Notes after the same shall become due and payable, or
make the principal thereof or any premium or interest thereon payable in any
coin or currency other than that provided in the Indenture, or modify the
subordination provisions of the Indenture in a manner adverse to the holders
of Notes or impair the right to convert the Notes into Common Stock or to
impair the obligation of the Company to purchase the Notes upon the occurrence
of a Change of Control; or (ii) reduce the aforesaid percentage of the
aggregate principal amount of Notes, the holders of which must consent to
authorize any such supplemental indenture, without the consent of the holders
of all outstanding Notes affected thereby.
The holders of a majority in aggregate principal amount of the Notes also
may, on behalf of the holders of all Notes, waive any past default under the
Indenture, except a default in the payment of the principal of, premium, if
any, or interest on any Note, a failure to convert Notes into Common Stock or
in respect of a provision under the Indenture which cannot be modified or
amended without the consent of each holder of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of the Notes in the case of
a merger or consolidation, to make provision with respect to the conversion
rights of holders in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the holders of the
Notes or that does not adversely affect the legal rights under the Indenture
of any such Holder, or to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange the Notes in accordance with the
procedures set forth in the Indenture. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection with any such transaction. The Registrar is not required
to transfer or exchange any Note selected for redemption. Also, the Registrar
is not required to transfer or exchange any Note for a period of 15 days
before a selection of the Notes to be redeemed.
SATISFACTION AND DISCHARGE
The Company may terminate its obligations under the Indenture at any time by
delivering all outstanding Notes to the Trustee for cancellation. After all
the Notes have been called for redemption or mature in one year, the Company
may terminate all of its obligations under the Indenture, other than its
obligations to pay the principal of, premium, if any, and interest on the
Notes, to convert the Notes and certain other obligations, at any time, by
irrevocably depositing with the Trustee money or noncallable U.S. Government
Obligations sufficient to pay all remaining indebtedness on the Notes, after
complying with certain other procedures set forth in the Indenture.
CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. Subject to the Trust Indenture Act, the
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest, as described in the Trust Indenture Act, it
must eliminate such conflict or resign.
The First National Bank of Chicago will be the Trustee under the Indenture.
The Company may in the future maintain deposit accounts and conduct other
banking transactions with the Trustee in the ordinary course of business.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $1 per share, and 5,000,000 shares of Preferred Stock,
no par value. The Board of Directors is authorized to determine the number and
designation of one or more series of Preferred Stock and the voting powers,
rights, preferences, qualifications, limitations or restrictions and the
shares of any such series. The Board has designated a series of $2.125
Cumulative Convertible Exchangeable Preferred Stock, consisting of 1,000,000
shares, 848,900 of which are currently outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders and to vote on all
matters on which a vote of stockholders is taken, except as otherwise provided
by statute. The shares of Common Stock do not have cumulative voting rights.
Therefore, the holders of a majority of shares voting for the election of
directors can elect all of the directors then standing for election, if they
choose to do so. Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, dissolution or winding up
of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities. The ability of the Company to pay dividends on its
Common Stock will depend primarily on the receipt of dividends and other
payments from its subsidiaries. The Company's insurance subsidiaries are
subject to state laws and regulations which limit their ability to pay
dividends or make other payments. In addition,
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<PAGE>
certain of the Company's credit agreements also limit its ability to pay
dividends. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources." Furthermore, the
Company's Certificate of Incorporation prohibits the Company from paying
dividends on the Common Stock if the Company is not current in its dividend
payments on the Preferred Stock. The Preferred Stock will rank prior to the
Common Stock as to the payment of dividends and distributions upon
liquidation, dissolution or winding up. See "--Preferred Stock." The shares of
Common Stock are not subject to liability for calls or assessments and have no
conversion rights, sinking fund privileges or preemptive rights.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to issue shares of Preferred Stock in one or more series and,
within certain limitations, to determine the dividend rights, dividend rate,
rights and terms of redemption, liquidation preferences, sinking fund terms,
conversion and voting rights of any series of Preferred Stock, the number of
shares constituting any such series, the designation thereof and the price
therefor. The Company believes that the ability of its Board of Directors to
issue one or more series of Preferred Stock will provide the Company with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of
Preferred Stock, as well as Common Stock, will be available for issuance
without further action by the Company's stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
The issuance of a series of Preferred Stock with voting or conversion rights
may adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may also have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present
plans to issue any shares of Preferred Stock.
$2.125 Preferred Stock and Related Subordinated Debentures
Holders of the $2.125 Preferred Stock are entitled to cumulative dividends
at the rate of $2.125 per annum per share. The $2.125 Preferred Stock is
convertible into Common Stock at the option of the holder at any time, unless
previously redeemed, at the rate of 1.6 shares of Common Stock for each share
of $2.125 Preferred Stock, subject to adjustment under certain circumstances.
The $2.125 Preferred Stock is also exchangeable in whole at the sole option of
the Company on any quarterly dividend payment date for the Company's 8 1/2%
Convertible Subordinated Debentures due 2014 (the "8 1/2% Debentures") at the
rate of $25 principal amount of 8 1/2% Debentures for each share of $2.125
Preferred Stock. The $2.125 Preferred Stock is redeemable for cash at any
time, in whole or in part, at the option of the Company, at redemption prices
declining from $25.85 on the date of this Prospectus to $25 on July 15, 1999,
plus accrued and unpaid dividends to the redemption date. In addition, the
$2.125 Preferred Stock is redeemable at the option of the holder upon certain
stock acquisitions or business combinations at a redemption price of $25 per
share, plus accrued and unpaid dividends to the redemption date.
Upon any liquidation dissolution or winding up of the Company, the holders
of the $2.125 Preferred Stock will be entitled to receive $25 per share, plus
cumulative accrued dividends. The holders of the $2.125 Preferred Stock are
not entitled to vote on any matters unless the Company shall be in arrears in
an amount equal to at least six quarterly dividends, in which case the holders
of the $2.125 Preferred Stock will be entitled to vote for the election of two
additional directors.
The Company intends to use a portion of the net proceeds of this offering to
redeem all of the outstanding shares of $2.125 Preferred Stock. Each share of
$2.125 Preferred Stock is convertible into 1.6 shares of the Company's Common
Stock. See "Use of Proceeds."
RIGHTS TO PURCHASE SERIES A JUNIOR PREFERRED STOCK
In 1990, the Company distributed one Right to Acquire Series A Junior
Preferred Stock (a "Right") to each holder of its Common Stock. In addition,
each share of Common Stock subsequently issued automatically carries with it a
Right. Subject to certain exceptions, the Rights generally become exercisable
and separately
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tradeable if a person or group (an "Acquiring Person") acquires 20% or more of
the Common Stock. An Acquiring Person is not deemed to include any stockholder
who, on December 14, 1990, already owned 20% of the outstanding Common Stock.
Upon such an event, each holder of a Right will be entitled to purchase one-
tenth of a share of Series A Junior Preferred Stock at a purchase price of
$4.50, subject to certain adjustments. Such preferred shares, of which
2,000,000 are authorized, would be voting and would be entitled to
distributions that are ten times the distributions on the Common Stock.
Subject to exercise of the Rights, in the event of certain business
combinations involving the Company, a holder of a Right would have the right
to receive Common Stock with a value of ten times the exercise price of the
Right.
The terms and conditions of the Rights are set forth in full in the Rights
Agreement between the Company and First Chicago Trust Company of New York,
dated December 12, 1990 (the "Rights Agreement"). The summary description of
the Rights set forth herein does not purport to be a complete description of
the terms and conditions of the Rights and is qualified in its entirety by
reference to the Rights Agreement, a copy of which was filed as an exhibit to
the Company's Registration Statement on Form 8-A filed with the Commission on
December 14, 1990, which is incorporated herein by reference. The Rights will
expire on December 14, 2000, and until they become exercisable, may be
redeemed by the Company for $.01 per Right.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Company's Certificate of Incorporation provides for a maximum of fifteen
directors and the division of the directors into three classes, each of which
serves for a staggered three-year term. These provisions could help to effect
perpetuation of current management.
Section 203 of the Delaware General Corporation Law contains certain
restrictions on the ability of an "interested stockholder" (defined as a
stockholder owning 15% or more of a corporation's voting stock) to engage in a
business combination with such corporation. Since the Company has not amended
its Certificate of Incorporation or Bylaws to prohibit the application of
Section 203, such Section may inhibit an interested stockholder's ability to
acquire additional shares of Common Stock or otherwise engage in a business
combination with the Company.
INSURANCE REGULATION CONCERNING CHANGE OF CONTROL
The Company owns, directly or indirectly, all of the shares of stock of
certain life and health insurance companies domiciled principally in Illinois.
Illinois insurance regulatory laws require prior approval by the Illinois
Director of Insurance of any acquisition of control of an Illinois insurance
company or of any company which controls an Illinois insurance company. Under
Illinois insurance regulatory laws, "control" is presumed to exist through the
ownership of 10% or more of the voting securities of a domestic insurance
company or of any company which controls a domestic insurance company. Any
purchaser of 10% or more of the shares of Common Stock of the Company, whether
by conversion or otherwise, will be presumed to have acquired control of the
Illinois domestic insurance subsidiaries unless the Illinois Director of
Insurance, following application by such purchaser, determines otherwise.
Accordingly, any purchase, whether by conversion or otherwise, of 10% or more
of the Common Stock of the Company, would require prior action by the Illinois
Director of Insurance. Such requirements may deter, delay or prevent certain
transactions affecting the control of or the ownership of Common Stock,
including transactions that could be advantageous to the stockholders of the
Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the $2.125
Preferred Stock is First Chicago Trust Company of New York.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the principal federal income tax
consequences of holding and disposing of Notes. This summary is based upon
laws, regulations, rulings and judicial decisions now in effect, all of which
are subject to change, possibly on a retroactive basis. This summary is
presented for informational purposes only and relates only to Notes or Common
Stock received upon conversion thereof that are held as "capital assets"
(generally, property held for investment within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code")). The summary
discusses certain federal income tax consequences to holders of Notes that are
citizens or residents of the United States. It does not discuss state, local
or foreign tax consequences, nor does it discuss tax consequences to
categories of holders of Notes that are subject to special rules, such as tax-
exempt organizations, insurance companies, financial institutions and dealers
in stocks and securities. Tax consequences may vary depending on the
particular status of an investor.
THIS SUMMARY DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE NOTES.
EACH INVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO SUCH PERSON HOLDING AND DISPOSING OF THE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY
RECENT PROPOSED CHANGES IN APPLICABLE TAX LAWS.
STATED INTEREST
A holder of Notes using the accrual method of accounting for tax purposes
generally will be required to include interest in income as such interest
accrues, while a cash basis holder will be required to include interest in
income when cash payments are made available to such holder.
CONVERSION OF NOTES
Except as otherwise indicated below, no gain or loss will be recognized for
federal income tax purposes upon the conversion of Notes into shares of Common
Stock. Cash paid in lieu of fractional shares of Common Stock will be taxed as
if the fractional shares of Common Stock were issued and then redeemed for
cash which should result in capital gain or loss, if any (measured by the
difference between the cash received for the fractional share and the holder's
basis therein). The tax basis of the shares of Common Stock received upon
conversion will be equal to the tax basis of the Notes converted reduced by
the portion of such basis, if any, allocable to any fractional share interest
exchanged for cash. The holding period of the shares of the Common Stock
received upon conversion will include the holding period of the Notes
converted.
If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g. distributions of cash, evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the conversion price of the Notes is reduced, or
if the Company voluntarily reduces the conversion price, such reduction will
be deemed to be the payment of a stock distribution to a holder of a Note
which may be taxable as a dividend. Holders of Notes could, therefore, have
taxable income as a result of an event pursuant to which they received no cash
or property that could be used to pay the related income tax.
DISPOSITION OF NOTES OR COMMON STOCK
In general, the holder of a Note or the Common Stock into which it is
converted will recognize gain or loss upon the sale, redemption, retirement or
other taxable disposition of the Note or Common Stock in an amount equal to
the difference between the amount of cash and the fair market value of
property received (except to the extent attributable to the payment of accrued
interest) and such holder's adjusted tax basis in the Note or Common Stock.
The holder's tax basis in a Note generally will be such holder's cost,
increased by the amount of accrued market discount with respect to the Note
(discussed below), and reduced by the amount of any
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amortizable bond premium the holder elects to amortize with respect to the
Note. Such gain or loss will be a capital gain or loss except to the extent of
any accrued market discount. See "--Market Discount and Bond Premium."
MARKET DISCOUNT AND BOND PREMIUM
If a Holder acquires a Note subsequent to its original issuance and the
Note's stated redemption price at maturity exceeds the Holder's initial tax
basis in the Note by more than a de minimis amount, the Holder should
generally be treated as having acquired the Note at a "market discount" equal
to such excess. In addition, if a Holder's initial tax basis in a Note exceeds
the stated redemption price at maturity of the Note, the Holder should
generally be treated as having acquired the Note with "bond premium" in an
amount equal to such excess. Holders should consult their tax advisers
regarding the existence, if any, and tax consequences of market discount and
bond premium.
BACKUP WITHHOLDING
Under the "backup withholding" provisions of federal income tax law, the
Company, its agents, a broker or any paying agent, as the case may be, will be
required to withhold a tax equal to 31% of any payment of (1) principal,
premium, if any, and interest on the Notes, (2) proceeds from the sale or
redemption of the Notes, (3) dividends on the Common Stock, and (4) proceeds
from the sale or redemption of the Common Stock, unless the holder (i) is
exempt from backup withholding and, when required, demonstrates this fact to
the payor or (ii) provides a taxpayer identification number to the payor,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding provisions.
Certain holders of Notes (including corporations, tax-exempt organizations,
individual retirement accounts and, to a limited extent, nonresident aliens)
are not subject to the backup withholding reporting requirements. Holders
should consult their own tax advisers to determine whether they are subject to
these backup withholding rules. A nonresident alien must submit a statement,
signed under penalties or perjury, attesting to that individual's exemption
from backup withholding. A holder of Notes or Common Stock that is otherwise
required to but does not provide the Company with a correct taxpayer
identification number may be subject to penalties imposed by the Code. Any
amounts paid as backup withholding with respect to Notes or Common Stock will
be credited to the income tax liability of the person receiving the payment
from which such amount was withheld.
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UNDERWRITING
Bear, Stearns & Co. Inc., EVEREN Securities, Inc. (formerly Kemper
Securities, Inc.), and Oppenheimer & Co., Inc. (the "Underwriters") have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is filed as an exhibit to the Registration
Statement), to purchase from the Company the following aggregate principal
amount of Notes (assuming no exercise of the Underwriters' over-allotment
option):
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ -----------
<S> <C>
Bear, Stearns & Co. Inc.......................................
EVEREN Securities, Inc........................................
Oppenheimer & Co., Inc........................................
-----------
Total..................................................... $65,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase Notes are subject to certain conditions, and that if any of the
Notes are purchased by the Underwriters pursuant to the Underwriting
Agreement, all of the Notes agreed to be purchased by the Underwriters must be
so purchased.
The Company has been advised that the Underwriters initially propose to
offer the Notes to the public at the offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of % of such principal amount of the Notes. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of % of
such principal amount of the Notes on sales to certain other dealers. After
the offering, the offering price and the concession and discount to dealers
may be changed.
The Company has granted to the Underwriters an option to purchase up to an
additional $9,750,000 principal amount of Notes at the offering price less
underwriting discounts and commissions. To the extent that this option to
purchase is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional principal amount of Notes being sold to the Underwriters as the
number set forth next to such Underwriter's name in the preceding table bears
to the total aggregate principal amount of Notes in such table. Such option
may be exercised to purchase Notes solely for the purpose of covering over-
allotments, if any, incurred in the sale of Notes in this offering. Such
option may be exercised at any time and from time to time up to 30 days after
the date of this Prospectus.
The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of ("Transfer"), directly or
indirectly, any shares of its Common Stock or any securities convertible into
or exchangeable or exercisable for its Common Stock or any rights to acquire
Common Stock for a period of 120 days after the date of this Prospectus,
without the prior written consent of Bear, Stearns & Co. Inc. ("Bear
Stearns"), subject to certain limited exceptions. In addition, each of the
Company's executive officers and directors has agreed not to Transfer,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock or any rights
to acquire Common Stock in excess of 10% of such executive officer's holdings
in the Common Stock or any securities convertible into or exchangeable or
exercisable (currently or in the future) for Common Stock or any rights to
acquire Common Stock as of the date of this Prospectus for a period of 120
days after the date of this Prospectus, without the prior written consent of
Bear Stearns, subject to certain limited exceptions.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
In June 1995, the Company engaged Bear Stearns to act as its financial
advisor to provide investment banking and advisory services for which it has
and will receive customary fees and expenses. In 1993, EVEREN Securities, Inc.
provided investment banking and advisory services to the Company in connection
with the Company's acquisition of CLAC.
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AVAILABLE INFORMATION
Pioneer Financial Services, Inc. is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048; and Suite 1400, 500 West Madison, chicago,
Illinois 60606. Copies of such material can also be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is
traded on the NYSE and the Chicago Stock Exchange. Such reports, proxy
statements and other information can also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement")
filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to this offering. This Prospectus does not
contain all of the information included in the Registration Statement.
Statements contained herein concerning the provisions of documents filed with,
or incorporated by reference in, the Registration Statement are not
necessarily complete, and each such statement is hereby qualified in its
entirety by reference to the copy of the applicable documents filed with the
Commission. reference is made to the Registration Statement for further
information with respect to the Company, the Notes offered hereby and the
Common Stock.
LEGAL MATTERS
The validity of the issuance of the securities being offered hereby will be
passed upon by McDermott, Will & Emery, Chicago, Illinois. Certain legal
matters in connection with the Notes will be passed upon for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Pioneer Financial Services, Inc.
appearing in or incorporated by reference (including financial statement
schedules incorporated by reference) in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated on their reports thereon also appearing elsewhere herein and
in the Registration Statement or incorporated by reference. Such consolidated
financial statements have been included herein or incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
61
<PAGE>
PIONEER FINANCIAL SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Statements of Consolidated Income for the years ended December 31, 1993,
1994 and 1995............................................................ F-3
Consolidated Balance Sheet as of December 31, 1994 and 1995............... F-4
Statements of Consolidated Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995......................................... F-6
Statements of Consolidated Cash Flows for the years ended December 31,
1993, 1994 and 1995...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pioneer Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Services, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related statements of consolidated income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pioneer
Financial Services, Inc. and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for investments in debt and
equity securities.
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 1996
F-2
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums and policy charges (Note 7):
Accident and health.............................. $601,684 $659,180 $625,951
Life and annuity................................. 39,282 44,929 61,092
-------- -------- --------
640,966 704,109 687,043
Net investment income (Note 5)..................... 40,242 42,786 70,975
Other income and realized investment gains and
losses (Note 5)................................... 17,920 27,260 42,066
-------- -------- --------
699,128 774,155 800,084
BENEFITS AND EXPENSES
Benefits:
Accident and health.............................. 397,963 407,249 398,971
Life and annuity................................. 39,419 42,947 76,846
-------- -------- --------
437,382 450,196 475,817
Insurance and general expenses..................... 162,831 192,810 218,388
Interest expense (Notes 10 and 13)................. 3,276 5,054 4,958
Amortization of deferred policy acquisition costs
(Note 11)......................................... 76,875 100,073 69,199
-------- -------- --------
680,364 748,133 768,362
-------- -------- --------
Income before income taxes......................... 18,764 26,022 31,722
Income taxes (benefit) (Note 6):
Current.......................................... 10,858 6,570 7,407
Deferred......................................... (4,239) 2,303 3,347
-------- -------- --------
6,619 8,873 10,754
-------- -------- --------
Net income......................................... 12,145 17,149 20,968
Preferred stock dividends (Note 14)................ 2,021 1,904 1,805
-------- -------- --------
Income applicable to common stockholders........... $ 10,124 $ 15,245 $ 19,163
======== ======== ========
Net income per common share:
Primary.......................................... $ 1.51 $ 2.36 $ 2.44
Fully diluted.................................... 1.26 1.58 1.85
Dividends declared per common share................ -- .15 .18
Average common and common equivalent shares
outstanding:
Primary.......................................... 6,724 6,459 7,839
Fully diluted.................................... 10,731 12,734 12,608
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1994 1995
------ ---------- ----------
<S> <C> <C>
Investments (Notes 5 and 20):
Securities available-for-sale:
Fixed maturities, at fair value........................ $ 218,748 $ 622,666
Equity securities, at fair value....................... 15,440 15,570
Fixed maturities held-to-maturity, at amortized cost..... 378,650 246,041
Real estate--at cost, less accumulated depreciation...... 16,959 18,250
Mortgage loans--at unpaid balance........................ 1,806 9,253
Policy loans--at unpaid balance.......................... 23,082 79,122
Short-term investments--at cost, which approximates fair
value................................................... 69,152 51,690
---------- ----------
Total investments.................................... 723,837 1,042,592
Cash..................................................... 8,612 20,274
Premiums and other receivables, less allowance for
doubtful accounts
(Notes 8 and 19)........................................ 20,102 23,429
Reinsurance receivables and amounts on deposit with
reinsurers
(Note 7)................................................ 41,426 184,719
Accrued investment income................................ 8,873 13,307
Deferred policy acquisition costs (Note 11).............. 225,618 219,874
Land, building, and equipment--at cost, less accumulated
depreciation
(Note 19)............................................... 20,314 26,433
Deferred federal income taxes (Note 6)................... 7,262 --
Other.................................................... 19,656 28,293
---------- ----------
$1,075,700 $1,558,921
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
LIABILITIES, REDEEMABLE PREFERRED ----------------------
STOCK, AND STOCKHOLDERS' EQUITY 1994 1995
--------------------------------- ---------- ----------
<S> <C> <C>
Policy liabilities:
Future policy benefits:
Life............................................... $ 246,953 $ 591,093
Annuity............................................ 210,132 216,431
Accident and health................................ 163,477 153,603
Unearned premiums.................................... 76,266 71,150
Policy and contract claims (Note 9).................. 155,373 166,111
Other................................................ 16,407 16,077
---------- ----------
868,608 1,214,465
General liabilities:
General expenses and other liabilities............... 31,793 48,580
Amounts due to reinsurers (Note 7)................... 5,249 82,954
Deferred federal income tax (Note 6)................. -- 2,393
Short-term notes payable (Notes 10, 22 and 23)....... 20,093 13,534
Long-term notes payable (Notes 10, 20, 22 and 23).... 2,520 21,504
Convertible subordinated debentures (Notes 13 and
20)................................................. 57,427 9,695
---------- ----------
Total liabilities.................................. 985,690 1,393,125
Commitments and contingencies (Notes 6 to 12 and 17)
Redeemable Preferred Stock, no par value (Note 14):
$2.125 cumulative convertible exchangeable preferred
stock:
Authorized: 5,000,000 shares
Issued and outstanding: (1994--867,300 shares;
1995--848,900 shares)............................. 21,682 21,222
Stockholders' equity (Notes 6 and 12 to 16):
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1994--6,996,157; 1995--11,207,591)............... 6,996 11,208
Additional paid-in capital......................... 29,299 72,198
Unrealized appreciation (depreciation) of
available-for-sale securities (Notes 3 and 5)..... (7,193) 4,518
Retained earnings.................................. 48,960 66,870
Treasury stock at cost (1994--1,078,400 shares;
1995--1,132,300 shares)........................... (9,734) (10,220)
---------- ----------
Total stockholders' equity....................... 68,328 144,574
---------- ----------
$1,075,700 $1,558,921
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL APPRECIATION TOTAL
COMMON PAID-IN (DEPRECIATION) RETAINED TREASURY STOCKHOLDERS
STOCK CAPITAL OF SECURITIES EARNINGS STOCK EQUITY
------- ---------- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... $ 6,820 $28,399 $ 3,044 $24,521 $ (52) $ 62,732
1993 transactions:
Net income............. -- -- -- 12,145 -- 12,145
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (2,021) -- (2,021)
Stock options exercised
(72,000 shares)....... 72 379 -- -- -- 451
Appreciation of equity
securities............ -- -- 241 -- -- 241
Purchase of treasury
stock (546,200
shares)............... -- -- -- -- (4,720) (4,720)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(8,057 shares)........ 8 36 -- -- -- 44
------- ------- -------- ------- -------- --------
Balance at December 31,
1993................... 6,900 28,814 3,285 34,645 (4,772) 68,872
1994 transactions:
Net income............. -- -- -- 17,149 -- 17,149
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (1,904) -- (1,904)
Cash dividends--Common
Stock ($.15 per
share)................ -- -- -- (930) -- (930)
Stock options exercised
(85,500 shares)....... 86 409 -- -- -- 495
Conversion of
convertible
subordinated
debentures (4,255
shares)............... 4 46 -- -- -- 50
Cumulative effect of
change in accounting
principle (Note 3).... -- -- 3,605 -- -- 3,605
Depreciation of
available-for-sale
securities............ -- -- (14,083) -- -- (14,083)
Purchase of treasury
stock (521,600
shares)............... -- -- -- -- (4,962) (4,962)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(6,332 shares)........ 6 30 -- -- -- 36
------- ------- -------- ------- -------- --------
Balance at December 31,
1994................... 6,996 29,299 (7,193) 48,960 (9,734) 68,328
1995 transactions:
Net income............. -- -- -- 20,968 -- 20,968
Cash dividends--
Preferred Stock
($2.125 per share).... -- -- -- (1,805) -- (1,805)
Cash dividends--Common
Stock ($.18 per
share)................ -- -- -- (1,253) -- (1,253)
Stock options exercised
(147,000 shares)...... 147 1,373 -- -- -- 1,520
Conversion of
convertible
subordinated
debentures (4,062,418
shares)............... 4,063 41,517 -- -- -- 45,580
Appreciation of
available-for-sale
securities............ -- -- 11,711 -- -- 11,711
Purchase of treasury
stock (53,900 shares). -- -- -- -- (486) (486)
Issuance of shares
pursuant to Agent
Stock Purchase Plan
(2,016 shares)........ 2 9 -- -- -- 11
------- ------- -------- ------- -------- --------
Balance at December 31,
1995................... $11,208 $72,198 $ 4,518 $66,870 $(10,220) $144,574
======= ======= ======== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 12,145 $ 17,149 $ 20,968
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in premiums receivable.. (3,912) 4,981 (2,321)
Increase (decrease) in policy liabilities... 31,132 (34,498) (30,922)
Deferral of policy acquisition costs........ (67,633) (65,258) (65,036)
Amortization of deferred policy
acquisition costs (Note 11)................ 76,875 100,073 69,199
Deferred income tax expense (benefit)....... (4,239) 2,303 3,347
Change in other assets and liabilities...... (13,423) 21,392 17,154
Depreciation, amortization, and accretion... 9,795 (102) 7,541
Realized losses (gains) (Note 5)............ 1,336 383 (3,993)
--------- --------- ---------
Net cash provided by operating activities..... 42,076 46,423 15,937
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases--fixed maturities................. (120,228) (110,416) (247,746)
Sales--fixed maturities..................... 51,780 99,865 189,882
Maturities--fixed maturities................ 18,836 44,116 19,099
Purchases--equity securities................ (5,532) (4,609) (14,854)
Sales--equity securities.................... 14,845 2,558 18,585
Securities held-to-maturity:
Purchases................................... (256,579) (84,010) (13,369)
Sales....................................... 126,072 9,427 4,710
Maturities.................................. 102,538 21,472 28,865
Purchase of investment real estate............ -- (17,442) (1,903)
Net decrease (increase) in other investments.. 26,038 (21,499) 15,593
Net purchases of property and equipment....... (3,956) (2,957) (6,650)
Purchase of subsidiaries (Note 4)............. (9,685) -- (8,314)
--------- --------- ---------
Net cash used by investing activities......... (55,871) (63,495) (16,102)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible
subordinated debentures (Note 13)............ 54,055 -- --
Increase in notes payable..................... -- 21,225 14,219
Repayment of notes payable.................... (31,401) (5,362) (1,794)
Proceeds from sale of agent receivables (Note
8)........................................... 25,376 24,393 20,851
Transfer of collections on previously sold
agent
receivables (Note 8)......................... (22,981) (28,743) (18,978)
Dividends paid--preferred..................... (2,021) (1,904) (1,805)
Dividends paid--common........................ -- (930) (1,253)
Stock options exercised....................... 451 495 1,520
Purchase of treasury stock.................... (4,720) (4,963) (486)
Retirement of preferred stock................. (315) (1,993) (460)
Other......................................... 44 87 13
--------- --------- ---------
Net cash provided by financing activities..... 18,488 2,305 11,827
--------- --------- ---------
Increase (decrease) in cash................... 4,693 (14,767) 11,662
Cash at beginning of year..................... 18,686 23,379 8,612
--------- --------- ---------
Cash at end of year........................... $ 23,379 $ 8,612 $ 20,274
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Pioneer Financial Services, Inc. (PFS) through its subsidiaries markets and
underwrites life insurance and annuities, health insurance, and provides
medical utilization management services in selected niche markets throughout
the United States. PFS bases its operations on four core businesses: Life
Insurance, Senior Health, Group Medical, and Medical Utilization Management.
Life insurance products include traditional life (term and whole life),
universal life, and interest sensitive life insurance and annuities sold
primarily to the middle income market. Senior health products include Medicare
supplement, long-term care, home health care and specialty health for
individuals age sixty-five and older. Group medical business consists of small
group and individual hospital and medical policies marketed primarily to self-
employed individuals and small business owners. Medical utilization management
services provided to underwriters, self insured businesses, provider
organizations, and others include pre-certification of in-patient and out-
patient medical care, case management, and development and management of
provider networks. Approximately 40% of PFS' premiums are written in six
states.
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include
the accounts and operations, after intercompany eliminations, of Pioneer
Financial Services, Inc. (PFS) and its subsidiaries.
USE OF ESTIMATES
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates, and such differences may be material to the
financial statements.
INVESTMENTS
Investments in fixed maturities include bonds and mortgage-backed securities
with contractual maturities greater than one year. Fixed maturities classified
as "available for sale" are carried at fair value and fixed maturities
classified as "held to maturity" are carried at amortized cost.
Although PFS has the ability and intent to hold held-to-maturity securities
to maturity, there could occur infrequent and unusual conditions under which
it would sell certain of those securities. Those conditions would include
unforeseen changes in asset quality, significant changes in tax law affecting
the taxation of securities, a significant business acquisition or disposition,
and changes in regulatory capital requirements or permissable investments.
Changes in fair values of available-for-sale securities, after adjustments
including deferred policy acquisition costs ("DAC"), if any, and deferred
income taxes, are reported as unrealized appreciation or depreciation directly
in stockholders' equity and, accordingly, have no effect on net income. DAC
offsets to the unrealized appreciation or depreciation represent valuation
adjustments or reinstatements of DAC that would have been required as a charge
or credit to operations had such unrealized amounts been realized.
The amortized cost of fixed maturity investments is adjusted for
amortization of premiums and accretion of discounts. That amortization or
accretion is included in net investment income.
F-8
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the mortgage-backed portion of the fixed maturity securities portfolio,
PFS recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and anticipated
future payments. The net investment in the security is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net investment
income.
On December 1, 1995, as a result of recently issued guidance from the
Financial Accounting Standards Board ("FASB"), PFS transferred held-to-
maturity fixed maturities with an amortized cost of $222,482,000 to available-
for-sale, and also transferred $110,152,000 of available-for-sale fixed
maturities to held-to-maturity. These transfers resulted in a $8,290,000
decrease to unrealized appreciation of securities.
For equity securities, changes in unrealized appreciation or temporary
depreciation, after deferred income tax effects, are reported directly in
stockholders' equity.
Realized gains and losses on the sale of investments, and declines in value
considered to be other-than-temporary, are recognized in operations on the
specific identification basis.
Short term investments have maturities of three months or less and are
carried at cost which approximates fair value.
REVENUES
Revenues for interest-sensitive life insurance and annuities consist of
charges assessed against policy account values. For accident and health and
other life insurance, premiums are recognized as revenue when due. Accident
and health group association dues and fees, included in other revenues, are
recognized as revenue when received.
FUTURE POLICY BENEFITS
The liabilities for future policy benefits related to the annuity and
interest-sensitive life insurance policies are calculated based on accumulated
fund values. As of December 31, 1995, interest credited during the contract
accumulation period ranged from 2.5% to 11.25%. Investment spreads and
mortality gains are recognized as profits when realized, based on the
difference between actual experience and amounts credited or charged to
policies.
The liabilities for future policy benefits on other life insurance and
accident and health insurance policies have been computed by a net level
method based on estimated future investment yield, mortality or morbidity, and
withdrawals, including provisions for adverse deviation. Interest rate
assumptions range from 2.5% to 9.25% depending on the year of issue. The
provisions for future policy benefits and the deferral and amortization of
policy acquisition costs are intended to result in benefits and expenses being
associated with premiums proportionately over the policy periods.
UNEARNED PREMIUMS
Unearned premiums are calculated using the monthly pro-rata basis.
DEFERRED POLICY ACQUISITION COSTS
Costs that vary with, and are primarily related to, the production of new
business are deferred. Such costs are primarily related to accident and health
business and principally include the excess of new business commissions over
renewal commissions and underwriting and sales expenses.
F-9
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For annuities and interest-sensitive life insurance policies, deferred costs
are amortized generally in proportion to expected gross profits arising from
the difference between investment and mortality experience and amounts
credited or charged to policies. That amortization is adjusted retrospectively
when estimates of current or future gross profits (including the impact of
realized investment gains and losses) to be realized from a group of products
are revised. For other life and accident and health policies, costs are
amortized over the premium-paying period of the policies, using the same
mortality or morbidity, interest, and withdrawal assumptions that are used in
calculating the liabilities for future policy benefits.
The unamortized cost of purchased insurance in force is included in DAC
($21,291,000 and $26,681,000 at December 31, 1994 and 1995, respectively).
Amortization of these amounts is in relation to the present value of estimated
gross profits over the estimated remaining life of the related insurance in
force.
POLICY AND CONTRACT CLAIMS
The liabilities for policy and contract claims, principally accident and
health, are determined using case-basis evaluations and statistical analyses
based on past experience and represent estimates of the ultimate net cost of
incurred claims and the related claim adjustment expenses. Although
considerable variability is inherent in such estimates, management believes
that these liabilities are adequate. The estimates are continually reviewed
and adjusted as necessary; such adjustments are included in current
operations. PFS maintains an additional provision for adverse deviation in its
accident and health claim liability estimates.
REINSURANCE
Reinsurance premiums, commissions, expense reimbursements, and receivables
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums reinsured to other companies have been
reported as reductions of premium revenues. Amounts recoverable for
reinsurance related to future policy benefits, unearned premium reserves, and
claim liabilities have been reported as reinsurance receivables; expense
allowances received in connection with reinsurance have been accounted for as
a reduction of the related DAC and are deferred and amortized accordingly.
FEDERAL INCOME TAXES
Federal income tax provisions are based on income or loss reported for
financial statement purposes and tax laws and rates in effect for the years
presented. Deferred income taxes have been provided for the effects of
temporary differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates. A valuation allowance
for deferred tax assets is provided where it is more likely than not that a
portion of the asset will not be realized.
DEPRECIATION
Building, equipment and investment real estate are recorded at cost and are
depreciated using principally the straight-line method.
NET INCOME PER COMMON SHARE
Primary net income per share of Common Stock is determined by dividing net
income, less dividends on Preferred Stock, by the weighted-average number of
Common Stock and Common Stock equivalents (dilutive
F-10
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock options) outstanding. Where the effect of Common Stock equivalents on
net income per share would be antidilutive, they are excluded from the average
shares outstanding. Fully diluted net income per share is computed as if the
Preferred Stock and Convertible Subordinated Debentures had been converted to
Common Stock.
COST IN EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
The cost in excess of net assets of companies acquired (goodwill)
($5,317,000 and $5,017,000 at December 31, 1994 and 1995, respectively) is
included in other assets and is being amortized principally on a straight-line
basis over periods from five to forty years. Goodwill is periodically
evaluated for impairment based principally on projected undiscounted net cash
flows of the acquired companies.
TREASURY STOCK
The board of directors has authorized PFS to buy back shares of its own
common and preferred stock on the open market from time to time. During 1993,
1994 and 1995 PFS repurchased 546,200, 521,600 and 53,900 shares,
respectively, of their common stock. During 1993, 1994 and 1995, PFS
repurchased 13,400, 78,900 and 18,400 shares of their preferred stock.
Treasury stock is accounted for using the cost method.
CASH FLOW INFORMATION
Cash includes cash on hand and demand deposits.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. PFS will adopt Statement 121 in
the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption of the new standard will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which the Company must adopt in 1996. This statement
establishes accounting and reporting standards for stock-based employee
compensation plans. The statement defines a fair value method of accounting
which would result in an income statement charge, or to continue using the
current accounting method for such compensation plans. If PFS elects to
continue using the current treatment, the pro-forma results of the new
provisions must be disclosed in the financial statements. PFS is in the
process of reviewing this statement.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
3. CHANGES IN ACCOUNTING PRINCIPLES
In 1995 PFS adopted FASB Statements 114 and 118 which relate to accounting
by creditors for impairment of mortgage loans. Implementation of these
statements did not have an effect on PFS' financial statements.
F-11
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FASB Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" was adopted by PFS as of January 1, 1994. Under Statement 115,
securities are classified as available-for-sale, held-to-maturity, or trading.
PFS classified a portion of its fixed maturity securities portfolio as
available-for-sale with the remainder classified as held-to-maturity.
Securities classified as available-for-sale are carried at fair value and
unrealized gains and losses on such securities are reported as a separate
component of stockholders' equity. Securities classified as held-to-maturity
are carried at cost, adjusted for amortization of premium or discount.
With the classification of a portion of the portfolio as available-for-sale,
the January 1, 1994, balance of stockholders' equity was increased by
$3,605,000 (net of adjustments to deferred income taxes) to reflect the net
unrealized gains on fixed maturity securities classified as available-for-sale
that were previously carried at amortized cost. The adoption of Statement 115
had no effect on net income or PFS' accounting policy for equity securities.
4. BUSINESS COMBINATIONS
On January 31, 1995, Pioneer acquired for cash of $24,000,000 (purchase
price $23,700,000 and $300,000 of additional costs), the outstanding common
shares of Connecticut National Life Insurance Company (CNL).
The acquisition was accounted for by the purchase method and, accordingly,
the purchase price was allocated to assets and liabilities acquired based on
estimates of their fair values.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Assets Acquired
Cash..................................................... $ 16,371
Investments.............................................. 274,263
Value of insurance in force.............................. 1,570
Receivables and amounts on deposit with reinsurers....... 87,213
Other assets............................................. 6,904
Liabilities Assumed
Policy liabilities....................................... (354,307)
Other liabilities........................................ (8,014)
--------
Total purchase price................................... $ 24,000
========
</TABLE>
The value of insurance in force will be amortized over the estimated
remaining life of the insurance in force.
The following unaudited pro-forma consolidated results of operations have
been prepared as if the acquisition had been made as of January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
--------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Revenues............................................. $809,500
Net income........................................... 18,700
Net income per share
Primary............................................ 2.60
Fully-diluted...................................... 1.70
</TABLE>
The foregoing pro-forma information is not necessarily indicative of either
the results of operations that would have occurred had the acquisition been
effective on January 1, 1994, or of future results of operations of the
consolidated companies.
F-12
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1995, PFS purchased ACMG, Inc., a managed care company, principally
for cash of $1,584,000. The total assets acquired at the purchase date were
approximately $2,600,000.
In August 1993, PFS purchased 80% of the outstanding common stock of
Continental Life & Accident Company and 100% of the outstanding common stock
of Continental Marketing Corporation for $7,100,000 in cash. The total assets
acquired at the purchase date were approximately $80,000,000.
Also in August 1993, PFS purchased Healthcare Review Corporation, a managed
care company, for $1,566,000 in cash. The total assets acquired at the
purchase date were approximately $2,000,000.
Revenues included in PFS' 1993 consolidated statement of income relating to
these acquired entities were $25,671,000. The operations of the entities did
not have a material effect on PFS' 1993 net income.
5. INVESTMENTS
Realized investment gains (losses), including provisions for other-than-
temporary impairments on investments held, and the change in unrealized
appreciation (depreciation) on fixed maturities, equity securities, and other
investments during the years shown are summarized as follows:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES OTHER TOTAL
---------- ---------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1993
Realized............................... $ (1,638) $ 293 $ 9 $ (1,336)
Unrealized............................. 3,864 442 -- 4,306
-------- ------- ----- --------
$ 2,226 $ 735 $ 9 $ 2,970
======== ======= ===== ========
1994
Realized............................... $ (94) $ 211 $(500) $ (383)
Unrealized............................. (58,705) (2,098) -- (60,803)
-------- ------- ----- --------
$(58,799) $(1,887) $(500) $(61,186)
======== ======= ===== ========
1995
Realized............................... $ (301) $ 4,605 $(311) $ 3,993
Unrealized............................. 86,406 (719) -- 85,687
-------- ------- ----- --------
$ 86,105 $ 3,886 $(311) $ 89,680
======== ======= ===== ========
</TABLE>
The cost of equity securities was $12,484,000 at December 31, 1994 and
$13,332,571 at December 31, 1995. At December 31, 1994, gross unrealized
appreciation on equity securities was $3,514,000 and gross unrealized
depreciation was $558,000. At December 31, 1995, gross unrealized appreciation
on equity securities was $2,781,000 and gross unrealized depreciation was
$544,000.
In 1995, sales of two held-to-maturity securities with an amortized cost of
$5,490,000 resulted due to a significant deterioration in creditworthiness.
Sales of these securities resulted in a realized loss of $780,000. Sales of
two held-to-maturity securities in 1994 with an amortized cost of $9,803,000
resulted after discussions with an insurance rating agency regarding specific
investments of PFS' insurance subsidiaries and evidence of a significant
deterioration in credit worthiness. Sales of these securities, all of which
were owned at January 1, 1994, resulted in a realized loss of $376,000.
F-13
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A comparison of amortized cost to fair value of fixed maturity investments
by category is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1994:
Held to Maturity
U.S. Treasury......... $ 8,891 $ 25 $ (840) $ 8,076
States and political
subdivisions......... 8,888 -- (810) 8,078
Foreign governments... 2,992 -- (197) 2,795
Corporate securities.. 147,419 90 (13,158) 134,351
Mortgage-backed
securities........... 210,460 558 (25,778) 185,240
-------- ------- -------- --------
$378,650 $ 673 $(40,783) $338,540
======== ======= ======== ========
Available for Sale
U.S. Treasury......... $ 23,207 $ 2 $ (1,357) $ 21,852
States and political
subdivisions......... 26,579 -- (760) 25,819
Foreign governments... 4,024 -- (559) 3,465
Corporate securities.. 95,939 -- (6,538) 89,401
Mortgage-backed
securities........... 83,020 37 (4,846) 78,211
-------- ------- -------- --------
$232,769 $ 39 $(14,060) $218,748
======== ======= ======== ========
At December 31, 1995:
Held to Maturity
U.S. Treasury......... $ 26,897 $ 319 $ (44) $ 27,172
States and political
subdivisions......... 4,669 227 -- 4,896
Corporate securities.. 51,608 1,797 (19) 53,386
Mortgage-backed
securities........... 162,867 4,599 (192) 167,274
-------- ------- -------- --------
$246,041 $ 6,942 $ (255) $252,728
======== ======= ======== ========
Available for Sale
U.S. Treasury......... $ 31,781 $ 2,303 $ -- $ 34,084
State and political
subdivisions......... 26,260 716 -- 26,976
Foreign governments... 3,072 -- (54) 3,018
Corporate securities.. 294,950 19,523 (972) 313,501
Mortgage-backed
securities........... 241,015 7,824 (3,752) 245,087
-------- ------- -------- --------
$597,078 $30,366 $ (4,778) $622,666
======== ======= ======== ========
</TABLE>
The carrying amount of PFS' available for sale fixed maturity investments
can increase or decrease significantly in the near term as a result of changes
in market interest rates. Unrealized appreciation on available-for-sale
securities at December 31, 1995 of $4,518,000 included gross appreciation of
$27,150,000 less unrealized appreciation of $17,397,000 on investments in
escrow trust accounts pursuant to agreements with certain reinsurers (See Note
7) and net of deferred taxes and DAC adjustments of $5,235,000. At December
31, 1994, the net depreciation of available-for-sale securities consisted of
gross depreciation of $11,066,000 net of deferred tax assets of $3,873,000.
The amortized cost and fair value of fixed maturities at December 31, 1995,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
F-14
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Held to Maturity:
Due in 1996......................................... $ 6,691 $ 6,784
Due 1997-2001....................................... 73,794 75,903
Due 2002-2006....................................... 2,225 2,217
Due after 2006...................................... 464 550
Mortgage-backed securities.......................... 162,867 167,274
-------- --------
$246,041 $252,728
======== ========
Available for Sale:
Due in 1996......................................... $ 7,639 $ 7,732
Due 1997-2001....................................... 114,199 119,818
Due 2002-2006....................................... 152,423 159,179
Due after 2006...................................... 81,802 90,850
Mortgage-backed securities.......................... 241,015 245,087
-------- --------
$597,078 $622,666
======== ========
</TABLE>
Proceeds from sales of investments (principally fixed maturities) during
1993, 1994 and 1995 were $192,697,000, $111,850,000 and $213,177,000,
respectively. Gross gains of $10,834,000, $1,448,000 and $1,537,000 and gross
losses of $12,472,000, $1,542,000 and $1,838,000 were realized on fixed
maturity sales in 1993, 1994 and 1995, respectively. Gross gains of $315,000,
$217,000 and $4,762,000 and gross losses of $22,000, $6,000 and $157,000 were
realized on sales of equity securities in 1993, 1994 and 1995, respectively.
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities............................... $34,529 $40,172 $61,076
Short-term investments......................... 2,691 1,549 3,623
Other.......................................... 4,069 4,189 9,550
------- ------- -------
Total investment income........................ 41,289 45,910 74,249
Investment expenses............................ (1,047) (3,124) (3,274)
------- ------- -------
Net investment income.......................... $40,242 $42,786 $70,975
======= ======= =======
</TABLE>
At December 31, 1995, securities with a carrying value of $104,294,000 were
on deposit with various government authorities to meet regulatory requirements
and securities with a carrying value of $201,898,000 are held in escrow trust
accounts pursuant to reinsurance agreements (See Note 7).
At December 31, 1995, the amortized cost of fixed maturity investments in
any one entity, other than the U.S. government or a U.S. government agency or
authority, which exceeded 10% of PFS' consolidated stockholders' equity were
as follows:
<TABLE>
<S> <C>
GE Capital Mortgage Services, Inc. .......................... $29,072,000
Prudential Home.............................................. 14,763,000
</TABLE>
Investment real estate (net of accumulated depreciation of $483,000 in 1994
and $1,095,000 in 1995) consists principally of land and a building used, in
part, as PFS' corporate headquarters.
At December 31, 1995, PFS held unrated or less-than-investment-grade
securities with a carrying value of $13,519,000. Those holdings amounted to
less than 1.3% of PFS' total investments at December 31, 1995.
F-15
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, fixed maturities with a carrying value of $10,472,000
had been non-income producing for the preceding 12-month period.
6. FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of PFS' deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities
Deferred policy acquisition costs.................... $72,306 $66,458
Net unrealized appreciation on available-for-sale
securities.......................................... -- 2,625
Other................................................ 1,537 9,075
------- -------
Total deferred tax liabilities....................... 73,843 78,158
------- -------
Deferred Tax Assets
Policy liabilities................................... 69,101 70,550
Financial reinsurance................................ 3,788 --
Loss carryforwards................................... 2,000 9,940
Net unrealized depreciation on available-for-sale
securities.......................................... 3,873 --
Other................................................ 6,213 11,775
------- -------
Total deferred tax assets............................ 84,975 92,265
Valuation allowance for deferred tax assets.......... (3,870) (16,500)
------- -------
Deferred tax assets net of valuation allowance....... 81,105 75,765
------- -------
Net deferred tax asset (liability)................... $ 7,262 $(2,393)
======= =======
</TABLE>
The nature of PFS' deferred tax assets and liabilities are such that the
reversal pattern for these temporary differences should generally result in
realization of PFS' deferred tax assets. PFS establishes a valuation allowance
for any portion of the deferred tax asset that management believes may not be
realized. In 1995 the valuation allowance increased $12,630,000 principally
due to the acquisition of Connecticut National Life Insurance Company (See
Note 4). There was no change in the valuation allowance in 1994 and in 1993
the valuation allowance increased $1,221,000.
PFS' effective federal income tax rate varied from the statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ -------------
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate
applied to income before income
taxes.............................. $6,567 35.0% $9,108 35.0% $11,103 35.0%
Nontaxable investment income........ (112) (.6) (384) (1.5) (473) (1.5)
Nondeductible goodwill amortization. 319 1.7 109 .4 60 .2
Other............................... (155) (.8) 40 .2 64 .2
------ ---- ------ ---- ------- ----
Income taxes and effective rate..... $6,619 35.3% $8,873 34.1% $10,754 33.9%
====== ==== ====== ==== ======= ====
</TABLE>
Taxes paid amounted to $5,735,000, $9,731,000 and $8,257,000 for 1993, 1994,
and 1995, respectively.
F-16
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under pre-1984 life insurance company income tax laws, a portion of a life
insurance company's "gain from operations" was not subjected to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as the "policyholders' surplus account." The balance in this
account at December 31, 1995 for PFS' life insurance subsidiaries was
$10,000,000. Should the policyholders' surplus accounts of PFS' life insurance
subsidiaries exceed their respective maximums, or should distributions in
excess of their tax-basis shareholders' surplus account be made by the life
insurance subsidiaries, such excess or distribution would be subject to
federal income taxes at rates then in effect. Deferred taxes of $3,500,000
have not been provided on amounts included in the policyholders' surplus
accounts, since PFS contemplates no such taxable events in the foreseeable
future.
As of December 31, 1995, PFS' life insurance subsidiaries had combined tax-
basis shareholders' surplus accounts of $63,700,000. Distributions up to that
amount would result in no income tax liability.
Certain of PFS' life insurance subsidiaries have tax basis operations loss
carryforwards of $28,400,000 expiring in years 2003 through 2008.
7. REINSURANCE
PFS' insurance subsidiaries reinsure risks with other companies to permit
the recovery of a portion of the direct losses. These reinsured risks are
treated as though, to the extent of the reinsurance, they are risks for which
the subsidiaries are not liable. PFS remains liable to the extent that the
reinsuring companies do not meet their obligations under these reinsurance
treaties.
PFS' premiums were reduced for reinsurance premiums by $40,592,000,
$37,273,000 and $66,193,000 in 1993, 1994, and 1995, respectively. Under
various reinsurance arrangements, PFS' premiums were increased by $19,338,000,
$16,928,000 and $13,474,000 in 1993, 1994, and 1995, respectively. PFS' policy
benefits have been reduced for reinsurance recoveries of $21,871,000 in 1993,
$23,319,000 in 1994 and $33,739,000 in 1995. At December 31, 1995,
approximately 29% of PFS' reinsurance receivables and amounts on deposit with
reinsurers were due from Lincoln National Life Insurance Company, 23% from
Employers Reinsurance Corporation and 15% from Reassurance Company of
Hannover.
Prior to the acquisition by PFS in January 1995, CNL had entered into
certain reinsurance arrangements. PFS retains the assets and related policy
liabilities associated with the reinsured business. In accordance with the
reinsurance contracts, PFS does not participate in the realized gains and
losses on the assets held in escrow under these agreements. Accordingly, PFS
has established an amount due to reinsurers at December 31, 1995 and a
corresponding reduction in unrealized appreciation on available-for-sale
securities for investments held in escrow trust accounts pursuant to these
agreements.
8. SALE OF AGENT RECEIVABLES
In 1993, 1994, and 1995 a subsidiary of PFS sold agent receivables to an
unaffiliated company for proceeds of $25,376,000, $24,393,000 and $20,851,000,
respectively. The outstanding balances of such agent receivables sold that
remained uncollected at December 31, 1994 and 1995 were $7,937,000 and
$11,360,000, respectively. PFS remains subject to a maximum credit exposure
under this agreement amounting to 10% of agent receivables at December 31,
1995.
F-17
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RECONCILIATION OF LIABILITY FOR POLICY AND CONTRACT CLAIMS
The following table provides a reconciliation of the beginning and ending
policy and contract claim liability balances reported in PFS' balance sheets:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Policy and contract claim
liability at beginning of year............. $148,141 $189,389 $155,373
Incurred claims related to:
Current year.............................. 431,357 482,449 469,881
Prior years............................... (20,750) (36,655) (26,282)
-------- -------- --------
Total claims incurred..................... 410,607 445,794 443,599
-------- -------- --------
Deduct claims paid related to:
Current year.............................. 260,702 350,210 322,210
Prior years............................... 108,657 129,600 110,651
-------- -------- --------
Total claims paid......................... 369,359 479,810 432,861
-------- -------- --------
Policy and contract claim
liability at end of year................... $189,389 $155,373 $166,111
======== ======== ========
</TABLE>
Claim reserves are estimates of amounts needed to pay reported and
unreported claims based on facts and circumstances known at the time the
reserves are established. Reserves are based on historical claims information,
industry statistics and other factors. The establishment of appropriate
reserves is an inherently uncertain process, and there can be no assurance
that the ultimate liability will not exceed recorded claim reserves.
PFS holds margins in its accident and health claim reserves to provide for
potential adverse deviation. Claim reserves estimates are continually reviewed
and adjusted as necessary.
10. NOTES PAYABLE
Short-term notes payable included $3,500,000 at December 31, 1995, drawn
under a line of credit arrangement. The borrowings are due in 1996 and bear
interest at prime and payable quarterly (See Note 22). The remaining balance
under the line of credit is due in April 1996.
At December 31, 1995 PFS had a loan of $13,393,000 which replaced the line
of credit utilized at December 31, 1994. The portion of the loan due in 1996
of $2,143,000 was included in short-term notes payable and the remainder was
included in long-term notes payable. Interest on the note is payable quarterly
currently at 5%. The note requires principal repayments of $535,000 per
quarter with a final payment on December 31, 1999. The Company holds
certificates of deposit at the bank in an amount equal to the outstanding
principal balance.
At December 31, 1995, PFS had an unsecured loan of $10,175,000. The portion
of the loan due in 1996 of $3,700,000 was included in short-term notes payable
and the balance was included in long-term notes payable. The note bears
interest currently at prime and is payable quarterly with the final payment
due August 1998.
At December 31, 1995, a PFS subsidiary had an unsecured loan of $825,000.
The portion of the loan due in 1996 of $300,000 is included in short-term
notes payable. The remainder of the note is included in long-term notes
payable. The note bears interest at prime and is payable quarterly with the
final payment due July 1998.
F-18
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, a PFS subsidiary had two loans totaling $3,565,000.
The portion of these loans due in 1996 of $311,000 are included in short-term
notes payable. The remainder of the notes are included in long-term notes
payable. The notes bear interest at prime and are payable quarterly with the
final payment due December 1999. PFS has guaranteed payment of the notes.
At December 31, 1995, PFS had $720,000 of short-term debt liability for
which a PFS agency subsidiary's future renewal commissions were pledged as
collateral.
At December 31, 1995 a PFS subsidiary had a short-term note payable in the
amount of $1,660,000 as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the former parent of CNL for
capital losses incurred on mortgage loan and real estate holdings. Interest is
payable at the average earnings rate of the investments, currently 8%.
At December 31, 1995 a PFS subsidiary had a loan of $1,200,000. The loan
bears interest at 8.8% and is due in July 1996.
The weighted average interest rate on short-term notes payable at year end
was 5.0%, 7.7% and 8.4% in 1993, 1994 and 1995, respectively.
Interest paid amounted to $1,023,000, $4,950,000 and $6,629,000 for 1993,
1994, and 1995, respectively.
11. ACCIDENT AND HEALTH BUSINESS
In making the determination that policy liabilities, future premiums, and
anticipated investment income will be adequate to provide for future claims
and expenses (including the amortization of deferred policy acquisition
costs), PFS has made assumptions with regard to each of these items. Although
there is significant variability inherent in these estimates, management
believes that these assumptions are reasonable.
The amortization of deferred policy acquisition costs is generally based on
the expected pattern of future revenues or gross profits and on the expected
persistency of the policies. PFS monitors the profitability and persistency of
its policies on a monthly basis. In reviewing the recoverability of deferred
policy acquisition costs related to medical insurance products, PFS has made
assumptions relative to future rate increases, medical claim trends, lapse
rates, expenses and investment income. Increased lapses or revised estimates
of profitability anticipating future losses could result in an increase in the
amortization rate or a write-off of deferred policy acquisition costs, which
would adversely impact results of operations and financial condition.
Pursuant to a 1994 actuarial study, PFS revised certain of these assumptions
to reflect present and anticipated future experience. This study resulted in
increased amortization of deferred policy acquisition costs in 1994 of
$16,700,000.
12. STATUTORY-BASIS FINANCIAL INFORMATION
The following tables compare combined net income and stockholders' equity
for PFS' insurance subsidiaries determined on the basis as prescribed or
permitted by regulatory authorities (statutory basis) with consolidated net
income and stockholders' equity reported in accordance with GAAP. Statutory
basis accounting emphasizes solvency rather than matching revenues and
expenses during an accounting period. The significant differences between
statutory basis accounting and GAAP are as follows:
Deferred Policy Acquisition Costs. Costs of acquiring new policies are
expensed when incurred on a statutory basis rather than capitalized and
amortized over the term of the related policies in the GAAP financial
statements.
F-19
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Policy Liabilities. Certain policy liabilities are calculated based on
statutorily required methods and assumptions on a statutory basis rather
than on estimated expected experience or, for annuity and interest-
sensitive life insurance, actual account balances for GAAP.
Financial Reinsurance. The effects of certain financial reinsurance
transactions are included in the statutory basis financial statements but
are eliminated from the GAAP financial statements.
Deferred Federal Income Taxes. Deferred federal income taxes are not
provided on a statutory basis for differences between financial statement
and tax return amounts.
Surplus Notes. Surplus notes are reported in capital and surplus on a
statutory basis rather than as liabilities in the GAAP financial
statements.
Non-insurance Companies' Equity. Contributions by PFS to the capital and
surplus of its insurance subsidiaries increases the stockholders' equity of
those insurance subsidiaries on a statutory basis but does not effect the
consolidated stockholders' equity on a GAAP basis.
Unrealized Appreciation/Depreciation On Fixed Maturities Available-For-
Sale. Fixed maturity securities classified as available-for-sale are
carried principally at amortized cost on a statutory basis rather than at
fair value with unrealized gains and losses on such securities reported as
a separate component of stockholders' equity in the GAAP financial
statements.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Combined net income on a statutory basis...... $10,155 $ 6,986 $ 9,576
Adjustment for:
Deferred policy acquisition costs........... (12,842) (34,814) (12,579)
Policy liabilities.......................... (18,494) 26,544 18,413
Financial reinsurance....................... 34,017 17,544 12,748
Deferred federal income taxes............... 4,239 (2,303) (3,347)
Non-insurance companies, eliminations, and
other adjustments.......................... (4,930) 3,192 (3,843)
------- ------- -------
Consolidated net income in accordance with
GAAP....................................... $12,145 $17,149 $20,968
======= ======= =======
</TABLE>
F-20
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Combined stockholders' equity on a statutory basis... $124,284 $115,423
Adjustments for:
Deferred policy acquisition costs.................. 225,618 219,874
Policy liabilities................................. (180,422) (156,141)
Financial reinsurance.............................. (12,748) --
Deferred federal income taxes...................... 7,262 (2,393)
Non-admitted assets................................ 10,813 15,354
Surplus notes...................................... (4,436) (4,756)
Unrealized appreciation (depreciation) on
available-for-sale fixed maturities............... (14,021) 25,588
Other.............................................. (12,296) (18,710)
-------- --------
Combined insurance subsidiaries stockholders'
equity on a GAAP basis.............................. 144,054 194,239
Non-insurance companies equity, eliminations and
other adjustments................................... (75,726) (49,665)
-------- --------
Consolidated stockholders' equity in accordance
with GAAP........................................... $ 68,328 $144,574
======== ========
</TABLE>
Dividends from PFS' insurance subsidiaries unassigned surplus are limited
principally to the greater of the prior-year statutory-basis net gain from
operations or 10% of statutory-basis surplus. The total amount of dividends
that could be paid in 1996 without regulatory approval is $3,711,000. At
December 31, 1995, PFS' retained earnings was $61,231,000 in excess of the
combined statutory-basis unassigned surplus of the insurance subsidiaries.
PFS is required to maintain adequate amounts of statutory-basis capital and
surplus to satisfy regulatory requirements and provide capacity for production
of new business. Acquisition costs relating to the production of new business
result in a reduction of statutory-basis net income and capital and surplus.
13. CONVERTIBLE SUBORDINATED DEBENTURES
In July 1993 PFS issued $57,477,000 of 8% convertible subordinated
debentures due in 2000. Interest on the debentures is payable in January and
July of each year. Net proceeds from the offering totaled approximately
$54,000,000 and were used, in part, to repay long-term notes payable. The
debentures are convertible into PFS' Common Stock at any time prior to
maturity, unless previously redeemed, at a conversion price of $11.75 per
share.
In August 1995, the Company accepted the conversion of $46,900,000 of the
outstanding 8% convertible subordinated debentures. The effect of the
conversion was an increase in stockholders' equity of $45,300,000 and a charge
to income of $3,500,000, net of taxes. Had the conversion occurred at the
beginning of the year, primary earnings per share would have decreased to
$2.02.
The debentures are redeemable by PFS under certain conditions after July
1996.
At December 31, 1995, 825,106 shares of PFS' Common Stock were reserved for
conversion of the outstanding convertible subordinated debentures.
F-21
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. REDEEMABLE PREFERRED STOCK
In 1989, PFS issued 1,000,000 shares of $2.125 Cumulative Convertible
Exchangeable Preferred Stock. The proceeds of the public offering were
$23,337,000 after reduction for expenses of $1,663,000, which expenses were
charged to additional paid-in capital. The Preferred Stock is carried on PFS'
balance sheet at the redemption and liquidation value of $25 per share. Each
share of Preferred Stock is convertible by the holders at any time into 1.6
shares of PFS Common Stock. Annual cumulative dividends of $2.125 per share
are payable quarterly. The preferred stock is nonvoting unless dividends are
in arrears. At December 31, 1995, 1,358,240 shares of PFS' Common Stock were
reserved for conversion of the outstanding preferred stock. The Preferred
Stock is redeemable at the option of the holders upon certain acquisitions or
other business combinations involving PFS Common Stock.
The Preferred Stock is redeemable by PFS at redemption prices of $25.85 per
share in 1995, declining to $25 in 1999. The Preferred Stock is exchangeable
in whole at PFS' option on any dividend payment date for PFS' 8 1/2%
Convertible Subordinated Debentures due in 2014 at the rate of $25 principal
amount of Subordinated Debentures for each share of Preferred Stock.
15. SHAREHOLDER RIGHTS AGREEMENT
In 1990, PFS distributed one preferred share purchase right for each
outstanding share of Common Stock. The rights are intended to cause
substantial dilution to a person or group that attempts to acquire PFS on
terms not approved by PFS' directors. The rights expire in 2000 or PFS may
redeem the rights prior to exercise for $.01 per right.
The rights are not exercisable unless a person or group acquires, or offers
to acquire, 20% or more of PFS' Common Stock under certain circumstances. The
rights, when exercisable, entitle the holder to purchase one-tenth of a share
of a new series of PFS Series A Junior Preferred Stock at a purchase price of
$45. Such preferred shares, of which 2,000,000 are authorized, would be voting
and would be entitled to distributions that are ten times the distributions to
common shareholders. Subsequent to exercise of the rights, in the event of
certain business combinations involving PFS, a holder of rights would have the
right to receive PFS Common Stock with a value of two times the exercise price
of the rights.
F-22
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. STOCK OPTIONS AND RIGHTS
PFS has a nonqualified stock option plan and certain stock incentive
programs principally for directors and key employees of PFS and its
subsidiaries. PFS' Board of Directors grants the options and specifies the
conditions of the options. The number of shares of common stock available for
benefits under the plan is equal to 15% of the average fully diluted shares
outstanding for the prior fiscal year. Options expire ten years after grant.
Information with respect to these options is as follows:
<TABLE>
<CAPTION>
1994 1995
----------------------- -----------------------
NUMBER EXERCISE NUMBER OF EXERCISE
OF SHARES PRICE SHARES PRICE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year............. 733,250 $5.50-$12.00 1,045,571 $5.50-$12.00
Granted........................ 480,321 8.88- 11.38 1,019,364 9.00- 22.25
Exercised...................... (85,500) 5.50- 11.00 (147,000) 5.50- 12.00
Canceled/repurchased........... (82,500) 5.50- 12.00 (25,000) 10.75
--------- ------------ --------- ------------
Options outstanding at end of
year.......................... 1,045,571 $5.50-$12.00 1,892,935 $5.50-$22.25
========= =========
Options exercisable at end of
year.......................... 561,250 692,566
========= =========
Unoptioned shares available for
granting of options........... 1,535,201 1,996,662
========= =========
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
PFS and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under
insurance policies, disputes with agents, and other matters. PFS' management
and its legal counsel are of the opinion that the disposition of these actions
will not have a material adverse effect on PFS' financial position.
PFS leases various office facilities furniture and equipment and computer
equipment under noncancelable operating leases. Rent expense was $4,516,000,
$4,530,000, and $7,140,000 in 1993, 1994, and 1995, respectively. Minimum
future rental commitments in connection with noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
1996.......................... $3,944,000
1997.......................... 5,039,000
1998.......................... 1,508,000
1999.......................... 970,000
2000.......................... 527,000
</TABLE>
PFS has entered into employment agreements with certain officers.
PFS' insurance subsidiaries are subject to extensive governmental regulation
and supervision at both federal and state levels. Such regulation includes
premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have
significant impact of PFS' revenues and results of operations.
The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, PFS has accrued for those
assessments net of estimated future premium tax reductions.
F-23
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. BENEFIT PLANS
PFS has a defined-contribution employee benefit plan that covers
substantially all home office employees who have attained age 21 and completed
one year of service. Plan participants may contribute from 1% to 10% of their
total compensation subject to an annual maximum. The plan also provides for
PFS to match participants' contributions up to $1,000 per year and 50% of
participants, contributions above $1,000 up to the annual Internal Revenue
Service limit ($9,240 in 1995). PFS makes employer contributions to the plan
in cash or in PFS Common Stock at the discretion of PFS' Board of Directors.
At December 31, 1995, the Plan's assets included PFS Common Stock of
$7,561,912, at fair value. PFS' contributions charged to operations were
$1,073,000 in 1993, $1,365,000 in 1994, and $1,564,804 in 1995.
A PFS subsidiary, which owns insurance and agency companies, had a stock
purchase plan that allowed certain eligible agents to purchase common stock in
the subsidiary at the subsidiary's per share book value. The plan was
terminated in November 1992. In accordance with the plan's provisions, agents
became fully vested. Eligible agents were given the option to participate in a
new agent stock purchase plan. This new plan allows agents to purchase PFS
Common Stock. Stock purchases are limited to a specific percentage of the
agent's commission as determined by PFS but in no event to be less than 3%.
Under the plan the agents are also credited with additional shares of PFS
Common Stock as determined by PFS. In 1993, 1994, and 1995, 8,057 shares,
6,332 shares, and 2,016 shares, respectively, of PFS Common Stock were issued
under this plan.
19. ALLOWANCES AND ACCUMULATED DEPRECIATION
Allowances for doubtful accounts related to other receivables amounted to
$895,000 at December 31, 1994 and $1,548,000 at December 31, 1995.
Accumulated depreciation related to building and equipment amounted to
$19,235,000 at December 31, 1994 and $23,370,000 at December 31, 1995.
20. FAIR VALUE INFORMATION
The following methods and assumptions were used by PFS in estimating its
fair values for financial instruments:
Cash, short-term investments, short-term notes payable, and accrued
investment income: The carrying amounts reported in the balance sheets for
these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services, or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield quality, and maturity of the investments. The fair
values for equity securities are based on quoted market prices.
Mortgage loans and policy loans: The carrying amount of PFS' mortgage
loans approximates their fair values. The fair values for policy loans are
estimated using capitalization of earnings methods, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings.
Investment contracts: Fair values for PFS' liabilities under investment-
type insurance contracts are based on current cash surrender values.
Fair values for PFS' insurance policies other than investment contracts
are not required to be disclosed. However, the fair values of liabilities
under all insurance policies are taken into consideration in PFS'
F-24
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance policies.
Long-term notes payable: The fair value of PFS' long-term notes payable
approximates the carrying value.
Convertible subordinated debentures: The fair value of PFS' convertible
subordinated debentures is based on quoted market prices.
The fair values of certain financial instruments along with their
corresponding carrying values of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------------- -----------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed Maturities:
Available-for-sale...................... $218,748 $218,748 $622,666 $622,666
Held-to-maturity........................ 338,540 378,650 252,728 246,041
Equity securities......................... 15,440 15,440 15,570 15,570
Mortgage loans............................ 1,806 1,806 9,253 9,253
Policy loans.............................. 22,025 23,082 78,230 79,122
Financial Liabilities:
Investment contracts...................... 194,072 203,654 205,160 214,573
Long-term notes payable................... 2,520 2,520 21,504 21,504
Subordinated debentures................... 54,843 57,427 14,833 9,695
</TABLE>
During 1994, PFS began using exchange-traded treasury futures contracts as
part of its overall interest rate risk management strategy for a portion of
its life and annuity business. The initial margin deposit paid for the futures
represents their cost basis which is adjusted to fair value in the financial
statements. Realized and unrealized gains and losses, which were immaterial in
1994 and 1995, are recognized as an adjustment to the carrying amount of the
asset being hedged. PFS had no futures contracts outstanding at December 31,
1995.
F-25
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. SEGMENT INFORMATION
PFS has four business segments: Group Medical, Senior Health, Life
Insurance, and Medical Utilization Management. The segments are based on PFS'
main Divisions. Allocations of investment income and certain general expenses
are based on various assumptions and estimates, and reported operating results
by segment would change if different methods were applied. Assets are not
individually identifiable by segment and have been allocated based on the
amount of policy liabilities by segment and by other formulas. Depreciation
expense and capital expenditures are not considered material. Realized
investment gains and losses are allocated to the appropriate segment. General
corporate expenses are not allocated to the individual segments. Revenues,
income or loss before income taxes, and identifiable assets by business
segment are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Group Medical:
Unaffiliated.............................. $ 379,742 $ 457,633 $ 430,885
Inter-segment............................. 30,439 35,373 21,541
Senior Health............................... 247,100 235,031 236,556
Life Insurance.............................. 67,780 71,075 115,545
Medical Utilization Management:
Unaffiliated.............................. 4,506 10,416 17,098
Inter-segment............................. 4,358 4,927 4,007
---------- ---------- ----------
733,925 814,455 825,632
Eliminations................................ 34,797 40,300 25,548
---------- ---------- ----------
Total................................... $ 699,128 $ 774,155 $ 800,084
========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAXES
Group Medical............................... $ 6,528 $ 10,889 $ 19,729
Senior Health............................... 12,255 13,420 16,753
Life Insurance.............................. 7,623 8,537 7,128
Medical Utilization Management.............. (1,211) 2,026 739
Corporate expenses.......................... (6,431) (8,850) (12,627)
---------- ---------- ----------
Total................................... $ 18,764 $ 26,022 $ 31,722
========== ========== ==========
IDENTIFIABLE ASSETS AT YEAR-END
Group Medical............................... $ 287,713 $ 245,763 $ 245,439
Senior Health............................... 301,700 291,703 337,789
Life Insurance.............................. 514,154 533,070 966,095
Medical Utilization Management.............. 4,704 5,164 9,598
---------- ---------- ----------
Total................................... $1,108,271 $1,075,700 $1,558,921
========== ========== ==========
</TABLE>
22. CREDIT ARRANGEMENTS
PFS has a line of credit arrangement for short-term borrowings with three
banks amounting to $17,000,000 through April 1996, of which $3,500,000 was
used at December 31, 1995. The line of credit arrangement can be terminated,
in accordance with the agreement, at PFS' option.
F-26
<PAGE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
23. SUBSEQUENT EVENTS
PFS signed a letter of intent to purchase Universal Fidelity Life Insurance
Company (Universal) for approximately $26,000,000 in March 1996. For 1995
Universal had statutory-basis premium revenue of approximately $33,000,000,
assets of $40,000,000, and statutory basis capital and surplus of
approximately $18,000,000.
On February 21, 1996 PFS filed a Registration Statement with the Securities
and Exchange Commission for the issuance of approximately $65,000,000 of
convertible subordinated notes due 2003 plus up to $9,750,000 which may be
used for over-allotments. PFS intends to use the net proceeds from the
offering to call its outstanding redeemable preferred stock and repay
outstanding bank debt. Any remaining proceeds will be contributed to the
capital and surplus of the insurance subsidiaries.
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1994 and 1995 is
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and policy charges........... $172,898 $176,803 $176,190 $178,219
Net investment income and other....... 18,367 16,926 17,674 17,079
Net income............................ 4,500 4,403 3,321 4,926
Net income per share:
Primary............................. .60 .59 .44 .73
Fully diluted....................... .40 .40 .32 .46
<CAPTION>
1995
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and policy charges........... $169,575 $162,706 $174,678 $180,084
Net investment income and other....... 24,444 27,546 27,065 33,986
Net income............................ 4,955 5,360 3,316 7,337
Net income per share:
Primary............................. .73 .78 .32 .60
Fully diluted....................... .47 .48 .30 .59
</TABLE>
F-27
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS
SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 14
Price Range of Common Stock and Dividend Policy........................... 15
Capitalization............................................................ 16
Selected Financial and Operating Data..................................... 17
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 19
Business.................................................................. 28
Management and Directors.................................................. 42
Principal Holders of Securities........................................... 45
Description of Notes...................................................... 47
Description of Capital Stock.............................................. 55
Certain Federal Income Tax Consequences................................... 58
Underwriting.............................................................. 60
Available Information..................................................... 61
Legal Matters............................................................. 61
Experts................................................................... 61
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$65,000,000
PIONEER FINANCIAL SERVICES, INC.
% CONVERTIBLE SUBORDINATED
NOTES DUE 2003
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the actual or estimated expenses in connection with the
issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Registration Fee................................................ $ 25,776
Printing of Registration Statement and Prospectus............... 100,000
Accounting Fees and Expenses.................................... 125,000
Legal Fees...................................................... 200,000
Trustees fees................................................... 15,000
NASD Filing Fee................................................. 7,975
Blue Sky fees and expenses...................................... 20,000
Miscellaneous................................................... 6,249
--------
Total....................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law contains provisions
under which corporations organized thereunder are permitted or required in
certain circumstances to indemnify directors, officers and others against
certain liabilities and permitted to maintain insurance to cover such
liabilities and liabilities against which such corporations may not directly
indemnify such persons. Article Thirteenth of the Certificate of Incorporation
and the by-laws of the Registrant grant indemnification to such persons to the
extent permitted by Delaware law and authorize the purchase of such insurance.
The Registrant has purchased such insurance.
Reference is made to the Underwriting Agreement to be filed as Exhibit 1
which contains indemnification provisions between the Registrant and the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement
4(a) Certificate of Designations with respect to the Company's $2.125
Cumulative Convertible Exchangeable Preferred Stock ("Preferred Stock")
(filed as Exhibit 4(a) to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 33-30017) and incorporated herein
by reference)
4(b) Proposed form of Indenture with respect to the Company's 8 1/2%
Convertible Subordinated Debentures due 2014 into which the Preferred
Stock is exchangeable (filed as Exhibit 4(b) to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-1 (No. 33-30017)
and incorporated herein by reference)
4(c) Rights Agreement dated as of December 12, 1990 between the Company and
First Chicago Trust Company of New York as Rights Agent (including
exhibits thereto) (filed as Exhibit 1 to the Company's registration
statement on Form 8-A dated December 14, 1990 and incorporated herein by
reference)
4(d) Form of Indenture relating to the Company's 8% Convertible Subordinated
Debentures due 2000, between Pioneer Financial Services, Inc. and Harris
Trust and Savings Bank, as Trustee (filed as Exhibit 4(d) to the Company's
Registration Statement on Form S-2 (No. 33-62760) and incorporated herein
by reference)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4(e) Form of 8% Convertible Subordinated Debenture due 2000 (included in
Exhibit 4(d) to the Company's Registration Statement on Form S-2 (No. 33-
62760) and incorporated herein by reference)
4(f) Form of Indenture between Pioneer Financial Services, Inc. and The First
National Bank of Chicago, as Trustee
4(g) Form of % Convertible Subordinated Note due 2003 (included in Exhibit
4(f))
5 Opinion of McDermott, Will & Emery, counsel to the Company, as to the
legality of the securities being registered
12* Statement regarding computation of ratio of earnings to Fixed charges.
23(a) Consent of Ernst & Young LLP
23(b) Consent of McDermott, Will & Emery (included in Exhibit 5)
24* Power of Attorney (included on signature page)
25* Form T-1 Statement of Eligibility Under Trust Indenture Act of 1939 of The
First National Bank of Chicago.
</TABLE>
- --------
*Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and
controlling persons of the Company pursuant to the foregoing provisions
described in Item 15, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(2) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(4) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THIS
19TH DAY OF MARCH, 1996.
Pioneer Financial Services, Inc.
/s/ Peter Nauert
By: _________________________________
Peter W. Nauert, Chairman, Chief
Executive Officer and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter W. Nauert Chairman, Chief Executive March 19, 1996
____________________________________ Officer and Director
Peter W. Nauert
/s/ David I. Vickers Vice President, Treasurer March 19, 1996
____________________________________ and Chief Financial
David I. Vickers Officer (Chief Accounting
Officer)
* President--Life Insurance March 19, 1996
____________________________________ Operations and Director
Charles R. Scheper
* President--Health Insurance March 19, 1996
____________________________________ Operations and Director
Thomas J. Brophy
* Director and General Counsel March 19, 1996
____________________________________ Emeritus
William B. Van Vleet
* Director March 19, 1996
____________________________________
Robert F. Nauert
* Director March 19, 1996
____________________________________
Michael A. Cavataio
* Director March 19, 1996
____________________________________
Karl-Heinz Klaeser
* Director March 19, 1996
____________________________________
Richard R. Haldeman
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director March 19, 1996
____________________________________
R. Richard Bastain, III
* Director March 19, 1996
____________________________________
Michael K. Keefe
* Director March 19, 1996
____________________________________
Carl A. Hulbert
</TABLE>
/s/ David I. Vickers
*By: __________________________
Attorney-In-Fact
II-4
<PAGE>
INDEX TO EXHIBITS FILED
TO REGISTRATION STATEMENT ON
FORM S-3 OF PIONEER FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement.......................
4 (f) Form of Indenture between Pioneer Financial Services,
Inc. and The First National Bank of Chicago, as
Trustee..............................................
4 (g) Form of % Convertible Subordinated Note due 2003
(included in Exhibit 4(f))...........................
5 Opinion of McDermott, Will & Emery, counsel to the
Company, as to the legality of the securities being
registered...........................................
12* Computation of Ratios of Earnings to Fixed Charges...
23(a) Consent of Ernst & Young LLP.........................
23(b) Consent of McDermott, Will & Emery (included in Ex-
hibit 5).............................................
25* Power of Attorney (included on signature page).......
26* Form T-1 Statement of Eligibility under Trust Inden-
ture Act of 1939 of , as Trustee...........
</TABLE>
- --------
* Previously filed.
<PAGE>
$65,000,000
___ % Convertible Subordinated Notes due 2003
PIONEER FINANCIAL SERVICES, INC.
UNDERWRITING AGREEMENT
----------------------
___________ __, 1996
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Pioneer Financial Services, a corporation organized and existing under the
laws of Illinois (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to Bear, Stearns & Co. Inc., Everen Securities,
Inc. and Oppenheimer & Co., Inc. (the "Underwriters") $65,000,000 aggregate
principal amount of its ___% Convertible Subordinated Notes due 2003 (the
"Initial Notes"), to be issued under an Indenture (the "Indenture") to be dated
as of __________ __, 1996, between the Company and The First National Bank of
Chicago, as trustee (the "Trustee"), and, for the sole purpose of covering over-
allotments in connection with the sale of the Initial Notes, at the option of
the Underwriters, up to an additional $9,750,000 aggregate principal amount of
its ___% Convertible Subordinated Notes due 2003 (the "Additional Notes"). The
Initial Notes and any Additional Notes purchased by the Underwriters are
referred to herein as the "Notes." The Notes are convertible into an
indeterminate number of shares of Common Stock, $1.00 par value, of the Company
(the "Com-
<PAGE>
mon Stock"); such number of shares deliverable upon conversion from time to time
being hereinafter called the "Shares." The Notes and the Shares are more fully
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and may have filed an amendment or
amendments thereto, on Form S-3 (No. 333-01119), for the registration of the
Notes and the Shares under the Securities Act of 1933, as amended (the "Act").
Such registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), is herein called the "Registration
Statement" and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is
required, is herein called the "Prospectus." The term "preliminary prospectus"
as used herein means a preliminary prospectus as described in Rule 430 of the
Regulations. Any reference herein to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-3
which were filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), on or before the effective date of the Registration Statement,
the date of such preliminary prospectus or the date of the Prospectus, as the
case may be, and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include (i) the
filing of any document under the Exchange Act after the effective date of the
Registration Statement, the date of such preliminary prospectus or the date of
the Prospec-
2
<PAGE>
tus, as the case may be, which is incorporated therein by reference and (ii) any
such document so filed.
(b) At the time of the effectiveness of the Registration Statement or the
effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission, when any document filed under the
Exchange Act is filed and at the Closing Date and the Additional Closing Date,
if any, (as hereinafter defined), the Registration Statement and the Prospectus
and any amendments thereof and supplements thereto complied or will comply in
all material respects with the applicable provisions of the Act and the
Regulations and the Exchange Act and the respective rules and regulations
thereunder and does not or will not contain an untrue statement of a material
fact and does not or will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading. When the preliminary prospectus, dated March 12, 1996, was first
filed with the Commission and when any amendment thereof or supplement thereto
was first filed with the Commission, such preliminary prospectus and any
amendments thereof and supplements thereto complied in all material respects
with the applicable provisions of the Act and the Regulations and the Exchange
Act and the respective rules and regulations thereunder and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection with
the preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.
3
<PAGE>
(c) Ernst & Young LLP, who have audited the consolidated financial
statements and supporting schedules included or incorporated by reference in the
Registration Statement, are independent public accountants as required by the
Act and the Regulations.
(d) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, (i) there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, assets, operations, condition
(financial or other), net worth or results of operations of the Company and its
subsidiaries taken as a whole, whether or not arising from transactions in the
ordinary course of business, (ii) since the date of the latest balance sheet
presented in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected or specifically described in the Registration Statement and the
Prospectus, (iii) neither the Company nor any of its subsidiaries have entered
into any transactions, other than those in the ordinary course of business or
disclosed in the Registration Statement and Prospectus, which are material to
the Company and its subsidiaries taken as a whole, (iv) there has been no
dividend or distribution of any kind declared, made or paid by the Company on
its capital stock (except for regular quarterly dividends on common stock and
preferred stock in each case as described in the Prospectus), and (v) there has
not been (A) any change in the capital stock of the Company or any of its
subsidiaries (other than the issuance of Common Stock pursuant to the conversion
of the $2.125 Preferred Stock or 8% Debentures (each as defined in the
Prospectus) or pursuant to the exercise of options granted under the Company's
existing employee stock and stock option plans in the ordinary course of
business) or (B) any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock of the Company (other than the grant
of options pursuant to the Company's existing employee stock and stock option
plans in the ordinary course of business) or any of its subsidiaries.
4
<PAGE>
(e) The Company is registered as an insurance holding company in Illinois,
Arizona and Pennsylvania and all other states, if any, in which such
registration is required. The Company has all requisite power and authority to
execute, deliver, and perform this Agreement and the Indenture. All necessary
corporate proceedings of the Company have been duly taken to authorize the
execution, delivery and performance of this Agreement and the Indenture by the
Company. This Agreement and the Indenture have been duly authorized by the
Company, and this Agreement has been and the Indenture (as of the Closing Date)
will be, duly executed and delivered by the Company, and this Agreement is, and
the Indenture will be, a legal, valid, and binding obligation of the Company,
and the Indenture will be enforceable as to the Company in accordance with its
terms subject, as to enforceability, to applicable bankruptcy, reorganization,
moratorium or other similar laws of general application affecting the rights of
creditors generally and by general equitable principles. No consent,
authorization, approval, order, license, certificate, or permit of or from, or
declaration or filing with, any federal, state or local insurance regulatory, or
other governmental authority or any court or other tribunal is required by the
Company or any subsidiary for the execution, delivery, or performance of this
Agreement and the Indenture by the Company (except filings under the Act, the
Exchange Act and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") which have been or will be made before the Closing Date and
under "blue sky" or state securities laws). No consent of any party to any
material contract, agreement, instrument, lease, license, arrangement, or
understanding, or under the terms of any series of the Company's outstanding
preferred stock, to which the Company or any subsidiary is a party, or to which
any of their respective properties or assets are subject, is required for the
execution, delivery, or performance of this Agreement or the Indenture; and the
execution, delivery and performance of this Agreement and the Indenture, the
issuance and sale of the Notes as contemplated hereby, the conversion thereof,
the issuance of the Shares as contemplated thereby or the consummation of any
other of the transactions herein or therein contemplated or the fulfillment of
the terms hereof or thereof, will not violate, result in a breach of, conflict
with, or (with or without the giving of notice or the passage of time or both)
entitle any party to termi-
5
<PAGE>
nate or call a default under any such contract, agreement, instrument, lease,
license, arrangement, or understanding, or violate or result in a breach of any
term of the certificate of incorporation or by-laws of the Company or any of its
subsidiaries or violate, result in a breach of, or conflict with any law, rule,
or regulation, or any order, judgment, or decree binding on the Company or any
of its subsidiaries or to which any of their respective operations, businesses,
properties, or assets are subject which violation, breach, conflict or
entitlement would, individually or in the aggregate, have a material adverse
effect upon the business, prospects, properties, assets, operations, condition
(financial or other), net worth or results of operations of the Company and its
subsidiaries taken as a whole, or would impair materially the ability of the
Company to perform its obligations hereunder or thereunder.
(f) Neither the Company nor any of its subsidiaries nor, to the Company's
knowledge, any other party, is now, or is reasonably expected by the Company or
any of its subsidiaries to be, in violation or breach of, or default
(disregarding any grace or notice provision) with respect to any material
provision of any contract, agreement, instrument, lease, license, policy,
reinsurance treaty, arrangement, or understanding to which the Company or any of
its subsidiaries is a party, which violation, breach or default or violations,
breaches or defaults, singly or in the aggregate has, or can reasonably be
expected in the future to have, a material adverse effect on the business,
prospects, properties, assets, operations, condition (financial or other), net
worth or results of operations of the Company and its subsidiaries taken as a
whole; and each such contract, agreement, instrument, lease, license, policy,
reinsurance treaty, arrangement, and understanding is in full force and is the
legal, valid and binding obligation of the Company or its subsidiaries, as the
case may be, and, to the Company's knowledge, the other parties thereto, and is
enforceable as to the Company or its subsidiaries, as the case may be, and, to
the Company's knowledge, the other parties thereto in accordance with its terms
subject, as to enforceability, to applicable bankruptcy, reorganization,
moratorium or other similar laws of general application affecting the rights of
creditors generally, except where such failure to be in full force or to be a
legal, valid and binding obligation or to be
6
<PAGE>
enforceable, as the case may be, has not had, or would not reasonably be
expected in the future to have, a material adverse effect on the business,
prospects, properties, assets, operations, condition (financial or other), net
worth or results of operations of the Company and its subsidiaries taken as a
whole.
(g) The Company and its subsidiaries have good and marketable title to all
real property and material assets disclosed in the Registration Statement and
Prospectus as being owned by them, free and clear of all liens, mortgages,
claims, security interests or other encumbrances, except such as are disclosed
in the Registration Statement and Prospectus and except for liens (i) incurred
in the ordinary course of business which do not materially effect the use or
value thereof and (ii) in respect of agent commissions and receivables from
agents incurred in connection with the sale of agent debit balances; the
property held under lease by the Company or its subsidiaries is held by them
under valid, subsisting and binding leases with only such exceptions with
respect to any particular lease as do not interfere in any material respect with
the conduct of the business of the Company and its subsidiaries taken as a whole
or as do not materially affect the value of such property as used by the Company
or are not material in amount and do not interfere in any material respect with
the use of the property or the conduct of the business of the Company and its
subsidiaries taken as a whole.
(h) All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued, and are fully paid and nonassessable, and
were not issued in violation of or subject to any preemptive or similar rights
to subscribe for or to purchase any such shares of Common Stock. The Company
had, at ________ __, 1996, an authorized and outstanding capitalization as set
forth in the Prospectus under the column "Actual" under the caption
"Capitalization." Except as disclosed in the Registration Statement and
Prospectus, the Company is not, and the Underwriters will not be, subject to any
preemptive or similar rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of Common Stock pursuant to the
Company's certificate of incorporation, bylaws or any agreement or other
instrument to which the Company is a party or by which the Company is bound.
Except as dis-
7
<PAGE>
closed in the Registration Statement and Prospectus, there are no options,
warrants, agreements, contracts or other rights in existence to purchase or
acquire from the Company any shares of the capital stock of the Company.
(i) All of the issued and outstanding capital stock of each subsidiary of
the Company has been duly authorized and validly issued and is fully paid and
nonassessable and was not issued in violation of preemptive or similar rights to
subscribe for or to purchase any shares of such capital stock and, except as
disclosed in the Prospectus or Schedule II hereto, is owned directly or
indirectly by the Company, free and clear of any lien, encumbrance, claim,
security interest, restriction on transfer, stockholders' agreement, voting
trust or other defect of title whatsoever (except for restrictions imposed by
state insurance laws on the transfer of shares of subsidiaries engaged in the
insurance business). Except as disclosed on Schedule II hereto, there are no
outstanding rights, warrants or options to acquire, or instruments convertible
into or exchangeable for, or agreements or understandings with respect to the
sale or issuance of, any shares of capital stock or other equity interest in any
of the Company's subsidiaries in which the Company owns 50% or more of the
equity of such subsidiary.
(j) The Notes and the Shares conform in all material respects to all
statements relating thereto contained in the Registration Statement and the
Prospectus; the Notes have been duly authorized and, when issued, authenticated
as specified in the Indenture and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be validly issued and free and clear of all
liens and restrictions on transfer and will constitute valid binding obligations
of the Company enforceable in accordance with their terms; the Indenture
complies as to form in all material respects with the requirements of the Trust
Indenture Act, and the rules and regulations of the Commission thereunder; and
upon effectiveness of the Registration Statement, will be duly qualified under
the Trust Indenture Act; the Shares issuable upon conversion of the Notes have
been duly authorized and, when issued and delivered upon conversion of the Notes
in accordance with the Indenture, will be validly issued, fully paid and non-
assessable and free and clear of all liens and restrictions on transfer
8
<PAGE>
(provided, however, that the Company may have to amend its Articles of
Incorporation to authorize additional shares of Common Stock in the event that,
as a result of the anti-dilutive provisions in the Indenture, a greater number
of shares of Common Stock are issuable upon conversion of the Notes); the Shares
initially issuable upon conversion of the Notes are eligible for trading on the
New York Stock Exchange; and the holders of outstanding shares of capital stock
of the Company are not entitled to preemptive or other rights to subscribe for
the Notes or for the Shares issuable upon conversion of the Notes.
(k) Each of the Company and its subsidiaries has been duly organized and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its subsidiaries is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the business, prospects, properties,
assets, operations, condition (financial or other), net worth or results of
operations of the Company and its subsidiaries taken as a whole. The Company
does not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 21 to the Annual
Report on Form 10-K for the Company's most recent fiscal year or as set forth on
Schedule II hereto.
(l) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries is a
party or to which any property of the Company or any of its subsidiaries is
subject or which is pending or, to the knowledge of the Company, contemplated
against the Company or any of its subsidiaries which could reasonably be
expected to result in a material adverse change in the business, prospects,
properties, assets, operations, condition (financial or other), net worth or
results of operations of the Company and its subsidiaries taken as a whole or
which is required to be disclosed in the Registration Statement and the
Prospectus.
9
<PAGE>
(m) The Company and its subsidiaries have filed all necessary federal,
state, local and foreign income, franchise and sales tax returns and have paid
all taxes shown thereon as due, and the Company has no knowledge of any tax
deficiency which has been asserted against the Company or any of its
subsidiaries which would materially and adversely affect the business or
properties of the Company and its subsidiaries, taken as a whole. To the
Company's knowledge, tax liabilities in the aggregate are adequately provided
for on the consolidated books of the Company. The Company has not received
notice of any material proposed additional tax assessments against it or any of
its subsidiaries.
(n) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which constitutes or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the Notes or the Company's Common Stock to facilitate the sale or
resale of the Notes.
(o) The financial statements, including the notes thereto, and supporting
schedules included in the Registration Statement and the Prospectus present
fairly the financial position of the Company and its subsidiaries as of the
dates indicated and the results of its operations for the periods specified; and
the policy reserves shown thereon are, to the best of the Company's knowledge,
adequate to meet policy liabilities in the ordinary course of business and
properly stated in all material respects; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. The statutory
financial statements of each of the Subsidiaries engaged in the insurance
business, from which certain financial information and certain ratios and other
statistical data contained in the Registration Statement have been derived, have
for each relevant period been prepared in accordance with accounting practices
prescribed or permitted by the National Association of Insurance Commissioners
and the Insurance Department of the respective states of domicile of such
Subsidiaries, and such accounting practices have been
10
<PAGE>
applied on a consistent basis throughout the periods involved, except as may be
set forth therein.
(p) Except as described in the Prospectus, no holder of securities of the
Company has any rights to the registration of securities of the Company because
of the filing of the Registration Statement or otherwise in connection with the
sale of the Notes contemplated hereby.
(q) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(r) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
(s) The documents incorporated or deemed to be incorporated by reference
in the Prospectus, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
under the Exchange Act, and, when read together with the other information in
the Prospectus, at the time the Registration Statement and any amendments
thereto become effective and at the Closing Date, will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(t) The certificates of authority issued by the Insurance Division of the
respective domiciliary state of each of the Company's subsidiaries engaged in
the insurance business are in full force and effect, and no proceedings to
revoke any of the certificates are pending or, to the best knowledge of the
Company, threatened. Each of the Company's subsidiaries engaged in the
insurance business holds such licenses, certificates, permits and other required
authorizations from insurance regulatory or other governmental authorities as
are adequate to conduct the business of the Company and its subsidiaries as
described in the Prospectus and necessary for qualification as an insurer or
insurance
11
<PAGE>
agent/broker, as the case may be, in each jurisdiction in which the conduct of
its business requires such qualification; and all licenses, certificates,
permits and other required authorizations are in full force and effect, and no
proceedings to revoke any of them are pending or, to the best knowledge of the
Company, threatened except where the failure to be in full force or effect,
singly or in the aggregate, do not or will not have a material adverse effect on
the business, prospects, properties, assets, operations, condition (financial or
other), net worth or results of operations of the Company and its subsidiaries
taken as a whole.
(u) Neither the Company nor any of its subsidiaries is in violation of any
law, ordinance, governmental rule or regulation (including, without limitation,
federal, state and local rules and regulations relating to the protection of the
environment or concerning the handling, storage, disposal or discharge of toxic
materials (collectively, "Environmental Laws")) or court decree or order to
which it or any of its property is subject, except for such violations which
(individually or in the aggregate) do not or will not have a material adverse
effect on the business, prospects, properties, assets, operations, condition
(financial or other), net worth or results of operations of the Company and its
subsidiaries taken as a whole. Each of the Company and its subsidiaries has
obtained any permits, consents and authorizations required to be obtained by it
under applicable laws, rules, ordinances or regulations including, without
limitation, Environmental Laws and any such permits, consents and authorizations
remain in full force and effect, except as to any of the foregoing the absence
of which (individually or in the aggregate) will not have a material adverse
effect on the business, prospects, properties, assets, operations, condition
(financial or other), net worth or results of operations of the Company and its
subsidiaries taken as a whole. There is no pending or, to the Company's or any
of its subsidiaries' knowledge, threatened, action or proceeding against the
Company or any of its subsidiaries alleging violations of any applicable laws,
rules, ordinances or regulations including, without limitation, any
Environmental Laws, other than any such actions or proceedings which,
individually or in the aggregate, if adversely determined, is not reasonably
likely to have a material adverse effect on the business, prospects, properties,
12
<PAGE>
assets, operations, condition (financial or other), net worth or results of
operations of the Company and its subsidiaries taken as a whole.
(v) The reinsurance treaties currently in effect between any subsidiary of
the Company, or "pool" of insurers in which a subsidiary participates, if any,
and reinsurers are accurately summarized in the Prospectus under the caption
"Business--Reinsurance." Neither any such pool, if any, nor any of the
Company's subsidiaries is in violation of or in default in any material respect
under any term or provision of any such treaty and, to the best knowledge of the
Company, no other party to any such treaty is in default or breach thereof in
any material respect.
(w) Schedule III hereto constitutes a complete list of every jurisdiction
in which the Company and Pioneer Life Insurance Company, Design Benefit Plans,
Inc., National Group Life Insurance Company., Continental Life & Accident
Company, Connecticut National Life Insurance Company, National Benefit Plans,
Inc. and Administrators Service Corporation (collectively, the "Designated
Subsidiaries") are registered to do business as a foreign corporation. The
Company and the Designated Subsidiaries are not required to be qualified in any
other jurisdiction except when the failure to be so qualified would not have a
material adverse effect on the business, prospects, properties, assets,
operations, condition (financial or other), net worth or results of operations
of the Company and its subsidiaries taken as a whole.
(x) No default or event of default with respect to any Senior Indebtedness
(as such term is defined in the Indenture) entitling the holders thereof to
accelerate the maturity thereof exists or will exist as a result of the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby and each of the Company and its subsidiaries has duly
performed or observed all material obligations, agreements, covenants or
conditions contained in any contract, indenture, mortgage, agreement or
instrument relating to any Senior Indebtedness.
(y) The Company and its subsidiaries maintain a system of internal
accounting controls suffi-
13
<PAGE>
cient to provide reasonable assurances that (A) transactions are executed in
accordance with management's general or specific authorization; (B) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(z) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for its business, including
but not limited to, general liability insurance and insurance covering real and
personal property owned or leased by the Company or any of its subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(aa) Neither the Company nor any of its subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof
(bb) The Company has complied with (or is exempt from) all of the
provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida
statutes, and all regulations promulgated thereunder relating to issues doing
business with the Government of Cuba or with any affiliate located in Cuba.
(cc) Except pursuant to this Agreement, neither the Company nor any of its
subsidiaries has incurred any liability for any finder's or broker's fee or
agent's commission in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
14
<PAGE>
2. Purchase, Sale and Delivery of the Notes.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, Initial Notes in
the respective principal amounts set forth opposite the name of such Underwriter
in Schedule I hereto at a purchase price equal to _____% of the principal amount
thereof, plus accrued interest from ________ __, 1996 (plus any additional
principal amount which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof).
(b) Payment of the purchase price for the Initial Notes shall be made at
the office of McDermott, Will & Emery in Chicago, Illinois, and delivery of the
certificates for the Initial Notes shall be made at the office of Bear, Stearns
& Co. Inc., New York, New York, 10167 or at such other place as shall be agreed
upon by you and the Company, at 10:00 A.M. on the third or fourth business day
(as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in
accordance with the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination of
the initial public offering price of the Notes), or such other time not later
than ten business days after such date as shall be agreed upon by you and the
Company (such time and date of payment and delivery being herein called the
"Closing Date"). Payment shall be made to the Company by wire transfer or
certified or official bank check or checks drawn in New York Clearing House
funds or similar next day funds payable to the order of the Company, against
delivery to you for the respective accounts of the Underwriters of certificates
for the Notes to be purchased by them. Certificates for the Notes shall be
registered in such name or names and in such authorized denominations as you may
request in writing at least two full business days prior to the Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Closing Date.
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(c) In addition, the Company hereby grants to the Underwriters the option
to purchase all or a portion of the Additional Notes at the same purchase price
per Note to be paid by the Underwriters to the Company for the Initial Notes as
set forth in this Section 2 plus accrued interest from _______________ to the
applicable Additional Closing Date, for the sole purpose of covering over-
allotments in the sale of Initial Notes by the Underwriters. This option may be
exercised at any time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate principal amount of Additional Notes
as to which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Notes are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Notes shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least one full business day prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.
The principal amount of Additional Notes to be sold to each Underwriter
shall be the principal amount which bears the same ratio to the aggregate
principal amount of Additional Notes being purchased as the principal amount of
Initial Notes set forth opposite the name of such Underwriter in Schedule I
hereto (or such number increased as set forth in Section 9 hereof) bears to
$65,000,000, subject, however, to such adjustments as you in your sole
discretion shall make so that the aggregate principal amount of Additional Notes
to be purchased by each Underwriter shall be in integrals of $1,000.
Payment for the Additional Notes shall be made by wire transfer or
certified or official bank check or checks, in New York Clearing House or
similar next day
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funds, payable to the order of the Company at the offices of McDermott, Will &
Emery, Chicago, Illinois, or such other location as may be mutually acceptable,
upon delivery of the certificates for the Additional Notes to the Underwriters.
3. Offering. Upon your authorization of the release of the Initial Notes,
the Underwriters propose to offer the Notes for sale to the public upon the
terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) If the Registration Statement has not yet been declared effective the
Company will use its best efforts to cause the Registration Statement and any
amendments thereto to become effective as promptly as possible, and if Rule 430A
is used or the filing of the Prospectus is otherwise required under Rule 424(b)
or Rule 434, the Company will file the Prospectus (properly completed if Rule
430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to you of such timely filing.
If the Company elects to rely on Rule 434, the Company will prepare and file a
term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission or
the "blue sky" or insurance securities authority of any jurisdiction regarding
the Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, and (vi) of the receipt by
the Company of any notification
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with respect to the suspension of the qualification of the Notes for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement or
file any document under the Exchange Act if such document would be deemed to be
incorporated by reference into the Prospectus to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof;
provided, however, that such objection shall not prevent the filing of any such
amendment or supplement or document under the Act or the Exchange Act which, in
the written opinion of outside counsel for the Company, is required to be filed
pursuant to the Act, the Exchange Act or the Regulations.
(b) If at any time when a prospectus relating to the Notes is required to
be delivered under the Act any event shall have occurred as a result of which
the Prospectus as then amended or supplemented would, in the judgment of the
Underwriters or the Company, include an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, or to file under the Exchange Act so as to comply therewith any
document incorporated by reference in the Registration Statement or the
Prospectus or in any amendment thereof or supplement thereto, the Company will
notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (except as set forth above in paragraph (a) of this
Section 4) which will correct such statement or omission or which will effect
such compliance and will use its best efforts to have any amendment to the
Registration Statement declared effec-
18
<PAGE>
tive as soon as possible for as long as any Underwriter is required to deliver a
prospectus in connection with sales of the Notes.
(c) The Company will promptly deliver to you three signed copies of the
Registration Statement, including exhibits and all documents incorporated by
reference therein and all amendments thereto (if requested by you), and the
Company will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, all
amendments of and supplements to such documents, if any, and all documents
incorporated by reference in the Registration Statement and Prospectus or any
amendment thereof or supplement thereto, without exhibits, as you may reasonably
request for as long as any Underwriter is required to deliver a prospectus in
connection with sales of the Notes.
(d) The Company will endeavor in good faith, in cooperation with you, at
or prior to the time of effectiveness of the Registration Statement, to qualify
the Notes for offering and sale under the "blue sky" or insurance securities
laws relating to the offering or sale of the Notes of such jurisdictions as you
may designate and to maintain such qualification in effect for so long as
required for the distribution thereof; except that in no event shall the Company
be obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 120 days from the date of the Prospectus, the
Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly ("Transfer"), any
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<PAGE>
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock or any rights to acquire Common Stock), and the
Company will obtain the undertaking of each of its executive officers and
directors not to engage in any of the aforementioned transactions on their own
behalf, other than (i) the Company's sale of Notes hereunder; (ii) the Company's
issuance of Common Stock upon the exercise of presently outstanding stock
options or upon the conversion of the outstanding $2.125 Preferred Stock or of
the 8% Debentures; (iii) under the Company's stock option, stock purchase plans
or other employee incentive plans existing on the date hereof; or (iv) the
Transfer of Common Stock (or securities convertible into or exchangeable for
Common Stock or any rights to acquire Common Stock) not in excess of 10% of such
officer's or director's holdings in Common Stock (or any securities convertible
into or exchangeable or exercisable for Common Stock or any rights to acquire
Common Stock).
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the Notes as set
forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Notes to be listed
on the New York Stock Exchange ("NYSE") and for so long as any of the Notes are
outstanding and the Company is subject to the reporting requirements of the
Exchange Act, use its best efforts to maintain the NYSE listing of the Common
Stock and for so long as any of the Notes are outstanding use its best efforts
to maintain the NYSE listing of the Notes.
(j) The Company, during the period when the Prospectus is required to be
delivered under the Act or the Exchange Act, will file all documents required to
be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange
Act within the time periods re-
20
<PAGE>
quired by the Exchange Act and the rules and regulations thereunder.
(k) So long as any of the Notes remain outstanding, the Company agrees to
keep reserved such number of shares of its Common Stock as are necessary to
permit the conversion of all of the Notes at the conversion price in effect from
time to time; and in connection therewith, the Company agrees to take any and
all such legal and other action necessary to permit the conversion of all the
Notes at any time including, if required by law, the filing and maintaining
effective of any registration statement with the Commission or under any state
"blue sky" or insurance securities laws, except that in no event shall the
Company be obligated in connection therewith to execute a general consent to
service of process.
(l) Until the Closing Date, neither the Company nor any of the
subsidiaries shall, without your prior written consent (which shall not be
unreasonably withheld), issue, directly or indirectly, any press release or
other communication or hold any press conference with respect to the Company,
any of the subsidiaries, their respective activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations, unless in the written opinion of legal counsel to the
Company such press release is required to comply with applicable law.
5. Payment of Expense. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents and all other
documents related to the public offering of the Notes (including those supplied
to the Underwriters in quantities as hereinabove
21
<PAGE>
stated), (ii) the issuance, transfer and delivery of the Notes to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the Notes under state or foreign securities or Blue Sky laws
and insurance securities laws, including the costs of printing and mailing a
preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters (which fees of counsel shall not exceed $20,000) and such counsel's
disbursements in relation thereto, (iv) listing the Notes and the Shares on the
NYSE, (v) filing fees of the Commission and the National Association of
Securities Dealers, Inc., (vi) the cost of printing certificates representing
the Notes, (vii) the cost and charges of any trustee, transfer agent or
registrar and (viii) all other costs and expenses incident to the performance of
the Company's obligations hereunder and not otherwise specifically provided for
in this Section. It is understood, however, that the Underwriters will pay all
travel expenses incurred by the Underwriters in connection with the consummation
of the transactions contemplated by this Agreement and all expenses incurred by
the Underwriters in marketing the Notes.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Initial Notes and the Additional Notes,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Initial Notes and any Additional Closing Date, if
different, for the Additional Notes), to the absence from any certificates,
opinions, written statements or letters furnished to you or to Skadden, Arps,
Slate, Meagher & Flom ("Underwriters' Counsel") pursuant to this Section 6 of
any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement (including the Statement of Eligibility and
Qualification of the Trustee on Form T-1 (the "T-1") shall have become effective
not later than 5:30 P.M., New York time, on the date of this Agreement, or at
such later time and date as shall have been consented to in writing by you; if
the Company shall have elected to rely upon Rule 430A or Rule
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<PAGE>
434 of the Regulations, the Prospectus shall have been filed with the Commission
in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to
the Closing Date no stop order suspending the effectiveness of the Registration
Statement (including the T-1) or any post-effective amendment thereof shall have
been issued and no proceedings therefor shall have been initiated or threatened
by the Commission.
(b) At the Closing Date you shall have received the opinion of McDermott,
Will & Emery, counsel for the Company, dated the Closing Date addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel, to
the effect that:
(i) Each of the Company and its Designated Subsidiaries has been
duly incorporated and is validly existing and in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
Designated Subsidiaries is duly qualified to do business and in good
standing as a foreign corporation in each jurisdiction listed on Schedule
III hereto. Each of the Company and its Designated Subsidiaries has full
corporate power and authority to conduct its business in the manner
described in the Prospectus (with such exceptions as are in the aggregate
not material to the business or financial condition of the Company and its
subsidiaries taken as a whole).
(ii) The Company has an authorized capital stock as set forth in
the Registration Statement and the Prospectus in the column entitled
"Actual" under the caption "Capitalization." All of the outstanding shares
of Common Stock are duly and validly authorized and issued, are fully paid
and nonassessable and were not issued in violation of or subject to any
preemptive rights (whether created by statute or by the Company's
certificate of incorporation or bylaws or, to the knowledge of such
counsel, based on a certificate from officers of the Company, any agreement
or other instrument to which the Company is a party or by which the Company
is bound). The Common Stock, Shares and the Notes conform
23
<PAGE>
in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus under the captions "Description
of Capital Stock" and "Description of the Notes.
(iii) The Common Stock currently outstanding is listed, and the
Notes to be sold under this Agreement to the Underwriters are duly
authorized for listing, on the NYSE.
(iv) To the knowledge of such counsel (based on a certificate
from officers of the Company) and except as disclosed in the Prospectus, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration
Statement or otherwise in connection with the sale of the Notes
contemplated hereby.
(v) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(vi) The Company has all requisite corporate power and authority
to execute, deliver and perform the Indenture, and all necessary corporate
proceedings of the Company have been taken to authorize the execution,
delivery and performance of the Indenture; the Indenture has been duly
authorized, executed and delivered by the Company, has been qualified under
the Trust Indenture Act, and constitutes a legal, valid and binding
instrument enforceable against the Company in accordance with its terms,
except to the extent that enforcement thereof may be limited by bankruptcy,
reorganization, insolvency, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and general
principles of equity (regardless of whether enforceability is considered in
a proceeding at law or equity); the issuance and sale of the Notes have
been duly authorized by requisite corporate action on the part of the
Company and, when executed and authenticated in accor-
24
<PAGE>
dance with the provisions of the Indenture and delivered to and paid for by
the Underwriters pursuant to this Agreement, will constitute valid and
binding obligations of the Company entitled to the benefits of the
Indenture (except as such benefits may be limited by bankruptcy,
reorganization, insolvency, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and general
principles of equity); the Shares issuable upon conversion of the Notes
have been duly authorized and Shares have been reserved for issuance upon
conversion of the Notes issued on the Closing Date, and, when issued and
delivered upon conversion of the Notes in accordance with the Indenture,
the Shares will be validly issued, fully paid and nonassessable (provided,
however, that the Company may have to amend its Articles of Incorporation
to authorize additional shares of Common Stock in the event that, as a
result of the anti-dilutive provisions in the Indenture, a greater number
of shares of Common Stock are issuable upon conversion of the Notes); no
holder of any outstanding shares of the Company's capital stock has any
preemptive rights (whether created by statute or by the Company's
certificate of incorporation or bylaws or, to the knowledge of such counsel
based on a certificate from officers of the Company, any agreement or other
instrument to which the Company is party or by which the Company is bound)
to subscribe for or purchase the Notes or the Shares issuable upon the
conversion thereof; and the certificates representing the Notes and the
Shares are in the form prescribed by the Indenture and the requirements of
the NYSE.
(vii) To the best of such counsel's knowledge, there is no
litigation or governmental or other action, suit, proceeding or
investigation before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or involving the
properties or business of, the Company or any of its subsidiaries, which is
of a character required to be disclosed in the
25
<PAGE>
Registration Statement and the Prospectus which has not been properly
disclosed therein.
(viii) The execution, delivery, and performance of this
Agreement and the Indenture and the consummation of the transactions
contemplated hereby and thereby including the sale of and issuance of the
Notes or issuance of the Shares upon conversion of the Notes by the Company
do not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement or instrument filed as an exhibit to, or
incorporated by reference in, the Registration Statement or (B) violate or
conflict with any provision of the certificate of incorporation or by-laws
of the Company, or, to the best knowledge of such counsel, any statute,
rule or regulation of any Illinois, New York or United States public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any Illinois, New York or United States court or any
Illinois, New York or United States public, governmental, or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets is required for the execution, delivery and
performance of this Agreement and the Indenture or the consummation of the
transactions contemplated hereby or thereby, except for (1) such as may be
required under state securities or Blue Sky laws or insurance securities
laws in connection with the purchase and distribution of the Notes by the
Underwriters (as to which such counsel need express no opinion) and (2)
such as have been made or obtained under the Act, the Exchange Act and the
Trust Indenture Act. To the best knowledge of such counsel, no consent of
any
26
<PAGE>
party to any contract or agreement filed as an exhibit to, or incorporated
by reference in, the Registration Statement, or under the provisions of any
outstanding series of the Company's preferred stock, is required for the
execution, delivery, or performance of this Agreement or the Indenture.
(ix) To the best knowledge of such counsel, any contract,
agreement, instrument, lease, policy, reinsurance treaty or license
required to be described in the Registration Statement or the Prospectus
has been properly described in all material respect therein. To the best
knowledge of such counsel, any contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement
has been filed with the Commission as an exhibit to the Registration
Statement.
(x) Insofar as statements in the Prospectus purport to summarize
the provisions of laws, rules, regulations, contracts, agreements,
instruments, or licenses, to the best knowledge of such counsel, such
statements constitute accurate summaries in all material respects.
(xi) The Company and each of its subsidiaries are, and upon sale
of the Notes will be, exempt from registration under the Investment Company
Act of 1940.
(xii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto appeared on their face to be
appropriately responsive in all material respects with the requirements of
the Act and the Trust Indenture Act and the respective rules and
regulations, except that such counsel does not express any opinion as to
the financial statements, schedules and other financial data included or
incorporated by reference therein or excluded therefrom, the exhibits to
the Registration Statement (except to the extent set forth in paragraph
(ix)), and
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<PAGE>
such counsel does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement and
the Prospectus except to the extent set forth below or in paragraphs (ii),
(vii), (ix) or (x) of this opinion. The documents filed under the Exchange
Act and incorporated by reference in the Registration Statement and the
Prospectus or any amendment thereof or supplement thereto when they became
effective or were filed with the Commission, as the case may be, appeared
on their face to be appropriately responsive in all material respects with
the Act or the Exchange Act, as applicable, and the rules and regulations
of the Commission thereunder, except that such counsel does not express
any opinion as to the financial statements, schedules and other financial
data included or incorporated by reference therein or excluded therefrom,
the exhibits to the Registration Statement (except to the extent set forth
in paragraph (ix)), and such counsel does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus except to the extent set forth
below or in paragraphs (ii), (vii), (ix) or (x) of this opinion, and no
facts have come to such counsel's attention to lead such counsel to believe
that any of such documents, when such documents became effective or were so
filed or, if amended, on the date of such amendment, as they case may be,
contained, in the case of a registration statement which became effective
under the Act, an untrue statement of a material fact, or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or, in the case of other documents which
were filed under the Exchange Act with the Commission, an untrue statement
of a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made when such documents were so filed, not misleading.
28
<PAGE>
(xiii) Such counsel has been advised that the Registration
Statement is effective under the Act, and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof has been issued and no
proceedings therefor have been initiated or threatened by the Commission
and all filings required by Rule 424(b) of the Regulations have been made.
(xiv) In addition, such opinion shall also contain a statement
that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company and the Underwriters at which the contents of
the Registration Statement and the Prospectus were discussed. Although
such counsel shall not be required to pass upon or assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (except to extent
set forth in paragraphs (ii), (vii), (ix) or (x) of this opinion) and
shall not be required to make an independent check or verification thereof,
no facts have come to such counsel's attention to lead such counsel to
believe that as of its Effective Date, the Registration Statement
(including all information deemed to be part of such registration statement
as of the Effective Time pursuant to Rule 430(A)(b) under the Act),
contained an untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or the Prospectus as of its date and as
of the Closing Date contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that such counsel need not express any opinion or belief
as to the financial statements, schedules and other financial data included
or excluded from the Registration
29
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Statement or the Prospectus or the exhibits to the Registration Statement
(except to the extent set forth in paragraph (ix) of this opinion).
In rendering such opinion, such counsel (A) shall only be required to opine with
respect to the laws of the States of Illinois and New York, the General
Corporation Law of Delaware and the laws of the United States; and (B) may rely
as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and certificates or other written statements
of officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company and its
subsidiaries, provided that copies of any such statements or certificates shall
be delivered to Underwriters' Counsel. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are justified
in relying thereon.
(c) At the Closing Date you shall have received the opinion of A.
Clark Waid III, Secretary and Counsel of the Company, dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company and each of its subsidiaries has full corporate
power and authority has received all consents, authorizations, approvals,
orders, licenses, permits and certificates of and from, and has made all
declarations and filings with, all federal, state or local regulatory
agencies or bodies, including insurance regulatory authorities, and other
governmental authorities and all courts and other tribunals, necessary to
own, lease, license, and use its properties and assets and to conduct its
business in the manner described in the Prospectus (with such exceptions as
in the aggregate will not have a material adverse effect on the condition
(financial or otherwise), results of operations, business, properties or
assets of the Company and its subsidiaries taken as a whole). Each of the
Company
30
<PAGE>
and, to the extent required, its subsidiaries is duly qualified to conduct
its business and is in good standing in every jurisdiction in which its
ownership, leasing, licensing, or use of property and assets or the conduct
of its business makes such qualification necessary, except where the
failure to be so qualified or in good standing does not have a material
adverse effect on the condition (financial or other), results of
operations, business, properties, or assets of the Company and its
subsidiaries taken as a whole.
(ii) To such counsel's knowledge, neither the Company nor any
subsidiary is in breach of, or default under any term or provision of any
material certificate, authorization, license, franchise or permit.
(iii) To the best knowledge of such counsel, neither the
Company nor any subsidiary of the Company is in violation or breach of, or
default (disregarding any grace or notice provision) with respect to, any
provision of any contract, policy, reinsurance treaty, agreement,
instrument, lease, license, arrangement, or understanding to which the
Company or any of its subsidiaries is a party, which violation, breach or
default is reasonably likely to have a material adverse effect on the
condition (financial or otherwise), results of operations, business,
properties or assets of the Company and its subsidiaries taken as a whole.
(iv) The Company is not in violation or breach of, or in default
with respect to, any term of its articles of incorporation or bylaws.
(v) To the best of such counsel's knowledge, there is no
litigation or governmental or other action, suit, proceeding or
investigation before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or involving the
properties or business of, the
31
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Company or any of its subsidiaries, which is of a character required to be
disclosed in the Registration Statement and the Prospectus which has not
been properly disclosed therein.
(vi) All of the issued and outstanding capital stock of each
subsidiary of the Company has been duly and validly issued and is fully
paid and nonassessable and was not issued in violation of any insurance
regulatory provision or any preemptive rights and, except as described in
Schedule II hereto, is owned directly or indirectly by the Company, free
and clear of any lien, encumbrance, claim, security interest, restriction
or transfer, shareholders' agreement, voting trust or other defect of title
whatsoever.
(vii) The execution, delivery, and performance of this Agreement
and the Indenture and the consummation of the transactions contemplated
hereby and thereby including the sale of and issuance of the Notes or
issuance of the Shares upon conversion of Notes by the Company do not and
will not (A) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or event which with notice of lapse
of time, or both, would constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to any
material agreement, instrument, lease, license, policy, reinsurance treaty,
arrangement or understanding to which the Company or any of its
subsidiaries is a party or by which any of their respective properties or
assets may be bound or (B) violate or conflict with any provision of the
certificate or articles of incorporation or by-laws of the Company or any
of its subsidiaries, or any judgment, decree, order, statute, rule or
regulation of any court or governmental agency or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets. To the best knowledge of such
counsel, no con-
32
<PAGE>
sent of any party to any material contract, agreement, instrument, lease,
license, policy, reinsurance treaty, arrangement, or understanding to which
the Company or any subsidiary is a party or to which any of their
respective properties or assets are subject is required for the execution,
delivery, or performance of this Agreement or the Indenture.
(viii) Insofar as statements in the Prospectus purport to
summarize the status of litigation, to the best knowledge of such counsel,
such statements constitute accurate summaries in all material respects.
In rendering such opinion, such counsel shall only be required to opine with
respect to the laws of the State of Illinois and the General Corporation Law of
Delaware and the laws of the United States.
(d) All proceedings taken in connection with the sale of the Notes as
herein contemplated shall be reasonably satisfactory in form and substance to
you and to Underwriters' Counsel, and the Underwriters shall have received from
said Underwriters' Counsel a favorable opinion, dated as of the Closing Date
with respect to the issuance and sale of the Notes, the Registration Statement
and the Prospectus and such other related matters as you may reasonably require,
and the Company shall have furnished to Underwriters' Counsel such documents as
they reasonably request for the purpose of enabling them to pass upon such
matters.
(e) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date, to the effect that (i) the condition set forth in subsection (a)
of this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference with their
33
<PAGE>
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a material adverse change, in the
business, prospects, properties, operations, condition (financial or otherwise),
or results of operations of the Company and its subsidiaries taken as a whole,
except in each case as described in or contemplated by the Prospectus.
(f) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Ernst & Young LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance reasonably satisfactory to you, to the effect that: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations; (ii) stating that, in their opinion, the
financial statements and schedules of the Company included or incorporated by
reference in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the applicable
published rules and regulations of the Commission thereunder; (iii) on the basis
of procedures consisting of a reading of the latest available unaudited interim
consolidated financial statements of the Company, and its subsidiaries, a
reading of the minutes of meetings and consents of the shareholders and boards
of directors of the Company and its subsidiaries and the committees of such
boards subsequent to December 31, 1995, inquiries of officers and other
employees of the Company and its subsidiaries who have responsibility for
financial and accounting matters of the Company and its subsidiaries with
respect to transactions and events subsequent to December 31, 1995 and other
specified procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that would cause
them to believe that: (A) with respect to the period subsequent to December 31,
1995 there were, as of the date of the most recent available monthly
consolidated financial statements of the Company and its subsidiaries, if any,
and as of a specified date not more than five days prior
34
<PAGE>
to the date of such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net consolidated assets or
stockholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter or (B) that during the period from December 31, 1995 to
the date of the most recent available monthly consolidated financial statements
of the Company and its subsidiaries, if any, and to a specified date not more
than five days prior to the date of such letter, there was any decrease, as
compared with the corresponding period in the prior fiscal year, in total
revenues, or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.
(g) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(h) You shall have received from each person who is a director or
officer of the Company an agreement to the effect that such person will not
Transfer (or announce any Transfer of) any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock or any rights to acquire Common Stock in excess of 10% of such officer's
or director's holdings in the Common Stock or
35
<PAGE>
any securities convertible into or exchangeable or exercisable (currently or in
the future) for Common Stock or any rights to acquire Common Stock as of the
date of the Prospectus for a period of 120 days after the date of the
Prospectus.
(i) Evidence satisfactory to the Underwriters that Duff & Phelps
Credit Rating Company has assigned to the Notes a rating of [__] or better.
(j) At the Closing Date, the Notes shall have been approved for
listing on the NYSE.
(k) No amendment to the Registration Statement or any amendment or
supplement to the Prospectus or document under the Exchange Act shall have been
filed by the Company to which the Underwriters shall reasonably object in
writing.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Notes may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to reasonable attorneys' fees and any and all
reasonable expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all
36
<PAGE>
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Notes, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided
further, that the foregoing indemnity shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Notes, or any controlling person of such Underwriter, if a
copy of the Prospectus (including any amendment or supplement thereto) was not
sent or given by on or behalf of such Underwriter to such person at or prior to
the written confirmation of the sale of the Notes to such person, and if the
Prospectus (including any amendment or supplement thereto) would have cured the
defect giving rise to such losses, claims, damages or liabilities, unless such
failure to deliver a copy of the Prospectus was a result of the failure of the
Company to provide a sufficient number of copies of such prospectus in a timely
manner. This indemnity agreement will be in addition to any liability which the
Company may otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of
37
<PAGE>
the Act or Section 20(a) of the Exchange Act, against any losses, liabilities,
claims, damages and expenses whatsoever as incurred (including but not limited
to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Notes, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Notes purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page and in the seven (7) paragraphs under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the registration
statement relating to the Notes as originally filed or in any amendment thereof,
any related preliminary prospectus or the Prospectus or in any amendment thereof
or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party
38
<PAGE>
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnifica-
39
<PAGE>
tion provision (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 7 hereof, in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company and (y) the underwriting discounts and commissions
received by the Underwriters, respectively, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company and
of the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred
40
<PAGE>
to above. Notwithstanding the provisions of this Section 8, (i) in no case shall
any Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Notes purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Notes
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Initial Notes or Additional Notes hereunder, and if the
Initial Notes or Additional Notes with respect to which such default relates do
not (after giving effect to
41
<PAGE>
arrangements, if any, made by you pursuant to subsection (b) below) exceed in
the aggregate 10% of the principal amount of Initial Notes or Additional Notes,
to which the default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the principal
amount of Initial Notes set forth opposite their respective names in Schedule I
hereto bear to the aggregate principal amount of Initial Notes set forth
opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
principal amount of the Initial Notes or Additional Notes, as the case may be,
you may in your discretion arrange for yourself or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Initial Notes or Additional Notes, as the case may be, to which
such default relates on the terms contained herein. In the event that within 5
calendar days after such a default you do not arrange for the purchase of the
Initial Notes or Additional Notes, as the case may be, to which such default
relates as provided in this Section 9, this Agreement or, in the case of a
default with respect to the Additional Notes, the obligations of the
Underwriters to purchase and of the Company to sell the Additional Notes shall
thereupon terminate, without liability on the part of the Company with respect
thereto (except in each case as provided in Section 5, 7 and 8 hereof) or the
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their default
hereunder.
(c) In the event that the Initial Notes or Additional Notes to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus
42
<PAGE>
which, in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Initial Notes and Additional
Notes.
10. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of when
(i) you and the Company shall have received notification of the effectiveness of
the Registration Statement or (ii) the execution of this Agreement. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying you or by you notifying the Company. Notwithstanding the foregoing,
the provisions of this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at
all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Notes at any time prior to the Additional Closing Date,
as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; or (B) if trading on
43
<PAGE>
the New York or American Stock Exchanges shall have been suspended, or minimum
or maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been required, on the New York or American
Stock Exchanges by the New York or American Stock Exchanges or by order of the
Commission or any other governmental authority having jurisdiction; or (C) if a
banking moratorium has been declared by a state or federal authority or if any
new restriction materially adversely affecting the distribution of the Initial
Notes or the Additional Notes, as the case may be, shall have become effective;
or (D) if any downgrading in the rating of the Company's debt securities or
preferred stock by any "nationally recognized statistical rating-organization"
(as defined for purposes of Rule 436(g) under the Act; or (E) (i) if the United
States becomes engaged in hostilities or there is an escalation of hostilities
involving the United States or there is a declaration of a national emergency or
war by the United States or (ii) if there shall have been such change in
political, financial or economic conditions if the effect of any such event in
(i) or (ii) as in your judgment makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Initial Notes or the Additional
Notes, as the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Notes provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all
reasonable out-of-pocket expenses (including the reasonable fees and expenses of
their counsel), incurred by the Underwriters in connection herewith.
44
<PAGE>
12. Notice. All communications hereunder,except as may be otherwise
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and
confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, N.Y. 10167, Attention:_____________; if sent to the
Company, shall be mailed, delivered, or telegraphed and confirmed in writing to
the Company, 1750 East Golf Road, Schaumburg, IL 60173, Attention: President,
with a copy to General Counsel.
13. Parties. This Agreement shall insure solely to the benefit of, and
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Notes from any of the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
45
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
PIONEER FINANCIAL SERVICES, INC.
By ____________________________
Accepted as of the date
first above written
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
By ____________________
On behalf of themselves
and the other Underwriters
named in Schedule I hereto.
46
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount of
Initial Notes to be
Name of Underwriter Purchased
-------------------------- --------------------
<S> <C>
Bear, Stearns & Co. Inc...
EVEREN Securities, Inc....
Oppenheimer & Co., Inc....
Total ....... $ ==========
</TABLE>
47
<PAGE>
===============================================================================
PIONEER FINANCIAL SERVICES, INC.
and
THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE
Indenture
Dated as of ________, 1996
$65,000,000*
____% Convertible Subordinated Notes due 2003
===============================================================================
*Subject to increase up to $74,750,000.
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE TABLE*
---------------------
Trust Indenture
Act Section Indenture Section
- --------------- -----------------
<S> <C>
310(a)(1)............................................. 7.10
(a)(2)............................................. 7.10
(a)(3)............................................. N.A.
(a)(4)............................................. N.A.
(b)................................................ 7.8; 7.10
(c)................................................ N.A.
311(a)................................................ 7.11
(b)................................................ 7.11
(c)................................................ N.A.
312(a)................................................ 2.5
(b)................................................ 12.3
(c)................................................ 12.3
313(a)................................................ 7.6
(b)(1)............................................. N.A.
(b)(2)............................................. 7.6
(c)................................................ 7.6; 12.2
(d)................................................ 7.6
314(a)................................................ 4.2; 12.2
(b)................................................ N.A.
(c)(1)............................................. 12.4
(c)(2)............................................. 12.4
(c)(3)............................................. N.A.
(d)................................................ N.A.
(e)................................................ 12.5
(f)................................................ N.A.
315(a)................................................ 7.1(b)
(b)................................................ 7.5; 12.2
(c)................................................ 7.1(a)
(d)................................................ 7.1(c)
(e)................................................ 6.11
316(a)(last sentence)................................. 2.9
(a)(1)(A).......................................... 6.5
(a)(1)(B).......................................... 6.4
(a)(2)............................................. N.A.
(b)................................................ 6.7
(c)................................................ 9.4
317(a)(1)............................................. 6.8
(a)(2)............................................. 6.9
(b)................................................ 2.4
</TABLE>
<PAGE>
<TABLE>
<S> <C>
318(a)................................................ 12.1
</TABLE>
N.A. Means Not applicable.
- -----------
* This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS AND INCORPORATION
BY REFERENCE.................................................... 1
Section 1.1 Definitions............................................. 1
Section 1.2 Other Definitions....................................... 6
Section 1.3 Incorporation by Reference of
Trust Indenture Act..................................... 7
Section 1.4 Rules of Construction................................... 7
ARTICLE 2 THE SECURITIES.................................................. 7
Section 2.1 Form and Dating......................................... 7
Section 2.2 Execution and Authentication............................ 7
Section 2.3 Registrar and Paying Agent.............................. 8
Section 2.4 Paying Agent to Hold Money
in Trust................................................ 9
Section 2.5 Holder Lists............................................ 9
Section 2.6 Transfer and Exchange................................... 10
Section 2.7 Replacement Securities.................................. 10
Section 2.8 Outstanding Securities.................................. 11
Section 2.9 Treasury Securities..................................... 12
Section 2.10 Temporary Securities.................................... 11
Section 2.11 Cancellation............................................ 12
Section 2.12 Defaulted Interest...................................... 12
ARTICLE 3 REDEMPTION...................................................... 13
Section 3.1 Notices to Trustee...................................... 13
Section 3.2 Selection of Securities
to Be Redeemed.......................................... 13
Section 3.3 Notice of Redemption.................................... 14
Section 3.4 Effect of Notice of Redemption.......................... 15
Section 3.5 Deposit of Redemption Price............................. 15
Section 3.6 Securities Redeemed in Part............................. 16
Section 3.7 Optional Redemption..................................... 16
Section 3.8 Mandatory Redemption.................................... 16
ARTICLE 4 COVENANTS....................................................... 17
Section 4.1 Payment of Securities................................... 17
Section 4.2 Maintenance of Office or Agency......................... 17
Section 4.3 Compliance Certificate.................................. 17
Section 4.4 Stay, Extension and Usury Laws.......................... 18
Section 4.5 Continued Existence..................................... 18
Section 4.6 Offer of Repurchase Upon Change
of Control.............................................. 19
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<TABLE>
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Section 4.7 Limitation on Dividend and
Other Payment Restrictions
Affecting Subsidiaries.................................. 21
Section 4.8 Taxes................................................... 22
Section 4.9 Commission Reports; Reports to
Securityholders......................................... 22
Section 4.10 Insurance............................................... 23
ARTICLE 5 SUCCESSORS...................................................... 24
Section 5.1 When Company May Merge, etc............................. 24
Section 5.2 Successor Corporation Substituted....................... 24
ARTICLE 6 DEFAULTS AND REMEDIES........................................... 25
Section 6.1 Events of Default....................................... 25
Section 6.2 Acceleration............................................ 28
Section 6.3 Other Remedies.......................................... 29
Section 6.4 Waiver of Past Defaults................................. 29
Section 6.5 Control by Majority..................................... 29
Section 6.6 Limitation on Suits..................................... 29
Section 6.7 Rights of Holders to Receive
Payment................................................. 30
Section 6.8 Collection Suit by Trustee.............................. 30
Section 6.9 Trustee May File Proofs of Claim........................ 31
Section 6.10 Priorities.............................................. 31
Section 6.11 Undertaking for Costs................................... 31
ARTICLE 7 TRUSTEE......................................................... 32
Section 7.1 Duties of Trustee....................................... 32
Section 7.2 Rights of Trustee....................................... 33
Section 7.3 Individual Rights of Trustee............................ 34
Section 7.4 Trustee's Disclaimer.................................... 34
Section 7.5 Notice of Defaults...................................... 34
Section 7.6 Reports by Trustee to Holders........................... 34
Section 7.7 Compensation and Indemnity.............................. 35
Section 7.8 Replacement of Trustee.................................. 36
Section 7.9 Successor Trustee by Merger, etc........................ 37
Section 7.10 Eligibility; Disqualification........................... 37
Section 7.11 Preferential Collection of Claims
Against Company......................................... 37
ARTICLE 8 DISCHARGE OF INDENTURE.......................................... 38
Section 8.1 Termination of Company's
Obligations............................................. 38
Section 8.2 Application of Trust Money.............................. 39
Section 8.3 Repayment to Company.................................... 39
Section 8.4 Reinstatement........................................... 40
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<TABLE>
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ARTICLE 9 AMENDMENTS...................................................... 40
Section 9.1 Without Consent of Holders.............................. 40
Section 9.2 With Consent of Holders................................. 41
Section 9.3 Compliance with Trust
Indenture Act........................................... 42
Section 9.4 Revocation and Effect of
Consents................................................ 42
Section 9.5 Notation on or Exchange of
Securities.............................................. 43
Section 9.6 Trustee Protected....................................... 43
ARTICLE 10 CONVERSION...................................................... 43
Section 10.1 Conversion Privilege.................................... 43
Section 10.2 Conversion Procedure.................................... 44
Section 10.3 Fractional Shares....................................... 45
Section 10.4 Taxes on Conversion..................................... 45
Section 10.5 Company to Reserve Stock................................ 46
Section 10.6 Adjustment of Conversion Price.......................... 46
Section 10.7 Notice of Adjustment.................................... 53
Section 10.8 Notice of Certain Transactions.......................... 53
Section 10.9 Reorganization of Company............................... 54
Section 10.10 Company Determination Final............................. 55
Section 10.11 Trustee's Disclaimer.................................... 55
ARTICLE 11 SUBORDINATION................................................... 55
Section 11.1 Agreement to Subordinate................................ 55
Section 11.2 Certain Definitions..................................... 55
Section 11.3 Liquidation; Dissolution;
Bankruptcy.............................................. 57
Section 11.4 Default on Senior Indebtedness.......................... 57
Section 11.5 When Distribution Must Be
Paid Over............................................... 59
Section 11.6 Notice by Company....................................... 59
Section 11.7 Subrogation............................................. 59
Section 11.8 Relative Rights......................................... 60
Section 11.9 Subordination May Not Be
Impaired by Company..................................... 60
Section 11.10 Distribution or Notice to
Representative.......................................... 61
Section 11.11 Rights of Trustee and
Paying Agent............................................ 61
Section 11.12 Authorization to Effect
Subordination........................................... 61
Section 11.13 Conversions Not Deemed Payment.......................... 62
Section 11.14 Amendments.............................................. 62
ARTICLE 12 MISCELLANEOUS................................................... 62
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<TABLE>
<S> <C>
Section 12.1 Trust Indenture Act Controls............................ 62
Section 12.2 Notices................................................. 62
Section 12.3 Communication by Holders with
Other Holders........................................... 63
Section 12.4 Certificate and Opinion as to
Conditions Precedent.................................... 64
Section 12.5 Statements Required in
Certificate or Opinion.................................. 64
Section 12.6 Rules by Trustee and Agents............................. 64
Section 12.7 Legal Holidays.......................................... 64
Section 12.8 No Recourse Against Others.............................. 65
Section 12.9 Counterparts............................................ 65
Section 12.10 Variable Provisions..................................... 65
Section 12.11 Governing Law........................................... 66
Section 12.12 No Adverse Interpretation of
Other Agreements........................................ 66
Section 12.13 Successors.............................................. 66
Section 12.14 Severability............................................ 66
Section 12.15 Table of Contents,
Headings, etc........................................... 66
</TABLE>
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INDENTURE dated as of March __, 1996 between Pioneer Financial
Services, Inc., a Delaware corporation (the "Company"), and The First National
Bank of Chicago, a national banking association duly organized and existing
under the laws of the United States, as Trustee (the "Trustee").
The Company and the Trustee mutually covenant and agree for the equal
and ratable benefit of the respective holders from time to time of the ___%
Convertible Subordinated Notes Due 2003 (the "Securities") as follows:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
------------------------------------------
Section 1.1 Definitions.
"Acquisition Price" means the weighted average per share price paid
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) in acquiring the Voting Stock.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Agent" means any Registrar or Paying Agent.
"Board of Directors" means either the Board of Directors of the
Company or any committee of such Board duly authorized to act hereunder.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
<PAGE>
"Business Day" means a day which in the Borough of Manhattan, City of
New York (or in any of the cities, if more than one), where amounts are payable
in respect of the Securities, as specified on the face of the form of Security,
is neither a legal holiday nor a day on which banking institutions are
authorized by law or regulation to close.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
corporate stock or any and all equivalent ownership interests in a Person (other
than a corporation) whether now outstanding or issued after the date hereof.
"Change of Control" means an event or series of events in which (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) acquires "beneficial ownership" (as determined in accordance
with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than
50% of the total Voting Stock of the Company at an Acquisition Price less than
105% of the conversion price then in effect with respect to the Notes; and (ii)
the holders of the Common Stock receive consideration which is not all or
substantially all common stock that is (or upon consummation of or immediately
following such event or events will be) listed on a United States national
securities exchange or approved for quotation on the Nasdaq National Market or
any similar United States system of automated dissemination of quotations of
securities prices; provided, however, that any such person or group shall not be
deemed to be the beneficial owner of, or to beneficially own, any Voting Stock
tendered in a tender offer until such tendered Voting Stock is accepted for
purchase under the tender offer.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, the body
performing such duties at such time.
"Common Stock" includes any stock of any class of the Company which
has no preference in respect of
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dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company and which is not subject
to redemption by the Company. However, subject to the provisions of Section
10.9, shares issuable on conversion of Securities shall include only shares of
the class designated as Common Stock of the Company at the date of the initial
issuance of Securities by the Company or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which are not subject to redemption by the Company; provided that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.
"Company" means Pioneer Financial Services, Inc., a Delaware
corporation, and, subject to Article 5, its successors and assigns.
"Corporate Trust Office" means the office of the Trustee at the
address of the Trustee specified in Section 12.10 or such other address as to
which the Trustee may give notice to the Company.
"Daily Market Price" when used with reference to the Common Stock or
another security means the price of a share of Common Stock or such other
security on the relevant date, determined on the basis of the last reported sale
price regular way of the Common Stock or such other security as reported on the
composite tape, or similar reporting system, for issues listed on the New York
Stock Exchange (or if the Common Stock or such other security is not then listed
on that Exchange, for issues listed on such other national securities exchange
upon which the Common Stock or such other security is listed as may be
designated by the Board of Directors from time to time for the purposes hereof)
or, if there is no such reported sale on the day in question, on the basis of
the average of the closing bid and asked quotations regular way as so reported,
or, if the Common Stock or such other
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security is not listed on any national securities exchange, on the basis of the
average of the high bid and low asked quotations regular way on the day in
question in the over-the-counter market as reported by the National Association
of Securities Dealers Automated Quotation System, or if not so quoted, as
reported by National Quotation Bureau, Incorporated, or a similar organization.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder," "Securityholder" or other similar terms means a Person in
whose name a Security is registered.
"Indenture" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented.
"Insurance Subsidiary" means any Subsidiary of the Company which is
engaged in the insurance business or which is qualified as an insurer or
insurance broker/agent.
"Officer" means the Chairman of the Board, the President, the Chief
Financial Officer, the Treasurer, any assistant Treasurer, Controller, Secretary
or any Vice President of the Company.
"Officers' Certificate" means a certificate signed by two Officers,
one of whom must be the principal executive officer, principal financial officer
or principal accounting officer of the Company.
"Opinion of Counsel" means an opinion in writing signed by legal
counsel who may be an employee of or counsel to the Company or who may be other
counsel reasonably satisfactory to the Trustee.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated association or
any other
4
<PAGE>
entity or organization or government or political subdivision or any agency or
instrumentality thereof.
"principal," wherever used with reference to the Securities or any
Security or any portion thereof, shall be deemed to include "and premium, if
any."
"Responsible Officer" when used with respect to the Trustee means any
officer of the Trustee assigned by the Trustee to administer its corporate trust
matters.
"Security" or "Securities" means the __% Convertible Subordinated
Notes due 2003, as amended or supplemented from time to time, authenticated and
delivered under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means any corporation, association or other business
entity of which more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, as in force at the date as of which this Indenture was originally
executed.
"Trustee" means the entity identified as "Trustee" in the first
paragraph hereof and, subject to the provisions of Article 5, shall also include
any successor trustee.
"Voting Stock" means stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
a corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
5
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Section 1.2 Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
<S> <C>
"Bankruptcy Law".................. 6.1
"Change of Control Offer"......... 4.6
"Change of Control Payment"....... 4.6
"Change of Control Payment Date".. 4.6
"Conversion Price"................ 10.1
"Credit Agreement"................ 4.7
"Custodian"....................... 6.1
"Event of Default"................ 6.1
"Expiration Time"................. 10.6
"Offer"........................... 10.6
"Paying Agent".................... 2.3
"Payment Default"................. 6.1
"Purchased Shares"................ 10.6
"Registrar"....................... 2.3
"Representative".................. 11.2
"Senior Indebtedness"............. 11.2
"U.S. Government Obligations"..... 8.1
</TABLE>
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture.
The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder of a Security;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Securities means the Company and any successor
obligor upon the Trust Indenture Act.
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All other terms used in this Indenture that are defined by the Trust
Indenture Act, defined by Trust Indenture Act reference to another statute or
defined by Commission rule under the Trust Indenture Act have the meanings so
assigned to them.
Section 1.4 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE 2
THE SECURITIES
--------------
Section 2.1 Form and Dating. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A to
this Indenture. The Securities may have notations, legends or endorsements
required by law, stock exchange rules or usage. Each Security shall be dated
the date of its authentication. The Securities shall be in denominations of
$1,000 and integral multiples thereof.
The terms and provisions contained in the Securities shall
constitute, and are hereby expressly made, a part of this Indenture and to
the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture, expressly agree to such terms and provisions
and to be bound thereby.
Section 2.2 Execution and Authentication. Two Officers shall
sign the Securities for the Company by manual or facsimile signature. The
Company's seal shall
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be reproduced on the Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds
that office at the time the Security is authenticated, the Security shall
nevertheless be valid.
A Security shall not be valid until authenticated by the manual
signature of the Trustee. The signature of the Trustee shall be conclusive
evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue up
to the aggregate principal amount stated in paragraph 4 of the Securities,
upon receipt of a written order of the Company signed by an Officer and may
rely upon an Opinion of Counsel as to the legality and form of the
Securities. The aggregate principal amount of Securities outstanding at
any time may not exceed such amount except as provided in Section 2.7
hereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. An authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in
this Indenture to authentication by the Trustee includes authentication by
such agent. An authenticating agent has the same rights as an Agent to
deal with the Company or an Affiliate of the Company.
Section 2.3 Registrar and Paying Agent. The Company shall
maintain in the Borough of Manhattan, City of New York, and in such other
locations as it shall determine, an office or agency where (i) Securities
may be presented for registration of transfer or for exchange
("Registrar"), (ii) Securities may be presented for payment or conversion
("Paying Agent") and (iii) notices and demands to or upon the Company in
respect of Securities and this Indenture may be served. The Company may
also from time to time designate one or more other offices or agencies
where the Securities may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve
the Company of its obligations to maintain an office or agency in the
Borough of Manhattan, City of
8
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New York, for such purposes. The Company or any of its Subsidiaries may
act as Registrar or Paying Agent except that for purposes of Article 8 and
Section 4.6, neither the Company nor any Subsidiary shall act as Paying
Agent. The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company may appoint one or more co-registrars
and one or more additional paying agents. The term "Registrar" includes
any co-registrar and the term "Paying Agent" includes any additional paying
agent. The Company may change any Paying Agent or Registrar without notice
to any Holder. The Company shall enter into an appropriate agency
agreement with any Agent not a party to this Indenture, which agreement
shall implement the provisions of this Indenture that relate to such Agent.
The Company shall notify the Trustee, in advance, of the name and address
of such Agent. If the Company fails to maintain a Registrar or Paying
Agent, the Trustee shall act as such.
The Company initially appoints the Trustee to act as Registrar,
Paying Agent and Agent for service of notices and demands in connection
with the Securities.
Section 2.4 Paying Agent to Hold Money in Trust. The Company
shall require each Paying Agent other than the Trustee to agree in writing
that the Paying Agent will hold in trust for the benefit of Holders or the
Trustee all money held by the Paying Agent for the payment of principal or
interest on the Securities, and will notify the Trustee of any default by
the Company in making any such payment. While any such default continues,
the Trustee may require a Paying Agent to pay all money held by it to the
Trustee. The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee. Upon payment over to the Trustee, the
Paying Agent (if other than the Company or a Subsidiary of the Company)
shall have no further liability for the money. If the Company or a
Subsidiary of the Company acts as Paying Agent, it shall segregate and hold
in a separate trust fund for the benefit of the Holders all money held by
it as Paying Agent.
Section 2.5 Holder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available
to it of the names and addresses of Holders and shall otherwise comply with
Trust Indenture Act (S) 312(a). If the Trustee is not the
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Registrar, the Company shall furnish to the Trustee at least seven Business
Days before each interest payment date and, at such other times as the
Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of Holders,
and the Company shall otherwise comply with Trust Indenture Act (S) 312(a).
Section 2.6 Transfer and Exchange. Where Securities are
presented to the Registrar or a co-registrar with a request to register a
transfer or to exchange them for an equal principal amount of Securities of
other denominations, the Registrar shall register the transfer or make the
exchange if its requirements for such transactions are met. To permit
registrations of transfer and exchanges, the Company shall issue and the
Trustee shall authenticate Securities at the Registrar's request. No
service charge shall be made for any registration of transfer or exchange
(except as otherwise expressly permitted herein), but the Company may
require payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any such
transfer tax or similar governmental charge payable upon exchanges pursuant
to Section 2.10, 3.6, 9.5 or 10.2).
The Company shall not be required (i) to issue, register the
transfer of or exchange Securities during a period beginning at the opening
of business 15 days before the day of any selection of Securities for
redemption under Section 3.2 and ending at the close of business on the day
of selection, or (ii) to register the transfer or exchange of any Security
so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
Section 2.7 Replacement Securities. If any mutilated Security
is surrendered to the Trustee, or the Company and the Trustee receive
evidence to their satisfaction of the destruction, loss or theft of any
Security, the Company shall issue and the Trustee, upon the written order
of the Company signed by an Officer in accordance with Section 2.2, shall
authenticate a replacement Security if the Trustee's requirements are met.
If required by the Trustee or the Company, an indemnity bond must be
supplied by the Holder that is sufficient in the judgment of the Trustee
and the Company to protect
10
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the Company, the Trustee, any Agent or any authenticating agent from any loss
which any of them may suffer if a Security is replaced. The Company may charge
for its expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
Section 2.8 Outstanding Securities. The Securities outstanding at any
time are all the Securities authenticated by the Trustee except for those
cancelled by it, those delivered to it for cancellation and those described in
this Section as not outstanding.
If a Security is replaced pursuant to Section 2.7 (other than a
mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a bona fide purchaser, in which case, such replacement security shall
not be deemed to be outstanding. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section 2.7.
If the principal amount of any Security is considered paid under
Section 4.1, it ceases to be outstanding and interest on it ceases to accrue.
Except as set forth in Section 2.9, a Security does not cease to be
outstanding because the Company or an Affiliate holds the Security.
Section 2.9 Treasury Securities. In determining whether the Holders of
the required principal amount of Securities have concurred in any direction,
waiver or consent, Securities owned by the Company, any Subsidiary of the
Company or by any Affiliate of the Company shall be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities which a Trustee has been advised in writing by the Company or the
Holder are so owned shall be so disregarded.
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Section 2.10 Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary securities upon a written order of the Company signed by an Officer
and delivered or caused to be delivered to the Trustee. Temporary Securities
shall be substantially in the form of definitive Securities but may have
variations that the Company considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate in accordance with Section 2.2 definitive Securities in exchange
for temporary Securities.
Holders of temporary Securities shall be entitled to all benefits of
this Indenture.
Section 2.11 Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar and Paying Agent shall
forward to the Trustee any Securities surrendered to them for registration of
transfer, exchange, payment or conversion. The Trustee and no one else shall
cancel all Securities surrendered for registration of transfer, exchange,
payment, replacement, cancellation or conversion, and certification of their
destruction shall be delivered to the Company unless, by a written order, signed
by an Officer, the Company shall direct that cancelled Securities be returned to
it. The Company may not issue new Securities to replace Securities that it has
paid (purchased on the open market or otherwise) or otherwise acquired or that
have been delivered to the Trustee for cancellation or that any Securityholder
has converted pursuant to Article 10.
Section 2.12 Defaulted Interest. If the Company defaults in a payment
of interest on the Securities, it shall pay the defaulted interest in any lawful
manner plus, to the extent lawful, interest payable on the defaulted interest,
to the Persons who are Holders on a subsequent special record date, in each case
at the rate provided in the Securities and in Section 4.1 hereof. The Company
shall, with the consent of the Trustee, fix each such special record date and
payment date. At least 15 days before the record date, the Company (or the
Trustee, in the name of and at the expense of the Company) shall mail to Holders
a notice that states the spe-
12
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cial record date, the related payment date and the amount of such interest to be
paid.
ARTICLE 3
REDEMPTION
----------
Section 3.1 Notices to Trustee. If the Company elects to redeem
Securities pursuant to the optional redemption provisions of Section 3.7 hereof,
it shall furnish to the Trustee an Officers' Certificate setting forth (i) the
Section of this Indenture pursuant to which the redemption shall occur, (ii) the
redemption date, (iii) the principal amount of Securities to be redeemed and
(iv) the redemption price, at least 45 days but not more than 60 days before a
redemption date, unless a shorter period is acceptable to the Trustee.
Section 3.2 Selection of Securities to Be Redeemed. If less than all
of the Securities are to be redeemed, the Trustee shall select the Securities to
be redeemed among the Holders of the Securities on a pro rata basis or in
accordance with any other method the Trustee considers fair and appropriate (and
in such manner as complies with applicable legal and stock exchange
requirements, if any), provided that no Securities of $1,000 or less shall be
redeemed in part. In the event of partial redemption, the particular Securities
to be redeemed shall be selected, unless otherwise provided herein, not less
than 30 days nor more than 60 days prior to the redemption date by the Trustee
from the outstanding Securities not previously called for redemption.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. In the event of
partial redemption, the Company and the Trustee may treat as outstanding any
Securities surrendered for conversion during the period of 15 days next
preceding the mailing of the notice of redemption set forth in Section 3.3.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption and, in the case of any Security selected for
partial redemp-
13
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tion, the principal amount thereof to be redeemed. Securities and portions of
them selected shall be in amounts of $1,000 or whole multiples of $1,000; except
that if all of the Securities of a Holder are to be redeemed, the entire
outstanding amount of Securities held by such Holder, even if not a multiple of
$1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption.
Section 3.3 Notice of Redemption. At least 30 days but not more than
60 days before a redemption date, the Trustee in the name and at the expense of
the Company shall publish a notice in the Wall Street Journal and the Company
shall mail or cause to be mailed, by first-class mail, a notice of redemption to
each Holder whose Securities are to be redeemed at its registered address.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion shall be
issued;
(4) if less than all the Securities are to be redeemed, the
identification of the particular Securities (or portion thereof) to be
redeemed, as well as the aggregate principal amount of Securities estimated
to be outstanding after such partial redemption;
(5) the Conversion Price, the date on which the right to convert the
principal of the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion;
(6) the name and address of the Paying Agent;
14
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(7) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(8) that, unless the Company defaults in making such redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the redemption date; and
(9) the paragraph of the Securities and/or Section of this Indenture
pursuant to which the Securities called for redemption are being redeemed;
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense.
Section 3.4 Effect of Notice of Redemption. Once notice of redemption
is published and mailed in accordance with Section 3.3 hereof, Securities so
called for redemption become due and payable on the redemption date at the
redemption price, plus accrued interest, if any.
Section 3.5 Deposit of Redemption Price. On or before the redemption
date, the Company shall deposit with the Trustee or with the Paying Agent (or,
if the Company is its own Paying Agent, the Company shall segregate and hold in
trust) money sufficient to pay the redemption price of and accrued interest on
all Securities to be redeemed on that date, other than any Securities called for
redemption on that date which have been converted prior to the date of such
deposit. The Trustee or the Paying Agent shall promptly return to the Company
any money deposited with the Trustee or the Paying Agent by the Company in
excess of the amounts necessary to pay the redemption price of, and accrued
interest on, all Securities to be redeemed.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent and held in trust for the
redemption of such Security shall (subject to any right of the Holder of such
Security or any predecessor security to receive interest as provided in the last
paragraph of Section 4.1) be paid to the Company upon request or, if then held
by the Company, shall be discharged from such trust.
15
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On and after the redemption date, interest shall cease to accrue on
the Securities or the portions of Securities called for redemption and any
conversion rights shall terminate. If a Security is redeemed on or after an
interest record date but on or prior to the related interest payment date, then
any accrued and unpaid interest shall be paid to the Person in whose name such
Security was registered at the close of business on such record date. If any
Security called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, and such Security
shall remain convertible from the redemption date until such principal is paid,
and to the extent lawful on any interest not paid on such unpaid principal, in
each case at the rate provided in the Securities and in Section 4.1 hereof.
Section 3.6 Securities Redeemed in Part. Upon surrender of a Security
that is redeemed in part, the Company shall issue and the Trustee shall
authenticate for the Holder of the Securities at the expense of the Company a
new Security equal in principal amount to the unredeemed portion of the Security
surrendered.
Section 3.7 Optional Redemption. The Company shall not have the option
to redeem the Securities prior to ______, 1999. Thereafter, the Company shall
have the option to redeem the Securities, in whole or in part, upon not less
than 30 nor more than 60 days' notice as set forth in Section 3.3, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest thereon to the applicable redemption date if
redeemed during the twelve-month period beginning:
Redemption
Date Price
---- ----------
________ __, 1999.................... __________%
________ __, 2000.................... __________%
________ __, 2001.................... __________%
________ __, 2002.................... 100%
Section 3.8 Mandatory Redemption. Except as set forth under Section
4.6 of this Indenture, the Compa-
16
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ny shall not be required to make mandatory redemption payments with respect to
the Securities. There are no sinking fund payments with respect to the
Securities.
ARTICLE 4
COVENANTS
---------
Section 4.1 Payment of Securities. The Company shall pay the principal
of and interest on the Securities on the dates and in the manner provided in the
Securities. Principal and interest shall be considered paid on the date due if
the Paying Agent (other than the Company or a Subsidiary of the Company) holds
on that date money designated for and sufficient to pay all principal and
interest then due; provided, however, that money held by the Paying Agent for
the benefit of holders of Senior Indebtedness pursuant to the provisions of
Article 11 hereof shall not be considered paid within the meaning of this
Section 4.1.
To the extent lawful, the Company shall pay interest (including post-
petition interest in any proceeding under any Bankruptcy Law) on (i) overdue
principal, at the rate borne by the Securities, compounded semiannually, and
(ii) overdue installments of interest (without regard to any applicable grace
period) at the same rate, compounded semiannually.
Section 4.2 Maintenance of Office or Agency. The Company will
maintain in the Borough of Manhattan, The City of New York, State of New York,
the office or agency required under Section 2.3. The Company will give prior
written notice to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company fails to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the address of the Trustee as set forth in Section 12.10.
Section 4.3 Compliance Certificate. The Company shall deliver to the
Trustee, within 120 days after the end of each fiscal year of the Company, an
Officers' Certificate stating that a review of the activities of the Company and
its Subsidiaries during the preceding fiscal year has been made under the
supervision
17
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of the signing Officers with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under this Indenture, and
further stating, as to each such Officer signing such certificate, that to the
best of his knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions hereof
(or, if a Default or Events of Default shall have occurred, describing all such
Defaults or Events of Default of which he may have knowledge) and that to the
best of his knowledge no event has occurred and remains in existence by reason
of which payments on account of the principal of or interest, if any, on the
Securities are prohibited. See Section 12.10.
The Company will, so long as any of the Securities are outstanding,
deliver to the Trustee, forthwith upon becoming aware of (i) any Default, Event
of Default or default in the performance of any covenant, agreement or condition
in this Indenture or (ii) any event of default or event which, with notice or
lapse of time, or both, could result in a default under Section 6.1(4), an
Officers' Certificate specifying such Default, Event of Default, default or
event.
Section 4.4 Stay, Extension and Usury Laws. The Company covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law wherever enacted, now or at any time hereafter
enforce, which may affect the covenants or the performance of this Indenture;
and the Company (to the extent it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law has been enacted.
Section 4.5 Continued Existence. Subject to Article 5 hereof, the
Company shall do or cause to be done all things necessary to preserve and keep
in full force and effect (i) its corporate existence, and the corporate,
partnership or other existence of any Subsid-
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<PAGE>
iary of the Company, in accordance with the respective organizational documents
(as the same may be amended from time to time) of the Company or any such
Subsidiary and (ii) the rights (charter and statutory), licenses and franchises
of the Company and its Subsidiaries; provided, however, that the Company shall
not be required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any of its Subsidiaries if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and its Subsidiaries,
taken as a whole, and that the loss thereof is not materially adverse to the
Holders of the Securities.
Section 4.6 Offer of Repurchase Upon Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder of
Securities shall have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's
Securities pursuant to the offer described below (the "Change of Control Offer")
at a purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Payment"). Within 10 days following any Change of Control, the Company
shall publish a notice in the Wall Street Journal, notify the Trustee and give
written notice of such Change of Control to each Holder by first-class mail
stating: (i) that the Change of Control Offer is being made pursuant to this
Section and that all Securities tendered will be accepted for payment; (ii) the
purchase price and the purchase date, which shall be a business day no earlier
than 30 days nor later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"); (iii) that any Security not tendered will
continue to accrue interest; (iv) that, unless the Company defaults in the
payment of the Change of Control Payment, all Securities accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date; (v) that Holders electing to have any Securities
purchased pursuant to a Change of Control Offer will be required to surrender
the Securities, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Securities completed, to the Paying Agent at the address
specified in the notice prior to the
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<PAGE>
close of business on the third Business Day preceding the Change of Control
Payment Date; (vi) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Securities delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Securities purchased; and (vii)
that Holders whose Securities are being purchased only in part will be issued
new Securities equal in principal amount to the unpurchased portion of the
Securities surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof. The Company shall comply with
the requirements of Rule 13c-4 and 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Securities
in connection with a Change of Control.
(b) On the Change of Control Payment Date, the Company shall, to
the extent lawful, (i) accept for payment Securities or portions thereof
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Securities or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof tendered to the Company.
The Paying Agent shall promptly mail to each Holder of Securities so accepted
payment in an amount equal to the purchase price of such Securities, and the
Trustee shall promptly authenticate and mail to each Holder a new Security equal
in principal amount to any unpurchased portion of the Securities surrendered, if
any; provided, that each such new Security shall be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
(c) Except as described above with respect to a Change of
Control, the Company shall not be required to repurchase or redeem the
Securities from the
20
<PAGE>
Holders of the Securities in the event of a takeover, recapitalization or
similar transaction.
Section 4.7 Limitation on Dividend and Other Payment Restrictions
Affecting Insurance Subsidiaries. The Company will not, and will not permit any
of its Insurance Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Insurance Subsidiary to (i) pay dividends or
make any other distribution on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to, the Company or a Subsidiary of the Company, (ii) make
loans or advances to the Company or any Subsidiary of the Company, or (iii)
transfer any of its properties or assets to the Company, except for such
encumbrances or restrictions existing under or by reason of (q) the Term Loan
dated August 30, 1995 between the Company and American National Bank and Trust
Company of Chicago, Firstar Bank Milwaukee, Bank One, Rockford and LaSalle
National Bank as in effect on the execution date of this Indenture (the "August
Term Loan"); (r) the Term Loan dated March 22, 1995 between the Company and
American National Bank and Trust Company of Chicago, Firstar Bank Milwaukee and
Bank One, Rockford as in effect on the execution date of this Indenture (the
"March Term Loan"); (s) the Credit Facility dated March 22, 1995 between the
Company and American National Bank and Trust Company of Chicago, Firstar Bank
Milwaukee, Bank One, Rockford and Fleet National Bank of Connecticut (the
"Credit Facility"); (t) any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings of the
agreements described in clauses (q), (r) and (s) hereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in such
agreements as in effect on the execution date of this indenture; (u) bank credit
facilities of any Insurance Subsidiary of the Company, as in effect from time to
time; (v) any instrument governing indebtedness of any Insurance Subsidiary of
the Company evidenced by industrial revenue bonds (provided that such
encumbrances or restrictions set forth in the agreements or instruments
described in clauses (u) and (v) hereof are no more restrictive with
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<PAGE>
respect to such dividend and other payment restrictions than those contained in
the agreements described in clauses (q), (r) and (s) hereof as in effect on the
execution date of this Indenture); (w) customary provisions restricting the
transfer of property or assets contained in any conditional sales contract or
capitalized lease of any Insurance Subsidiary of the Company; (x) applicable
law; (y) customary provisions restricting subletting or assignment of any lease
governing a leasehold interest of the Company or any Insurance Subsidiary of the
Company which lease was entered into in the ordinary course of business and
consistent with past practice; (z) arrangements relating to the sale of agent
debit balances by the Company or its Subsidiaries; or (aa) any instrument
governing indebtedness of a person acquired by the Company or any insurance
subsidiary of the Company at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the person, so
acquired.
Section 4.8 Taxes. The Company shall pay or discharge or cause to be
paid or discharged, before the same shall become delinquent, (i) all taxes,
assessments and governmental charges (including withholding taxes and any
penalties, interest and additions to taxes) levied or imposed upon the Company
or its Subsidiaries or upon the income, profits or property of the Company or
any such Subsidiary, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any such Subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which disputed
amounts adequate reserves have been made.
Section 4.9 Commission Reports; Reports to Securityholders.
(a) The Company shall file with the Trustee within 15 days after it
files them with the Commission copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules
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<PAGE>
and regulations prescribe) which the Company is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Company
also shall comply with the other provisions of the Trust Indenture Act (S)
314(a). If the Company is not subject to the requirements of the Exchange Act,
it shall file with the Trustee, within 15 days after it would have been required
to file with the Commission, financial statements, including any notes thereto
(and with respect to annual reports, an auditors' report by a nationally
recognized firm of independent certified public accountants), and a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," both comparable to that which the Company would have been required
to include in such annual reports, information, documents or other reports if it
were subject to the requirements of Section 13 or 15(d) of the Exchange Act.
(b) So long as the Securities remain outstanding, the Company shall
cause its annual reports to stockholders and any quarterly or other financial
reports furnished by it to stockholders to be mailed to the Holders (no later
than the date such materials are mailed to the Company's stockholders) at their
addresses appearing in the register of Securities maintained by the Registrar.
If the Company is not required to furnish annual or quarterly reports to its
stockholders pursuant to the Exchange Act, it shall cause its financial
statements referred to in Section 4.9(a) above, including any notes thereto (and
with respect to annual reports, an auditors' report by a nationally recognized
firm of independent certified public accountants), and a "Management's
Discussion and Analysis of Financial Condition and Results of Operations," to be
so mailed to the Holders within 120 days after the end of each of the Company's
fiscal years and within 60 days after the end of each of its first three fiscal
quarters.
Section 4.10 Insurance. The Company shall provide, or cause to be
provided, for itself and its Subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds customarily insured against
by corporations similarly situated and owning like properties, including, but
not limited to, products liability insurance and public liability insurance,
with reputable insurers or with the government of the United States of America
or an agency or instrumen-
23
<PAGE>
tality thereof, in such amounts with such deductibles and by such methods as
shall be determined in good faith by the Board of Directors to be appropriate.
ARTICLE 5
SUCCESSORS
----------
Section 5.1 When Company May Merge, etc. The Company, in a single
transaction or through a series of related transactions, shall not consolidate
with or merge with or into, or sell, lease, convey or otherwise dispose of all
or substantially all of its assets to, any Person unless:
(1) the Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, lease,
conveyance or other disposition shall have been made, is a corporation
organized and existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the corporation formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, lease,
conveyance or other disposition shall have been made, assumes by
supplemental indenture all the obligations of the Company under the
Securities and this Indenture, except that it need not assume the
obligations of the Company as to conversion of Securities if, pursuant to
Section 10.9, the Company or another Person enters into a supplemental
indenture obligating it to deliver the securities, cash or other assets
deliverable upon conversion of Securities; and
(3) immediately after the transaction no Default or Event of Default
exists.
The Company shall deliver to the Trustee prior to the consummation of
the proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with this Indenture.
Section 5.2 Successor Corporation Substituted. Upon any
consolidation or merger, or any sale, lease,
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<PAGE>
conveyance or other disposition of all or substantially all of the assets of the
Company in accordance with Section 5.1, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
lease, conveyance or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor person has been named
as the Company herein; provided, however, that the predecessor Company in the
case of a sale, lease, conveyance or other disposition shall not be released
from the obligation to pay the principal of and interest on the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
---------------------
Section 6.1 Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any Security
when the same becomes due and payable and the Default continues for a
period of 30 days (whether or not prohibited by Article 11 hereof);
(2) the Company defaults in the payment of the principal of any
Security when the same becomes due and payable at maturity, upon redemption
or otherwise, including failure by the Company to repurchase the Securities
when required pursuant to Section 4.6 hereof (whether or not prohibited by
Article 11 hereof);
(3) the Company fails to comply with any of its other agreements or
covenants in, or provisions of, the Securities or this Indenture and the
Default continues for the period and after the notice specified below;
(4) an event of default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured
or evidenced any indebtedness for money borrowed by the Company or any of
its Subsidiaries (or the payment
25
<PAGE>
of which is guaranteed by the Company or any of its Subsidiaries), whether
such indebtedness or guarantee now exists or shall be created after the
date hereof, which default (i) is caused by a failure to pay principal or
interest on such indebtedness prior to the expiration of the grace period
provided in such indebtedness (a "Payment Default") or (ii) results in the
acceleration of such indebtedness prior to its expressed maturity and, in
each case, the principal amount of such indebtedness, together with the
principal amount of any other such indebtedness under which there has been
a Payment Default or the maturity of which has been so accelerated,
aggregates $10 million or more;
(5) final judgments or decrees shall be entered by a court of
competent jurisdiction against the Company or any Subsidiary involving
liabilities of $10 million or more (singly or in the aggregate) (after
deducting the portion of such liabilities accepted by a reputable insurance
company) and such final judgments or decrees shall not have been vacated,
discharged, satisfied or stayed pending appeal within 60 days from the
entry thereof;
(6) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(i) commences a voluntary case or proceeding,
(ii) consents to, or acquiesces in, the institution of a
bankruptcy or an insolvency proceeding against it or the entry of a
judgment, decree or order for relief against it in an involuntary case or
proceeding,
(iii) applies for, consents to or acquiesces in the appointment
of or taking possession by a Custodian of it or any Subsidiary or for all
or substantially all of its property,
(iv) makes a general assignment for the benefit of its
creditors,
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(v) generally is unable to pay its debts as the same become
due;
(vi) admits in writing its inability to pay its debts
generally as they become due,
(vii) becomes insolvent, or
(viii) takes any corporate action in furtherance of or to
facilitate, conditionally or otherwise, any of the foregoing;
(7) a court of competent jurisdiction enters any judgment, order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any Subsidiary in an
involuntary case,
(ii) appoints a Custodian of the Company or any Subsidiary or
for all or substantially all of its property, or
(iii) orders the winding-up or liquidation of the Company or
any Subsidiary,
and the order or decree remains unstayed and in effect for 60 days or any
bankruptcy or insolvency petition or application is filed, or any bankruptcy
case or insolvency proceeding is commenced, against the Company or any
Subsidiary and such petition, application, case or preceding is not dismissed
within 60 days.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar
Federal or State Law for the relief, supervision, conservation, reorganization
or liquidation of debtors or for the benefit of creditors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law. The term "Significant Subsidiary" means any Subsidiary which (a)
has assets in excess of $10 million, or (b) in its last completed fiscal year
generated revenue in excess of $5 million.
A Default under clause (3) (other than Defaults under Section 5.1 or
10.1 which Defaults shall be Events of Default without the notice or passage of
time specified in this paragraph) is not an Event of Default until the Trustee
or the Holders of at least 25% in principal
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<PAGE>
amount of the then outstanding Securities notify the Company of the Default and
the Company does not cure the Default within 60 days after receipt of the
notice. The notice must specify the Default, demand that it be remedied and
state that the notice is a "Notice of Default." Such notice shall be given by
the Trustee if requested by the Holders of at least 25% in principal amount of
the Security then outstanding.
In the case of any Event of Default pursuant to the provisions of this
Section 6.1 occurring by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding payment
of the premium which the Company would have had to pay if the Company then had
elected to redeem the Securities pursuant to Paragraph 5 of the Securities, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law, anything in this Indenture or in the Securities
contained to the contrary notwithstanding.
Section 6.2 Acceleration. If an Event of Default (other than an
Event of Default specified in clauses (6) and (7) of Section 6.1 with respect to
the Company) occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount of the then outstanding Securities by notice to the
Company (and to the Trustee if such notice is given by the Holders), may declare
the unpaid principal of and accrued interest on all the Securities to be due and
payable. Upon such declaration the principal and interest shall be due and
payable. In the event of a declaration of acceleration under the Indenture
because an Event of Default set forth in Section 6.1(4) has occurred and is
continuing, such declaration of acceleration shall be automatically annulled if
the holders of the indebtedness which is the subject of such Event of Default
have rescinded their declaration of acceleration in respect of such indebtedness
within 30 days thereof and no other Event of Default has occurred during
such 30-day period which has not been cured or waived. If an Event of Default
specified in clause (6) or (7) of Section 6.1 occurs, such an amount shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder. The Holders of a majority in
principal amount of the then outstanding Securities by notice to the Trustee may
rescind an acceleration and its
28
<PAGE>
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration.
Section 6.3 Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any holder of Securities in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.4 Waiver of Past Defaults. The Holders of a majority in
principal amount of the then outstanding Securities by notice to the Trustee may
waive an existing Default or Event of Default and its consequences except a
continuing Default or Event of Default in the payment of the principal of or
interest on any Security or a Default or Event of Default under Article 10.
Section 6.5 Control by Majority. The Holders of a majority in
principal amount of the then outstanding Securities may direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on it. However, the Trustee may
refuse to follow any direction that conflicts with law or this Indenture, is
unduly prejudicial to the rights of other Holders, or would involve the Trustee
in personal liability.
Section 6.6 Limitation on Suits. A Holder may pursue a remedy with
respect to this Indenture or the Securities only if:
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(1) the Holder gives to the Trustee notice of a continuing Event of
Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Securities make a request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Securities do not give the Trustee a
direction inconsistent with the request.
A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.
Section 6.7 Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder of a Security to
receive payment of principal and interest on the Security, on or after the
respective due dates expressed in the Security, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of the Holder.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to bring suit for the enforcement of the right to
convert the Security shall not be impaired or affected without the consent of
the Holder.
Section 6.8 Collection Suit by Trustee. If an Event of Default
specified in Section 6.1(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount of principal and interest remaining unpaid on the
Securities and interest on overdue principal and interest and such further
amount
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as shall be sufficient to cover the costs and, to the extent lawful, expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other amounts due the
Trustee under Section 7.7.
Section 6.9 Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property. Nothing contained herein shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Securityholder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Securityholder in any such proceeding.
Section 6.10 Priorities. If the Trustee collects any money pursuant
to this Article, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 7.7;
Second: to holders of Senior Indebtedness to the extent required by
Article 11;
Third: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without
preference or priority of any kind, according to the amounts
due and payable on the Securities for principal and interest,
respectively; and
Fourth: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders.
Section 6.11 Undertaking for Costs. In any suit for the enforcement
of any right or remedy under
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this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder pursuant to Section 6.7, a suit by a holder for the enforcement of the
right to convert any Security in accordance with Article 10 or a suit by Holders
of more than 10% in principal amount of the then outstanding Securities.
ARTICLE 7
TRUSTEE
-------
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically
set forth in this Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
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(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own wilful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section.
(2) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
Section 7.2 Rights of Trustee.
Except as otherwise provided in Section 7.1:
(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee
shall not be liable for any action it takes or omits to take in good
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faith in reliance on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
Section 7.3 Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or an Affiliate with the same rights it
would have if it were not Trustee. However, in the event that the Trustee
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue as Trustee or resign.
Any Agent may do the same with like rights. However, the Trustee is subject to
Sections 7.10 and 7.11.
Section 7.4 Trustee's Disclaimer. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use of the proceeds
from the Securities, and it shall not be responsible for any statement of the
Company in the Indenture or any statement in the Securities other than its
authentication.
Section 7.5 Notice of Defaults. If a Default or Event of Default
occurs and is continuing and if it is known to the Trustee, the Trustee shall
mail to Securityholders a notice of the Default or Event of Default within 90
days after it occurs. Except in the case of a Default or Event of Default in
payment on any Security (including any failure to make any mandatory repurchase
payment required hereunder), the Trustee may withhold the notice if and so long
as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of Securityholders.
Section 7.6 Reports by Trustee to Holders. Within 60 days after the
reporting date stated in Section
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12.10, the Trustee shall mail to Securityholders a brief report dated as of such
reporting date that complies with Trust Indenture Act (S) 313(a) (but if no
event described in Trust Indenture Act (S) 313(a) has occurred within the twelve
months preceding the reporting date, no report need be transmitted). The Trustee
also shall comply with Trust Indenture Act (S) 313(b)(2). The Trustee shall also
transmit by mail all reports as required by Trust Indenture Act (S) 313(c).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the Commission and each stock exchange on which the
Securities are listed. The Company shall notify the Trustee when the Securities
are listed on any stock exchange.
Section 7.7 Compensation and Indemnity. The Company shall pay to the
Trustee from time to time reasonable compensation for its services hereunder.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred by it. Such expenses
may include the reasonable compensation and out-of-pocket expenses of the
Trustee's agents and counsel.
The Company shall indemnify the Trustee against any loss or liability
incurred by it including, to the extent provided herein, the costs and expenses
of defending itself against any claims or liability in connection with the
exercise or performance of any of its powers or duties hereunder. The Trustee
shall notify the Company promptly of any claim for which it may seek indemnity.
If the Company defends against any such claim, the Trustee shall cooperate in
the defense. The Trustee may have separate counsel, selected by it, at the
Company's expense for such counsel's reasonable fees and expenses before the
Company assumes the defense of such claim, and at the Trustee's expense after
the Company has assumed such defense. If, however, the counsel selected by the
Trustee advises the Company and the Trustee as to such claim that the posture of
the Company is or may be inconsistent with the posture of the Trustee, then the
Trustee may resume the defense of such claim with its counsel and the Company
shall pay the reasonable fees and expenses of such counsel incurred after that
time. The Company need
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not pay for any settlement made without its consent, which consent shall not be
unreasonably withheld.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through negligence or bad faith. If
negligence or bad faith of the Trustee is established, the Trustee shall be
responsible for its own counsel fees.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(6) or (7) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee. A resignation or removal of the
Trustee and appointment of a successor Trustee shall become effective only upon
the successor Trustee's acceptance of appointment as provided in this Section.
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the then outstanding Securities may remove the
Trustee by so notifying the Trustee and the Company. The Company may remove the
Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee or its
property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason,
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the Company shall promptly appoint a successor Trustee. Within one year after
the successor Trustee takes office, the Holders of a majority in principal
amount of the then outstanding Securities may appoint a successor Trustee to
replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the then outstanding Securities
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.7. Notwithstanding the replacement of the Trustee
pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof
shall continue for the benefit of the retiring Trustee with respect to expenses
and liabilities incurred by it prior to such replacement.
Section 7.9 Successor Trustee by Merger, etc. If the Trustee
consolidates, merges or converts into, or transfers all or substantially all of
its corporate trust business to, another corporation, the successor corporation
without any further act shall be the successor Trustee.
Section 7.10 Eligibility; Disqualification. This Indenture shall
always have a Trustee who satisfies the requirements of Trust Indenture Act (S)
310(a)(1), (2) and (5). The Trustee shall always have a combined capital and
surplus as stated in Section 12.10. The Trustee
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is subject to and shall comply with Trust Indenture Act (S) 310(b).
Section 7.11 Preferential Collection of Claims Against Company. The
Trustee is subject to and shall comply with Trust Indenture Act (S) 311(a),
excluding any creditor relationship listed in Trust Indenture Act (S) 311(b). A
Trustee who has resigned or been removed shall be subject to Trust Indenture Act
(S) 311(a) to the extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
----------------------
Section 8.1 Termination of Company's Obligations. This Indenture
shall cease to be of further effect (except that the Company's obligations under
Section 7.7 and 8.3 shall survive) when all outstanding Securities theretofore
authenticated and issued have been delivered to the Trustee for cancellation and
the Company has paid all sums payable hereunder. In addition, the Company may
terminate all of its obligations under this Indenture (except the Company's
obligations under Sections 7.7 and 8.3) if:
(1) the Securities mature within one year or all of them are to be
called for redemption within one year under arrangements satisfactory to
the Trustee for giving the notice of redemption; and
(2) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations sufficient to pay principal and interest in
such amounts (and at such times as are sufficient in the opinion of a
nationally recognized firm of independent certified public accountants
expressed in a written certification thereof delivered to the Trustee),
without consideration of any reinvestment of such interest, to pay
principal of and interest on the Securities to maturity or redemption, as
the case may be, and to pay all other sums payable by it hereunder. The
Company may make the deposit only during the one-year period and only if
Article 11 permits it.
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and in either case the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions precedent
provided for herein relating to the discharge of this Indenture have been
complied with.
However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6,
2.7, 4.1, 4.4, 4.5, 7.7, 7.8, 8.3 and 8.4 and in Article 10, shall survive until
the Securities are no longer outstanding. Thereafter, only the Company's
obligations in Sections 7.7 and 8.3 shall survive.
After a deposit made pursuant to this Section 8.1, the Trustee upon
request shall acknowledge in writing the discharge of the Company's obligations
under this Indenture except for those surviving obligations specified above.
"U.S. Government Obligations" means direct obligations of the United
States of America for the timely payment of which the full faith and credit of
the United States of America is pledged. In order to have money available on a
payment date to pay principal or interest on the Securities, the U.S. Government
Obligations shall be payable as to principal or interest on or before such
payment date in such amounts as will provide the necessary money. U.S.
Government Obligations shall not be callable at the issuer's option.
Section 8.2 Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to Section
8.1. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal and interest on the Securities. Money and securities
so held in trust are not subject to Article 11.
Section 8.3 Repayment to Company. The Trustee and the Paying Agent
shall promptly pay to the Company upon request any excess money or securities
held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the
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payment of principal or interest that remains unclaimed for two years after the
date upon which such payment shall have become due; provided, however, that the
Company shall have first caused notice of such payment to the Company to be
mailed to each Securityholder entitled thereto no less than 30 days prior to
such payment. After payment to the Company, Securityholders entitled to the
money must look to the Company for payment as general creditors unless an
applicable abandoned property law designates another Person.
Section 8.4 Reinstatement. If (i) the Trustee or Paying Agent is
unable to apply any money in accordance with Section 8.2 by reason of any order
or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application and (ii) the Holders of at least a
majority in principal amount of the then outstanding Securities so request by
written notice to the Trustee, the Company's obligations under this Indenture
and the Securities shall be revived and reinstated as though no deposit had
occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent
is permitted to apply all such money in accordance with Section 8.2; provided,
however, that if the Company makes any payment of interest on or principal of
any Security following the reinstatement of its obligations, the Company shall
be subrogated to the rights of the Holders of such Securities to receive such
payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENTS
----------
Section 9.1 Without Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without the consent of any
Securityholder:
(1) to cure any ambiguity, defect or inconsistency;
(2) to comply with Sections 5.1 and 10.9;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
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(4) to make any change that would provide additional rights or
benefits to Securityholders or that does not adversely affect the legal
rights hereunder of any Securityholder; or
(5) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
Section 9.2 With Consent of Holders. Subject to Section 6.7, the
Company and the Trustee may amend this Indenture or the Securities with the
written consent of the Holders of at least a majority in principal amount of the
then outstanding Securities. Subject to Sections 6.4 and 6.7, the Holders of a
majority in principal amount of the Securities then outstanding may also waive
compliance in a particular instance by the Company with any provision of this
Indenture or the Securities. However, without the consent of each
Securityholder affected, an amendment or waiver under this Section may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment or waiver;
(2) reduce the rate of or change the time for payment of interest on
any Security;
(3) reduce the principal of or change the fixed maturity of any
Security or alter the redemption provisions with respect thereto;
(4) make any Security payable in money other than that stated in the
Security;
(5) make any change in Section 6.4, 6.7 or 9.2 (this sentence);
(6) except as otherwise provided in Article 10, increase the
Conversion Price or otherwise modify or affect in any manner adverse to the
Securityholders the terms and conditions of Article 10;
(7) make any change in Article 11 that adversely affects the rights of
any Securityholder; or
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(8) waive a default in the payment of the principal of, or interest
on, any Security (except a rescission of acceleration of the Securities by
the Holders of at least a majority in aggregate principal amount of the
Securities and a waiver of the payment default that resulted from such
acceleration) or any Default under Article 10.
To secure a consent of the Holders under this Section, it shall not be
necessary for the Holders to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing the amendment
or waiver. If any Securityholder fails to receive any such notice, or if such
notice contains a defect, such failure or defect shall not impair or affect the
validity of any such supplement on waiver.
Section 9.3 Compliance with Trust Indenture Act. Every amendment to
this Indenture or the Securities shall be set forth in a supplemental indenture
that complies with the Trust Indenture Act as then in effect.
Section 9.4 Revocation and Effect of Consents. Until an amendment or
waiver becomes effective, a consent to it by a Holder of a Security is a
continuing consent by the Holder and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent is not made on any Security. However,
any such Holder or subsequent Holder may revoke the consent as to his Security
or portion of a Security if the Trustee receives the notice of revocation before
the date on which the Trustee receives an Officer's Certificate certifying that
the Holders of the requisite principal amount of Securities have consented to
the amendment or waiver.
The Company may fix a record date for the purpose of determining the
Holders entitled to consent to any amendment or waiver. If the Company fixes a
record date, the record date shall be fixed at (i) the later of 30 days prior to
the first solicitation of such consent
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or the date of the most recent list of Holders furnished to the Trustee prior to
such solicitation pursuant to Section 2.5 or (ii) such other date as the Company
shall designate. If a record date is fixed, then notwithstanding the foregoing,
those Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to consent to such amendment
or waiver or to revoke any consent previously given, whether or not such Persons
continue to be Holders after such record date.
After an amendment or waiver becomes effective it shall bind every
Securityholder, unless it is of the type described in any of clauses (1) through
(8) of Section 9.2. In such case, the amendment or waiver shall bind each
Holder of a Security who has consented to it and every subsequent Holder of a
Security that evidences the same debt as the consenting Holder's Security.
Section 9.5 Notation on or Exchange of Securities. The Trustee may
place an appropriate notation about an amendment or waiver on any Security
thereafter authenticated. The Company in exchange for all Securities may issue
and the Trustee shall authenticate new Securities that reflect the amendment or
waiver.
Section 9.6 Trustee Protected. The Trustee shall sign all supplemental
indentures, except that the Trustee need not sign any supplemental indenture
that adversely affects its rights.
ARTICLE 10
CONVERSION
----------
Section 10.1 Conversion Privilege. A Holder of a Security may convert
it into Common Stock at any time during the period stated in paragraph 6 of the
Securities. The number of shares issuable upon conversion of a Security is
determined as follows: Divide the aggregate principal amount of the Securities
to be converted by the Conversion Price (rounded to three decimal places) in
effect on the conversion date. Round the result to the nearest 1/100th of a
share.
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The initial conversion price is stated in paragraph 6 of the
Securities (the "Conversion Price"). The conversion price is subject to
adjustment.
A Holder may convert a portion of a Security if the portion is $1,000
or an integral multiple of $1,000. Provisions of this Indenture that apply to
conversion of all of a Security also apply to conversion of a portion of it.
If a Security or portion thereof is called for redemption, such
conversion right in respect of the Security or portion thereof so called shall
expire at the close of business on the date prior to the date fixed for such
redemption unless the Company defaults in making the payment due upon
redemption, in which case such right of conversion shall be reinstated.
Section 10.2 Conversion Procedure. To convert a Security a Holder
must satisfy the requirements in paragraph 6 of the Securities. The date on
which the Holder satisfies all those requirements is the conversion date. As
soon as practical, the Company shall deliver a certificate for the number of
full shares of Common Stock issuable upon the conversion and a check for any
fractional share. The person in whose name the certificate is registered shall
be treated as a stockholder of record on and after the conversion date.
Securities surrendered for conversion during the period from the close
of business on any record date next preceding any interest payment date to the
opening of business on such interest payment date shall (except in the case of
Securities or portions thereof which have been called for redemption within such
period) be accompanied by payment in New York Clearing House funds or other
funds acceptable to the Company of an amount equal to the interest payable on
such interest payment date on the principal amount of Securities being
surrendered for conversion. Subject to the provisions of Section 4.1 relating to
the payment of defaulted interest by the Company, the interest payment with
respect to a Security called for redemption on a redemption date during the
period from the close of business on any record date next preceding any interest
payment date to the opening of business on such interest payment date shall be
payable on such interest payment date to the Holder of such
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Security at the close of business on such record date (notwithstanding the
conversion of such Security after such record date and prior to such interest
payment date), and the Holder converting such Security need not include a
payment of such interest payment amount upon surrender of such Security for
conversion. Holders on a Record Date who convert Securities on or after the
corresponding interest payment date will receive the interest payable by the
Company on that date and need not include payment in the amount of such interest
payable by the Company on that date and need not include payment in the amount
of such interest upon surrender of those securities for conversion. Except as
provided above, no payment or adjustment shall be made upon any conversion on
account of any interest accrued on the Securities surrendered for conversion or
on account of any dividends on the Common Stock issued upon conversion which
were declared for payment to holders of Common Stock of record as of a date
prior to the conversion date.
If a Holder converts more than one Security at the same time, the
number of full shares issuable upon the conversion shall be based on the total
principal amount of the Securities converted.
Upon a surrender of a Security that is converted in part, the Company
shall issue and the Trustee shall authenticate for the Holder a new Security
equal in principal amount to the unconverted portion of the Security
surrendered.
If the last day on which a Security may be converted is a Legal
Holiday, the Security may be surrendered on the next succeeding day that is not
a Legal Holiday.
Section 10.3 Fractional Shares. The Company will not issue a
fractional share of Common Stock upon conversion of a Security. Any fractional
interest in a share of Common Stock which would otherwise be issuable upon
conversion of any Security or Securities (or specified portions thereof), shall
be paid in cash (computed to the nearest cent) in an amount equal to the Daily
Market Price thereof at the close of business on the Business Day next preceding
the day of conversion multiplied by the fractional interest (expressed as a
percent-
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age) that otherwise would have been deliverable upon conversion of the
Securities.
Section 10.4 Taxes on Conversion. If a Holder of a Security converts
it, the Company shall pay any documentary, stamp or similar issue or transfer
tax due on the issue of shares of Common Stock upon the conversion. However, the
Holder shall pay any such tax which is due because the shares are issued in a
name other than the Holder's name, and no such issue or delivery shall be made
unless and until the person or entity requesting such issue or delivery has paid
to the Company the amount of any such tax or has established, to the
satisfaction of the Company, that such tax has been paid.
Section 10.5 Company to Reserve Stock. The Company has reserved and
shall continue to reserve out of its authorized but unissued Common Stock or its
Common Stock held in treasury enough shares of Common Stock to permit the
conversion of the Securities in full.
All shares of Common Stock which may be issued upon conversion of the
Securities shall be fully paid and non-assessable, free of all liens and charges
and not subject to any preemptive rights.
The Company will comply with all securities laws regulating the offer
and delivery of shares of Common Stock upon conversion of Securities and will
endeavor to list such shares on each national securities exchange on which the
Common Stock is listed.
Section 10.6 Adjustment of Conversion Price.
(a) In case the Company shall pay or make a dividend or other
distribution on any class of Capital Stock of the Company in Common Stock, the
Conversion Price in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such Conversion
Price by a fraction the numerator of which shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination and the denominator of which shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to
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become effective immediately after the opening of business on the date following
the date fixed for such determination. For the purposes of this paragraph (a),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company will not pay any
dividend or make any distribution on shares of Common Stock held in the treasury
of the Company.
(b) In case the Company shall issue rights, warrants or other
securities convertible into Common Stock to all holders of its Common Stock
entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price per share less than the
current market price per share (determined as provided in paragraph (h) of this
Section) of the Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights, warrants or convertible
securities, the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by multiplying
such Conversion Price by a fraction the numerator of which shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock so
offered for subscription or purchase (or the aggregate conversion price of
convertible securities so offered for subscription or purchase) would purchase
at such current market price and the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the additional number of shares of Common Stock so
offered for subscription or purchase (or into which the convertible securities
so offered for subscription or purchase are convertible), such reduction to
become effective immediately after the opening of business on the date following
the date fixed for such determination. If at the end of the period during which
such warrants or rights are exercisable or such securities are convertible, not
all warrants or rights shall have been exercised or not all securities shall
have been converted, the Conversion Price shall be readjusted to such price as
would have been obtained had the adjustment made on their issuance been made
upon the basis of the issuance of only the number of such warrants, rights or
securities as were
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actually exercised with respect to, or converted into, Common Stock.
Notwithstanding the foregoing (i) if the rights, warrants or other securities
described in this paragraph are exercisable only upon the occurrence of a
specified event or events ("Trigger Event"), then the Conversion Price will not
be adjusted until the occurrence of the earliest Trigger Event and (ii) the
distribution to holders of Common Stock of separate certificates representing
rights to purchase Common Stock or Preferred Stock will not require an
adjustment in the Conversion Price until such rights become exercisable upon the
occurrence of the earliest Trigger Event. For the purposes of this paragraph
(b), the number of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Company. The Company will not issue
any rights, warrants or convertible securities in respect of shares of Common
Stock held in the treasury of the Company.
(c) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall each be
combined into a smaller number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately after
the opening of business on the day following the day upon which such subdivision
or combination becomes effective.
(d) In case the Company or any Subsidiary of the Company shall,
by dividend or otherwise, distribute to all holders of its Common Stock (i)
evidences of its indebtedness and/or (ii) cash or other assets (including
securities, but excluding any rights or warrants referred to in paragraph (b) of
this Section, any dividend paid out of current or retained earnings payable
solely in cash that may from time to time be fixed by the Board of Directors and
any dividend or distribution referred to in paragraph (a) of this Section), then
in such case the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying
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the Conversion Price in effect immediately prior to the close of business on
such record date by a fraction of which the numerator shall be the current
market price per share (determined as provided in paragraph (h) of this Section)
of the Common Stock on such record date less the then fair market value as
determined by the Board of Directors (whose determination shall be conclusive
and shall be described in a Board Resolution filed with the Trustee) of the
portion of the cash or other assets or evidences of indebtedness so distributed
(and for which an adjustment to the Conversion Price has not previously been
made pursuant to the terms of this Section 10.6) applicable to one share of
Common Stock and the denominator shall be such current market price per share of
the Common Stock, such adjustment to become effective immediately prior to the
opening of business on the day following such record date.
(e) The reclassification of Common Stock into securities,
including securities other than Common Stock (other than any reclassification
upon a consolidation or merger to which Section 10.9 applies), shall be deemed
to involve (a) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall
be deemed to be "the date fixed for the determination of stockholders entitled
to receive such distribution" and the "date fixed for such determination" within
the meaning of paragraph (b) of this Section), and (b) a subdivision or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of shares
of Common Stock outstanding immediately thereafter (and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective",
as the case may be, and "the day upon which such subdivision or combination
becomes effective" within the meaning of paragraph (c) of this Section).
(f) In case the Company shall issue to an Affiliate shares of
its Common Stock at a price per share less than the current market price per
share (determined as provided in paragraph (h) of this Section) on the date the
Company fixes the offering price of such additional shares, the Conversion Price
shall be reduced immediately thereafter so that it shall equal the price
determined by
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multiplying such Conversion Price in effect immediately prior thereto by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such additional shares plus the
number of shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered would purchase at the current market
price and the denominator shall be the number of shares of Common Stock that
would be outstanding immediately after the issuance of such additional shares.
Such adjustment shall be made successively whenever such an issuance is made.
For the purpose of this paragraph (f), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company. The Company will not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the Company. This paragraph (f)
shall not apply to Common Stock issued to any Affiliate under bona-fide benefits
plans adopted by the Board of Directors for the benefit of the Company's
directors, employees and advisers.
(g) In case a tender or exchange offer made by the Company or
any Subsidiary of the Company for all or any portion of the Company's Common
Stock (any such tender or exchange offer being referred to as an "Offer") shall
expire and such Offer shall involve an aggregate consideration having a fair
market value as of the expiration of such Offer (the "Expiration Time") that,
together with (i) the fair market value of consideration payable in respect of
any other Offer, as of the expiration of such other Offer, concluded within the
12 months preceding the expiration of such Offer and in respect for which no
conversion price adjustment pursuant to this paragraph (g) has been made and
(ii) the aggregate amount of dividends paid out of current or retained earnings
referred to in clause (d) above to all holders of Common Stock within the 12
months preceding the expiration of such Offer and in respect of which no
conversion price adjustment pursuant to paragraph (d) has been made, exceeds 15%
of the product of the current market price per share (determined as provided in
paragraph (h) of this Section) of the Common Stock on the Expiration Time times
the number of shares of Common Stock outstanding (including any tendered shares)
on the Expiration Time, the Conversion Price shall be reduced by multiplying
such Conversion Price in effect immediately prior to
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the Expiration Time by a fraction of which the numerator shall be (i) the
product of the current market price per share (determined as provided in
paragraph (h) of this Section) of the Common Stock on the Expiration Time times
the number of shares of Common Stock outstanding (including any tendered shares)
on the Expiration Time minus (ii) the fair market value of the aggregate
consideration payable to stockholders based on the acceptance (up to any maximum
specified in the terms of the tender or exchange offer) of all shares validly
tendered and not withdrawn as of the Expiration Time (the shares deemed so
accepted being referred to as the "Purchased Shares") and the denominator shall
be the product of (i) such current market price per share of the Expiration Time
times (ii) such number of outstanding shares on the Expiration Time less the
number of Purchased Shares, such reduction to become effective immediately prior
to the opening of business on the day following the Expiration Time.
For purposes of this paragraph (g), the fair market value of any
consideration with respect to an Offer shall be determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution filed with the Trustee.
(h) For the purpose of any computation under paragraphs (b),
(d), (f) and (g) of this Section, the current market price per share of Common
Stock on any day shall be deemed to be the average of the Daily Market Prices
for the 30 consecutive Business Days ending on the last full trading day on the
exchange or market referred to in determining such Daily Market Prices prior to
the day in question.
(i) The Company from time to time may to the extent permitted by
law reduce the Conversion Price by any amount for any period of time if the
period is at least 20 Business Days, if the Board of Directors has made a
determination that such a decrease would be in the best interests of the
Company, which determination shall be conclusive and if the reduction is
irrevocable during the period.
Whenever the Conversion Price is reduced, the Company shall mail to
Securityholders a notice of the reduction. The Company shall mail the notice at
least 15 days before the date the reduced conversion price takes
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effect. The notice shall state the reduced conversion price and the period it
will be in effect.
(j) No adjustment in the Conversion Price shall be required
unless such adjustment (plus any adjustments not previously made by reason of
this paragraph (i)) would require an increase or decrease of at least 1% in such
price; provided, however, that adjustments which by reason of this paragraph (j)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment and provided, further, that adjustments shall be
required and made in accordance with the provisions of this Section 10.6 (other
than this paragraph (j)) not later than such time as may be required in order to
preserve the tax free nature of a distribution to the holders of shares of
common stock. Adjustments to the conversion price shall be to the nearest cent.
Anything in this paragraph (j) to the contrary notwithstanding, the Company
shall be entitled to make such reductions in the Conversion Price, in addition
to those required by this Section 10.6, as it in its discretion shall determine
to be advisable in order that any stock dividend, subdivision or combination of
shares, distribution of capital stock, or rights or warrants, or to purchase
stock or securities, or distribution of evidences of indebtedness or assets
(other than cash dividends or distributions paid from retained earnings)
hereafter made by the Company to its stockholders shall be a tax free
distribution for federal income tax purposes.
(k) Notwithstanding any other provision of this Section 10.6, no
adjustment to the Conversion Price shall reduce the Conversion Price below the
then par value per share of the Common Stock, and any such purported adjustment
shall instead reduce the Conversion Price to such par value. The Company hereby
covenants not to take any action (i) to increase the par value per share of the
Common Stock or (ii) that would or does result in any adjustment in the
conversion price that, if made without giving effect to the previous sentence,
would cause the Conversion Price to be less than the par value per share of the
Common Stock.
(l) Notwithstanding the foregoing, in the event of a
distribution to holders of Common Stock generally of shares of capital stock or
rights to acquire
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capital stock (in either case, other than Common Stock), the Company may,
instead of making any adjustment in the Conversion Price, make proper provisions
so that each holder of a Note who converts such Note (or any portion thereof)
after the record date for such distribution (and prior to the expiration or
redemption of such rights, if applicable) shall be entitled to receive upon such
conversion, in addition to the shares of Common Stock issuable upon such
conversion, the kind and amount of such shares of capital stock or rights which
the holder would have been entitled to receive had such Note (or portion
thereof) been converted immediately prior to such record date.
Section 10.7 Notice of Adjustment. Whenever the conversion price is
adjusted, the Company shall promptly mail to Securityholders a notice of the
adjustment. The Company shall file with the Trustee a certificate from the
Company's independent public accountants briefly stating the facts requiring the
adjustment and the manner of computing it. The certificate shall be conclusive
evidence that the adjustment is correct.
Section 10.8 Notice of Certain Transactions.
If:
(a) the Company takes any action that would require an
adjustment in the conversion price pursuant to Section 10.6;
(b) of any consolidation, merger or share exchange to which the
Company is a party and for which approval of stockholders is required or of the
conveyance or transfer of all or substantially all of the assets of the Company;
(c) the Company takes any action that would require a
supplemental indenture pursuant to Section 10.9; or
(d) there is a liquidation or dissolution (voluntary or
involuntary) or winding up of the Company,
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Securities pursuant to Section 2.2 and shall cause
to be
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mailed to all Holders at least 20 days prior to the applicable record, effective
or expiration date hereinabove specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend, distribution or
granting of rights, warrants or convertible securities, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, rights, warrants or convertible
securities are to be determined, or (y) the date on which any reclassification,
consolidation, merger, share exchange, conveyance, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, share exchange,
conveyance, transfer, dissolution, liquidation or winding up, or (z) the date on
which any tender offer commenced, the date on which such tender offer is
scheduled to expire unless extended, the consideration offered and the other
material terms thereof (or the material terms of any amendment thereto).
Section 10.9 Reorganization of Company. If the Company is a party to
a transaction subject to Section 5.1, or a merger which reclassifies or changes
its outstanding Common Stock, upon consummation of such transaction the
Securities shall automatically become convertible into the kind and amount of
securities, cash or other assets which the Holder of a Security would have owned
immediately after the consolidation, merger, transfer or lease if the Holder had
converted the Security immediately before the effective date of the transaction.
Concurrently with the consummation of such transaction, the Person obligated to
issue securities or deliver cash or other assets upon conversion of the
Securities shall enter into a supplemental indenture so providing and further
providing for adjustments which shall be as nearly equivalent as may be
practical to the adjustments provided for in this Article. The successor
Company shall mail to Securityholders a notice describing the supplemental
indenture.
If securities deliverable upon conversion of Securities, as provided
above, are themselves convertible into the securities of an Affiliate of the
formed, sur-
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viving, transferee or lessee corporation, that issuer shall join in the
supplemental indenture which shall so provide.
If this Section applies, Section 10.6(e) does not apply.
Section 10.10 Company Determination Final. Any determination that
the Company or the Board of Directors must make pursuant to Section 10.6 is
conclusive.
Section 10.11 Trustee's Disclaimer. The Trustee has no duty to
determine when an adjustment under this Article should be made, how it should be
made or what it should be. The Trustee has no duty to determine whether any
provisions of a supplemental indenture under Section 10.9 are correct. The
Trustee makes no representation as to the validity or value of any securities or
assets issued upon conversion of Securities. The Trustee shall not be
responsible for the company's failure to comply with this Article.
ARTICLE 11
SUBORDINATION
-------------
Section 11.1 Agreement to Subordinate. The Company agrees, and each
Securityholder by accepting a Security agrees, that the indebtedness evidenced
by the Security is subordinated in right of payment, to the extent and in the
manner provided in this Article, to the prior payment in full of all Senior
Indebtedness and that the subordination is for the benefit of the holders of
Senior Indebtedness.
Section 11.2 Certain Definitions.
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Indebtedness.
"Senior Indebtedness" with respect to the Securities means the
principal of, premium, if any, and interest on, and any fees, costs, expenses
and any other amounts (including indemnity payments) related to the following,
whether outstanding on the date hereof or
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hereafter incurred or created: (a) indebtedness, matured or unmatured, whether
or not contingent, of the Company for money borrowed, (b) any interest rate
contract, interest rate swap agreement or other similar agreement or arrangement
designed to protect the Company or any of its Subsidiaries against fluctuations
in interest rates, (c) indebtedness, matured or unmatured, whether or not
contingent, of the Company evidenced by notes, debentures, bonds or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof), (d) obligations of the Company as lessee under capitalized leases and
under capitalized leases of property made as part of any sale and leaseback
transactions, (e) indebtedness of others of any of the kinds described in the
preceding clauses (a) through (d) assumed or guaranteed by the Company and (f)
renewals, extensions, modifications, amendments, and refundings of, and
indebtedness and obligations of a successor Person issued in exchange for or in
replacement of, indebtedness or obligations of the kinds described in the
preceding clauses (a) through (e), unless the agreement pursuant to which any
such indebtedness described in clauses (a) through (e) is created, issued,
assumed or guaranteed expressly provides that such indebtedness is not senior or
superior in right of payment to the Securities; provided, however, that the
following shall not constitute Senior Indebtedness: (i) any indebtedness or
obligation of the Company in respect of the Securities, (ii) the Company's 8%
Convertible Subordinated Debentures due 2000; (iii) any indebtedness of the
Company to any of its Subsidiaries or other Affiliates; (iv) any indebtedness of
the Company that is subordinated or junior in any respect to any other
indebtedness of the Company other than Senior Indebtedness; (v) any indebtedness
of the Company incurred for the purchase of goods or materials in the ordinary
course of business and (vi) indebtedness of the Company that by its terms is
pari passu with or subordinate or subject in right of payment to the Securities.
For the purposes of this Indenture, Senior Indebtedness shall not be
deemed to have been paid in full until the holders of the Senior Indebtedness
shall have indefeasibly received payment in full in cash of all Senior
Indebtedness; provided that if any holder of Senior Indebtedness agrees to
accept payment in full of such Senior Indebtedness for consideration other than
cash, such holder shall be deemed to have indefeasibly
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received payment in full of such Senior Indebtedness. The provisions of this
Article shall continue to be effective or be reinstated, as the case may be, if
at any time any payment of any of the Senior Indebtedness is rescinded or must
otherwise be returned by any holder of Senior Indebtedness upon the insolvency,
bankruptcy or organization of the Company or otherwise, all as though such
payment had not been made.
A distribution may consist of cash, securities or other property, by
set-off or otherwise.
Section 11.3 Liquidation; Dissolution; Bankruptcy. Upon any
distribution to creditors of the Company in a liquidation or dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, in an assignment for the
benefit of creditors or any marshalling of the Company's assets and liabilities:
(1) holders of Senior Indebtedness shall be entitled to receive
payment in full of all such Senior Indebtedness (including interest after
the commencement of any such proceeding at the rate specified in the
applicable Senior Indebtedness) before Securityholders shall be entitled to
receive any payment with respect to the Securities (except that
Securityholders may receive securities that are subordinated to at least
the same extent as the Securities to (i) Senior Indebtedness and (ii) any
securities issued in exchange for Senior Indebtedness); and
(2) until all Senior Indebtedness (as provided in subsection (1)
above) is paid in full, any distribution to which Securityholders would be
entitled but for this Article shall be made to holders of Senior
Indebtedness (except that Securityholders may receive securities that are
subordinated to at least the same extent as the Securities to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior
Indebtedness), as their interests may appear.
Section 11.4 Default on Senior Indebtedness. The Company may not
make any payment or distribution to the Trustee or any Securityholder in respect
of principal
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of or interest on the Securities and may not acquire from the Trustee or any
Securityholder any Securities for cash or property (other than securities that
are subordinated to at least the same extent as the Securities to (i) Senior
Indebtedness and (ii) any securities issued in exchange for Senior Indebtedness)
until all Senior Indebtedness has been paid in full if:
(1) a default in the payment of any principal of, premium, if any, or
interest on Senior Indebtedness occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Senior Indebtedness; or
(2) a default, other than a default referred to in subsection (1)
above (a "Nonpayment Default"), on Senior Indebtedness occurs and is
continuing that then permits holders of the Senior Indebtedness to
accelerate its maturity and the Trustee receives a notice of the default
from the Representative or Representatives of holders of at least a
majority in principal amount of Senior Indebtedness then outstanding, or if
none is outstanding, of at least a majority in principal amount of the
commitments therefor. If the Trustee receives any such notice of a
Nonpayment Default, a subsequent notice received within 360 days thereafter
shall not be effective for purposes of this Section. No Nonpayment Default
that existed or was continuing on the date of delivery of any such notice
to the Trustee shall be, or be made, the basis for a subsequent notice
unless such default shall have been cured or waived for a period of not
less than 180 days.
The Company may and shall resume payments on and distributions in
respect of the Securities and may acquire them upon the earlier of:
(i) the date upon which the default is cured or waived, or
(ii) in the case of a default referred to in Section 11.4(2)
hereof, 179 days after the date on which the notice is received if the
maturity of such Senior Indebtedness has not been accelerated,
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if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
Section 11.5 When Distribution Must Be Paid Over. In the event that
the Trustee (or Paying Agent if other than the Trustee) or any Securityholder
receives any payment of principal or interest with respect to the Securities at
a time when such payment is prohibited by Section 11.3 or 11.4 hereof, such
payment shall be held by the Trustee (or Paying Agent if other than the Trustee)
or such Securityholder, in trust for the benefit of, and immediately shall be
paid over and delivered, upon written request, to, the holders of Senior
Indebtedness as their interests may appear or their Representative under the
indenture or other agreement (if any) pursuant to which Senior Indebtedness may
have been issued, as their respective interests may appear, for application to
the payment of all Senior Indebtedness remaining unpaid to the extent necessary
to pay all Senior Indebtedness in full in accordance with its terms, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 11, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of Securityholders or the Company or any other Person money or assets to
which any holders of Senior Indebtedness shall be entitled by virtue of this
Article 11, except if such payment is made as a result of the willful misconduct
or gross negligence of the Trustee.
Section 11.6 Notice by Company. The Company shall promptly notify
the Trustee and the Paying Agent of any facts known to the Company that would
cause a payment of any principal or interest with respect to the Securities to
violate this Article, but failure to give such notice shall not affect the
subordination of the Securi-
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ties to the Senior Indebtedness as provided in this Article.
Section 11.7 Subrogation. After all Senior Indebtedness is paid in
full and until the Securities are paid in full, Securityholders shall be
subrogated (equally and ratably with all other Indebtedness pari passu with the
Securities) to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Securityholders have been applied to the payment of
Senior Indebtedness. A distribution made under this Article to holders of Senior
Indebtedness that otherwise would have been made to Securityholders is not, as
between the Company and Securityholders, a payment by the Company on the
Securities.
Section 11.8 Relative Rights. This Article defines the relative
rights of Securityholders and holders of Senior Indebtedness. Nothing in this
Indenture shall:
(1) impair, as between the Company and Securityholders, the
obligation of the Company, which is absolute and unconditional, to pay
principal of and interest on the Securities in accordance with their terms;
(2) affect the relative rights of Securityholders and creditors of
the Company other than their rights in relation to holders of Senior
Indebtedness; or
(3) prevent the Trustee or any Securityholder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Indebtedness to receive
distributions and payments otherwise payable to Securityholders.
If the Company fails because of this Article to pay principal of or
interest on a Security on the due date, the failure is still a Default or Event
of Default.
Section 11.9 Subordination May Not Be Impaired by Company. No right
of any holder of Senior Indebtedness to enforce the subordination of the
indebtedness
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evidenced by the Securities shall be impaired by any act or failure to act by
the Company or any Holder or by the failure of the Company or any Holder to
comply with this Indenture.
Section 11.10 Distribution or Notice to Representative. Whenever a
distribution is to be made or a notice given to holders of Senior Indebtedness,
the distribution may be made and the notice given to their Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article 11, the Trustee and the Securityholders shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the
Securityholders for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 11.
Section 11.11 Rights of Trustee and Paying Agent. Notwithstanding
the provisions of this Article 11 or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts that
would prohibit the making of any payment or distribution by the Trustee, and the
Trustee and the Paying Agent may continue to make payments on the Securities,
unless the Trustee shall have received at its Corporate Trust Office at least
three Business Days prior to the date of such payment written notice of facts
that would cause the payment of any principal and interest with respect to the
Securities to violate this Article. Only the Company or a Representative may
give the notice. Nothing in this Article 11 shall impair the claims of, or
payments to, the Trustee under or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
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Section 11.12 Authorization to Effect Subordination. Each holder of
a Security by the Holder's acceptance thereof authorizes and directs the Trustee
on the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article 11, and appoints the
Trustee to act as the Holder's attorney-in-fact for any and all such purposes.
Without limiting the foregoing, each Representative is hereby irrevocably
authorized and empowered (in its own name or in the name of the Securityholders
or the Trustee or otherwise), but shall have no obligation, to demand, sue for,
collect and receive every payment or distribution referred to in Section 11.3
above and give acquittance therefor and to file claims and proofs of claim and
take such other action as it may deem necessary or advisable for the exercise or
enforcement of any of the rights or interests of the holders or owners of the
Senior Indebtedness hereunder; provided that for purposes of this Section 11.12
holders or owners of Senior Indebtedness may act only through such
Representative.
Section 11.13 Conversions Not Deemed Payment. For the purposes of
this Article only, the issuance and delivery of Common Stock upon conversion of
Securities in accordance with Article 10 shall not be deemed to constitute a
payment or distribution on account of the principal of or interest on the
Securities or on account of the purchase or other acquisition of Securities.
Nothing contained in this Article or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than holders of Senior Indebtedness and the Holders, the right, which is
absolute and unconditional, of the Holder of any Security to convert such
Security in accordance with Article 10.
Section 11.14 Amendments. The provisions of this Article 11 shall
not be amended or modified without the written consent of the Holders of Senior
Indebtedness.
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ARTICLE 12
MISCELLANEOUS
-------------
Section 12.1 Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies, or conflicts with the duties imposed by Trust
Indenture Act (S) 318(c), the imposed duties shall control.
Section 12.2 Notices. Any notice or communication by the Company or
the Trustee to the other is duly given if in writing and delivered in person or
mailed by first-class mail (registered or certified, return receipt requested),
telecopier or overnight air courier guaranteeing next day delivery to the
other's address stated in Section 12.10. The Company or the Trustee by notice
to the other may designate additional or different address for subsequent
notices or communications.
All notices and communications (other than those sent to holders of
Securities) shall be deemed to have been duly given; at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and
the next Business Day after timely delivery to the courier, if sent by overnight
air courier guaranteeing next day delivery.
Any notice or communication to a Holder of a Security shall be mailed
by first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on
the register kept by the Registrar. Any notice of communication shall also be
so mailed to any Person described in Trust Indenture Act (S) 313(c) to the
extent required by the Trust Indenture Act. Failure to mail a notice or
communication to a Holder of a Security or any defect in it shall not affect its
sufficiency with respect to other Holders of Securities.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Securityholders, it
shall mail a copy to the Trustee and each Agent at the same time.
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All other notices or communications shall be in writing.
Section 12.3 Communication by Holders with Other Holders.
Securityholders may communicate pursuant to Trust Indenture Act (S) 312(b) with
other Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of Trust Indenture Act (S) 312(c).
Section 12.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(1) an Officer's Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
Section 12.5 Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture shall include:
(1) a statement that the person making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
satisfied; and
64
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(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been satisfied.
Section 12.6 Rules by Trustee and Agents. The Trustee may make
reasonable rules for action by or a meeting of Securityholders. The Registrar
or Paying Agent may make reasonable rules and set reasonable requirements for
its functions.
Section 12.7 Legal Holidays. A "Legal Holiday" is a Saturday, a
Sunday or a day on which banking institutions are not required to be open.
If a date of maturity of interest on or principal of the Notes or the date
fixed for redemption is a Legal Holiday at a place of payment, payment may
be made at that place on the next succeeding day that is not a Legal
Holiday with the same force and effect as if made on the date of maturity
or date fixed for redemption, and no interest shall accrue for the
intervening period.
Section 12.8 No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Securityholder by accepting a Security
waives and releases all such liability. The waiver and release are part of
the consideration for the issue of the Securities.
Section 12.9 Counterparts. This Indenture may be executed in any
number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
Section 12.10 Variable Provisions. The first certificate pursuant to
Section 4.3 shall be for the fiscal year ending on _______ __, 199__.
The reporting date for Section 7.6 is ______ of each year. The first
reporting date is ___________.
65
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The Trustee shall always have a combined capital and surplus of at
least $___________ as set forth in its most recent published annual report
of condition.
The Company's address is:
1750 East Golf Road
Schaumburg, IL 60173
Attention: President, with copy to
General Counsel
Telephone: (708) 995-0400
The Trustee's address is:
The First National Bank of Chicago
One First National Plaza
Suite 0126
Chicago, IL 60670
Attention: Corporate Trust Services
Division
Fax: (312) 407-1708
Section 12.11 Governing Law. The internal laws of the State of New
York shall govern this Indenture and the Securities, without regard to the
conflicts of laws provisions thereof.
Section 12.12 No Adverse Interpretation of Other Agreements. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or a subsidiary. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
Section 12.13 Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successor. All agreements of the
Trustee in this Indenture shall bind its successor.
Section 12.14 Severability. In case any provision in this Indenture
or in the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
66
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Section 12.15 Table of Contents, Headings, etc. The Table of
Contents, Cross-Reference Table, and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
67
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
PIONEER FINANCIAL SERVICES, INC.
By:
--------------------------------------
Attest
- ------------------------------
Secretary
THE FIRST NATIONAL BANK OF CHICAGO,
Trustee
By:
--------------------------------------
Attest
- ------------------------------
68
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EXHIBIT A
---------
[FORM OF FACE OF SECURITY]
__% Convertible Subordinated Note
due 2003
CUSIP # _______
No. $________
PIONEER FINANCIAL SERVICES, INC.
promises to pay to
or registered assigns,
the principal sum of
_________________________________________ Dollars
on _________, 2003.
Interest Payment Dates: __________ and __________
Record Dates: ___________ and ____________
A-1
<PAGE>
Dated:___________________________
PIONEER FINANCIAL SERVICES, INC.
By:______________________________
Name:
Title:
By:______________________________
Name:
Title:
(SEAL)
This is one of the Securities referred
to in the within mentioned Indenture:
The First National Bank of Chicago,
as Trustee
By:_______________________________
Authorized Officer
A-2
<PAGE>
[FORM OF REVERSE SECURITY]
__% Convertible Subordinated Note due 2003
Capitalized terms used herein shall have the meanings ascribed to them
in the Indenture unless otherwise indicated.
1. Interest. Pioneer Financial Services, Inc., a Delaware
Corporation (the "Company"), promises to pay interest on the principal amount of
this Security at __% per annum from _______, 1996 until maturity. The Company
will pay interest semi-annually on ________ and ________ of each year,
commencing _________, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the
Securities will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from _________, 1996. To the extent lawful the
Company shall pay interest on (i) overdue principal and premium, if any, at the
same rate per annum on the Securities then in effect and (ii) on overdue
installments of interest (without regard to any applicable grace period) at the
same rate, compounded semiannually. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
2. Method of Payments. The Company will pay interest on the
Securities (except defaulted interest) to the Persons who are registered Holders
of Securities at the close of business on the __________ and __________ next
preceding the Interest Payment Date, even if such Securities are cancelled after
such record date and on or before such Interest Payment Date. The Holder hereof
must surrender this Security to a Paying Agent to collect principal payments.
The Securities will be payable both as to principal and interest at the office
or agency of the Company maintained for such purpose within the City and State
of New York, or, at the option of the Company, payment of interest may be made
by check mailed to the Holders of the Securities at their addresses set forth in
the register of Holders of Securities.
3. Paying Agent and Registrar. Initially, The First National Bank of
Chicago, the Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying Agent or Registrar without notice
to any Holder. Subject to certain limitations set forth in the Indenture, the
Company or any of its Subsidiaries may act in any such capacity.
4. Indenture. The Company issued the Securities under an Indenture
dated as of __________, 1996 ("Indenture") between the Company and the Trustee.
The terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code (S)(S) 77aaa-77bbbb). The Securities
A-3
<PAGE>
are subject to all such terms, and Holders are referred to the Indenture and
such Act for a statement of such terms and in the event that there shall be any
inconsistency between such terms and this Security, the terms of the Indenture
shall govern. The Securities are general unsecured obligations of the Company
limited to $74,750,000 in aggregate principal amount (including $9,750,000
aggregate principal amount of Securities that may be sold by the Company
pursuant to the over-allotment option granted pursuant to the Underwriting
Agreement dated ___________, 1996 among the Company, Bear, Stearns & Co. Inc.,
EVEREN Securities, Inc. and Oppenheimer & Co., Inc.), plus amounts, if any,
sufficient to pay interest and premium, if any, on outstanding Securities as set
forth in Paragraph 2.
5. Subordination. The Company's payment of the principal of,
premium, if any, and interest on the Securities is subordinated to the prior
payment in full of the Company's Senior Indebtedness. Each Holder of Securities
by his or her acceptance hereof covenants and agrees that all payments of the
principal of, premium, if any, and interest on the Securities by the Company
shall be subordinated in accordance with the provisions of Article 11 of the
Indenture, and each Holder accepts and agrees to be bound by such provisions.
6. Conversion Rights. Subject to and upon compliance with the
provisions of the Indenture, the Holder of this Security is entitled, at his
option, at any time on or before the close of business on __________, 2003 or in
case this Security or a portion hereof is called for redemption, then in respect
of this Security or such portion hereof until and including, but (unless the
Company defaults in making the payment due upon redemption) not after, the close
of business on the date prior to the date fixed for redemption, to convert this
Security (or any portion of the principal amount hereof which is $1,000 or an
integral multiple thereof), at the principal amount hereof, or of such portion,
into that number of fully paid and non-assessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock of the Company
obtained by dividing the principal amount of the Securities or portion thereof
surrendered for conversion by a conversion price equal to $________ (or at the
current adjusted conversion price if an adjustment has been made as provided in
the Indenture) (the "Conversion Price") by surrender of this Security, duly
endorsed or assigned to the Company or in blank, to the Company at the Corporate
Trust Office or at another office or agency in the Borough of Manhattan, City of
New York, New York accompanied by written notice to the Company that the Holder
hereof elects to convert this Security, or if less than the entire principal
amount hereof is to be converted, the portion hereof to be converted, and, in
case such surrender shall be made during the period from the close of business
on any record date next preceding any Interest Payment Date to the opening of
business on such Interest Payment Date (unless this Security or the portion
thereof being converted has been called for redemption on a redemption date
within such period), also accompanied by payment in New York Clearing House, or
other funds acceptable to the Company, of an amount equal to the interest
payable on such Interest Payment Date on the principal amount of this
A-4
<PAGE>
Exhibit 5
---------
March 18, 1996
Board of Directors
Pioneer Financial Services, Inc.
1750 East Golf Road
Suite 150
Schaumburg, Illinois 60173
Re: Registration Statement on Form S-3
File No.: 333-1119
------------------
Dear Board Members:
You have requested our opinion in connection with the above-referenced
registration statement (the "Registration Statement") which has been filed with
the Securities and Exchange Commission by Pioneer Financial Services, Inc. (the
"Company"). The Registration Statement relates to the proposed public offering
by the Company of up to $74,500,000 principal amount of Convertible Subordinated
Notes Due 2003 (the "Notes") ($9,750,000 principal amount of which are subject
to an over-allotment option granted by the Company to the Underwriters of the
proposed offering), the shares of Common Stock, par value $1.00 per share, of
the Company (the "Common Stock") into which the Notes are convertible and the
Rights to Acquire Series A Junior Preferred Stock issuable in connection
therewith (the "Rights").
In arriving at the opinion expressed below, we have examined the
Registration Statement, the form of Indenture between the Company and The First
National Bank of Chicago, as trustee (the "Indenture") and such other documents
as we have deemed necessary to enable us to express the opinion hereinafter set
forth. In addition, we have examined and relied, to the extent we deem proper,
on certificates of officers of the Company as to factual matters, and on the
originals or copies certified or otherwise identified to our satisfaction, of
<PAGE>
Board of Directors
March 18, 1996
Page Two
all such corporate records of the Company and such other instruments and
certificates of public officials and other persons as we have deemed
appropriate. In our examination, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as copies, the genuineness of all signatures on
documents reviewed by us and the legal capacity of natural persons.
Based on the foregoing, we are of the opinion that:
(1) The Notes, when and if the terms thereof are duly determined by
the Pricing Committee of the Board of Directors of the Company and such
Notes are issued and sold pursuant to the terms and conditions set forth in
the Registration Statement, will be legally issued and will constitute
valid and binding obligations of the Company.
(2) The shares of Common Stock into which the Notes are convertible,
when and if issued upon conversion of the Notes in accordance with the
terms of the Indenture, will be validly issued, fully paid and
nonassessable and the Rights issuable in connection therewith, when and if
issued in connection with the Common Stock, will be legally issued and will
constitute valid and binding obligations of the Company.
Members of our firm are admitted to the practice of law in the State of
Illinois and we express no opinion as to the laws of any jurisdiction other than
the laws of the State of Illinois, the General Corporation Law of the State of
Delaware and the laws of the United States of America. We hereby consent to the
references to our firm under the caption "Legal Matters" in the Registration
Statement and to the use of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not hereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
McDermott, Will & Emery
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 8, 1996 in Amendment No. 2 to the
Registration Statement (Form S-3 No. 333-1119) and related Prospectus of
Pioneer Financial Services, Inc. for the registration of Convertible
Subordinated Notes Due 2003.
We also consent to the incorporation by reference therein of our report
dated March 8, 1996, with respect to the consolidated financial statements and
financial statement schedules of Pioneer Financial Services, Inc. and
subsidiaries included in its Annual Report (Form 10-K) for the year ended
December 31, 1995, as amended by Form 10-K/A, filed with the Securities and
Exchange Commission.
ERNST & YOUNG LLP
Chicago, Illinois
March 18, 1996
