<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 033-77028
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 15, 1994
LOGO
$100,000,000
DELPHI FUNDING L.L.C.
9.31% CAPITAL SECURITIES, SERIES A
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
DELPHI FINANCIAL GROUP, INC.
------------------
The 9.31% Capital Securities, Series A (the "Series A Capital Securities"),
offered hereby represent preferred limited liability company interests in Delphi
Funding L.L.C., a Delaware limited liability company ("Delphi Funding"). Delphi
Financial Group, Inc., a Delaware corporation (the "Company"), will be the owner
of all the common limited liability company interests in Delphi Funding ("Series
A Common Securities" and, collectively with the Series A Capital Securities, the
"Series A Securities").
(Continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE S-10 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE SERIES A CAPITAL SECURITIES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
PROCEEDS TO
DELPHI
INITIAL PUBLIC UNDERWRITING FUNDING
OFFERING PRICE(1) COMMISSION(2) (1)(3)(4)
------------------ -------------- -------------
<S> <C> <C> <C>
Per Series A Capital Security.................... $1,000 (3) $1,000
Total............................................ $100,000,000 (3) $100,000,000
</TABLE>
- ---------------
(1) Plus accrued distributions, if any, from the date of original issuance.
(2) Delphi Funding and the Company have each agreed to indemnify Goldman, Sachs
& Co. against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Series A Capital
Securities will be invested in the Series A Subordinated Debentures, the
Company has agreed to pay to Goldman, Sachs & Co. as compensation for their
arranging the investment therein of such proceeds $12.50 per Series A
Capital Security (or $1,250,000 in the aggregate). See "Underwriting."
(4) Before deducting estimated expenses of $325,000 payable by the Company.
------------------
The Series A Capital Securities offered hereby are offered by Goldman,
Sachs & Co., as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the Series A Capital Securities will be ready for delivery in book-entry
form only through the facilities of DTC in New York, New York, on or about March
25, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
------------------
The date of this Prospectus Supplement is March 20, 1997.
<PAGE> 2
(Cover page continued)
Delphi Funding exists for the sole purpose of issuing the Series A Capital
Securities and investing the proceeds thereof in $103,093,000 aggregate
principal amount of 9.31% Junior Subordinated Deferrable Interest Debentures,
Series A (the "Series A Subordinated Debentures"), to be issued by the Company.
The Series A Subordinated Debentures will mature on March 25, 2027 (which date
may be shortened to a date not earlier than March 25, 2012 in certain
circumstances as described under "Certain Terms of Series A Subordinated
Debentures -- Conditional Right to Shorten Maturity or Redeem upon a Tax Event"
upon the occurrence of a Tax Event (as defined herein) if certain conditions are
met). The Series A Capital Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation or redemption over the Series A Common Securities. See "Certain
Terms of Series A Capital Securities -- Subordination of Series A Common
Securities."
The Series A Capital Securities will constitute "DF Preferred Securities"
as described in the accompanying Prospectus. Holders of the Series A Capital
Securities will be entitled to receive preferential cumulative cash
distributions accruing from the date of original issuance and payable
semi-annually in arrears on March 25 and September 25 of each year, commencing
September 25, 1997, at the annual rate of 9.31% of the Liquidation Amount of
$1,000 per Series A Capital Security ("Distributions"). Subject to certain
exceptions, as described herein, the Company has the right to defer payment of
interest on the Series A Subordinated Debentures at any time or from time to
time for a period not exceeding 10 consecutive semi-annual periods with respect
to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Series A
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of 9.31%, compounded semi-annually, to the extent permitted
by applicable law), the Company may elect to begin a new Extension Period
subject to the requirements set forth herein. If interest payments on the Series
A Subordinated Debentures are so deferred, Distributions on the Series A Capital
Securities will also be deferred and the Company will not be permitted, subject
to certain exceptions described herein, to declare or pay any cash distributions
with respect to the Company's capital stock or debt securities that rank pari
passu with or junior to the Series A Subordinated Debentures. During an
Extension Period, interest on the Series A Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Series A
Capital Securities are entitled will accumulate) at the rate of 9.31% per annum,
compounded semi-annually from the relevant payment date for such interest, and
holders of Series A Capital Securities will be required to recognize income (in
the form of original issue discount) for United States federal income tax
purposes. See "Certain Terms of Series A Subordinated Debentures -- Option to
Defer Interest Payments" and "Certain Federal Income Tax
Considerations -- Potential Deferral of Interest Payments."
The Series A Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness (as defined in "Certain Terms of Series A Subordinated
Debentures -- Subordination") of the Company. Substantially all of the Company's
existing indebtedness constitutes Senior Indebtedness. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any subsidiary, upon such subsidiary's liquidation or reorganization
or otherwise, is subject to the prior claims of creditors of that subsidiary,
except to the extent that the Company may itself be recognized as a creditor of
that subsidiary. Accordingly, the Series A Subordinated Debentures (and
therefore the Series A Capital Securities) will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and holders
thereof should look only to the assets of the Company for payments on the Series
A Subordinated Debentures. See "Certain Terms of Series A Subordinated
Debentures -- Subordination."
The Company has, through the Series A Guarantee, the L.L.C. Agreement, the
Series A Subordinated Debentures and the Indenture (each as defined herein),
taken together, fully, irrevocably and unconditionally guaranteed all of Delphi
Funding's obligations under the Series A
S-2
<PAGE> 3
(Cover page continued)
Capital Securities. See "Relationship Among the Series A Capital Securities, the
Series A Subordinated Debentures and the Series A Guarantee -- Full and
Unconditional Guarantee." The Series A Guarantee of the Company guarantees the
payment of Distributions and payments on liquidation or redemption of the Series
A Capital Securities, but only in each case to the extent of funds held by
Delphi Funding, as described herein (the "Series A Guarantee"). See "Certain
Terms of Series A Guarantee." If the Company does not make interest payments on
the Series A Subordinated Debentures held by Delphi Funding, Delphi Funding will
have insufficient funds to pay Distributions on the Series A Capital Securities.
The Series A Guarantee does not cover payment of Distributions when Delphi
Funding has insufficient funds to pay such Distributions. In such event, a
holder of Series A Capital Securities may institute a legal proceeding directly
against the Company pursuant to the terms of the Indenture to enforce payment of
amounts equal to such Distributions to such holder. See "Certain Terms of Series
A Subordinated Debentures -- Enforcement of Certain Rights By Holders of Series
A Securities." The obligations of the Company under the Series A Guarantee, like
its obligations under the Series A Subordinated Debentures, are subordinate to
all Senior Indebtedness of the Company.
The Series A Capital Securities are subject to mandatory redemption, in
whole or in part, upon repayment of Series A Subordinated Debentures at maturity
or their earlier redemption. The Series A Subordinated Debentures are redeemable
prior to maturity at the option of the Company (i) on or after March 25, 2007,
in whole at any time or in part from time to time, or (ii) at any time in
certain circumstances as described under "Certain Terms of Series A Subordinated
Debentures -- Conditional Right to Shorten Maturity or Redeem upon a Tax Event,"
in whole (but not in part), upon the occurrence of a Tax Event. For a
description of the redemption prices for the Series A Capital Securities
pursuant to clause (i) or (ii) above, see "Certain Terms of Series A Capital
Securities -- Redemption" and "Certain Terms of Series A Subordinated
Debentures -- Redemption."
The Company will have the right at any time to dissolve Delphi Funding. In
the event of the dissolution of Delphi Funding, after satisfaction of
liabilities to creditors of Delphi Funding as required by applicable law, the
holders of the Series A Capital Securities will be entitled to receive a
Liquidation Amount of $1,000 per Series A Capital Security plus accumulated and
unpaid Distributions thereon to the date of payment, which may be in the form of
a distribution of such amount in Series A Subordinated Debentures in exchange
therefor, subject to certain exceptions. See "Certain Terms of Series A Capital
Securities -- Liquidation of Delphi Funding and Distribution of Series A
Subordinated Debentures to Holders."
The Series A Capital Securities will be represented by a global certificate
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Series A Capital Securities will be shown on, and
transfers thereof will be effected only through, records maintained by
participants in DTC. Except as described in "Book-Entry Issuance," Series A
Capital Securities in certificated form will not be issued in exchange for the
global certificate.
------------------
The information in this Prospectus Supplement supplements, and should be
read in conjunction with, the information contained in the accompanying
Prospectus. As used herein, (i) the "Indenture" means the Subordinated
Indenture, as amended and supplemented from time to time, between the Company
and Wilmington Trust Company, as trustee (the "Debenture Trustee"), (ii) the
"L.L.C. Agreement" means the Amended and Restated Limited Liability Company
Agreement of Delphi Funding and (iii) "DFG" refers to Delphi Financial Group,
Inc. and the "Company" refers to DFG and all of its consolidated subsidiaries,
except where another definition is indicated or the context otherwise requires.
Each of the other capitalized terms used in this Prospectus Supplement and not
otherwise defined in this Prospectus Supplement has the meaning set forth in the
accompanying Prospectus.
------------------
S-3
<PAGE> 4
(Cover page continued)
NO EMPLOYEE BENEFIT OR OTHER PLAN SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH, A "PLAN"), NO
ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S
INVESTMENT IN THE ENTITY (A "PLAN ASSET ENTITY"), AND NO PERSON INVESTING "PLAN
ASSETS" OF ANY PLAN, MAY ACQUIRE OR HOLD THE SERIES A CAPITAL SECURITIES OR ANY
INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE
RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS
EXEMPTION ("PTCE") 96-23, 95-50, 91-38, 90-1 OR 84-14 WITH RESPECT TO SUCH
PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SERIES A CAPITAL SECURITIES
OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND
HOLDING THEREOF THAT IT EITHER (A) IS NOT A PLAN OR PLAN ASSET ENTITY AND IS NOT
PURCHASING SUCH SECURITIES ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN OR (B)
IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER PTCE 96-23, 95-60, 91-38,
90-1 OR 84-14 WITH RESPECT TO SUCH PURCHASE OR HOLDING. SEE "CERTAIN ERISA
CONSIDERATIONS."
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A CAPITAL
SECURITIES INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------
NORTH CAROLINA
The Commissioner of Insurance of the State of North Carolina has not
approved or disapproved this offering, nor has the Commissioner passed upon the
accuracy or adequacy of this Prospectus.
S-4
<PAGE> 5
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 (and
the related notes thereto) included elsewhere and incorporated by reference in
this Prospectus. Unless the context otherwise requires or as otherwise specified
herein, (i) all references in this Prospectus to "DFG" are to Delphi Financial
Group, Inc. and all references to the "Company" are to DFG and its consolidated
subsidiaries and (ii) all financial information provided herein is prepared on
the basis of generally accepted accounting principles ("GAAP") and not statutory
accounting practices ("SAP").
THE COMPANY
Delphi Financial Group, Inc., through its wholly-owned subsidiaries, is a
leading provider of group employee benefits, focusing primarily on group life,
disability, and personal accident insurance directed at the employee benefits
market and excess workers' compensation insurance for the self-insured portion
of this market. The Company also offers asset accumulation products, primarily
annuities, to individuals and groups. The Company's products are offered
throughout the United States through its home offices, 25 regional offices and
approximately 11,000 independent brokers, agents and third party administrators
("TPAs"). At or for the year ended December 31, 1996, the Company had total
insurance premiums and policyholder fees of $335.2 million, operating income of
$99.6 million, total assets of $2,857.9 million and shareholders' equity of
$367.0 million. The combined ratio of the Company's insurance subsidiaries for
1996 was 96.7%.
The Company's revenues are diversified among its product categories. For
1996, life, disability income and excess workers' compensation premiums
contributed 41%, 27% and 17% to total insurance premiums and policyholder fees.
In addition, the Company received $59.5 million of asset accumulation product
deposits in 1996.
The Company was formed in 1987 for the purpose of acquiring Reliance
Standard Life Insurance Company ("RSLIC"). RSLIC primarily provides group life,
long-term disability, and personal accident insurance to the employee benefits
market and also sells annuities, principally single-premium deferred annuities
("SPDAs") and flexible premium annuities ("FPAs"). RSLIC's group premium income
has grown at a compound annual rate of 11% over the past five years and reached
$275.2 million in 1996. RSLIC's statutory net income for 1996 was $23.2 million.
RSLIC focuses on companies with 100 to 500 employees in markets where it
believes recent employment growth has been high. RSLIC believes it enjoys
competitive strengths resulting from its stable market presence, disciplined
underwriting and service capabilities. RSLIC has achieved consistently strong
underwriting results, with combined ratios of less than 100% for every year
since 1988 and a combined ratio of 97.7% for 1996.
In March 1996, the Company acquired Safety National Casualty Corporation
("SNCC"), one of the country's oldest writers of excess workers' compensation
coverages for the self-insured market. SNCC's excess workers' compensation
product provides coverage to employers and groups who self-insure their workers'
compensation risks. The coverage applies to losses in excess of the applicable
self-insured retentions of employers and groups, whose workers' compensation
claims are generally handled by TPAs, and are principally targeted to mid-sized
companies and association groups. SNCC's statutory net income for 1996 was $23.5
million. SNCC considers its disciplined approach to underwriting and risk
selection expertise to be important competitive strengths which have resulted in
combined ratios of less than 100% for every year since 1993 and a combined ratio
of 92.1% for the period from March 5, 1996 (the date SNCC was acquired by the
Company) to December 31, 1996.
The Company's operating strategy has been to (i) focus on selected portions
of the group employee benefits market in which the Company believes it can earn
underwriting profits; (ii) emphasize acquisitions on an opportunistic basis
(such as the acquisitions of SNCC and five
S-5
<PAGE> 6
separate blocks of SPDA business acquired since 1988); (iii) emphasize the
active management of the Company's investment portfolio to enhance the
portfolio's performance and reduce risk; and (iv) more recently, grow its asset
accumulation business through introduction of products such as its SPDA product
with a market value adjustment ("MVA") feature. The Company's operating strategy
has contributed to a 14% annual growth rate in total insurance premiums and
policyholder fees from January 1988 through December 1996, excluding individual
life insurance business, which the Company exited in 1994. This strategy has
also contributed to an increase in total assets from $819.1 million at December
31, 1987 to $2,857.9 million at December 31, 1996, a compound annual growth rate
of 15%, and an increase in shareholders' equity from $24.1 million at December
31, 1987 to $367.0 million at December 31, 1996, a compound annual growth rate
of 35%. During the period from December 31, 1992 to December 31, 1996, the
Company reduced its debt to total capitalization ratio from 56% to 39% while its
interest coverage ratio has improved from 2.86x to 5.83x as of December 31, 1992
and 1996, respectively.
The Company considers the active management of its investment portfolio an
important part of its profitability. The Company's investment strategy
emphasizes liquidity and yield, while seeking to limit risks associated with
interest rate fluctuations and credit quality. The Company's average net
investment income yield on invested assets was 8.5%, 8.3% and 6.6% in 1996, 1995
and 1994, respectively.
The Company also views the maintenance of financial resources at the
holding company level as important to retaining its financial flexibility. At
December 31, 1996, the Company had approximately $117.2 million of available
investments as a source of liquidity at the holding company level. These
investments consist primarily of marketable securities and balances with
independent investment managers. The Company considers the investment portfolio
at the holding company and the investment income thereon to be important sources
of additional liquidity which can be used for, among other things, payment of
its debt obligations and expansion where considered appropriate. In addition,
the Company's insurance subsidiaries will be permitted to make dividend payments
totaling $37.2 million during 1997 without prior regulatory approval.
The Company's two principal insurance subsidiaries are RSLIC and SNCC.
RSLIC's claims-paying ability is rated A- (Excellent) by A.M. Best Company
("A.M. Best"), A (Good) by Standard & Poor's Corporation ("S&P") and A+
(Single-A-Plus) by Duff & Phelps Credit Rating Company ("Duff & Phelps"). SNCC's
claims-paying ability is rated A (Excellent) by A.M. Best and A (Good) by S&P.
These ratings are intended to address the creditworthiness of an insurance
company from the point of view of a policyholder. These ratings are not intended
for the protection of investors and do not apply to the securities offered
hereby or any other securities of Delphi Funding or the Company.
THE OFFERING
Securities Offered......... $100,000,000 aggregate Liquidation Amount of 9.31%
Capital Securities, Series A (Liquidation Amount
$1,000 per Capital Security).
Offering Price............. $1,000 per Series A Capital Security, plus accrued
Distributions, if any, from date of original
issuance.
Distribution Dates......... March 25 and September 25 of each year, commencing
September 25, 1997.
Extension Periods.......... Distributions on Series A Capital Securities will
be deferred for the duration of any Extension
Period elected by the Company with respect to the
payment of interest on the Series A Subordinated
Debentures. No Extension Period will exceed 10
consecutive semi-annual periods or extend beyond
the Stated Maturity.
S-6
<PAGE> 7
Ranking.................... The Series A Capital Securities will rank pari
passu, and payments thereon will be made pro rata,
with the Series A Common Securities except as
described under "Certain Terms of Series A Capital
Securities -- Subordination of Series A Common
Securities." The Series A Subordinated Debentures
will be unsecured and subordinate and junior in
right of payment to the extent and in the manner
set forth in the Indenture to all Senior Debt (as
defined herein). See "Certain Terms of Series A
Subordinated Debentures." The Series A Guarantee
will constitute an unsecured obligation of the
Company and will rank subordinate and junior in
right of payment to the extent and in the manner
set forth in the Guarantee Agreement to all Senior
Debt.
Redemption................. The Series A Capital Securities are subject to
mandatory redemption, in whole or in part, upon
repayment of Series A Subordinated Debentures at
maturity or their earlier redemption. The Series A
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or
after March 25, 2007, in whole at any time or in
part from time to time, or (ii) at any time in
certain circumstances as described under "Certain
Terms of Series A Subordinated
Debentures -- Conditional Right to Shorten Maturity
or Redeem upon a Tax Event," in whole (but not in
part), upon the occurrence of a Tax Event.
Ratings.................... The Series A Capital Securities are expected to be
rated "BBB-" by S&P, "BBB-" by Duff & Phelps and
"ba2" by Moody's Investors Service. A security
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization.
ERISA Considerations....... Prospective investors must carefully consider the
restrictions on purchase set forth under "ERISA
Considerations."
Use of Proceeds............ The net proceeds to Delphi Funding from the sale of
the Series A Capital Securities will be invested by
Delphi Funding in the Series A Subordinated
Debentures. The Company intends to use the net
proceeds from the sale of the Series A Subordinated
Debentures to repay $50.0 million principal amount
of revolving indebtedness outstanding under the
Credit Agreement (as defined herein) and for
general corporate purposes, including but not
limited to investments in existing and future
subsidiaries, the financing of possible future
acquisitions and the reduction of indebtedness.
Pending any such use, the Corporation may
temporarily invest the net proceeds or may use them
to reduce short-term indebtedness. See "Use of
Proceeds."
For additional information regarding the Series A Capital Securities, see
"Certain Terms of Series A Capital Securities," "Certain Terms of Series A
Subordinated Debentures," "Certain Terms of Series A Guarantee" and "Certain
Federal Income Tax Considerations."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors."
S-7
<PAGE> 8
SUMMARY FINANCIAL DATA
The summary financial data of the Company set forth below were derived from
the audited consolidated financial statements incorporated herein by reference
and should be read in conjunction with the consolidated financial statements,
related notes and other financial information and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein and
set forth in the Company's periodic reports which are incorporated herein by
reference.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Insurance premiums and policyholder
fees:
Group employee benefit products...... $ 331,378 $ 257,079 $ 233,697 $ 206,587 $ 178,737
Annuities............................ 2,122 2,121 1,716 6,285 3,086
Other insurance products(2).......... 1,733 1,702 13,099 22,047 21,065
Net investment income.................. 154,750 117,112 106,576 177,374 133,515
Net realized investment gains
(losses)............................. (2,651) 704 10,213 13,963 19,115
-------- -------- -------- -------- --------
Total revenue................... 487,332 378,718 365,301 426,256 355,518
Benefits and expenses.................. 387,713 314,549 315,407 335,685 298,416
-------- -------- -------- -------- --------
Income from continuing operations
before interest and income tax
expense.............................. 99,619 64,169 49,894 90,571 57,102
Interest expense....................... 18,269 13,257 12,252 17,720 19,949
Income tax expense..................... 27,496 18,170 11,698 26,098 12,513
-------- -------- -------- -------- --------
Income from continuing operations...... $ 53,854 $ 32,742 $ 25,944 $ 46,753 $ 24,640
======== ======== ======== ======== ========
Net income(3).......................... $ 47,253 $ 30,464 $ 25,818 $ 34,746 $ 23,659
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges(4)........................... 5.25x 4.60x 3.87x 4.93x 2.79x
======== ======== ======== ======== ========
PER SHARE DATA(5):
Income from continuing operations
excluding realized investment gains
(losses)............................. $ 2.97 $ 2.22 $ 1.33 $ 3.28 $ 1.36
Income from continuing operations...... $ 2.88 $ 2.25 $ 1.79 $ 3.64 $ 1.98
Net income(3).......................... $ 2.53 $ 2.10 $ 1.78 $ 2.70 $ 1.90
Fully diluted book value per
share(6)(7).......................... $18.84 $15.32 $11.72 $13.95 $10.56
Weighted average shares outstanding
(000's)(8)........................... 18,693 14,532 14,495 12,856 12,421
BALANCE SHEET DATA:
Total investments...................... $2,295,007 $1,791,531 $1,965,154 $2,041,774 $1,881,880
Total assets........................... 2,857,906 2,323,010 2,472,776 2,344,321 2,211,751
Long-term debt......................... 231,004 134,611 159,577 159,545 164,274
Shareholders' equity(7)................ 366,965 222,815 170,382 200,968 129,046
OTHER DATA:
Group employee benefit products
ratios(9):
Loss ratio........................... 70.0% 74.4% 74.3% 72.7% 70.6%
Expense ratio........................ 26.7 24.5 23.5 26.1 26.0
-------- -------- -------- -------- --------
Combined ratio.................. 96.7% 98.9% 97.8% 98.8% 96.6%
======== ======== ======== ======== ========
Debt to total capitalization
ratio(10)............................ 38.6% 37.7% 48.4% 44.3% 56.0%
Interest coverage ratio(11)............ 5.83x 4.84x 4.07x 5.11x 2.86x
Return on average equity(12)........... 18.5% 16.6% 10.4% 25.5% 15.2%
STATUTORY DATA(13):
Combined statutory operating
results(14).......................... 40,048 19,310 38,312 35,452 19,737
Combined adjusted statutory
surplus(15).......................... 367,586 202,001 188,530 174,999 161,716
</TABLE>
S-8
<PAGE> 9
- ---------------
(1) Reflects the acquisition of excess workers' compensation business as a
result of the merger with SIG Holding, Inc. ("SIG") in March 1996 (the "SIG
Merger").
(2) Amounts for 1994, 1993 and 1992 include individual life insurance business,
which the Company exited in July 1994. See Note N to the Consolidated
Financial Statements incorporated herein by reference.
(3) The Company discontinued its long-term care business in 1996 and recognized
a one-time after-tax charge of $5.8 million in 1996 attributable to this
discontinuance. After-tax operating losses on this business were $0.8
million, $2.3 million and $0.1 million for the years ended December 31,
1996, 1995 and 1994, respectively. Additionally, the Company has incurred
after-tax extraordinary losses associated with the early extinguishment of
debt. These losses totaled $12.0 million and $0.4 million for the years
ended December 31, 1993 and 1992, respectively. The Company also recognized
an after-tax charge of $0.6 million related to the cumulative effect of a
change in accounting for post-retirement benefits other than pensions in
the year ended December 31, 1992.
(4) In computing the ratio of earnings to fixed charges, fixed charges consist
of interest expense, including amortization of debt discount, and such
portion of rental expense as is estimated to be representative of the
interest factor, all on a pre-tax basis. Earnings are pre-tax income from
continuing operations, plus fixed charges.
(5) Prior periods have been restated to reflect the 20% stock dividend
distributed on September 30, 1996.
(6) Fully diluted book value per share is calculated by dividing shareholders'
equity, as increased by the proceeds of the assumed exercise of outstanding
stock options, by total shares outstanding, also increased by shares issued
upon the assumed exercise of the options.
(7) In 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"). See Note A to the Consolidated
Financial Statements incorporated herein by reference.
(8) Weighted average shares outstanding in 1996, 1995, 1994 and 1993 reflect
the issuance of 2.1 million shares of Class A Common Stock in October 1993.
(9) Loss ratio is the ratio of incurred claims and claim expenses to premium
earned. Expense ratio is the ratio of underwriting expenses to premiums
earned. Combined ratio is the sum of the expense ratio and the loss ratio.
A combined ratio under 100% generally indicates an underwriting profit and
a combined ratio over 100% generally indicates an underwriting loss. The
extent to which the combined ratio deviates from 100% indicates relative
underwriting profit or loss. The loss, expense and combined ratios for the
year ended December 31, 1996, excluding excess workers' compensation
business, were 72.9%, 24.8% and 97.7%, respectively.
(10) Total capitalization is the sum of the Company's long-term debt and
shareholders' equity. The debt to total capitalization ratio for 1996
giving pro forma effect to the issuance of the Series A Capital Securities
would be 27.9%.
(11) The interest coverage ratio is calculated by dividing income from
continuing operations before interest and income tax expense by interest
expense (which, for 1996, excludes interest paid in connection with the
settlement of prior-year federal income taxes).
(12) Return on average equity is calculated by dividing income from continuing
operations by average shareholders' equity, excluding from both the
numerator and the denominator realized investment gains and losses,
discontinued operations, extraordinary items and changes in accounting
principles, as determined as of the beginning and end of each year.
(13) Statutory accounting practices provide for the recording of transactions
and the preparing of financial statements in accordance with the rules and
procedures prescribed or permitted by statute or regulatory authorities.
Combined statutory data for 1996 includes $21.4 million of statutory
operating income and $139.8 million of statutory surplus for SNCC.
(14) Statutory operating results exclude net realized investment gains and
losses. The 1996 and 1995 statutory operating results include net losses of
$2.3 million and $4.2 million, respectively, attributable to the Company's
discontinued long-term care business. The statutory results for 1994
include a $12.5 million gain related to the Company exiting its individual
life insurance business.
(15) Adjusted statutory surplus is not reduced by the asset valuation reserve
("AVR") established by the Company's life insurance subsidiaries. The AVR
is a required formulaic reserve for life companies under SAP for potential
future credit-related losses for fixed maturity securities and for
potential future losses on other categories of invested assets.
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RISK FACTORS
An investment in the Series A Capital Securities involves a certain degree
of risk. Prospective investors should carefully evaluate the following
considerations in addition to the other information in this Prospectus
Supplement, including the information in the documents incorporated by
reference, and the accompanying Prospectus before purchasing any of the
securities offered hereby. In addition, because holders of the Series A Capital
Securities may receive Series A Subordinated Debentures in exchange therefor
upon liquidation of Delphi Funding, prospective purchasers of Series A Capital
Securities are also making an investment decision with regard to the Series A
Subordinated Debentures and should carefully review all the information
regarding the Series A Subordinated Debentures contained herein.
RISKS RELATED TO THE COMPANY
HOLDING COMPANY STRUCTURE
Because DFG is a holding company, its ability to meet debt service
obligations (including on the Series A Subordinated Debentures) and to make any
payment required under the Series A Guarantee, as well as to pay dividends and
expenses, will depend upon receipt of sufficient funds from its subsidiaries, as
well as the Company's financial resources at the holding company level.
The Company had approximately $117.2 million of available investments as a
source of liquidity at the holding company level at December 31, 1996, primarily
held through its non-insurance subsidiaries, which are generally not subject to
any significant restrictions on their ability to pay dividends or make
distributions to DFG. These investments consist primarily of marketable
securities and balances with independent investment managers. The Company's
positions in marketable securities can generally be liquidated at market value
at any time. The balances with independent investment managers are substantially
all withdrawable by the Company at least annually, subject to applicable notice
requirements.
Other current sources of liquidity include payments made on a surplus
debenture (the "Surplus Debenture") issued by Reliance Standard Life Insurance
Company of Texas ("RSLIC-Texas") to DFG, dividends paid from insurance
subsidiaries, primarily generated from operating cash flows and investments, and
borrowings available under the $200.0 million Third Amended and Restated Credit
Agreement dated as of December 5, 1996 among DFG and the lenders named therein
(the "Credit Agreement"). During 1997, the Company's insurance subsidiaries will
be permitted to make dividend payments totaling $37.2 million without prior
regulatory approval, and as of December 31, 1996, $100.0 million was available
for borrowing under the Credit Agreement, $54.0 million of which is restricted
for use in connection with, among other things, acquisitions or redemption of
SIG's 8.5% Senior Secured Notes due 2003 (the "SIG Senior Notes"). At December
31, 1996, the unpaid principal balance of the Surplus Debenture, which is
payable in quarterly installments through December 31, 1999, was $58.0 million.
RSLIC-Texas generates less than 1% of the Company's premiums, policyholder fees
and deposits; therefore, payments on the Surplus Debenture are generally funded
by dividend payments made by RSLIC to RSLIC-Texas. These dividends are subject
to regulatory restrictions and, in the absence of regulatory approval, are
generally limited within any 12-month period, in the aggregate, to the greater
of RSLIC's statutory net income for the preceding calendar year, or 10% of
RSLIC's statutory surplus as of the preceding December 31, determined in
accordance with state insurance regulations. RSLIC will be permitted to make
dividend payments of $23.2 million during 1997 without prior regulatory
approval. SNCC's ability to pay dividends is subject to regulatory and certain
other contractual restrictions and, in the absence of the requisite approvals,
dividends are generally limited within any 12-month period, in the aggregate, to
the lesser of 10% of SNCC's statutory surplus as of the preceding December 31,
or SNCC's statutory net investment income for the preceding calendar year,
determined in accordance with state insurance regulations. SNCC will be
permitted to make dividend payments of $14.0 million
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during 1997 without prior regulatory approval. Additional dividends may also be
paid by RSLIC and SNCC with the requisite approvals.
The Company's current liquidity needs, in addition to funding operating
expenses, include principal and interest payments on outstanding borrowings
under the Credit Agreement, the Company's 8.0% Senior Notes due 2003 (the
"Senior Notes") and the SIG Senior Notes, which borrowings and notes outstanding
totaled $231.0 million as of December 31, 1996. Beginning in 1999, the maximum
amount available to DFG under the Credit Agreement will be reduced on October 1
of each year with the balance due on April 1, 2003. At DFG's current level of
borrowing, no principal repayments would be required until October 1, 2002. The
Senior Notes mature in their entirety on October 1, 2003 and are not subject to
any sinking fund requirements nor are they redeemable prior to maturity. The SIG
Senior Notes mature in $9.0 million annual installments beginning in May 1999.
See Note F to the Consolidated Financial Statements incorporated herein by
reference.
CONTROL BY ROSENKRANZ & COMPANY
Each share of Class A Common Stock, par value $.01 per share, of DFG (the
"Class A Common Stock") is entitled to one vote per share on all matters
submitted to a shareholder vote and each share of Class B Common Stock, par
value $.01 per share, of the Company (the "Class B Common Stock") is entitled to
ten votes per share on all such matters. Each share of Class B Common Stock is
convertible at any time into one share of Class A Common Stock. The holders of
the Class A Common Stock vote as a separate class to elect one director of the
Company. See "Description of Capital Stock of Delphi" in the accompanying
Prospectus. As of December 31, 1996, Rosenkranz & Company owns 5,202,944 shares
of the Class B Common Stock. This represents approximately 26% of the total
number of shares of Class A and Class B Common Stock outstanding, on a fully
diluted basis. These shares owned by Rosenkranz & Company represent
approximately 68% of the combined voting power of the shareholders of the
Company, on a fully diluted basis. In addition, Robert Rosenkranz, the
beneficial owner of the corporate general partner of Rosenkranz & Company, holds
an irrevocable proxy to vote or has direct or beneficial ownership of additional
shares of Class B Common Stock representing approximately a 14% voting interest,
on a fully diluted basis, in the Company. Holders of a majority of such voting
power have the power to elect all of the members of DFG's Board of Directors
(other than the director elected by the holders of Class A Common Stock) and to
determine the outcome of fundamental corporate transactions, including mergers
and acquisitions, consolidations and sales of all or substantially all of the
assets of the Company. The Company is a party to consulting and other agreements
with certain affiliates of Rosenkranz & Company which are expected to continue
in accordance with their terms.
INSURANCE REGULATIONS
The Company's insurance subsidiaries are highly regulated by state
insurance authorities in the states in which they are domiciled and the other
states in which they conduct business. Such regulations, among other things,
limit the amount of dividends and other payments that can be made by such
subsidiaries without prior regulatory approval (as described above under
"-- Holding Company Structure") and impose restrictions on the amount and type
of investments such subsidiaries may have. These regulations also affect many
other aspects of the Company's insurance subsidiaries' businesses, including,
for example, risk-based capital requirements, various reserve requirements and
the terms and conditions and manner of sale and marketing of such subsidiaries'
insurance products. These regulations are intended to protect policyholders
rather than investors. See "Business -- Regulation."
INVESTMENT PERFORMANCE AND STRATEGY
The market value of the Company's investments varies depending on economic
and market conditions. In addition, in the event that investments are called or
redeemed prior to stated maturity,
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the Company may be unable to reinvest the proceeds in securities with comparable
interest rates. The Company may also be required in the future to sell certain
investments at a price and a time when the market value of such investments is
less than the book value of such investments. As of December 31, 1996, 36% of
the Company's invested assets consisted of mortgage-backed securities which
subject the Company to a degree of extension risk or prepayment risk. As of
December 31, 1996, non-investment grade fixed maturity investments, balances
with independent investment managers and equity securities represented 7%, 5%
and 3% of total invested assets, respectively.
COMPETITION; RATINGS; OTHER FACTORS AFFECTING BUSINESS
The insurance industry is highly competitive. The Company competes with
numerous other insurance and financial services companies both in connection
with sales of insurance and asset accumulation products and in acquiring blocks
of business. Many of these organizations have substantially greater asset bases,
higher ratings from ratings agencies, larger and more diversified portfolios of
insurance products and larger agency sales operations. Competition in asset
accumulation product markets is also encountered from the expanding number of
banks, securities brokerage firms and other financial intermediaries marketing
alternative savings products, such as mutual funds, traditional bank investments
and retirement funding alternatives.
The Company believes that its reputation in the marketplace, quality of
service and investment returns have enabled it to compete effectively for new
insurance business in its targeted markets. The Company reacts to changes in the
marketplace generally by focusing on products with adequate margins and
attempting to avoid those with low margins. The Company believes that its
smaller size, relative to some of its competitors, enables it to more easily
tailor its products to the demands of customers.
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor impacting the competitive position of
insurance companies. Each of the rating agencies reviews its ratings of
companies periodically and there can be no assurance that current ratings will
be maintained in the future. Claims-paying and financial strength ratings are
based upon factors relevant to policyowners and are not directed toward
protection of investors. A downgrade in the ratings of the Company's insurance
subsidiaries could adversely affect sales of their products and could have a
material adverse effect on the results of operations of the Company.
Changing economic conditions can have an impact on underwriting results for
the Company's insurance products and the performance of the Company's investment
portfolio. The Company's profitability is also significantly affected by its
investment results.
RISKS RELATED TO THE CAPITAL SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE SERIES A GUARANTEE AND
THE SERIES A SUBORDINATED DEBENTURES
The obligations of the Company under the Series A Guarantee issued by the
Company for the benefit of the holders of Series A Capital Securities and under
the Series A Subordinated Debentures are unsecured and rank subordinate and
junior in right of payment to all Senior Indebtedness of the Company.
Substantially all of the Company's existing indebtedness constitutes Senior
Indebtedness. Because the Company is a holding company, the right of the Company
to participate in any distribution of the assets of any subsidiary (including
RSLIC) upon such subsidiary's liquidation or reorganization or otherwise, is
subject to the prior claims of creditors of that subsidiary, except to the
extent that the Company may itself be recognized as a creditor of that
subsidiary. Accordingly, the Series A Subordinated Debentures (and therefore the
Series A Capital Securities) will be effectively subordinated to all existing
and future liabilities of the Company's subsidiaries, and holders of Series A
Subordinated Debentures should look only to the assets of the Company for
payments on the Series A Subordinated Debentures. None of the Indenture, the
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Series A Guarantee or the L.L.C. Agreement places any limitation on the amount
of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Company or any of its subsidiaries. See "Description of Debt
Securities -- Subordination of Subordinated Debt Securities" in the accompanying
Prospectus.
The ability of Delphi Funding to pay amounts due on the Series A Capital
Securities is solely dependent upon the Company making payments on the Series A
Subordinated Debentures as and when required.
OPTION TO DEFER INTEREST PAYMENT; TAX CONSEQUENCES; MARKET PRICE CONSEQUENCES
So long as no event of default under the Indenture has occurred or is
continuing, the Company has the right under the Indenture to defer payment of
interest on the Series A Subordinated Debentures at any time or from time to
time for a period not exceeding 10 consecutive semi-annual periods with respect
to each Extension Period, provided that no Extension Period may extend beyond
the Stated Maturity of the Series A Subordinated Debentures. As a consequence of
any such deferral, semi-annual Distributions on the Series A Capital Securities
by Delphi Funding will also be deferred (and the amount of Distributions to
which holders of the Series A Capital Securities are entitled will accumulate
additional Distributions thereon at the rate of 9.31% per annum, compounded
semi-annually from the relevant payment date for such Distributions) during any
such Extension Period. During any such Extension Period, the Company may not,
and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including other series
of Subordinated Debt Securities) that rank pari passu with or junior in interest
to the Series A Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Series A Subordinated Debentures (other than (a) dividends or
distributions in capital stock of the Company, (b) any declaration of a dividend
in connection with the implementation of a stockholders' rights plan or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the Series A Guarantee and (d) purchases of common stock related to the issuance
of common stock or rights or options under any of the Company's benefit plans
for its directors, officers, employees or other persons within the definition of
"employee" for purposes of a registration of shares for an employee benefit plan
of the Company, or related to the issuance of common stock or rights under a
dividend reinvestment or Stock Purchase Plan, or related to the issuance of
common stock (or securities convertible into or exchangeable for common stock)
as consideration in an acquisition transaction that was entered into prior to
the commencement of such Extension Period). Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest on the
Series A Subordinated Debentures, provided that no Extension Period may exceed
10 consecutive semi-annual periods or extend beyond the Stated Maturity of the
Series A Subordinated Debentures. Upon the termination of any Extension Period
and the payment of all interest then accrued and unpaid (together with interest
thereon at the annual rate of 9.31%, compounded semi-annually from the interest
payment date for such interest, to the extent permitted by applicable law), the
Company may elect to begin a new Extension Period subject to the above
requirements. There is no limitation on the number of times that the Company may
elect to begin an Extension Period. See "Certain Terms of Series A Capital
Securities -- Distributions" and "Certain Terms of Series A Subordinated
Debentures -- Option to Defer Interest Payments."
Should an Extension Period occur, a holder of Series A Capital Securities
will be required to accrue income (in the form of original issue discount) in
respect of its pro rata share of the Series A Subordinated Debentures held by
Delphi Funding for United States federal income tax purposes. As a result, a
holder of Series A Capital Securities will be required to include such income in
gross income for United States federal income tax purposes in advance of the
receipt of cash attributable
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to such income, and will not receive the cash related to such income from Delphi
Funding if the holder disposes of the Series A Capital Securities prior to the
record date for the payment of Distributions. See "Certain Federal Income Tax
Consequences -- Potential Deferral of Interest Payments" and "-- Sale or
Redemption of Series A Capital Securities."
The Company has no current intention of exercising its right to defer
payments of interest on the Series A Subordinated Debentures. However, should
the Company elect to exercise such right in the future, the market price of the
Series A Capital Securities is likely to be affected. A holder that disposes of
its Series A Capital Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continues to hold its
Series A Capital Securities.
TAX EVENT -- EXCHANGE OF SERIES A CAPITAL SECURITIES FOR SERIES A SUBORDINATED
DEBENTURES, SHORTENING OF MATURITY OF SERIES A SUBORDINATED DEBENTURES OR
REDEMPTION
Upon the occurrence of a Tax Event (whether occurring before or after March
25, 2007), the Company has the right, if certain conditions are met, (i) to
dissolve Delphi Funding and, after satisfaction of liabilities to creditors of
Delphi Funding as required by applicable law, cause the Series A Subordinated
Debentures to be distributed to the holders of the Series A Capital Securities
in exchange therefor upon liquidation of Delphi Funding, (ii) to shorten the
maturity of the Series A Subordinated Debentures to a date not earlier than
March 25, 2012, or (iii) to redeem the Series A Subordinated Debentures in whole
(but not in part) within 90 days following the occurrence of such Tax Event and
thereby cause a mandatory redemption of the Series A Capital Securities. If a
redemption following a Tax Event occurs before March 25, 2007, such redemption
will be at a price equal to the Make-Whole Amount (as defined in "Certain Terms
of Series A Capital Securities -- Redemption") together with accrued interest to
but excluding the date fixed for redemption. See "Certain Terms of Series A
Subordinated Debentures -- Conditional Right to Shorten Maturity or Redeem upon
a Tax Event."
A "Tax Event" has the meaning set forth under "Certain Terms of Series A
Capital Securities -- Redemption" below.
See "Certain Federal Income Tax Considerations -- Possible Tax Law Changes
Affecting the Series A Capital Securities" for a discussion of certain budget
proposals that, if adopted, could give rise to a Tax Event, which may permit the
Company to shorten the maturity of the Series A Subordinated Debentures or cause
a redemption of the Series A Capital Securities prior to March 25, 2007.
EXCHANGE OF SERIES A CAPITAL SECURITIES FOR SERIES A SUBORDINATED DEBENTURES
The Company will have the right at any time to dissolve Delphi Funding and,
after satisfaction of liabilities to creditors of Delphi Funding as required by
applicable law, cause the Series A Subordinated Debentures to be distributed to
the holders of the Series A Securities in exchange therefor upon liquidation of
Delphi Funding. See "Certain Terms of Series A Capital Securities -- Liquidation
of Delphi Funding and Distribution of Series A Subordinated Debentures to
Holders."
Under current United States federal income tax law and interpretations, a
distribution of the Series A Subordinated Debentures upon a liquidation of
Delphi Funding will not be a taxable event to holders of the Series A Capital
Securities. However, if a Tax Event were to occur which would cause Delphi
Funding to be subject to United States federal income tax with respect to income
received or accrued on the Series A Subordinated Debentures, a distribution of
the Series A Subordinated Debentures by Delphi Funding could be a taxable event
to Delphi Funding and the holders of the Series A Capital Securities. See
"Certain Federal Income Tax Considerations -- Exchange of Series A Capital
Securities For Series A Subordinated Debentures."
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MARKET PRICES
There can be no assurance as to the market prices for Series A Capital
Securities or Series A Subordinated Debentures that may be distributed in
exchange for Series A Capital Securities upon liquidation of Delphi Funding.
Accordingly, the Series A Capital Securities that an investor may purchase,
whether pursuant to the offer made hereby or in any secondary market, or the
Series A Subordinated Debentures that a holder of Series A Capital Securities
may receive on liquidation of Delphi Funding, may trade at a discount to the
price that the investor paid to purchase the Series A Capital Securities offered
hereby. As a result of the existence of the Company's right to defer interest
payments, the market price of the Series A Capital Securities (which represent
beneficial ownership interests in Delphi Funding) may be more volatile than the
market prices of debt securities that are not subject to such optional
deferrals. See "Certain Terms of Series A Subordinated Debentures."
RIGHTS UNDER THE SERIES A GUARANTEE
The Series A Guarantee guarantees to the holders of the Series A Securities
the following payments, to the extent not paid by Delphi Funding: (i) any
accumulated and unpaid Distributions required to be paid on the Series A Capital
Securities, to the extent that Delphi Funding has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Series A
Securities called for redemption, to the extent that Delphi Funding has funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution of Delphi Funding (unless the Series A Subordinated Debentures are
distributed to holders of the Series A Capital Securities), the lesser of (a)
the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that Delphi Funding has
funds on hand available therefor at such time, and (b) the amount of assets of
Delphi Funding remaining available for distribution to holders of the Series A
Securities after payment of creditors of Delphi Funding as required by
applicable law.
The Series A Guarantee is subordinated as described under "-- Ranking of
Subordinated Obligations Under the Series A Guarantee and the Series A
Subordinated Debentures."
The holders of not less than a majority in aggregate Liquidation Amount of
the Series A Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee (as
defined herein) in respect of the Series A Guarantee. Any holder of the Series A
Securities may institute a legal proceeding directly against the Company to
enforce its rights under the Series A Guarantee without first instituting a
legal proceeding against Delphi Funding, the Guarantee Trustee or any other
person or entity. If the Company were to default on its obligation to pay
amounts payable under the Series A Subordinated Debentures, Delphi Funding would
lack funds for the payment of Distributions or amounts payable on redemption of
the Series A Securities or otherwise, and, in such event, holders of the Series
A Securities would not be able to rely upon the Series A Guarantee for payment
of such amounts. Instead, if an event of default under the Indenture shall have
occurred and be continuing and such event is attributable to the failure of the
Company to pay interest on or principal of the Series A Subordinated Debentures
on the applicable payment date, then a holder of Series A Securities may
institute a legal proceeding directly against the Company pursuant to the terms
of the Indenture for enforcement of payment to such holder of the principal of
or interest on such Series A Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Amount of the Series A Securities of such
holder (a "Direct Action"). In connection with such Direct Action, the Company
will have a right of set-off under the Indenture to the extent of any payment
made by the Company to such holder of Series A Securities in the Direct Action.
Except as described herein, holders of Series A Securities will not be able to
exercise directly any other remedy available to the holders of the Series A
Subordinated Debentures or assert directly any other rights in respect of the
Series A Subordinated Debentures. See "Certain Terms of Series A Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Series A Capital
Securities," "-- Debenture Events of Default"
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and "Certain Terms of Series A Guarantee." The L.L.C. Agreement provides that
each holder of Series A Securities by acceptance thereof agrees to the
provisions of the Series A Guarantee and the Indenture.
LIMITED VOTING RIGHTS
Holders of Series A Capital Securities generally will have limited voting
rights relating only to the modification of the Series A Capital Securities and
the exercise of Delphi Funding's rights as holder of Series A Subordinated
Debentures and the Series A Guarantee. Holders of Series A Capital Securities
will not be entitled to vote to appoint, remove or replace the Managing Member
(as defined).
TRADING CHARACTERISTICS OF SERIES A CAPITAL SECURITIES
The Company does not intend to have the Series A Capital Securities listed
or approved for quotation on any securities exchange or automated quotation
system. The Series A Capital Securities may trade at prices that do not fully
reflect the value of accrued and unpaid interest with respect to the underlying
Series A Subordinated Debentures. See "Certain Federal Income Tax
Consequences -- Potential Deferral of Interest Payments" and "-- Sale or
Redemption of Series A Capital Securities" for a discussion of the United States
federal income tax consequences that may result from a taxable disposition of
the Series A Capital Securities.
POSSIBLE TAX LAW CHANGES AFFECTING THE SERIES A CAPITAL SECURITIES
The Clinton Administration's Budget Proposal for fiscal year 1998, released
February 6, 1997 (the "Administration Proposal"), proposed certain tax law
changes that would, among other things, generally deny interest deductions for
interest on an instrument issued by a corporation that has a maximum term of
more than 15 years and that is not shown as indebtedness on the separate balance
sheet of the issuer or, where the instrument is issued to a related party (other
than a corporation), where the holder or some other related party issues a
related instrument that is not shown as indebtedness on the issuer's
consolidated balance sheet. The above-described provision of the Administration
Proposal is proposed to be effective no earlier than the date of first committee
action. To date, neither the House Ways and Means Committee nor the Senate
Finance Committee has taken action on the Administration Proposal. However,
there can be no assurance that one or the other of such committees will not act
prior to the issuance of the Series A Subordinated Debentures, in which case the
Company will not be able to deduct interest on the Series A Subordinated
Debentures. Furthermore, there can be no assurance that future legislative
proposals or final legislation will not adversely affect the ability of the
Company to deduct interest on the Series A Subordinated Debentures or otherwise
affect the tax treatment of the transaction described herein. Such a change
could give rise to a Tax Event, which, depending on certain circumstances, could
permit the Company to terminate Delphi Funding and cause the Series A
Subordinated Debentures to be distributed to the holders of the Series A Capital
Securities in exchange therefor upon liquidation of Delphi Funding, to shorten
the maturity of the Series A Subordinated Debentures to a date not earlier than
March 25, 2012 or to cause a redemption of the Series A Capital Securities
before March 25, 2007. See "Certain Terms of Series A Subordinated
Debentures -- Conditional Right to Shorten Maturity or Redeem upon a Tax Event"
and "-- Redemption."
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DELPHI FINANCIAL GROUP, INC.
DFG, through its wholly-owned subsidiaries, is a leading provider of group
employee benefits, focusing primarily on group life, long-term disability, and
personal accident insurance directed at the employee benefits market and excess
workers' compensation insurance for the self-insured portion of this market. The
Company also offers asset accumulation products, primarily annuities, to
individuals and groups. The Company's products are offered throughout the United
States through its home offices, 25 regional offices and approximately 11,000
independent brokers, agents and TPAs. At or for the year ended December 31,
1996, the Company had total insurance premiums and policyholder fees of $335.2
million, operating income of $99.6 million, total assets of $2,857.9 million and
shareholders' equity of $367.0 million. The combined ratio of the Company's
insurance subsidiaries for 1996 was 96.7%.
The Company's revenues are diversified among its product categories. For
1996, life, disability income and excess workers' compensation premiums
contributed 41%, 27% and 17% to total insurance premiums and policyholder fees.
In addition, the Company received $59.5 million of asset accumulation product
deposits in 1996.
The Company was formed in 1987 for the purpose of acquiring RSLIC. RSLIC
primarily provides group life, long-term disability, and personal accident
insurance to the employee benefits market and also sells annuities, principally
SPDAs and FPAs. RSLIC's group premium income has grown at a compound annual rate
of 11% over the past five years and reached $275.2 million in 1996. RSLIC's
statutory net income for 1996 was $23.2 million. RSLIC focuses on companies with
100 to 500 employees in markets where it believes recent employment growth has
been high. RSLIC believes it enjoys competitive strengths resulting from its
stable market presence, disciplined underwriting and service capabilities. RSLIC
has achieved consistently strong underwriting results, with combined ratios of
less than 100% for every year since 1988 and a combined ratio of 97.7% for 1996.
In March 1996, the Company acquired SNCC, one of the country's oldest
writers of excess workers' compensation coverages for the self-insured market.
SNCC's excess workers' compensation product provides coverage above self-insured
retentions retained by employers and groups, which generally have their workers'
compensation claims handled by TPAs, and are principally targeted to mid-sized
companies and association groups. SNCC's statutory net income for 1996 was $23.5
million. SNCC considers its disciplined approach to underwriting and risk
selection expertise to be important competitive strengths which have resulted in
combined ratios of less than 100% for every year since 1993 and a combined ratio
of 92.1% for the period from March 5, 1996 (the date SNCC was acquired by the
Company) to December 31, 1996.
The Company's operating strategy has been to (i) focus on selected portions
of the group employee benefits market in which the Company believes it can earn
underwriting profits; (ii) emphasize acquisitions on an opportunistic basis
(such as the acquisitions of SNCC and five separate blocks of SPDA business
acquired since 1988); (iii) emphasize the active management of the Company's
investment portfolio to enhance the portfolio's performance and reduce risk; and
(iv) more recently, grow its asset accumulation business through introduction of
products such as its SPDA product with an MVA feature. The Company's operating
strategy has contributed to a 14% annual growth rate in total insurance premiums
and policyholder fees from January 1988 through December 1996, excluding
individual life insurance business, which the Company exited in 1994. This
strategy has also contributed to an increase in total assets from $819.1 million
at December 31, 1987 to $2,857.9 million at December 31, 1996, a compound annual
growth rate of 15%, and an increase in shareholders' equity from $24.1 million
at December 31, 1987 to $367.0 million at December 31, 1996, a compound annual
growth rate of 35%. During the period from December 31, 1992 to December 31,
1996, the Company reduced its debt to total capitalization ratio from 56% to
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<PAGE> 18
39% while its interest coverage ratio has improved from 2.86x to 5.83x as of
December 31, 1992 and 1996, respectively.
The Company considers the active management of its investment portfolio an
important part of its profitability. The Company's investment strategy
emphasizes liquidity and yield, while seeking to limit risks associated with
interest rate fluctuations and credit quality. The Company's average net
investment income yield on invested assets was 8.5%, 8.3% and 6.6% in 1996, 1995
and 1994, respectively. The net investment income yield on invested assets
excludes realized and unrealized gains and losses with respect to securities
carried as available for sale and includes realized and unrealized gains and
losses with respect to trading account securities and balances with independent
investment managers.
The Company also views the maintenance of financial resources at the
holding company level as important to retaining its financial flexibility. At
December 31, 1996, the Company had approximately $117.2 million of available
investments as a source of liquidity at the holding company level. These
investments consist primarily of marketable securities and balances with
independent investment managers. The Company considers the investment portfolio
at the holding company and the investment income thereon to be important sources
of additional liquidity which can be used for, among other things, payment of
its debt obligations and expansion where considered appropriate. In addition,
the Company's insurance subsidiaries will be permitted to make dividend payments
totaling $37.2 million during 1997 without prior regulatory approval.
The Company's two principal insurance subsidiaries are RSLIC and SNCC.
RSLIC's claims-paying ability is rated A- (Excellent) by A.M. Best, A (Good) by
S&P and A+ (Single-A-Plus) by Duff & Phelps. SNCC's claims-paying ability is
rated A (Excellent) by A.M. Best and A (Good) by S&P. These ratings are intended
to address the creditworthiness of an insurance company from the point of view
of a policyholder. These ratings are not intended for the protection of
investors and do not apply to the securities offered hereby or other securities
of Delphi Funding or the Company.
Rosenkranz & Company, the corporate general partner of which is
beneficially owned by Robert Rosenkranz, Chairman of the Board, President and
Chief Executive Officer of the Company, has approximately a 26% equity interest
and approximately a 68% voting interest, on a fully diluted basis, in the
Company. In addition, Mr. Rosenkranz holds an irrevocable proxy to vote or has
direct or beneficial ownership of additional shares of Class B Common Stock
representing approximately a 14% voting interest, on a fully diluted basis, in
the Company.
DELPHI FUNDING L.L.C.
Delphi Funding, a subsidiary of DFG, is a limited liability company
organized under the laws of the State of Delaware. All of its limited liability
company interests (other than DF Preferred Securities) are owned by DFG and are
non-transferable. Delphi Funding's registered office in the State of Delaware is
c/o Delphi Financial Group, Inc., 1105 North Market Street, Suite 1230, P.O. Box
8985, Wilmington, Delaware 19899, telephone: (302) 478-5142. Delphi Funding has
no board of directors, and all of its business and affairs will be conducted by
DFG, as manager (in such capacity, the "Managing Member"). The location of the
principal executive offices of the Managing Member is set forth under "The
Company" in the accompanying Prospectus. Delphi Funding exists solely for the
purpose of issuing the Series A Securities and lending the net proceeds from the
sale thereof to DFG by purchasing the Series A Subordinated Debentures.
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<PAGE> 19
USE OF PROCEEDS
The net proceeds from the sale of the Series A Capital Securities will be
used by Delphi Funding to purchase Series A Subordinated Debentures. The net
proceeds of the sale of the Series A Subordinated Debentures will be used by the
Company to repay $50.0 million principal amount of revolving indebtedness
outstanding under the Credit Agreement (on which interest was payable as of
December 31, 1996 at a weighted average rate of 6.1% per annum) and for general
corporate purposes, including but not limited to investments in existing and
future subsidiaries, the financing of possible future acquisitions and the
reduction of indebtedness. Pending any such use, the Company may temporarily
invest the net proceeds or may use them to reduce short-term indebtedness.
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<PAGE> 20
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1996 and as adjusted to give pro forma effect to the
issuance of the Series A Capital Securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Corporate debt:
Credit Agreement................................................ $100,000 $ 50,000(1)
Senior Notes.................................................... 84,649 84,649
SIG Senior Notes................................................ 46,355 46,355
-------- -----------
Total corporate debt.................................... 231,004 181,004
Company obligated mandatorily redeemable capital securities of
subsidiary LLC holding solely junior subordinated deferrable
interest debentures of the Company(2)........................... -- 100,000
Shareholders' equity.............................................. 366,965 366,965
-------- -----------
Total capitalization.................................... $597,969 $ 647,969
Debt to total capitalization ratio................................ 38.6% 27.9%
======== ===========
</TABLE>
- ---------------
(1) Reflects the repayment of $50.0 million of indebtedness under the Credit
Agreement with a portion of the proceeds from the issuance of the Series A
Capital Securities.
(2) As described herein, the sole assets of Delphi Funding will be approximately
$103,093,000 principal amount of Series A Subordinated Debentures issued by
the Company to Delphi Funding. The Series A Subordinated Debentures will
bear interest at the rate of 9.31% per annum and will mature on March 25,
2027 (which date may be shortened to a date not earlier than March 25, 2012
in certain circumstances as described under "Certain Terms of Series A
Subordinated Debentures -- Conditional Right to Shorten Maturity or Redeem
upon a Tax Event"). The Company owns all of the Series A Common Securities
of Delphi Funding.
It is anticipated that Delphi Funding will not be subject to the reporting
requirements under the Exchange Act.
ACCOUNTING TREATMENT
For financial reporting purposes, Delphi Funding will be treated as a
subsidiary of the Company and, accordingly, the accounts of Delphi Funding will
be included in the consolidated financial statements of the Company. The Series
A Capital Securities will be presented as a separate line item in the
consolidated balance sheets of the Company under the caption "Company-obligated
mandatorily redeemable capital securities of subsidiary LLC holding solely
junior subordinated deferrable interest debentures of the Company" and
appropriate disclosures about the Series A Capital Securities, the Series A
Guarantee and the Series A Subordinated Debentures will be included in the notes
to the consolidated financial statements. For financial reporting purposes, the
Company will record Distributions payable on the Series A Capital Securities as
an expense in the consolidated statements of income.
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<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data of the Company set forth below for
each of the five years ended December 31, 1996, 1995, 1994, 1993 and 1992, were
derived from the audited consolidated financial statements incorporated herein
by reference. The data should be read in conjunction with the consolidated
financial statements, related notes and other financial information and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein and set forth in the Company's periodic reports
which are incorporated herein by reference.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Insurance premiums and policyholder fees:
Group employee benefit products............ $331,378 $257,079 $233,697 $206,587 $178,737
Annuities.................................. 2,122 2,121 1,716 6,285 3,086
Other insurance products(2)................ 1,733 1,702 13,099 22,047 21,065
Net investment income........................ 154,750 117,112 106,576 177,374 133,515
Net realized investment gains (losses)....... (2,651) 704 10,213 13,963 19,115
--------- --------- --------- --------- ---------
Total revenue......................... 487,332 378,718 365,301 426,256 355,518
Benefits and expenses........................ 387,713 314,549 315,407 335,685 298,416
--------- --------- --------- --------- ---------
Income from continuing operations before
interest and income tax expense............ 99,619 64,169 49,894 90,571 57,102
Interest expense............................. 18,269 13,257 12,252 17,720 19,949
Income tax expense........................... 27,496 18,170 11,698 26,098 12,513
--------- --------- --------- --------- ---------
Income from continuing operations............ $ 53,854 $ 32,742 $ 25,944 $ 46,753 $ 24,640
========= ========= ========= ========= =========
Net income(3)................................ $ 47,253 $ 30,464 $ 25,818 $ 34,746 $ 23,659
========= ========= ========= ========= =========
Ratio of earnings to fixed charges(4)........ 5.25x 4.60x 3.87x 4.93x 2.79x
========= ========= ========= ========= =========
PER SHARE DATA(5):
Income from continuing operations excluding
realized investment gains (losses)......... $ 2.97 $ 2.22 $ 1.33 $ 3.28 $ 1.36
Income from continuing operations............ $ 2.88 $ 2.25 $ 1.79 $ 3.64 $ 1.98
Net income(3)................................ $ 2.53 $ 2.10 $ 1.78 $ 2.70 $ 1.90
Fully diluted book value per share(6)(7)..... $18.84 $15.32 $11.72 $13.95 $10.56
Weighted average shares outstanding
(000's)(8)................................. 18,693 14,532 14,495 12,856 12,421
BALANCE SHEET DATA:
Total investments............................ $2,295,007 $1,791,531 $1,965,154 $2,041,774 $1,881,880
Total assets................................. 2,857,906 2,323,010 2,472,776 2,344,321 2,211,751
Long-term debt............................... 231,004 134,611 159,577 159,545 164,274
Shareholders' equity(7)...................... 366,965 222,815 170,382 200,968 129,046
OTHER DATA:
Group employee benefit products ratios(9):
Loss ratio................................. 70.0% 74.4% 74.3% 72.7% 70.6%
Expense ratio.............................. 26.7 24.5 23.5 26.1 26.0
---------- ---------- ---------- ---------- ----------
Combined ratio........................ 96.7% 98.9% 97.8% 98.8% 96.6%
========== ========== ========== ========== ==========
Debt to total capitalization ratio(10)....... 38.6% 37.7% 48.4% 44.3% 56.0%
Interest coverage ratio(11).................. 5.83x 4.84x 4.07x 5.11x 2.86x
Return on average equity(12)................. 18.5% 16.6% 10.4% 25.5% 15.2%
STATUTORY DATA(13):
Combined statutory operating results(14)..... 40,048 19,310 38,312 35,452 19,737
Combined adjusted statutory surplus(15)...... 367,586 202,001 188,530 174,999 161,716
</TABLE>
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<PAGE> 22
- ---------------
(1) Reflects the acquisition of excess workers' compensation business as a
result of the SIG Merger in March 1996.
(2) Amounts for 1994, 1993 and 1992 include individual life insurance business,
which the Company exited in July 1994. See Note N to the Consolidated
Financial Statements incorporated herein by reference.
(3) The Company discontinued its long-term care business in 1996 and recorded a
one-time after-tax charge of $5.8 million in 1996 attributable to this
discontinuance. After-tax operating losses on this business were $0.8
million, $2.3 million and $0.1 million for the years ended December 31,
1996, 1995 and 1994, respectively. Additionally, the Company has incurred
after-tax extraordinary losses associated with the early extinguishment of
debt. These losses totaled $12.0 million and $0.4 million for the years
ended December 31, 1993 and 1992, respectively. The Company also recognized
an after-tax charge of $0.6 million related to the cumulative effect of a
change in accounting for post-retirement benefits other than pensions in
the year ended December 31, 1992.
(4) In computing the ratio of earnings to fixed charges, fixed charges consist
of interest expense, including amortization of debt discount, and such
portion of rental expense as is estimated to be representative of the
interest factor, all on a pre-tax basis. Earnings are pre-tax income from
continuing operations, plus fixed charges.
(5) Prior periods have been restated to reflect the 20% stock dividend
distributed on September 30, 1996.
(6) Fully diluted book value per share is calculated by dividing shareholders'
equity, as increased by the proceeds of the assumed exercise of outstanding
stock options, by total shares outstanding, also increased by shares issued
upon the assumed exercise of the options.
(7) In 1994, the Company adopted the provisions of SFAS No. 115. See Note A to
the Consolidated Financial Statements incorporated herein by reference.
(8) Weighted average shares outstanding in 1996, 1995, 1994 and 1993 reflect
the issuance of 2.1 million shares of Class A Common Stock in October 1993.
(9) Loss ratio is the ratio of incurred claims and claim expenses to premium
earned. Expense ratio is the ratio of underwriting expenses to premiums
earned. Combined ratio is the sum of the expense ratio and the loss ratio.
A combined ratio under 100% generally indicates an underwriting profit and
a combined ratio over 100% generally indicates an underwriting loss. The
extent to which the combined ratio deviates from 100% indicates relative
underwriting profit or loss. The loss, expense and combined ratios for the
year ended December 31, 1996, excluding excess workers' compensation
business, were 72.9%, 24.8% and 97.7%, respectively.
(10) Total capitalization is the sum of the Company's long-term debt and
shareholders' equity. The debt to total capitalization ratio for 1996
giving pro forma effect to the issuance of the Series A Capital Securities
would be 27.9%.
(11) The interest coverage ratio is calculated by dividing income from
continuing operations before interest and income tax expense by interest
expense (which, for 1996, excludes interest paid in connection with the
settlement of prior-year federal income taxes).
(12) Return on average equity is calculated by dividing income from continuing
operations by average shareholders' equity, excluding from both the
numerator and the denominator realized investment gains and losses,
discontinued operations, extraordinary items and changes in accounting
principles, as determined as of the beginning and end of each year.
(13) Statutory accounting practices provide for the recording of transactions
and the preparing of financial statements in accordance with the rules and
procedures prescribed or permitted by statute or regulatory authorities.
Combined statutory data for 1996 includes $21.4 million of statutory
operating income and $139.8 million of statutory surplus for SNCC.
(14) Statutory operating results exclude net realized investment gains and
losses. The 1996 and 1995 statutory operating results include net losses of
$2.3 million and $4.2 million, respectively, attributable to the Company's
discontinued long-term care business. The statutory results for 1994
include a $12.5 million gain related to the Company exiting its individual
life insurance business.
(15) Adjusted statutory surplus is not reduced by AVR established by the
Company's life insurance subsidiaries. The AVR is a required formulaic
reserve for life companies under SAP for potential future credit-related
losses for fixed maturity securities and for potential future losses on
other categories of invested assets.
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the results of operations and financial
condition of the Company. This analysis should be read in conjunction with the
Consolidated Financial Statements and related notes set forth in the Company's
periodic reports incorporated herein by reference.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Insurance Premiums and Policyholder Fees. Insurance premiums and
policyholder fees in 1996 were $335.2 million as compared to $260.9 million in
1995, an increase of 28%. Contributing to this increase was $56.2 million in
premiums from the Company's excess workers' compensation business which was
acquired as a result of the SIG Merger. Also contributing to the increase was
growth in premiums from the Company's other group employee benefit products,
including the impact of certain price increases, growth and development of the
Company's sales force and normal growth in employment and salary levels for the
Company's existing customer base. Deposits from the Company's SPDA products,
including the Company's new MVA product, which it began marketing in the fall of
1995, were $57.5 million during 1996 as compared to $11.4 million in 1995.
Deposits for the Company's asset accumulation products, which are long-term in
nature, are not recorded as premiums; instead, the deposits are recorded as a
liability.
Net Investment Income. Net investment income in 1996 was $154.8 million as
compared to $117.1 million in 1995, an increase of 32%. The increase is
principally due to an increase in average invested assets as a result of the SIG
Merger. The weighted average annual yield on invested assets, excluding realized
and unrealized investment gains and losses, was 8.5% on average invested assets
of $1,823.2 million and 8.3% on average invested assets of $1,417.5 million in
1996 and 1995, respectively.
Net Realized Investment (Losses) Gains. Net realized investment losses
were $2.7 million in 1996 as compared to net realized investment gains of $0.7
million in 1995. The Company's investment strategy results in periodic sales of
securities and the recognition of realized investment gains and losses arising
from those sales.
Benefits and Expenses. Policyholder benefits and expenses in 1996 were
$387.7 million as compared to $314.5 million in 1995, an increase of 23%. During
1996, benefits and expenses for group employee benefit products increased by
$66.2 million as compared to 1995. Of this increase, $51.7 million was
attributable to the Company's excess workers' compensation business which was
acquired as a result of the SIG Merger. The remaining increase was primarily
attributable to growth in the Company's other group employee benefit product
lines. The combined ratio for group insurance lines, excluding excess workers'
compensation insurance, decreased from 98.9% in 1995 to 97.7% in 1996. This
decrease reflects the impact of certain price increases and the expansion of the
Company's loss management capabilities during 1995. Amortization of cost of
business acquired related to asset accumulation products was accelerated by $4.8
million during 1996 primarily due to better than anticipated investment results.
Benefits and interest credited on asset accumulation products decreased by $4.0
million in 1996 as compared to 1995, principally due to the scheduled maturities
during 1995 of guaranteed investment contracts with crediting rates that were
generally higher than the Company's other asset accumulation products. Primarily
due to these maturities, average funds under management decreased by $87.1
million and the weighted average annual crediting rate on asset accumulation
products declined from 5.6% to 5.2%.
Operating Income. Income from continuing operations before interest and
taxes in 1996 was $99.6 million as compared to $64.2 million in 1995, an
increase of 55%. The increase was primarily due to the acquisition of the excess
workers' compensation business through the SIG Merger, partially offset by net
realized investment losses in 1996.
S-23
<PAGE> 24
Interest Expense. Interest expense in 1996 was $18.3 million as compared
to $13.3 million in 1995. The increase was primarily due to interest expense on
the SIG Senior Notes, which were assumed in conjunction with the SIG Merger, and
additional borrowings under the Credit Agreement in 1996 to fund the SIG Merger
partially offset by a decline in the weighted average borrowing rate on the
Credit Agreement. Also contributing to the increase was interest paid in 1996 in
connection with the settlement of prior-year federal income taxes.
Income Taxes. Income tax expense in 1996 was $27.5 million as compared to
$18.2 million in 1995. The increase was primarily due to the $35.4 million
increase in operating income partially offset by a decrease in the effective tax
rate from 35.7% in 1995 to 33.8% in 1996 due to an increase in tax-exempt
interest earned during 1996.
Discontinued Operations. The Company recorded the discontinuance of its
long-term care insurance business in 1996. Operating losses on this business
totaled $0.8 million and $2.3 million, net of a tax benefit of $0.4 million and
$1.2 million, in 1996 and 1995, respectively. The Company also recorded a
one-time charge in 1996 of $5.8 million, net of a tax benefit of $3.2 million,
as a result of the discontinuance of this business.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Insurance Premiums and Policyholder Fees. Insurance premiums and
policyholder fees in 1995 were $260.9 million as compared to $248.5 million in
1994, an increase of 5%. Premiums from group employee benefits products
increased $23.4 million, an increase of 10%. Contributing to the increase in
premiums was the growth and development of the Company's sales force, normal
growth in employment and salary levels for the Company's existing customer base
and certain price increases. The Company had virtually no premium from
individual insurance during 1995 due to the 100% reinsurance of this business
effective July 1, 1994, while 1994 reflected premiums of $13.1 million. See Note
N to the Consolidated Financial Statements incorporated herein by reference.
Net Investment Income. Net investment income in 1995 was $117.1 million as
compared to $106.6 million in 1994, an increase of 10%. The weighted average
annual yield on invested assets, excluding realized and unrealized investment
gains and losses, was 8.3% on average invested assets of $1,417.5 million and
6.6% on average invested assets of $1,625.2 million in 1995 and 1994,
respectively. The increase in yield was primarily due to improved performance by
the Company's independent investment manager program and its trading account
securities. The impact of the increase in yield was partially offset by a
decrease in average invested assets principally due to policy maturities and
surrenders and the asset transfer associated with the reinsurance of the
Company's individual life insurance business.
Net Realized Investment Gains. Net realized investment gains were $0.7
million in 1995 as compared to $10.2 million in 1994. The Company's investment
strategy results in periodic sales of securities and the recognition of realized
investment gains and losses arising from those sales.
Benefits and Expenses. Policyholder benefits and expenses in 1995 were
$314.5 million as compared to $315.4 million in 1994. Benefits and expenses
related to the Company's individual insurance business, which was 100% reinsured
effective July 1, 1994, decreased $17.2 million in 1995 as compared to the same
period in 1994. Benefits and interest credited on asset accumulation products
decreased by $12.9 million. The primary cause of the decrease was a decline in
average funds under management of $201.3 million in 1995 as compared to 1994 due
to policy maturities and surrenders. The weighted average annual crediting rate
on asset accumulation products was 5.6% in 1995 and 1994. Amortization of cost
of business acquired related to asset accumulation products increased by $2.5
million during 1995 due to an increase in the difference between investment
yields and credited rates. During 1995, benefits and expenses for group employee
benefit products increased by $25.7 million as compared to 1994, primarily due
to premium growth in these product lines. The combined ratio (loss ratio plus
expense ratio) for group employee benefit products was 98.9% for the year ended
December 31, 1995 as compared to 97.8% for 1994. The increase in the
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<PAGE> 25
combined ratio was primarily due to an increase in expenses related to the
expansion of the Company's loss management capabilities.
Operating Income. Income from continuing operations before interest and
taxes in 1995 was $64.2 million as compared to $49.9 million for 1994, an
increase of 29%. The increase was primarily due to an increase in the weighted
average annual yield on invested assets. Partially offsetting this increase in
operating income was a decrease in realized investment gains.
Interest Expense. Interest expense for 1995 was $13.3 million as compared
to $12.3 million for 1994, an increase of 8%. Interest on the $85.0 million
Senior Notes was unchanged. Short-term interest rates, which affect the floating
interest rate payable under the Credit Agreement, declined during the year;
however, on average, they were more than 100 basis points higher than the
previous year.
Income Taxes. Income tax expense in 1995 was $18.2 million as compared to
$11.7 million in 1994. The increase was primarily due to the $14.3 million
increase in operating income partially offset by an increase in the effective
tax rate to 35.7% in 1995 as compared to 31.1% for 1994, which includes an
adjustment for a one-time tax recovery.
Discontinued Operations. The operating loss from the Company's
discontinued long-term care insurance business for 1995 was $2.3 million as
compared to $0.1 million for 1994. This business, which was discontinued in
1996, was acquired in December 1994.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company had approximately $117.2 million of financial
resources available at the holding company level at December 31, 1996, which are
primarily comprised of investments in the common stock of its non-insurance
subsidiaries. The assets of these non-insurance subsidiaries are primarily
invested in balances with independent investment managers and marketable
securities. Substantially all of the amounts invested with independent
investment managers are withdrawable at least annually, subject to applicable
notice requirements. A shelf registration is also in effect under which up to
$49.2 million in securities may be issued by the Company (after giving effect to
the offering being made hereby).
Other sources of liquidity at the holding company level include interest
and principal payments made on the Surplus Debenture issued by RSLIC-Texas to
the Company, dividends paid from insurance subsidiaries, primarily generated
from operating cash flows and investments, and borrowings available under the
Credit Agreement. At December 31, 1996, the unpaid principal balance of the
Surplus Debenture, which is payable in quarterly installments through December
31, 1999, was $58.0 million. RSLIC-Texas generates less than 1% of the Company's
premiums, policyholder fees and deposits; therefore, payments on the Surplus
Debenture are generally funded by dividend payments made by RSLIC to
RSLIC-Texas. These dividends are subject to regulatory restrictions and, in the
absence of regulatory approval, are generally limited within any 12-month
period, in the aggregate, to the greater of RSLIC's statutory net income for the
preceding calendar year, or 10% of RSLIC's statutory surplus as of the preceding
December 31, determined in accordance with state regulations. RSLIC will be
permitted to make dividend payments of $23.2 million during 1997 without prior
regulatory approval. SNCC's ability to pay dividends is subject to regulatory
and certain other contractual restrictions and, in the absence of the requisite
approvals, dividends are generally limited within any 12-month period, in the
aggregate, to the lesser of 10% of SNCC's statutory surplus as of the preceding
December 31, or SNCC's statutory net investment income for the preceding
calendar year, determined in accordance with state regulations. SNCC will be
permitted to make dividend payments totaling $14.0 million during 1997 without
prior approval. Additional dividends may also be paid by RSLIC and SNCC with the
requisite approvals. See "Business -- Regulation." The Credit Agreement permits
the Company to borrow up to $200.0 million at any one time. Of the unused
portion of the facility, $54.0 million is restricted for use in connection with,
among other things, acquisitions or the redemption of the SIG Senior Notes.
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<PAGE> 26
The Company's current liquidity needs, in addition to funding operating
expenses, include principal and interest payments on outstanding borrowings
under the Credit Agreement, the Senior Notes and the SIG Senior Notes. Beginning
in 1999, the maximum amount available to the Company under the Credit Agreement
will be reduced on October 1 of each year with the balance due on April 1, 2003.
At the Company's current level of borrowing, no principal repayments would be
required until October 1, 2002. The Senior Notes mature in their entirety on
October 1, 2003 and are not subject to any sinking fund requirements nor are
they redeemable prior to maturity. The SIG Senior Notes amortize in $9.0 million
annual installments beginning in May 1999. See Note F to the Consolidated
Financial Statements incorporated herein by reference.
Indebtedness under the Credit Agreement is subject to certain restrictions
and financial covenants considered ordinary for this type of borrowing,
including, among others, the maintenance of certain financial ratios, minimum
statutory surplus requirements for RSLIC and SNCC, minimum consolidated equity
requirements for the Company and certain investment and dividend limitations.
The indenture pursuant to which the Senior Notes were issued contain certain
covenants and restrictions which set forth, among other things, limitations on
incurrence of indebtedness by the Company, limitations on payments of dividends
on and repurchases of stock of Delphi and limitations on transactions with
stockholders and affiliates. The note agreement pursuant to which the SIG Senior
Notes were issued contains certain covenants which set forth, among other
things, minimum statutory surplus requirements for SNCC, minimum consolidated
equity requirements for SIG, as well as the maintenance of certain financial
ratios. As of December 31, 1996, the Company was in compliance in all material
respects with all restrictions and covenants in the Credit Agreement and the
Senior Notes, and SIG was in compliance in all material respects with all
restrictions and covenants in the SIG Senior Notes. See Annex 1 for a
description of certain of these restrictions and covenants.
The Company actively pursues acquisitions of blocks of business and
insurance and financial services companies that complement or may otherwise be
strategically consistent with its existing business. The Company routinely
engages in discussions with respect to certain potential transactions, any of
which could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only
basis, including the undistributed earnings of its subsidiaries, scheduled
payments under the Surplus Debenture and additional borrowings available under
the Credit Agreement, are expected to exceed the Company's cash requirements for
1997.
The principal liquidity requirements of the Company's insurance
subsidiaries are, in the cases of RSLIC, FRSLIC and SNCC, their contractual
obligations to policyholders and contractholders, and in the case of
RSLIC-Texas, its payments to the Company on the Surplus Debenture. The primary
sources of funding for these obligations, in addition to operating earnings, are
the marketable investments included in the investment portfolios of RSLIC,
FRSLIC and SNCC. The Company believes that these sources of funding will be
adequate for its insurance subsidiaries to satisfy on both a short-term and
long-term basis these contractual obligations throughout their estimated or
stated period.
Operating activities increased cash and cash equivalents by $97.8 million
during 1996. Net investing activities provided $101.0 million of cash during
1996, primarily due to sales of securities and net cash acquired as a result of
the SIG Merger. Financing activities used $125.8 million of cash during 1996,
principally to reduce reverse repurchase agreement liabilities, offset by
additional borrowings under the Credit Agreement to fund the cash consideration
associated with the SIG Merger.
The Company recorded the discontinuance of its long-term care insurance
business in 1996. This is expected to be accomplished by means of a sale, which
is intended to be consummated by mid-1997. This business was purchased in
December 1994 and was expected to become a significant part of the Company's
operations. The Company exited this business due to its continued
S-26
<PAGE> 27
losses attributable to lower than expected sales and profit levels and decided
to concentrate its resources on other opportunities such as product and
distribution enhancements for the Company's group employee benefit products. The
discontinuance of this business is not expected to have a material effect on the
Company's financial condition or liquidity in the future.
Investments. The Company's overall investment strategy to achieve its
objectives of safety and liquidity, while seeking the best available return,
focuses on, among other things, managing the durations of the Company's
interest-sensitive assets and liabilities and minimizing the Company's exposure
to fluctuations in interest rates. The Company has de-emphasized the use of
reverse repurchase agreements and has reduced its liabilities under these
agreements from $202.5 million at December 31, 1995 to $50.2 million at December
31, 1996. The Company's investment portfolio primarily consists of investments
in fixed maturity securities. The weighted average credit rating of the
Company's fixed maturity portfolio as rated by S&P was "AA" at December 31,
1996. While the investment grade rating of the Company's fixed maturity
portfolio addresses credit risk, it does not address other risks, such as
prepayment and extension risks, which are discussed below.
During the year ended December 31, 1996, the Company's investments in
mortgage-backed securities decreased to 36% of total invested assets, or $819.8
million, as compared to 63% of total invested assets, or $1,133.5 million, at
December 31, 1995. This decrease resulted from the sale of $296.3 million of
mortgage-backed securities and the acquisition of SIG's investment portfolio,
which totaled $556.3 million at December 31, 1996. Approximately 35% of the
Company's mortgage-backed securities are guaranteed by U.S. Government sponsored
entities as to the full amount of principal and interest. The remaining 65% of
the mortgage-backed portfolio consists of investments in trusts created by banks
and finance and mortgage companies. Ninety-nine percent of the Company's
mortgage-backed securities portfolio, based on fair value, have been rated as
investment grade by nationally recognized statistical rating organizations. The
single largest investment in mortgage-backed securities backed by a single
mortgage pool totaled $50.7 million, or 2% of total invested assets, at December
31, 1996. The Company's holdings include certain privately placed
mortgage-backed securities, the fair value of which totaled $121.8 million at
December 31, 1996. Although there is an additional degree of liquidity risk
associated with privately placed securities, the Company believes that, if
necessary, it could liquidate all or a portion of its investments in these
securities in a timely manner at or close to market value. The Company has not
experienced any material write-downs in its mortgage-backed portfolio.
Mortgage-backed securities subject the Company to a degree of interest rate
risk, including prepayment and extension risk, which is generally a function of
the sensitivity of each security's underlying collateral to prepayments under
varying interest rate environments and the repayment priority of the securities
in the particular securitization structure. The Company seeks to limit the
extent of this risk by emphasizing the more predictable payment classes and
securities with stable collateral. In addition, the Company has developed a
hedging program to assist it in managing the duration of its mortgage-backed
securities. The hedging program utilizes short positions in U.S. Treasury
futures contracts to reduce the Company's interest rate risk, effectively
shortening the duration of the Company's mortgage-backed securities. At December
31, 1996, the Company maintained mortgage-backed securities with a weighted
average duration of 4.9 years, after giving effect to hedging activities, in
line with the duration of its interest sensitive liabilities. The duration of
the Company's mortgage-backed securities without the hedging instruments was
approximately 5.6 years. At December 31, 1996, realized losses on closed futures
positions totaling $23.9 million and unrealized gains on open futures positions
totaling $1.4 million have been deferred and recorded as adjustments to the
amortized cost of the mortgage-backed securities being hedged and will be
amortized into investment income over the expected term of the securities being
hedged.
The Company has also developed a hedging program to reduce the interest
rate risk associated with its municipal securities portfolio. This hedging
program utilizes short positions in U.S. Treasury futures contracts and limits
the interest rate risk associated with its investments in trusts comprised of
municipal securities. The short futures contracts hedging these securities have
a net deferred
S-27
<PAGE> 28
realized loss on closed positions of $4.9 million and an unrealized gain on open
positions of $1.8 million which have been recorded as adjustments to the
amortized cost of the municipal securities being hedged and will be amortized
into investment income over the expected term of the securities being hedged.
The Company maintains an investment program in which securities have been
financed using advances from the Federal Home Loan Bank of Pittsburgh ("FHLB").
The Company has utilized this program to manage the duration of its liabilities
and to earn spread income, which is the difference between the financing cost
and the earnings from the securities purchased with those funds. The advances
from the FHLB, which are at a fixed rate, had an average term to maturity of 3.8
years. This program requires the Company to maintain securities on deposit with
the FHLB as collateral for the advances outstanding. As the fair value of those
securities increases or decreases, the Company may be allowed to retake
possession of securities or be required to deposit additional securities.
The ability of the Company's insurance subsidiaries to make investments is
subject to the insurance laws and regulations of their respective state of
domicile. Each of these states has comprehensive investment regulations. In
addition, the Credit Agreement and, as to SNCC, the SIG Senior Notes also
contain limitations, with which the Company is currently in compliance in all
material respects, on the composition of the Company's investment portfolio. The
Company also continually monitors its investment portfolio and attempts to
ensure that the risks associated with concentrations of investments in either a
particular sector of the market or a single entity are limited.
Asset/Liability Management. A significant aspect of the Company's
continued profitability is its ability to manage risks associated with
interest-sensitive assets and liabilities. The Company prices its annuity
products based on assumptions concerning prevailing and expected interest rates
and other factors to achieve a positive difference, or spread, between its
expected return on investments and the crediting rate. The Company achieves this
spread by active portfolio management focusing on matching the durations of
invested assets and related liabilities to minimize the exposure to fluctuations
in interest rates and by the adjustment of the crediting rate on annuity
products. The results of this asset/liability matching are analyzed periodically
through cash flow analysis under multiple interest rate scenarios. The Company
believes that it will continue to achieve a positive spread and that the amount
of lapses and surrender rates will remain consistent with those assumed in the
pricing of the products.
S-28
<PAGE> 29
BUSINESS
DFG is an insurance holding company engaged through its subsidiaries in
offering a diverse portfolio of group employee benefit products including life,
disability, excess workers' compensation and personal accident insurance. The
Company also offers asset accumulation products, primarily annuities, to
individuals and groups. The Company's two product categories are group employee
benefit products and asset accumulation products. The Company offers its
insurance products in all fifty states and the District of Columbia.
Pennsylvania, New Jersey, Illinois, California, Florida and New York
collectively accounted for approximately 48% of the Company's direct written
premiums determined in accordance with SAP, with no state representing more than
approximately 11% of these premiums for the year ended December 31, 1996.
GROUP EMPLOYEE BENEFIT PRODUCTS
The Company emphasizes the origination of specialty insurance products
directed to the employee benefits market, primarily group life, disability,
excess workers' compensation and personal accident insurance. The Company also
offers group dental insurance. The Company markets its group products to
employer-employee groups and associations in a variety of industries. The
Company insures groups ranging from 10 to more than 1,000 individuals, although
the average size of insured groups currently ranges from 100 to 300 individuals.
In underwriting its group employee benefit products, the Company attempts to
avoid concentrations of business in any industry segment or geographic area.
The following table sets forth, for the periods indicated, selected
financial and statistical data concerning the Company's group employee benefit
products:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Insurance premiums:
Life...................................... $ 135,806 $ 127,760 $ 115,450
Disability income......................... 92,024 85,849 80,666
Excess workers' compensation(1)........... 56,200 -- --
Personal accident and other............... 47,348 43,470 37,581
----------- ----------- -----------
Total insurance premiums.......... $ 331,378 $ 257,079 $ 233,697
=========== =========== ===========
Group life insurance policy data:
Group life insurance in force:
Balance, beginning of period........... $43,468,174 $45,547,840 $37,337,683
Sales.................................. 6,969,825 6,412,543 4,805,923
Lapses................................. (8,201,918) (8,430,816) (4,754,623)
Other increases (decreases)(2)......... 6,920,549 (61,393) 8,158,857
----------- ----------- -----------
Balance, end of period................. $49,156,630 $43,468,174 $45,547,840
=========== =========== ===========
Policy count.............................. 6,976 6,652 6,274
</TABLE>
- ---------------
(1) Excess workers' compensation business was acquired as a result of the SIG
Merger.
(2) Represents net increases (decreases) due to changes in the face amounts of
policies issued.
S-29
<PAGE> 30
The profitability of group employee benefit products is affected by, among
other things, differences between actual and projected claims experience and the
ability to control administrative expenses. The table below sets forth for the
periods indicated the loss and expense ratios as a percent of premium income for
the Company's group employee benefit products.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loss ratio............................................................. 70.0% 74.4% 74.3%
Expense ratio.......................................................... 26.7 24.5 23.5
---- ---- ----
Combined ratio....................................................... 96.7% 98.9% 97.8%
==== ==== ====
</TABLE>
The loss, expense and combined ratios for the year ended December 31, 1996,
excluding excess workers' compensation business, were 72.9%, 24.8% and 97.7%,
respectively.
The Company's group life insurance products, which include voluntary group
term life, provide for the payment of a stated amount upon the death of a member
of the insured group and policy terms are generally one year. Accidental death
and dismemberment insurance, which provides for the payment of a stated amount
upon the accidental death or dismemberment of a member of the insured group, is
frequently sold in conjunction with group life policies and is included in
premiums charged for group life insurance. The Company reinsures risks in excess
of $150,000 per individual for employer provided group life insurance policies
and $100,000 for voluntary group term life policies under indemnity reinsurance
arrangements with various reinsurance companies. See "Reinsurance."
Group disability products offered by the Company, principally long-term
disability insurance, generally provide a specified level of benefits to persons
who, because of sickness or injury, are unable to work for a specified period of
time. The Company focuses group long-term disability sales toward employers
engaged principally in service industries such as accounting, architecture and
engineering, as well as certain retailing and manufacturing fields. Long-term
disability benefits generally are paid monthly and typically are limited for any
one employee to two-thirds of the employee's earned income up to a specified
maximum benefit. The Company actively manages its disability claims, working
with claimants to help them return to work as quickly as possible. When
insureds' disabilities prevent them from returning to their original jobs, the
Company, in appropriate cases, provides assistance in developing new productive
skills for an alternative career. Premiums are generally determined annually for
disability insurance and are based upon expected morbidity and emerging
experience of the insured group, as well as assumptions regarding operating
expenses and future interest rates. The Company reinsures risks in excess of
$2,500 per individual per month under an indemnity reinsurance arrangement. See
"-- Reinsurance."
The Company's excess workers' compensation business was acquired in March
1996 as a result of the SIG Merger. This product provides coverage to employers
and groups who self-insure their workers' compensation risks. The coverage
applies to losses in excess of the applicable self-insured retentions ("SIRs" or
deductibles) of employers and groups, whose workers' compensation claims are
generally handled by TPAs. This product is principally targeted to mid-sized
companies and association groups, particularly small municipalities, hospitals
and schools. These companies and groups tend to be less prone to catastrophic
workers' compensation exposures and less price sensitive than larger account
business. Because claim payments do not begin until after the SIR is met, it
takes an average of 13 years from the date the claim is incurred to the time
claim payments begin. At that point, the payments are primarily for wage
replacement, similar to the benefit provided under disability coverage. Medical
payments, if any, tend to be stable and predictable. The Company reinsures risks
between $500,000 and $50.0 million per policy per occurrence. See
"-- Reinsurance."
S-30
<PAGE> 31
The Company's personal accident insurance products include business travel
and "all risk" accidental death and dismemberment insurance. These policies pay
a stated amount based on a predetermined schedule in the event of accidental
dismemberment or death of a member of the insured group. The Company reinsures
risks in excess of $150,000 per individual under indemnity reinsurance
arrangements with pools of reinsurers through managing reinsurance underwriters.
In addition, under a catastrophe reinsurance agreement, the amount of the
Company's loss arising from any one occurrence is limited to $500,000. See
"-- Reinsurance."
The Company's group employee benefit products are sold primarily by
independent brokers, agents and TPAs. The Company's home offices and 25 regional
offices provide sales support and service existing business. The Company
believes that its regional sales network minimizes expenses traditionally
associated with large insurance company captive marketing systems.
ASSET ACCUMULATION PRODUCTS
The Company's asset accumulation products consist primarily of annuity
products, principally SPDAs and FPAs. The Company consummated five separate
annuity block acquisitions between 1988 and 1992 that resulted in the assumption
of $967.1 million in liabilities in the form of policyholder account balances.
The first acquisition was an assumption reinsurance transaction, and the others
were indemnity reinsurance transactions. In the case of each acquisition, assets
supporting the related reserves were transferred to, and are managed by, the
Company. Pursuant to the assumption reinsurance acquisition, the Company has the
right to establish the crediting rate with respect to the business acquired. The
Company has the right under each indemnity reinsurance transaction to recommend
to the ceding company crediting rates with respect to the business acquired. The
ceding company is solely responsible for payment of crediting rates to the
extent that these rates exceed the greater of the recommended rate and certain
benchmark rates. A substantial portion of the Company's profitability on asset
accumulation products is generated from spread income, which is the difference
between the net yield achieved on invested assets and the interest credited on
policyholder account balances. As a result of the Company's ability to recommend
increases or decreases to applicable crediting rates annually, it believes that
it can manage the spread income on the annuity business acquired. The aggregate
lapse rates experienced on the annuity acquisitions have been consistent with
the levels assumed in pricing the transactions and consequently have not
adversely affected the Company's liquidity or results of operations.
In the fall of 1995, the Company began to market its new SPDA annuity
products, including an MVA annuity product that provides for an adjustment to
the accumulated value of the policy if it is surrendered during the surrender
charge period. These new products are sold predominantly through networks of
independent agents. For the year ended December 31, 1996, these new products
accounted for $57.5 million of asset accumulation product deposits, of which
$45.5 million was attributable to the new MVA annuity product. One network of
independent agents accounted for approximately 75% of the deposits from these
new products during 1996. The Company believes that it has a good relationship
with this network.
S-31
<PAGE> 32
The following table sets forth for the periods indicated selected financial
and statistical data concerning the Company's asset accumulation products:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Asset accumulation product deposits:
Annuities....................................... $ 59,460 $ 13,580 $ 7,142
GICs(1)......................................... -- -- 1,250
-------- -------- --------
Total asset accumulation product
deposits.............................. $ 59,460 $ 13,580 $ 8,392
======== ======== ========
Policy count...................................... 37,288 38,119 40,818
Funds under management (at period end):
Annuities....................................... $689,952 $695,737 $773,300
GICs(1)......................................... 1,046 18,997 117,061
-------- -------- --------
Total funds under management............ $690,998 $714,734 $890,361
======== ======== ========
</TABLE>
- ---------------
(1) The Company no longer actively markets its GIC product and the remaining
contract matures in 1998.
An SPDA provides for a single payment by an annuity holder to the Company,
and the payment of interest by the Company at the applicable crediting rate. An
FPA provides for periodic payments by an annuity holder to the Company, the
timing and amount of which are at the discretion of the annuity holder, and the
payment of interest by the Company at the applicable crediting rate. Interest
credited on SPDAs and FPAs is not paid currently to the annuity holder but
instead accumulates and is added to the annuity holder's account value. This
accumulation is tax deferred. The crediting rate may be increased or decreased
by the Company annually, typically on the policy anniversary, subject to
specified guaranteed minimum crediting rates. Minimum guaranteed crediting rates
currently range from 3.0% to 5.5%. Withdrawals may be made at any time, but some
withdrawals may result in the assessment of surrender charges, market value
adjustments, taxes, and/or tax penalties on the withdrawn amount.
At December 31, 1996, annuity liabilities were composed of $492.6 million
of SPDA liabilities and $197.4 million of FPA liabilities, for a total of $690.0
million of annuity liabilities with a weighted average crediting rate of 5.4%.
Of these liabilities, $194.8 million were subject to surrender charges averaging
7.3% at December 31, 1996. Annuity liabilities not subject to surrender charges
have been in force, on average, for 15 years.
The Company prices its annuity products based on assumptions concerning
prevailing and expected interest rates and other factors to achieve a positive
difference, or spread, between its expected return on investments and the
crediting rate. The Company achieves this spread by active portfolio management
focusing on matching the durations of invested assets and related liabilities to
minimize the exposure to fluctuations in market interest rates and by the
adjustment of the crediting rate on its annuity products. In response to changes
in interest rates, the Company increases or decreases the crediting rates on its
annuity products. Although the Company believes that these strategies will
continue to permit it to achieve a positive spread, a significant decline in the
yield on the Company's investments could adversely affect the results of
operations and financial condition of the Company.
In light of the annuity holder's ability to withdraw funds and the
volatility of market interest rates, it is difficult to predict the timing of
the Company's payment obligations under its SPDAs and FPAs. Consequently, the
Company maintains a portfolio of investments which are readily marketable and
sufficient in management's judgment to satisfy liquidity requirements. See
"-- Investments."
S-32
<PAGE> 33
VARIABLE LIFE INSURANCE PRODUCTS
In 1991, the Company introduced a variable flexible premium universal life
insurance policy under which the related assets are segregated in a separate
account not subject to claims of general creditors of the Company. Policyholders
may elect to deposit amounts in the account from time to time, subject to
underwriting limits and a minimum initial deposit of $1.0 million. At December
31, 1996, these deposits, excluding the Company's deposit, totaled $71.9
million. Pursuant to the investment option that is available to policyholders,
the assets of the separate account have been invested with independent
investment managers employing a variety of diversified investment strategies.
Both the cash values and death benefits of these policies fluctuate according to
the investment experience of the assets in the separate account; accordingly,
the investment risk with respect to these assets is borne by the policyholders
and any adverse investment experience with respect to these investments would
not have a material adverse effect on the Company's results of operations and
financial condition. The Company earns fee income from the separate account in
the form of charges for management and other administrative fees. The Company
reinsures risks in excess of $200,000 per individual under indemnity reinsurance
arrangements with various reinsurance companies. See "-- Reinsurance."
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based in part on assumptions
about the incidence and timing of insurance claims. The Company has adopted and
follows detailed underwriting procedures designed to assess and qualify
insurance risks before issuing policies to groups and individuals. To implement
these procedures, the Company employs a professional underwriting staff.
In underwriting group coverage, the Company focuses on the risk
characteristics of the group to be insured as a whole. A prospective group is
evaluated with particular attention paid to the claims experience of the group
with prior carriers, the occupations of the insureds, the nature of the business
of the group, the current economic outlook of the group in relation to others in
its industry and of the industry as a whole, the appropriateness of the benefits
or SIR applied for and income from other sources during disability. The
Company's policies generally afford it the flexibility to adjust premiums
charged annually to its policyholders in order to reflect emerging mortality or
morbidity experience.
INVESTMENTS
The Company's management of its investment portfolio is an important
component of its profitability since a substantial portion of its operating
income is generated from the difference between the yield achieved on invested
assets and the interest credited on policyholder funds and reserves. The
Company's overall investment strategy to achieve its objectives of safety and
liquidity, while seeking the best available return, focuses on, among other
things, managing the durations of the Company's interest-sensitive assets and
liabilities and minimizing the Company's exposure to fluctuations in interest
rates.
At December 31, 1996, the Company's invested assets had an aggregate
carrying value of $2,295.0 million. At December 31, 1996, 1995 and 1994, the
Company's fixed maturity portfolio (including cash, cash equivalents and
short-term investments), which represented 86.3%, 87.7% and 85.1%, respectively,
of the Company's invested assets, had weighted average durations of 4.9 years,
3.9 years and 3.1 years, respectively, after giving effect to hedging
activities. The extension in duration of the fixed portfolio in 1996 is related
to the acquisition of long-duration insurance liabilities as a result of the SIG
Merger.
S-33
<PAGE> 34
The following table sets forth at the dates indicated the carrying value of
the Company's investment portfolio. For information regarding the composition
and diversification of the Company's investment portfolio, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources-Investments" included herein and
Notes A, C, D, J and O of the Notes to the Consolidated Financial Statements
incorporated herein by reference.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities:
Available for sale:
U.S. Government backed mortgage-backed
securities.................................. $ 289,460 $ 363,365 $ 265,868
Other mortgage-backed securities.............. 530,341 770,174 661,830
U.S. Treasury and other U.S. Government
guaranteed securities....................... 692,313 176,526 136,883
Obligations of U.S. states, municipalities and
political subdivisions...................... 218,092 59,865 50,744
Corporate securities.......................... 129,038 136,060 95,965
Other fixed maturity securities............... 32,268 48,293 4,587
---------- ---------- ----------
Total available for sale................. 1,891,512 1,554,283 1,215,877
---------- ---------- ----------
Held to maturity:
U.S. Government backed mortgage-backed
securities.................................. -- -- 235,167
Other mortgage-backed securities.............. -- -- 155,374
U.S. Treasury and other U.S. Government
guaranteed securities....................... -- -- 64,290
---------- ---------- ----------
Total held to maturity................... -- -- 454,831
---------- ---------- ----------
Total fixed maturity securities.......... 1,891,512 1,554,283 1,670,708
Equity securities.................................. 74,018 27,949 14,049
Cash and cash equivalents.......................... 89,711 16,685 1,443
Other investments.................................. 239,766 192,614 278,954
---------- ---------- ----------
Total investments........................ $2,295,007 $1,791,531 $1,965,154
========== ========== ==========
</TABLE>
The following table sets forth for the periods indicated the pretax
investment results of the Company's investment portfolio:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average investments(1)(2).................. $1,823,223 $1,417,472 $1,625,179
Net investment income(2)(3)................ 154,750 117,112 106,576
Weighted average annual yield(4)........... 8.5% 8.3% 6.6%
Net realized investment (losses) gains..... $ (2,651) $ 704 $ 10,213
</TABLE>
- ---------------
(1) Average investments are computed by dividing the total of the amortized
cost of investments at the beginning of the period reduced by advances from
the FHLB, reverse repurchase agreement liabilities and short securities
positions plus the individual quarter-end balances by five and deducting
one-half of net investment income.
(2) The increases in 1996 reflect the impact of the SIG Merger.
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<PAGE> 35
(3) Consists principally of interest and dividend income less investment
expenses.
(4) The weighted average annual yield on the Company's investment portfolio for
each period is computed by dividing net investment income (exclusive of
realized and unrealized gains and losses) by average investments for the
period. See "Delphi Financial Group, Inc." for a discussion regarding the
calculation of the weighted average annual yield.
REINSURANCE
The Company participates in various reinsurance arrangements both as the
ceding insurer and as the assuming insurer. Arrangements in which the Company is
the ceding insurer afford various levels of protection against excessive loss by
assisting the Company in diversifying its risks and by limiting its maximum loss
on risks that exceed retention limits. Under indemnity reinsurance transactions
in which the Company is the ceding reinsurer, the Company is exposed to a degree
of risk if the assuming company becomes insolvent. To limit this risk, the
Company reevaluates each of these reinsurance arrangements on a periodic basis
focusing principally on the ratings and claims-paying abilities of the
respective reinsurers.
The Company cedes portions of the risks relating to its group employee
benefit and variable life insurance products under indemnity reinsurance
agreements with various unaffiliated reinsurers. The terms of these agreements,
which are typical for agreements of this type, provide, among other things, for
the automatic acceptance by the reinsurer of ceded risks in excess of the
Company's retention limits stated in the agreements. The Company pays
reinsurance premiums to these reinsurers which are, in general, based upon
percentages of premiums received by the Company on the business reinsured less,
in certain cases, ceding commissions and experience refunds paid by the
reinsurer to the Company. These agreements are generally terminable at any time
as to new risks by either the Company or the reinsurer on appropriate notice;
however, termination does not affect risks ceded during the term of the
agreement, which generally remain with the reinsurer, subject, in certain cases,
to specified rights on the part of the Company to recapture these risks. All of
the Company's significant reinsurers are rated "A-" (Excellent) or higher by
A.M. Best. See Notes D and N of the Notes to the Consolidated Financial
Statements incorporated herein by reference.
As of December 31, 1996, reinsured amounts with the Company's reinsurers
are as follows:
<TABLE>
<CAPTION>
POLICY AMOUNTS
RESERVES AND RECOVERABLE
PREMIUM POLICYHOLDER FROM REINSURERS
INCOME ACCOUNT BALANCES FOR PAID AND
CEDED CEDED UNPAID CLAIMS
------- ---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Protective Life Insurance Company......... $14,128 $132,499 $ 1,243
Cologne Life Reinsurance Company.......... -- 18,517 9,576
TAURUS.................................... 13,554 -- --
Sun Life Assurance of Canada.............. 9,670 13,605 5,712
All other reinsurers...................... 24,164 6,344 22,119
------- -------- -------
Total........................... $61,516 $170,965 $38,650
======= ======== =======
</TABLE>
The Company currently participates as an assuming insurer in a number of
reinsurance pools. These reinsurance pools generally are administered by TPAs or
managing underwriters which underwrite risks, coordinate premiums charged and
process claims. The Company has the right, generally exercisable annually, to
terminate or change its participation in any of these pools as to new business.
These reinsurance pools represented, in the aggregate, $53.0 million of premiums
and policyholder fees and $48.9 million of benefits for the year ended December
31, 1996. The Company's five largest participations in these reinsurance pools
represented $44.5 million of earned premiums and $41.7 million of benefits for
the year ended December 31, 1996. The Company has
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<PAGE> 36
also acquired blocks of annuity business through indemnity and assumption
reinsurance agreements. See "-- Asset Accumulation Products."
LIFE AND ACCIDENT AND HEALTH INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves to
satisfy its life, accident and health and annuity policy and contract
obligations. These reserves, together with premiums to be received on policies
in force and interest thereon at certain assumed rates, are calculated to be
sufficient to satisfy policy and contract obligations. The Company performs
periodic studies to compare current experience for mortality, interest and lapse
rates with expected experience in the reserve assumptions to determine future
policy benefit reserves for these products. Differences are reflected currently
in earnings for each period. The Company has not experienced significant adverse
deviations from its assumptions.
The life and accident and health insurance reserves carried in the
Consolidated Financial Statements are calculated based on GAAP and differ from
those reported by the Company for statutory financial statement purposes. These
differences arise from the use of different mortality and morbidity tables and
interest assumptions, the introduction of lapse assumptions into the reserve
calculation and the use of the level-premium reserve method on all insurance
business. See Note A of the Notes to Consolidated Financial Statements
incorporated herein by reference for certain additional information regarding
reserve assumptions under GAAP.
EXCESS WORKERS' COMPENSATION INSURANCE RESERVES
The Company carries as liabilities actuarially determined reserves for
anticipated claims and claim expenses for casualty insurance products. Reserves
for claim expenses represent the estimated probable costs of investigating those
claims and, when necessary, defending lawsuits in connection with those claims.
Reserves for claims and claim expenses are estimated based on individual loss
data, historical loss data and industry averages and indices and include amounts
determined on the basis of individual and actuarially determined estimates of
future losses. Therefore, the ultimate liability could deviate from the amounts
currently reflected in the Consolidated Financial Statements incorporated herein
by reference. Over 95% of these reserves relate to excess workers' compensation
insurance, and the balance consists of reserves for excess unemployment
compensation insurance, self-insurance bonds and an excess umbrella liability
insurance product that was discontinued in 1985.
Reserving practices under GAAP allow discounting of claim reserves related
to excess workers' compensation losses to reflect the time value of money.
Reserve discounting for these types of claims is common industry practice, and
the discount factors used are less than the annual tax-equivalent investment
yield earned by the Company on its invested assets. Reserves for claim expenses
are not discounted.
The following table provides a reconciliation of beginning and ending
unpaid claims and claim expenses from March 5, 1996, the date of the SIG Merger,
to December 31, 1996.
<TABLE>
<CAPTION>
PERIOD FROM MARCH 5 TO
DECEMBER 31, 1996
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Unpaid claims and claim expenses, beginning of period................... $ 369,871
Provision for claims and claim expenses incurred in the current year.... 28,290
Increase in estimated claims and claim expenses incurred in prior
years................................................................. 7,358
--------
Incurred claims and claim expenses during the current year............ 35,648
--------
Deduct claims and claim expenses paid, occurring during:
Current year.......................................................... 249
Prior years........................................................... 24,444
--------
Total paid.................................................... 24,693
--------
Unpaid claims and claim expenses, end of period......................... $ 380,826
========
</TABLE>
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<PAGE> 37
The increase in estimated claims and claim expenses incurred in prior years
is primarily due to the accretion of interest on discounted claim reserves. The
effects of the discount to reflect the time value of money of $164.0 million and
$168.8 million at March 5, 1996, the date of the SIG Merger, and December 31,
1996, respectively, have been removed from the loss development table which
follows in order to present the gross loss development.
<TABLE>
<CAPTION>
MARCH 5, DECEMBER 31,
1996 1996
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reserve for unpaid claims and claim expenses......................... $533,871 $549,653
Cumulative amount of liability paid:
Period from March 5 to December 31, 1996........................... 24,444
Liability reestimated as of:
December 31, 1996.................................................. 524,423
Cumulative redundancy................................................ 9,448
</TABLE>
The "Reserve for unpaid claims and claim expenses" line of the table shows
the estimated reserve for unpaid claims and claim expenses recorded at the end
of each of the periods indicated. These liabilities represent the estimated
amount of losses and expenses for claims arising in the current year and all
prior years that are unpaid at the end of each period. The "Cumulative amount of
liability paid" line of the table represents the cumulative amounts paid with
respect to the liability previously recorded as of the end of each succeeding
period. The "Liability reestimated" line of the table shows the reestimated
amount relating to the previously recorded liability and is based upon
experience as of the end of each succeeding period. This estimate is either
increased or decreased as additional information about the frequency and
severity of claims for each period becomes available and is reviewed. The
Company periodically reviews the estimated reserves for claims and claim
expenses and any changes are reflected currently in earnings for each period.
The Company has not experienced significant adverse deviations from its
assumptions. The "Cumulative redundancy" line of the table represents the
aggregate change in the estimated claim reserve liabilities over the prior
period.
The excess workers' compensation insurance reserves carried in the
Consolidated Financial Statements are calculated in accordance with GAAP and,
excluding the effects of reinsurance, are approximately $26.0 million less than
those reported by the Company for statutory financial statement purposes at
December 31, 1996. This difference is primarily due to the use of different
discount factors under GAAP and SAP. See Note A of the Notes to Consolidated
Financial Statements incorporated herein by reference for certain additional
information regarding reserve assumptions under GAAP.
COMPETITION
The insurance industry is highly competitive. The Company competes with
numerous other insurance and financial services companies both in connection
with sales of insurance and asset accumulation products and in acquiring blocks
of business. Many of these organizations have substantially greater asset bases,
higher ratings from ratings agencies, larger and more diversified portfolios of
insurance products and larger agency sales operations. Competition in asset
accumulation product markets is also encountered from the expanding number of
banks, securities brokerage firms and other financial intermediaries marketing
alternative savings products, such as mutual funds, traditional bank investments
and retirement funding alternatives.
The Company believes that its reputation in the marketplace, quality of
service and investment returns have enabled it to compete effectively for new
insurance business in its targeted markets. The Company reacts to changes in the
marketplace generally by focusing on products with adequate margins and
attempting to avoid those with low margins. The Company believes that its
smaller size, relative to some of its competitors, enables it to more easily
tailor its products to the demands of customers.
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<PAGE> 38
REGULATION
The Company's insurance subsidiaries are highly regulated by state
insurance authorities in the states in which they are domiciled and the other
states in which they conduct business. These regulations, among other things,
limit the amount of dividends and other payments that can be made by the
Company's insurance subsidiaries without prior regulatory approval and impose
restrictions on the amount and type of investments these subsidiaries may have.
These regulations also affect many other aspects of the Company's insurance
subsidiaries' business, including, for example, RBC requirements, various
reserve requirements and the terms and conditions and manner of sale and
marketing of the these subsidiaries' insurance products. These regulations are
intended to protect policyholders rather than investors. The Company's insurance
subsidiaries are required under these regulations to file detailed annual
reports with the supervisory agencies in the various states in which they do
business, and their business and accounts are subject to examination at any time
by these agencies. Under state insurance laws and the rules of the National
Association of Insurance Commissoners ("NAIC"), the Company's insurance
subsidiaries may be examined periodically, usually at three- to five-year
intervals, by the supervisory agencies of the states in which they do business.
To date, no examinations have produced any significant adverse findings or
adjustments.
The ability of the Company to receive dividends from its insurance
subsidiaries is governed by the insurance laws of the subsidiaries' respective
states of domicile. These insurance laws require, among other things, that the
statutory surplus of the domiciled insurance company, following any dividend or
distribution, be reasonable in relation to its outstanding liabilities and
adequate to its financial needs, as determined under standards contained
therein. The insurance commissioners of these states may bring an action to
enjoin or rescind the payment of a dividend or distribution by an insurer
domiciled in its state that would cause the insurer's statutory surplus to be
unreasonable or inadequate under this standard. For further information on state
limitations on dividends by insurers, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- General" herein and Note K of the Notes to the Consolidated
Financial Statements incorporated herein by reference.
From time to time, increased scrutiny has been placed upon the insurance
regulatory framework, and a number of state legislatures have considered or
enacted legislative measures that alter, and in many cases increase, state
authority to regulate insurance companies. In addition to legislative
initiatives of this type, the NAIC and insurance regulators have been and are
involved in a process of reexamining existing laws and their application to
insurance companies. In particular, this reexamination has focused on insurance
company investment and solvency issues and, more recently, issues relating to
the manner in which insurance products are sold and marketed. In some instances,
it has resulted in new interpretations of existing law, the development of new
laws and the implementation of nonstatutory guidelines. These developments may
impact, among other things, the structure of insurance company investment
portfolios and the earnings thereon. In addition, the NAIC is currently in the
process of comprehensively codifying (and, in certain respects, revising) SAP,
which process, when complete, may affect the manner in which insurance
companies, including the Company's insurance subsidiaries, report their
statutory financial condition and operating results. It is not possible to
predict the future impact of changing regulation or accounting practices on the
operations of the Company and its insurance subsidiaries.
The NAIC's risk-based capital ("RBC") requirements for insurance companies
take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to the insurer's business and specify varying
degrees of regulatory action to occur to the extent that an insurer does not
meet the specified RBC thresholds, with increasing degrees of regulatory
scrutiny or intervention provided for companies in categories of lesser RBC
compliance. The Company believes that its insurance subsidiaries are adequately
capitalized under the RBC requirements and that the thresholds will not have any
significant regulatory effect on the Company. However, were the insurance
subsidiaries' RBC position to decline in the future, the insurance subsidiaries'
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<PAGE> 39
continued ability to pay dividends and the degree of regulatory supervision or
control to which they are subjected may be affected.
The Company's insurance subsidiaries can also be required, under solvency
or guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of insurance companies that become
insolvent. These assessments may be deferred or forgiven under most solvency or
guaranty laws if they would threaten an insurer's financial strength and, in
most instances, may be offset against future state premium taxes. The amount of
any future assessments under these laws cannot reasonably be estimated and thus
is not included in the Company's reserves, although none of the Company's
insurance subsidiaries has ever incurred any significant costs of this nature.
The federal government currently does not directly regulate the insurance
business. However, federal legislation and administrative policies in a number
of areas, such as pension regulation, age, sex and disability-based
discrimination, financial services regulation and federal taxation, can
significantly affect the insurance business.
From time to time, federal legislative proposals have been made that would,
if enacted, have an adverse impact on the federal income tax treatment of
certain annuity contracts. There can be no assurance that such legislation will
not be adopted in the future. Any legislation adopted, depending on its nature,
could have a positive or adverse effect on the persistency of the Company's
SPDAs and FPAs and the Company's ability to market or acquire additional blocks
of these types of products.
EMPLOYEES
The Company and its subsidiaries employed 514 persons at December 31, 1996.
The Company believes that it enjoys good relations with its employees.
OTHER SUBSIDIARIES
The Company conducts certain of its investment management activities
through its wholly-owned subsidiary, DCM, and makes certain investments,
including certain of its balances with independent investment managers, through
other wholly-owned non-insurance subsidiaries.
OTHER TRANSACTIONS
On February 23, 1993, the Company entered into an $85.0 million revolving
credit facility with a group of institutional lenders and used a portion of the
facility to refinance a term loan with an institutional lender. Beginning in
July 1993, the Company implemented a recapitalization plan (the
"Recapitalization") designed to enhance its financial condition by increasing
shareholders' equity, reducing leverage and decreasing interest expense. In
addition, the Recapitalization was designed to increase the liquidity of the
Company's Class A Common Stock. The first step of the Recapitalization occurred
in July 1993 and included (i) increasing the principal amount available under
the Credit Agreement from $85.0 million to $120.0 million and (ii) using $30.0
million of the additional available funds to redeem $29.0 million aggregate
principal amount of the Company's 11 3/4% Senior Subordinated Debentures due
1999 (the "Senior Subordinated Debentures") at 103.42% of par value. In October
1993, the Company completed the second step of the Recapitalization, which
included (i) the public offering of $85.0 million of the Senior Notes, for net
proceeds of $82.4 million and (ii) the public offering of 3.3 million shares of
Class A Common Stock (of which 1.2 million shares were sold by selling
shareholders) for net proceeds to the Company of $35.8 million. The
Recapitalization was completed in November 1993, when the Company redeemed all
of the remaining $87.8 million par value Senior Subordinated Debentures at
103.42% of par value.
In July 1994, the Company's shelf registration statement was declared
effective by the Securities and Exchange Commission. The shelf registration
statement provides for the sale, from
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<PAGE> 40
time to time, of up to $49.2 million of securities (after giving effect to the
offering being made hereby).
In December 1995, the Company and its existing lenders, along with
additional lenders, agreed to amend and restate the terms of the Credit
Agreement to increase the maximum amount available under the facility at any one
time to $200.0 million. Of the total facility, $98.0 million is restricted for
use in connection with, among other things, acquisitions or the redemption of
the SIG Senior Notes.
On March 5, 1996, SIG was merged into the Company for consideration of
approximately $54.5 million of cash, net of approximately $1.0 million payable
upon the exercise of certain SIG stock options, which was funded from additional
borrowings under the Credit Agreement, and approximately 5.2 million shares of
the Company's Class A Common Stock, including shares of Class A Common Stock
reserved for issuance upon the exercise of stock options of SIG assumed by the
Company in connection with the merger, plus additional contingent consideration
of up to $20.0 million. The contingent consideration will be payable in shares
of the Company's Class A Common Stock or, at the option of the Company, in cash.
No contingent consideration is due unless SIG's cumulative net income exceeds
$41.8 million for the two years ending December 31, 1997, $62.6 million for the
three years ending December 31, 1998, or $83.5 million for the four years ending
December 31, 1999, and the maximum amount is triggered at cumulative net income
levels of $75.3 million for the three-year period or $104.4 million for the
four-year period. The Company also assumed $45.0 million of the SIG Senior
Notes.
The Company discontinued its long-term care insurance business during 1996.
This is expected to be accomplished by means of a sale, which is intended to be
consummated by mid-1997. This business was purchased in December 1994 and was
expected to become a significant part of the Company's operations. The Company
exited this business due to its continued losses attributable to lower than
expected sales and profit levels and decided to concentrate its resources on
other opportunities such as product and distribution enhancements for the
Company's group employee benefit products. The discontinuance of this business
is not expected to have a material effect on the Company's financial condition
or liquidity in the future.
On August 30, 1996, the Company's Board of Directors declared a 20% stock
dividend distributed on September 30, 1996 to stockholders of record on
September 16, 1996. Results per share and applicable share amounts for prior
periods have been restated to reflect the stock dividend.
In December 1996, the Company and its existing lenders agreed to amend and
restate the terms of the Credit Agreement to, among other things, reduce the
Company's borrowing costs. Under the amended terms, the maximum amount available
will be reduced incrementally over a four and one-half year period beginning in
October 1999.
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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS OF DFG, RSLIC AND SNCC
The table below presents certain information concerning each of the
executive officers of DFG, RSLIC and SNCC.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Robert Rosenkranz............ 54 Director of DFG; Chairman of the Board, President and
Chief Executive Officer of DFG; Chairman of the Board of
RSLIC
Charles P. O'Brien........... 60 Director of DFG; President and Chief Executive Officer of
RSLIC
Robert M. Smith, Jr. ........ 45 Director and Vice President of DFG
Thomas A. Sullivan........... 56 Director of DFG; President of DCM
B.K. Werner.................. 63 Director of DFG; Chairman of the Board and Chief
Executive Officer of SNCC
Chad W. Coulter.............. 34 Assistant Secretary of DFG; Vice President, Secretary and
General Counsel of RSLIC
Jane R. Dunlap............... 64 Vice President and Treasurer of DFG; Vice President,
Finance of RSLIC
Wayne M. Benseler............ 47 Vice President and Chief Actuary of RSLIC
Lawrence E. Daurelle......... 45 Vice President and Treasurer of RSLIC
Christopher A. Fazzini....... 34 Vice President -- Sales and Marketing of RSLIC
</TABLE>
Mr. Rosenkranz has served as the President and Chief Executive Officer of
DFG since May 1987 and has served as Chairman of the Board of Directors of DFG
since April 1989. He is also Chairman of the Board of RSLIC, First Reliance
Standard Life Insurance Company ("FRSLIC") and RSLIC-Texas and serves on the
Board of Directors of SNCC. Mr. Rosenkranz, by means of beneficial ownership of
the corporate general partner of Rosenkranz & Company, an irrevocable proxy and
direct or beneficial ownership, has the power to vote all of the outstanding
shares of Class B Common Stock, which represents 82% of the voting power of the
Company's common stock on a fully diluted basis as of February 21, 1997.
Mr. O'Brien has served as a Director of DFG since November 1987. Since
August 1976, Mr. O'Brien has served as President, Chief Executive Officer and a
Director of RSLIC. Mr. O'Brien also serves as President and Chief Executive
Officer and a Director of RSLIC-Texas and FRSLIC and as a Director of SNCC.
Mr. Smith has served as Vice President of DFG and as Vice President of DCM
since July 1994 and as a Director of DFG since January 1995. Mr. Smith also
serves as a Director of RSLIC-Texas, RSLIC, FRSLIC and SNCC. Prior to March
1994, Mr. Smith was Director, Investment Banking for Merrill Lynch & Company in
New York, New York.
Mr. Sullivan has served as a Director of DFG since July 1991. He became
President of DCM and a limited partner in Rosenkranz & Company in July 1991.
Prior to that, he served as Chief Investment Officer of Delphi Capital
Management, Inc. ("DCM") from January 1990 to July 1991, and as Chief Investment
Officer of DFG from November 1987 to December 1989. Since April 1987, Mr.
Sullivan has been owner of MMS Advisors, a commodity trading advisory company.
Mr. Werner was elected a Director of DFG upon the SIG Merger. He has served
as Chairman of the Board of SNCC since June 1987 and as Chief Executive Officer
since June 1990. Mr. Werner has served as a Director of and has been employed in
various capacities by SNCC since 1959.
Mr. Coulter has served as Vice President, Secretary and General Counsel of
RSLIC, FRSLIC and RSLIC-Texas since February 1994. Mr. Coulter has also served
as Assistant Secretary of DFG since March 1994. From January 1991 to February
1994, he was employed in various capacities by RSLIC. Prior to January 1991, Mr.
Coulter was an associate with the law firm of Morris, Nichols, Arsht & Tunnell
in Wilmington, Delaware.
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<PAGE> 42
Ms. Dunlap has served as Vice President of DFG since April 1989 and
Treasurer of the Company since April 1988. She has been Vice President, Finance
of RSLIC since March 1984, Vice President, Finance of FRSLIC since April 1987,
and Vice President, Finance of RSLIC-Texas since November 1987. Ms. Dunlap has
been employed in various capacities by RSLIC since August 1975.
Mr. Benseler has served as Vice President and Chief Actuary of RSLIC and
FRSLIC since August 1986 and as Vice President and Chief Actuary of RSLIC-Texas
since November 1987. He has been employed in various capacities by RSLIC since
February 1980.
Mr. Daurelle has served as Vice President and Treasurer of RSLIC, FRSLIC
and RSLIC-Texas since May 1995. From October 1994 to April 1995, he was Senior
Vice President and Chief Financial Officer for Mutual Assurance Company, and
from September 1993 to October 1994 he was Senior Vice President, Strategic
Planning for The Fidelity Mutual Life Insurance Company. Prior to September
1993, Mr. Daurelle was Vice President of United Pacific Life Insurance Company.
Mr. Fazzini has served as Vice President -- Sales and Marketing of RSLIC
since November 1996. He has been employed in various capacities by RSLIC since
July 1984.
OTHER KEY EMPLOYEES
Harold F. Ilg; age 49; Vice Chairman of the Board of SNCC. Mr. Ilg has been
associated with SIG for over 18 years starting in 1978.
Terrence T. Schoeninger; age 49; President of SNCC. Mr. Schoeninger has
been associated with SNCC for over 17 years, since 1979.
Mark A. Wilhelm; age 43; Senior Vice President of Underwriting of SNCC. Mr.
Wilhelm has been associated with SNCC for 19 years, since 1977.
Gerald R. Scott; age 45; Senior Vice President of Claims of SNCC. Mr. Scott
has been associated with SNCC for 13 years, since 1983.
Duane A. Hercules; age 37; Senior Vice President of Finance and Treasurer
of SNCC. Mr. Hercules has been associated with SNCC for over 12 years, since
1984.
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<PAGE> 43
CERTAIN TERMS OF SERIES A CAPITAL SECURITIES
The following summary of certain terms and provisions of the Series A
Capital Securities supplements the description of the terms and provisions of
the Preferred Securities set forth in the accompanying Prospectus under the
heading "Delphi Funding L.L.C. -- DF Preferred Securities," to which description
reference is hereby made. The Series A Capital Securities constitute "DF
Preferred Securities" as such term is used in the Prospectus. This summary of
certain terms and provisions of the Series A Capital Securities, which describes
the material provisions thereof, does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the L.L.C. Agreement, to
which reference is hereby made. The form of the L.L.C. Agreement will be filed
as an exhibit to a Current Report on Form 8-K.
GENERAL
Pursuant to the terms of the L.L.C. Agreement, Delphi Funding will issue
the Series A Capital Securities and the Series A Common Securities. The Series A
Capital Securities will be limited to $100,000,000 aggregate Liquidation Amount
outstanding. The Series A Capital Securities represent preferred limited
liability company interests in Delphi Funding and the holders thereof will be
entitled to a preference in certain circumstances with respect to Distributions
and amounts payable on redemption or liquidation over the Series A Common
Securities of Delphi Funding, as well as other benefits as described in the
L.L.C. Agreement; otherwise, the Series A Capital Securities will rank pari
passu, and payments will be made thereon pro rata, with the Series A Common
Securities. See "-- Subordination of Series A Common Securities." Legal title to
the Series A Subordinated Debentures will be held by Delphi Funding. Delphi
Funding is and will be managed by the Managing Member at all times while the
Series A Capital Securities are outstanding. Holders of Series A Capital
Securities will not have the right to remove or replace the Managing Member. The
Series A Guarantee will be a guarantee on a subordinated basis with respect to
the Capital Securities but will not guarantee payment of Distributions or
amounts payable on redemption or liquidation of the Series A Capital Securities
when Delphi Funding does not have funds on hand available to make such payments.
See "Certain Terms of Series A Guarantee."
DISTRIBUTIONS
Distributions on each Series A Capital Security will be payable at the
annual rate of 9.31% of the stated Liquidation Amount of $1,000, payable
semi-annually in arrears on March 25 and September 25 of each year, to the
holders of the Series A Capital Securities on the relevant record dates. The
record dates for the Series A Capital Securities will be, for so long as the
Series A Capital Securities remain in book-entry form, one Business Day (as
defined in the L.L.C. Agreement) prior to the relevant Distribution payment date
and, in the event the Series A Capital Securities are not in book-entry form,
fifteen days prior to the relevant Distribution payment date. Distributions on
the Series A Capital Securities will be cumulative. Distributions will
accumulate from the date of original issuance. The first Distribution payment
date for the Series A Capital Securities will be September 25, 1997. The amount
of Distributions payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Series A Capital Securities is not a Business
Day, then payment of the Distributions payable on such date will be made on the
next succeeding day that is a Business Day (and without any additional
Distributions or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on the date such payment was originally payable.
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer payment of
interest on the Series A Subordinated
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<PAGE> 44
Debentures at any time or from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each Extension Period, provided
that no Extension Period may extend beyond the Stated Maturity of the Series A
Subordinated Debentures. As a consequence of any such deferral of interest
payments by the Company, semi-annual Distributions on the Series A Capital
Securities by Delphi Funding will also be deferred during any such Extension
Period. Distributions to which holders of the Series A Capital Securities are
entitled will accumulate additional Distributions thereon at the rate per annum
of 9.31% thereof, compounded semi-annually from the relevant payment date for
such Distributions. The term "Distributions" as used herein shall include any
such additional Distributions. During any such Extension Period, the Company may
not, and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including other series
of Subordinated Debt Securities) that rank pari passu with or junior in interest
to the Series A Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Series A Subordinated Debentures (other than (a) dividends or
distributions in capital stock of the Company, (b) any declaration of a dividend
in connection with the implementation of a stockholders' rights plan or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the Series A Guarantee and (d) purchases of common stock related to the issuance
of common stock or rights or options under any of the Company's benefit plans
for its directors, officers, employees or other persons within the definition of
"employee" for purposes of a registration of shares for an employee benefit plan
of the Company, related to the issuance of common stock or rights under a
dividend reinvestment and stock purchase plan, or related to the issuance of
common stock (or securities convertible into or exchangeable for common stock)
as consideration in an acquisition transaction that was entered into prior to
the commencement of such Extension Period). Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest on the
Series A Subordinated Debentures, provided that no Extension Period may exceed
10 consecutive semi-annual periods or extend beyond the Stated Maturity of the
Series A Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the rate of 9.31%, compounded semi-annually, to the extent
permitted by applicable law), the Company may elect to begin a new Extension
Period. There is no limitation on the number of times that the Company may elect
to begin a new Extension Period. See "Certain Terms of Series A Subordinated
Debentures -- Option to Defer Interest Payments" and "Certain Federal Income Tax
Considerations -- Potential Deferral of Interest Payments."
The revenue of Delphi Funding available to holders of its Series A Capital
Securities will be limited to payments under the Series A Subordinated
Debentures. See "Certain Terms of Series A Subordinated Debentures." If the
Company does not make interest payments on the Series A Subordinated Debentures,
Delphi Funding will not have funds to pay Distributions on the Series A Capital
Securities. The payment of Distributions (if and to the extent Delphi Funding
has funds legally available for the payment of such Distributions and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Certain Terms of Series A Guarantee."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Series A
Subordinated Debentures.
REDEMPTION
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of the Series A Subordinated Debentures, whether at Stated Maturity or
upon earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption shall be applied by Delphi Funding to
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<PAGE> 45
redeem a Like Amount (as defined below) of the Series A Securities, upon not
less than 30 nor more than 60 days notice prior to the date fixed for repayment
or redemption (provided no such notice need be given for any redemption on the
Stated Maturity), at a redemption price, with respect to the Series A Capital
Securities (the "Redemption Price"), equal to the aggregate Liquidation Amount
of such Series A Capital Securities plus accumulated and unpaid Distributions
thereon to the date of redemption (the "Redemption Date") and the related amount
of the premium, if any, paid by the Company upon the concurrent redemption of
such Series A Subordinated Debentures. See "Certain Terms of Series A
Subordinated Debentures -- Redemption." If less than all of the Series A
Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then
the proceeds from such repayment or redemption, including any premium paid by
the Company, shall be allocated to the redemption pro rata of the Series A
Capital Securities and the Series A Common Securities.
Optional Redemption. The Company has the right to redeem the Series A
Subordinated Debentures (i) on or after March 25, 2007, in whole at any time or
in part from time to time or (ii) at any time following a Tax Event, in certain
circumstances as described under "Certain Terms of Series A Subordinated
Debentures -- Conditional Right to Shorten Maturity or Redeem upon a Tax Event,"
in whole (but not in part) within 90 days following the occurrence of a Tax
Event. A redemption of the Series A Subordinated Debentures would cause a
mandatory redemption of a Like Amount (as defined below) of the Series A Capital
Securities and Series A Common Securities.
The Redemption Price, in the case of a redemption under (i) above, shall
equal the following prices expressed in percentages of the Liquidation Amount
together with accrued Distributions to but excluding the Redemption Date. If
redeemed during the 12-month period beginning March 25:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------------------------------------ ----------
<S> <C>
2007.................................................................... 104.6550%
2008.................................................................... 104.1895
2009.................................................................... 103.7240
2010.................................................................... 103.2585
2011.................................................................... 102.7930
2012.................................................................... 102.3275
2013.................................................................... 101.8620
2014.................................................................... 101.3965
2015.................................................................... 100.9310
2016.................................................................... 100.4655
</TABLE>
and at 100% on or after March 25, 2017.
The Redemption Price, in the case of a redemption following a Tax Event as
described under (ii) above, shall equal for each Series A Capital Security the
Make-Whole Amount for a corresponding $1,000 principal amount of Series A
Subordinated Debentures together with accrued Distributions to but excluding the
Redemption Date. The "Make-Whole Amount" shall be equal to the greater of (i)
100% of the principal amount of such Series A Subordinated Debentures or (ii) as
determined by a Quotation Agent (as defined below), the sum of the present
values of the principal amount and premium payable as part of the Redemption
Price with respect to an optional redemption of such Series A Subordinated
Debentures on March 25, 2007, together with scheduled payments of interest from
the Redemption Date to March 25, 2007 (the "Remaining Life"), in each case
discounted to the Redemption Date on a semi-annual basis (assuming a 360-day
year consisting of 30-day months) at the Adjusted Treasury Rate (as defined
below).
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate (as defined below) plus (i) 2.00% if such Redemption Date occurs
on or before March 25, 1998 or (ii) 0.50% if such Redemption Date occurs after
March 25, 1998.
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"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue (as defined below),
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price (as
defined below) for such redemption date. The Treasury Rate shall be calculated
on the third Business Day preceding the Redemption Date.
"Comparable Treasury Issue" means with respect to any Redemption Date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after March 25, 2007, the two
most closely corresponding United States Treasury securities shall be used as
the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Quotation Agent" means Goldman, Sachs & Co. and its successors; provided,
however, that if the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
shall substitute therefor another Primary Treasury Dealer.
"Comparable Treasury Price" means (A) the average of five Reference
Treasury Dealer Quotations (as defined below) for such Redemption Date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Debenture Trustee obtains fewer than three such Reference Treasury
Dealer Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer (as defined below) and any Redemption Date, the
average, as determined by the Debenture Trustee, of the bid and asked prices for
the Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Debenture Trustee by such Reference
Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day
preceding such Redemption Date.
"Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any
other Primary Treasury Dealer selected by the Debenture Trustee after
consultation with the Company.
"Like Amount" means (i) with respect to a redemption of Series A
Securities, Series A Securities having a Liquidation Amount equal to that
portion of the principal amount of Series A Subordinated Debentures to be
contemporaneously redeemed or which will contemporaneously mature in accordance
with the Indenture, allocated to the Series A Common Securities and to the
Series A Capital Securities pro rata based upon the relative Liquidation Amounts
of such classes and the proceeds of which will be used to pay the Redemption
Price of such Series A Securities, and (ii) with respect to a distribution of
Series A Subordinated Debentures to holders of Series A Securities in exchange
therefor in connection with a dissolution or liquidation of Delphi Funding,
Series A Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the
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<PAGE> 47
Series A Securities of the holder to whom such Series A Subordinated Debentures
would be distributed.
"Liquidation Amount" means the stated amount of $1,000 per Series A
Security.
A "Tax Event" means, with respect to Series A Subordinated Debentures held
by Delphi Funding, the receipt by Delphi Funding of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced proposed change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such proposed
change, pronouncement or decision is announced on or after the date of issuance
of the Series A Capital Securities under the L.L.C. Agreement, there is more
than an insubstantial risk that (i) Delphi Funding is, or will be within 90 days
of the date of such opinion, taxable as a corporation for United States federal
income tax purposes or is otherwise subject to United States federal income tax
with respect to income received or accrued on the Series A Subordinated
Debentures, (ii) interest payable by the Company on the Series A Subordinated
Debentures is not, or within 90 days of the date of such opinion, will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes or (iii) Delphi Funding is, or will be within 90 days of the date
of the opinion, subject to more than a de minimis amount of other taxes, duties
or other governmental charges. With respect to Series A Subordinated Debentures
which are no longer held by Delphi Funding, "Tax Event" means the receipt by the
Company of an opinion of counsel experienced in such matters to the effect that,
as a result of any amendment to, or change (including any announced proposed
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which proposed change, pronouncement or decision is announced on or after the
date of issuance of the Series A Subordinated Debentures under the Indenture,
there is more than an insubstantial risk that interest payable by the Company on
the Series A Subordinated Debentures is not, or within 90 days of the date of
such opinion will not be, deductible by the Company, in whole or in part, for
United States federal income tax purposes (each of the circumstances referred to
in clauses (i), (ii) and (iii) of the preceding sentence and the circumstances
referred to in this sentence being referred to herein as an "Adverse Tax
Consequence").
See "Certain Federal Tax Law Considerations -- Possible Tax Law Changes
Affecting the Series A Capital Securities" for a discussion of certain budget
proposals that, if adopted, could give rise to a Tax Event, which may permit the
Company to shorten the Stated Maturity of the Series A Subordinated Debentures
or cause a redemption of the Series A Capital Securities prior to March 25,
2007.
REDEMPTION PROCEDURES
The Series A Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Series A Subordinated Debentures. Redemptions of the Series A
Capital Securities shall be made and the Redemption Price shall be payable on
each Redemption Date only to the extent that Delphi Funding has funds on hand
available for the payment of such Redemption Price and shall be subject to the
rights of creditors under applicable law. See also "-- Subordination of Series A
Common Securities."
If Delphi Funding gives a notice of redemption in respect of the Series A
Capital Securities, which are in book-entry form then, by 12:00 noon, New York
City time, on the Redemption Date, to the extent funds are available, Delphi
Funding will deposit irrevocably with the depository funds
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<PAGE> 48
sufficient to pay the applicable Redemption Price and will give the depository
irrevocable instructions and authority to pay the Redemption Price to the
holders of such Series A Capital Securities. See "Book-Entry Issuance." If such
Series A Capital Securities are no longer in book-entry form, Delphi Funding, to
the extent funds are available, will irrevocably deposit with the paying agent
for the Series A Capital Securities funds sufficient to pay the applicable
Redemption Price and will give such paying agent irrevocable instructions and
authority to pay the Redemption Price to the holders thereof upon surrender of
their certificates evidencing such Series A Capital Securities. Notwithstanding
the foregoing, Distributions payable on or prior to the Redemption Date for any
Series A Capital Securities called for redemption shall be payable to the
holders of such Series A Capital Securities on the relevant record dates for the
related Distribution Dates. If notice of redemption shall have been given and
funds deposited as required, then upon the date of such deposit, all rights of
the holders of the Series A Capital Securities so called for redemption will
cease, except the right of the holders of such Series A Capital Securities to
receive the Redemption Price, but without interest on such Redemption Price, and
such Series A Capital Securities will cease to be outstanding. In the event that
any date fixed for redemption of Series A Capital Securities is not a Business
Day, then payment of the Redemption Price payable on such date will be made on
the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Series A Capital Securities called for redemption is improperly
withheld or refused and not paid either by Delphi Funding or by the Company
pursuant to the Series A Guarantee as described under "Certain Terms of Series A
Guarantee," Distributions on such Series A Capital Securities will continue to
accrue at the then applicable rate, from the Redemption Date originally
established by Delphi Funding for such Series A Capital Securities to the date
such Redemption Price is actually paid, in which case the actual payment date
will be the date fixed for redemption for purposes of calculating the Redemption
Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Series A Capital Securities by tender, in
the open market or by private agreement.
Payment of the Redemption Price on the Series A Capital Securities shall be
made to the applicable recordholders thereof as they appear on the register for
the Series A Capital Securities on the relevant record date, which shall be one
Business Day prior to the relevant Redemption Date; provided, however, that in
the event that any Series A Capital Securities are not in book-entry form, the
relevant record date for such Series A Capital Securities shall be 15 days prior
to the Redemption Date or liquidation date, as applicable.
If less than all of the Series A Capital Securities and Series A Common
Securities issued by Delphi Funding are to be redeemed on a Redemption Date,
then the aggregate Liquidation Amount of such Series A Capital Securities and
Series A Common Securities to be redeemed shall be allocated pro rata to the
Series A Capital Securities and the Series A Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Series A Capital
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Managing Member from the outstanding
Series A Capital Securities not previously called for redemption, by such method
as the Managing Member shall deem fair and appropriate and which may provide for
the selection for redemption of portions (equal to $1,000 or an integral
multiple of $1,000 in excess thereof) of the Liquidation Amount of Series A
Capital Securities of a denomination larger that $1,000. The Managing Member
shall promptly notify the registrar in writing of the Series A Capital
Securities selected for redemption and, in the case of any Series A Capital
Securities selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of the L.L.C. Agreement, unless the context otherwise
requires, all provisions relating to the redemption of the Series A Capital
Securities shall relate, in the case of any Series A Capital
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<PAGE> 49
Securities redeemed or to be redeemed only in part, to the portion of the
aggregate Liquidation Amount of Series A Capital Securities which has been or is
to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Series A Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the Redemption Price on the Series A Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on such Series A Subordinated
Debentures or portions thereof (and Distributions will cease to accrue on the
Series A Capital Securities or portions thereof) called for redemption.
SUBORDINATION OF SERIES A COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Series A
Capital Securities and Series A Common Securities, as applicable, shall be made
pro rata based on the Liquidation Amount of such Series A Capital Securities and
Series A Common Securities; provided, however, that if on any Distribution Date
or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, Series A
Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of Series A Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid Distributions on
all of the outstanding Series A Capital Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the Redemption
Price the full amount of such Redemption Price on all of the outstanding Series
A Capital Securities then called for redemption, shall have been made or
provided for, and all funds available to Delphi Funding shall first be applied
to the payment in full in cash of all Distributions on, or Redemption Price of,
the Series A Capital Securities then due and payable.
LIQUIDATION OF DELPHI FUNDING AND DISTRIBUTION OF SERIES A SUBORDINATED
DEBENTURES TO HOLDERS
The Company will have the right at any time to dissolve Delphi Funding and,
after satisfaction of the liabilities to creditors of Delphi Funding as provided
by applicable law, cause the Series A Subordinated Debentures to be distributed
to the holders of the Series A Capital Securities in exchange therefor upon
liquidation of Delphi Funding.
Pursuant to the L.L.C. Agreement, Delphi Funding shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur
of: (i) certain events of bankruptcy, dissolution or liquidation of the holders
of the Series A Common Securities; (ii) upon receipt by the Managing Member of
written notice from the Company, directing the Managing Member to dissolve
Delphi Funding; (iii) redemption of all of the Series A Capital Securities as
described under "-- Redemption -- Mandatory Redemption"; and (iv) the entry of
an order for the dissolution of Delphi Funding by a court of competent
jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, Delphi Funding shall be liquidated by the Managing Member as
expeditiously as the Managing Member determines to be possible by distributing,
after satisfaction of liabilities to creditors of Delphi Funding as provided by
applicable law, to the holders of Series A Securities in exchange therefor a
Like Amount of the Series A Subordinated Debentures, unless such distribution is
determined by the Managing Member not to be practical, in which event such
holders will be entitled to receive out of the assets of Delphi Funding
available for distribution to holders, after satisfaction of liabilities to
creditors of Delphi Funding as provided by applicable law, an amount equal to,
in the case of holders of Series A Capital Securities, the aggregate of the
Liquidation Amount plus accrued and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation Distribution"). If such Liquidation
Distribution can be paid only in part because Delphi Funding has insufficient
assets available to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by Delphi Funding on the Series A Capital Securities
shall be paid on a pro rata basis. The holders of the Series A Common Securities
will be entitled to receive distributions upon any such liquidation
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pro rata with the holders of its Series A Capital Securities, except that if a
Debenture Event of Default has occurred and is continuing, the Series A Capital
Securities shall have a priority over the Series A Common Securities.
After the liquidation date fixed for any distribution of the Series A
Subordinated Debentures, the Series A Securities will no longer be deemed to be
outstanding and DTC or its nominee, as the registered holder of the Series A
Capital Securities, will receive a registered global certificate or certificates
representing the Series A Subordinated Debentures to be delivered upon such
distribution with respect to Series A Capital Securities held by the depository
or its nominee. Any certificates representing the Series A Securities not held
by the depository or its nominee will be deemed to represent the Series A
Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of the Series A Securities, and accruing interest at the rate
provided for in the Series A Subordinated Debentures from the last Distribution
Date on which a Distribution was made on such Series A Securities, until such
certificates are presented to the security registrar for the Series A Securities
for transfer or reissuance.
If the Company does not redeem the Series A Subordinated Debentures prior
to maturity and Delphi Funding is not liquidated and the Series A Subordinated
Debentures are not distributed to holders of the Series A Capital Securities,
the Series A Capital Securities will remain outstanding until the repayment of
the Series A Subordinated Debentures and the distribution of the Liquidation
Distribution of the holders of the Series A Capital Securities.
Under current United States federal income tax law and interpretations, a
distribution of Series A Subordinated Debentures in exchange for the Series A
Capital Securities will not be a taxable event to holders of the Series A
Capital Securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or other circumstances, however, the distribution
could be a taxable event to holders of the Series A Capital Securities. See
"Certain Federal Income Tax Considerations -- Exchange of Series A Capital
Securities for Series A Subordinated Debentures."
If Delphi Funding is dissolved and the Series A Subordinated Debentures are
distributed to holders of the Series A Capital Securities in exchange therefor
upon liquidation of Delphi Funding, the Company shall continue to have the right
to shorten the maturity of or to redeem the Series A Subordinated Debentures in
certain circumstances upon the occurrence of a Tax Event, as described under
"Certain Terms of Series A Subordinated Debentures -- Conditional Right to
Shorten Maturity or Redeem upon a Tax Event."
There can be no assurance as to the market prices for the Series A Capital
Securities or the Series A Subordinated Debentures that may be distributed in
exchange for Series A Capital Securities if a dissolution and liquidation of
Delphi Funding were to occur. Accordingly, the Series A Capital Securities that
an investor may purchase, or the Series A Subordinated Debentures that the
investor may receive on dissolution and liquidation of Delphi Funding, may trade
at a discount to the price that the investor paid to purchase the Series A
Capital Securities offered hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
L.L.C. Agreement with respect to the Series A Capital Securities issued
thereunder (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Certain Terms of Series A Subordinated Debentures -- Debenture Events
of Default"); or
(ii) default by Delphi Funding in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period
of 30 days; or
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(iii) default by Delphi Funding in the payment of any Redemption Price
of any Series A Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Managing Member in the L.L.C. Agreement
(other than a covenant or warranty a default in the performance of which or
the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 90 days after there
has been given, by registered or certified mail, to the defaulting Managing
Member by the holders of at least 25% in aggregate Liquidation Amount of
the outstanding Series A Capital Securities, a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the L.L.C. Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Managing Member.
Within five Business Days after the occurrence of any Event of Default
actually known to the Managing Member, the Managing Member shall transmit notice
of such Event of Default to the holders of Series A Capital Securities and the
Company, unless such Event of Default shall have been cured or waived. The
Managing Member is required to file annually with Delphi Funding a certificate
as to whether or not they are in compliance with all the conditions and
covenants applicable to them under the L.L.C. Agreement.
If a Debenture Event of Default has occurred and is continuing, the Series
A Capital Securities shall have a preference over the Series A Common Securities
as described above. See "-- Subordination of Series A Common Securities" and "--
Liquidation of Delphi Funding and Distribution of Series A Subordinated
Debentures to Holders." The existence of an Event of Default does not entitle
the holders of Series A Capital Securities to accelerate the maturity thereof.
RESIGNATION AND REPLACEMENT OF MANAGING MEMBER
The Managing Member shall have no right to resign from Delphi Funding.
Holders of the Series A Capital Securities shall not have the right to vote to
appoint, remove or replace the Managing Member.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF DELPHI FUNDING.
Delphi Funding may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below. Delphi Funding may, at the request of the Company, with the
consent of the Managing Member and without the consent of the holders of the
Series A Capital Securities, merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, a limited liability company organized as such
under the laws of any State; provided, that (i) such successor entity either (a)
expressly assumes all of the obligations of Delphi Funding with respect to the
Series A Capital Securities or (b) substitutes for the Series A Capital
Securities other securities having substantially the same rights, powers,
privileges and other terms as the Series A Capital Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Series A
Capital Securities in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Managing Member expressly
appoints the managing members of such successor entity possessing the same
powers and duties as the Managing Member, (iii) the Successor Securities are
listed, or any Successor Securities will be listed upon notifications of
issuance, on any national securities exchange or automated quotation system on
which the Series A Capital Securities are then listed, if any, (iv) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the Series A Capital Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization which
gives ratings on the Series A Capital Securities, (v) such merger,
consolidation, amalgamation,
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replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Series A Capital Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose identical to that of Delphi Funding, (vii) prior
to such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease, the Managing Member has received an opinion from independent counsel
to Delphi Funding experienced in such matters to the effect that such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Series A Capital Securities (including any Successor Securities) in any material
respect, and (viii) the Company or any permitted successor or assignee owns all
of the Series A Common Securities of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Series A Guarantee. Notwithstanding the foregoing,
Delphi Funding shall not, except with the consent of holders of 100% in
Liquidation Amount of the Series A Capital Securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to any other entity or permit
any other entity to consolidate, amalgamate, merge with or into, or replace it
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause Delphi Funding or the successor entity to be taxable as a
corporation for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF L.L.C. AGREEMENT
Except as provided below and under "Certain Terms of Series A
Guarantee -- Amendments and Assignment" and as otherwise required by law and the
L.L.C. Agreement, the holders of the Series A Capital Securities will have no
voting rights.
The L.L.C. Agreement may be amended from time to time by the Managing
Member without the consent of the holders of the Series A Capital Securities (i)
to cure any ambiguity, correct or supplement any provisions in the L.L.C.
Agreement that may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the L.L.C.
Agreement, which shall not be inconsistent with the other provisions of the
L.L.C. Agreement, (ii) to modify, eliminate or add to any provisions of the
L.L.C. Agreement to such extent as shall be necessary to ensure that Delphi
Funding will not be taxable as a corporation for United States federal income
tax purposes at all times that any Series A Securities are outstanding or (iii)
to modify, eliminate or add to any provisions of the L.L.C. Agreement to such
extent as shall be necessary to meet the requirements of any national securities
exchange or automated quotation system on which the Company seeks to list the
Series A Capital Securities; provided, however, that in the case of any of
clause (i), clause (ii) or clause (iii), such action shall not adversely affect
in any material respect the interests of any holder of Series A Capital
Securities, and any amendments of the L.L.C. Agreement shall become effective
when notice thereof is given to the holders of Series A Securities. The L.L.C.
Agreement may be amended by the Managing Member with (i) the consent of holders
representing not less than a majority (based upon Liquidation Amounts) of the
outstanding Series A Securities, and (ii) receipt by Delphi Funding of an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Managing Member in accordance with such amendment will not
cause Delphi Funding to be taxable as a corporation for United States federal
income tax purposes, provided that without the consent of each holder of Series
A Securities, the L.L.C. Agreement may not be amended to (i) change the amount
or timing to any Distribution on the Series A Securities or otherwise adversely
affect the amount of any Distribution required to be made in respect of the
Series A Securities as of a specified date or (ii) restrict the right of a
holder of Series A Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Series A Subordinated Debentures are held by Delphi Funding,
Delphi Funding shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee or exercising any
trust or power conferred on the Debenture
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Trustee with respect to the Series A Subordinated Debentures, (ii) waive any
past default, which is waivable under the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Series A
Subordinated Debentures shall be due and payable, (iv) consent to any amendment,
modification or termination of the Indenture or the Series A Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Series A Capital Securities; provided,
however, that where a consent under the Indenture would require the consent of
each holder of Series A Subordinated Debentures affected thereby, no such
consent shall be given by Delphi Funding without the prior consent of each
holder of the corresponding Series A Capital Securities. Delphi Funding shall
not revoke any action previously authorized or approved by a vote of the holders
of the Series A Capital Securities except by subsequent vote of the holders of
the Series A Capital Securities. Delphi Funding shall notify each holder of
Series A Capital Securities of any notice of default received from the Debenture
Trustee with respect to the Series A Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Series A Capital
Securities, prior to taking any of the foregoing actions, Delphi Funding shall
obtain an opinion of counsel experienced in such matters to the effect that such
action would not cause Delphi Funding to be taxable as a corporation for United
States federal income tax purposes.
Any required approval of holders of Series A Capital Securities may be
given at a meeting of holders of Series A Capital Securities convened for such
purpose or pursuant to written consent. Delphi Funding will cause a notice of
any meeting at which holders of Series A Capital Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of Series A Capital Securities
in the manner set forth in the L.L.C. Agreement.
No vote or consent of the holder of Series A Capital Securities will be
required for Delphi Funding to redeem and cancel its Series A Capital Securities
in accordance with the L.L.C. Agreement.
Notwithstanding that holders of Series A Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Series A Capital Securities that are owned by the Managing Member or any
affiliate of the Managing Member shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
REGISTRATION AND TRANSFER OF SERIES A CAPITAL SECURITIES
The Series A Capital Securities will be represented by a global certificate
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Series A Capital Securities will be shown on, and
transfers thereof will be effected only through, records maintained by
Participants in DTC. Except as described below, Series A Capital Securities in
certificated form will not be issued in exchange for the global certificate. See
"Book-Entry Issuance."
A global security shall be exchangeable for Series A Capital Securities
registered in the names of persons other than DTC or its nominee only if (i) DTC
notifies Delphi Funding that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time DTC ceases to be a clearing agency registered as
such under the Exchange Act at a time when DTC is required to be so registered
to act as such depositary, (ii) Delphi Funding in its sole discretion determines
that such global security shall be so exchangeable or (iii) there shall have
occurred and be continuing an event of default under the Indenture with respect
to the Series A Subordinated Debentures. Any global security that is
exchangeable pursuant to the preceding sentence shall be exchangeable for
definitive certificates registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
from its Participants with respect to ownership of beneficial interests in such
global security. In the event that Series A Capital Securities are issued in
definitive form, such Series A Capital
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Securities will be in denominations of $1,000 and integral multiples thereof and
may be transferred or exchanged at the offices described below.
Purchasers and transfers of Series A Capital Securities represented by a
global security held by DTC or its nominee will be made as described under
"Book-Entry Issuance." None of the Managing Member, any Paying Agent, or the
Securities Registrar for the Series A Capital Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global Series
A Capital Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. In the event Series A Capital
Securities are issued in certificated form, the Liquidation Amount and
Distributions will be payable, the transfer of the Series A Capital Securities
will be registrable, and Series A Capital Securities will be exchangeable for
Series A Capital Securities of other denominations of a like aggregate
Liquidation Amount, at the corporate office of Delphi Funding in Wilmington,
Delaware, or at the offices of any paying agent or transfer agent appointed by
Delphi Funding, provided that payment of any Distribution may be made at the
option of Delphi Funding by check mailed to the address of the persons entitled
thereto, by wire transfer or by direct deposit. In addition, if the Series A
Capital Securities are issued in certificated form, the record dates for payment
of Distributions will be fifteen days prior to the relevant Distribution payment
date. For a description of DTC and the terms of the depositary arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
DELPHI FUNDING EXPENSES
Pursuant to the L.L.C. Agreement, the holders of the Series A Common
Securities will be liable to Delphi Funding for all the debts, expenses and
obligations of Delphi Funding (other than obligations of Delphi Funding to pay
to the holders of any Series A Capital Securities the amounts due such holders
pursuant to the terms of the Series A Capital Securities) to the extent not
satisfied out of Delphi Funding's assets.
PAYMENTS AND PAYING AGENTS
Payments in respect of the Series A Capital Securities shall be made to
DTC, which shall credit the relevant accounts at DTC on the applicable
Distribution Dates or, if the Series A Capital Securities are not held by DTC,
such payments shall be made by wire transfer, direct deposit or check mailed to
the address of the holder entitled thereto as such address shall appear on the
Register. The paying agent (the "Paying Agent") shall initially be Wilmington
Trust Company and any co-paying agent chosen by Wilmington Trust Company and
acceptable to the Managing Member. The Paying Agent shall be permitted to resign
as Paying Agent upon 30 days' written notice to the Managing Member. In the
event that Wilmington Trust Company shall no longer be the Paying Agent, the
Managing Member shall appoint a successor (which shall be a bank or trust
company acceptable to the Managing Member and the Company) to act as Paying
Agent.
REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company will act as registrar and transfer agent for the
Series A Capital Securities.
Registration of transfers of Series A Capital Securities will be effected
without charge by or on behalf of Delphi Funding, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. Delphi Funding will not be required to register or cause to be
registered the transfer of Series A Capital Securities after such Series A
Capital Securities have been called for redemption.
See "Book-Entry Issuance" with respect to registration and transfer of
Series A Capital Securities held as global securities by DTC or its nominee.
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MISCELLANEOUS
The Managing Member is authorized and directed to conduct the affairs of
and to operate Delphi Funding in such a way that Delphi Funding will not be
taxable as a corporation for United States federal income tax purposes and so
that the Series A Subordinated Debentures will be treated as indebtedness of the
Company for United States federal income tax purposes. In this connection, the
Managing Member is authorized to take any action, not inconsistent with
applicable law, the certificate of formation of Delphi Funding or the L.L.C.
Agreement, that the Managing Member determines in its discretion to be necessary
or desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Series A Capital
Securities.
Holders of the Series A Capital Securities have no preemptive or similar
rights.
Delphi Funding may not borrow money or issue debt or mortgage or pledge any
of its assets.
CERTAIN TERMS OF SERIES A SUBORDINATED DEBENTURES
The Series A Subordinated Debentures are to be issued under the Indenture
under which Wilmington Trust Company is acting as Debenture Trustee. The
following summary of certain terms and provisions of the Series A Subordinated
Debentures supplements the description of the terms and provisions of the Debt
Securities set forth in the accompanying Prospectus under the heading
"Description of Debt Securities," to which description reference is hereby made.
The summary of certain terms and provisions of the Series A Subordinated
Debentures set forth below, which describes the material provisions thereof,
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Indenture, to which reference is hereby made. The
form of Indenture will be filed as an exhibit to a Current Report on Form 8-K.
GENERAL
Concurrently with the issuance of the Series A Capital Securities, Delphi
Funding will invest the proceeds thereof, together with the consideration paid
by the Company for the Series A Common Securities, in the Series A Subordinated
Debentures issued by the Company. The Series A Subordinated Debentures will bear
interest at the annual rate of 9.31% of the principal amount thereof, payable
semi-annually in arrears on March 25 and September 25 of each year (each, an
"Interest Payment Date"), commencing September 25, 1997, to the person in whose
name each Series A Subordinated Debenture is registered at the close of business
on the relevant record date. The record dates for the Series A Subordinated
Debentures will be, for so long as they are held by Delphi Funding or in Global
form, the Business Day next preceding each Interest Payment Date and, in the
case of Series A Subordinated Debentures not held by Delphi Funding or in Global
form, 15 days prior to each Interest Payment Date. It is anticipated that, until
the liquidation, if any, of Delphi Funding, each Series A Subordinated Debenture
will be held in the name of Delphi Funding for the benefit of the holders of the
Series A Securities. The amount of interest payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Series A Subordinated
Debentures is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on the date such payment was originally payable. Accrued
Interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of 9.31% thereof, compounded semi-annually from the relevant
Interest Payment Date. The term "interest" as used herein shall include
semi-annual interest payments, interest on semi-annual interest payments not
paid on the applicable Interest Payment Date and Additional Sums (as defined
below), as applicable.
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The Series A Subordinated Debentures will be issued as a series of junior
subordinated deferrable interest debentures under the Indenture.
The Series A Subordinated Debentures will mature on March 25, 2027 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened by the Company in certain circumstances upon the
occurrence of a Tax Event as described under "-- Conditional Right to Shorten
Maturity or Redeem upon a Tax Event" to any date not earlier than March 25,
2012. In the event that the Company elects to shorten the maturity of the Series
A Subordinated Debentures, it shall give notice to the Debenture Trustee, and
the Debenture Trustee shall give notice of such shortening to the holders of the
Series A Subordinated Debentures no more than 30 and no less than 60 days prior
to the effectiveness thereof.
The Series A Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. See "-- Subordination." Substantially all of the Company's existing
indebtedness constitutes Senior Indebtedness. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any subsidiary, including RSLIC, upon such subsidiary's liquidation or
reorganization or otherwise, is subject to the prior claims of creditors of that
subsidiary, except to the extent that the Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Series A Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries, and holders of Series A Subordinated Debentures should
look only to the assets of the Company for payments on the Series A Subordinated
Debentures. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Indenture, any existing indenture or any other indenture that the
Company may enter into in the future or otherwise. See "-- Subordination."
OPTION TO DEFER INTEREST PAYMENTS
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Series A Subordinated Debentures to defer
payment of interest on the Series A Subordinated Debentures for a period not
exceeding 10 consecutive semi-annual periods with respect to each Extension
Period, provided that no Extension Period may extend beyond the Stated Maturity
of the Series A Subordinated Debentures. At the end of such Extension Period,
the Company must pay all interest then accrued and unpaid on the Series A
Subordinated Debentures (together with interest on such unpaid interest at the
annual rate of 9.31%, compounded semi-annually from the relevant Interest
Payment Date, to the extent permitted by applicable law). During an Extension
Period, interest will accrue and holders of Series A Subordinated Debentures (or
holders of Series A Capital Securities while such series is outstanding) will be
required to recognize income (in the form of original issue discount) for United
States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Potential Deferral of Interest Payments."
During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock, (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company (including other series of Junior Subordinated
Debentures) that rank pari passu with or junior in interest to the Series A
Subordinated Debentures or (iii) make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu with or junior in interest to the Series A
Subordinated Debentures (other than (a) dividends or distributions in capital
stock of the Company, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the redemption or repurchase
of any such rights pursuant thereto, (c) payments under the Series A Guarantee
and (d) purchases of common stock related to the issuance of common stock or
rights or options under any of the Company's benefit plans for its directors,
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officers, employees or other persons within the definition of "employee" for
purposes of a registration of shares for an employee benefit plan of the
Company, related to the issuance of common stock or rights under a dividend
reinvestment and stock purchase plan, or related to the issuance of common stock
(or securities convertible into or exchangeable for common stock) as
consideration in an acquisition transaction that was entered into prior to the
commencement of the Extension Period). Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest on the
Series A Subordinated Debentures, provided that no Extension Period may exceed
10 consecutive semi-annual periods or extend beyond the Stated Maturity of the
Series A Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the rate of 9.31%, compounded semi-annually, to the extent
permitted by applicable law), the Company may elect to begin a new Extension
Period subject to the above requirements. No interest shall be due and payable
during an Extension Period, except at the end thereof. The Company must give the
Managing Member and the Debenture Trustee notice of its election to begin such
Extension Period at least one Business Day prior to the earlier of (i) the date
interest on the Series A Subordinated Debentures would have been payable except
for the election to begin such Extension Period, (ii) the date the Managing
Member is required to give notice to the New York Stock Exchange, the Nasdaq
National Market or other applicable stock exchange or automated quotation system
on which the Series A Capital Securities are then listed or quoted, if any, or
to holders of Series A Subordinated Debentures of the record date for such
Distributions or (iii) the date such Distributions are payable, but in any event
not less than one Business Day prior to such record date. The Debenture Trustee
shall give notice of the Company's election to begin a new Extension Period to
the holders of the Series A Subordinated Debentures. There is no limitation on
the number of times that the Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If Delphi Funding is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Series A Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
Delphi Funding shall not be reduced as a result of any such additional taxes,
duties or other governmental charges.
REDEMPTION
The Series A Subordinated Debentures are redeemable prior to maturity at
the option of the Company (i) on or after March 25, 2007, in whole at any time
or in part from time to time or (ii) at any time following a Tax Event, in
certain circumstances as described under "-- Conditional Right to Shorten
Maturity or Redeem upon a Tax Event," in whole (but not in part) within 90 days
following the occurrence of a Tax Event. The proceeds of any such redemption
will be used by Delphi Funding to redeem the Series A Securities.
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The Redemption Price, in the case of a redemption under (i) above, shall
equal the following prices, expressed in percentages of the principal amount,
together with accrued interest to but excluding the Redemption Date. If redeemed
during the 12-month period beginning March 25:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
------------------------------------------------------------------------ ----------
<S> <C>
2007.................................................................... 104.6550%
2008.................................................................... 104.1895
2009.................................................................... 103.7240
2010.................................................................... 103.2585
2011.................................................................... 102.7930
2012.................................................................... 102.3275
2013.................................................................... 101.8620
2014.................................................................... 101.3965
2015.................................................................... 100.9310
2016.................................................................... 100.4655
</TABLE>
and at 100% on or after March 25, 2017.
The Redemption Price, in the case of a redemption following a Tax Event as
described under (ii) above, shall equal the Make-Whole Amount (as defined under
"Certain Terms of Series A Capital Securities -- Redemption"), together with
accrued interest to but excluding the Redemption Date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Series A Subordinated
Debentures to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price, on and after the redemption date interest
ceases to accrue on such Series A Subordinated Debentures or portions thereof
called for redemption.
DISTRIBUTION OF SERIES A SUBORDINATED DEBENTURES
As described under "Certain Terms of Series A Capital
Securities -- Liquidation of Delphi Funding and Distribution of Series A
Subordinated Debentures to Holders," under certain circumstances involving the
termination of Delphi Funding, Series A Subordinated Debentures may be
distributed to the holders of the Series A Capital Securities in exchange
therefor upon liquidation of Delphi Funding after satisfaction of liabilities to
creditors of Delphi Funding as provided by applicable law. If distributed to
holders of Series A Capital Securities, the Series A Subordinated Debentures
will initially be issued in the form of one or more global securities and DTC,
or any successor depositary for the Series A Capital Securities, will act as
depositary for the Series A Subordinated Debentures. It is anticipated that the
depositary arrangements for the Series A Subordinated Debentures would be
substantially identical to those in effect for the Series A Capital Securities.
There can be no assurance as to the market price of any Series A Subordinated
Debentures that may be distributed to the holders of Series A Capital
Securities.
CONDITIONAL RIGHT TO SHORTEN MATURITY OR REDEEM UPON A TAX EVENT
If a Tax Event occurs and either (i) in the opinion of counsel to the
Company experienced in such matters, there would in all cases, after effecting
the termination of Delphi Funding and the distribution of the Series A
Subordinated Debentures to the holders of the Series A Capital Securities in
exchange therefor, be more than an insubstantial risk that an Adverse Tax
Consequence would continue to exist or (ii) the Series A Subordinated Debentures
are not held by Delphi Funding, then the Company shall have the right (a) to
shorten the Stated Maturity of the Series A Subordinated Debentures to the
minimum extent required, but in any event to a date not earlier than March 25,
2012 (the action referred to in this clause (a) being referred to herein as a
"Maturity
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Advancement"), such that, in the opinion of counsel to the Company experienced
in such matters, after advancing the Stated Maturity, interest paid on the
Series A Subordinated Debentures will be deductible for federal income tax
purposes, or (b) if in the opinion of counsel to the Company experienced in such
matters, there would in all cases, after effecting a Maturity Advancement, be
more than an insubstantial risk that an Adverse Tax Consequence would continue
to exist, to redeem the Series A Subordinated Debentures, in whole but not in
part, at any time within 90 days following the occurrence of the Tax Event at a
Redemption Price equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the Redemption Date. See "Certain Terms of Series A
Capital Securities -- Liquidation of Delphi Funding and Distribution of Series A
Subordinated Debentures to Holders" and "-- Redemption" and "Certain Terms of
Series A Subordinated Debentures -- General" and "-- Redemption."
Holders of Series A Capital Securities should consult their own tax
advisors regarding the tax consequences to them of a Maturity Advancement.
See "Certain Federal Tax Law Consequences -- Possible Tax Law Changes
Affecting the Series A Capital Securities" for a discussion of certain
legislative proposals that, if adopted, could give rise to a Tax Event, which
may permit the Company to shorten the Stated Maturity of the Series A
Subordinated Debentures or cause a redemption of the Series A Capital Securities
prior to March 25, 2007.
REGISTRATION AND TRANSFER OF SERIES A SUBORDINATED DEBENTURES
The Series A Subordinated Debentures will be registered in the name of
Delphi Funding. In the event that the Series A Subordinated Debentures are
distributed to holders of Series A Capital Securities, it is anticipated that
the depositary and other arrangements for the Series A Subordinated Debentures
will be substantially identical to those in effect for the Series A Capital
Securities as applicable. See "Certain Terms of Series A Capital
Securities -- Registration and Transfer of Series A Capital Securities" and
"Book-Entry Issuance."
The Series A Subordinated Debentures will be issuable only in registered
form without coupons in denominations of $1,000 and any integral multiple
thereof. Series A Subordinated Debentures will be exchangeable for other Series
A Subordinated Debentures of any authorized denominations, of a like aggregate
principal amount, of the same original issue date and stated maturity and
bearing the same interest rate.
The Series A Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the form
of transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the appropriate securities registrar or at the
office of any transfer agent designated by the Company for such purpose with
respect to the Series A Subordinated Debentures, without service charge and upon
payment of any taxes and other governmental charges as described in the
Indenture. The Company will appoint Wilmington Trust Company as securities
registrar and transfer agent under the Indenture. The Company may at any time
rescind the designation of the transfer agent or approve a change in the
location through which any such transfer agent acts, provided that the Company
maintains a transfer agent in each place of payment. The Company may at any time
designate additional transfer agents with respect to the Series A Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Series A Subordinated Debentures during a period beginning at the opening of
business 15 days before the mailing of a notice of redemption of Series A
Subordinated Debentures and ending at the close of business on the day of such
mailing of notice of redemption or (ii) transfer or exchange any Series A
Subordinated Debentures selected for redemption, except, in the case of any
Series A Subordinated Debentures being redeemed in part, any portion thereof not
to be redeemed.
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PAYMENT AND PAYING AGENTS
Payment of principal of (and premium, if any) and any interest on Series A
Subordinated Debentures will be made at the office of the Debenture Trustee in
The City of New York or at the office of such paying agent or paying agents as
the Company may designate from time to time, except that at the option of the
Company payment of any interest may be made (i) except in the case of Global
Series A Subordinated Debentures, by check mailed to the address of the person
entitled thereto as such address shall appear in the securities register or (ii)
by wire transfer or direct deposit to an account maintained by the person
entitled thereto as specified in the securities register, provided that proper
transfer instructions have been received by the Regular Record Date. The Company
will initially appoint Wilmington Trust Company as a paying agent. Payment of
any interest on Series A Subordinated Debentures will be made to the person in
whose name such Series A Subordinated Debenture is registered at the close of
business on the Regular Record Date for such interest, except in the case of
defaulted interest. The Company may at any time designate additional paying
agents or rescind the designation of any paying agent; however the Company will
at all times be required to maintain a paying agent in each place of payment for
each series of Series A Subordinated Debentures.
RESTRICTIONS ON CERTAIN PAYMENTS
The Company has covenanted that it will not, and will not permit any
subsidiary of the Company to, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock, (ii) make any payment of principal, interest
or premium, if any, on or repay or repurchase or redeem any debt securities of
the Company (including other series of junior subordinated debentures ranking
pari passu with the Series A Subordinated Debentures) that rank pari passu with
or junior in interest to the Series A Subordinated Debentures or (iii) make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
with or junior in interest to the Series A Subordinated Debentures (other than
(a) dividends or distributions in capital stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Series A Guarantee and (d) purchases of
common stock related to the issuance of common stock or rights or options under
any of the Company's benefit plans for its directors, officers, employees or
other persons within the definition of "employee" for purposes of a registration
of shares for an employee benefit plan of the Company, related to the issuance
of common stock or rights under a dividend reinvestment and stock purchase plan,
or related to the issuance of common stock (or securities convertible into or
exchangeable for common stock) as consideration in an acquisition transaction
that was entered into prior to the commencement of such Extension Period) if at
such time (i) there shall have occurred any event of which the Company has
actual knowledge (a) that with the giving of notice or the lapse of time, or
both, would constitute an "Event of Default" under the Indenture with respect to
the Series A Subordinated Debentures and (b) in respect of which the Company
shall not have taken reasonable steps to cure, (ii) if the Series A Subordinated
Debentures are held by Delphi Funding, the Company shall be in default with
respect to its payment of any obligations under the Series A Guarantee or (iii)
the Company shall have given notice of its selection of an Extension Period as
provided in the Indenture with respect to the Series A Subordinated Debentures
and shall not have rescinded such notice, and such Extension Period, or any
extension thereof, shall be continuing.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of the Series A Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies
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(provided that any such action does not materially adversely affect the interest
of the holders of the Series A Subordinated Debentures or the holders of the
Series A Capital Securities so long as they remain outstanding) and qualifying,
or maintaining the qualification of, the Indenture under the Trust Indenture
Act. The Indenture contains provisions permitting the Company and the Debenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of Series A Subordinated Debentures, to modify the Indenture in
a manner adversely affecting the rights of the holders of Series A Subordinated
Debentures in any material respect; provided that no such modification may,
without the consent of the holder of each Series A Subordinated Debenture so
affected, (i) change the Stated Maturity of the Series A Subordinated Debentures
(except as otherwise specified in this Prospectus Supplement), or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon or (ii) reduce the percentage of principal amount of Series A
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture, provided further that, so long as any Series
A Capital Securities remain outstanding, (a) no such modification may be made
that adversely affects the holders of such Series A Capital Securities in a
material respect, and no termination of the Indenture may occur, and no waiver
of any event of default or compliance with any covenant under the Indenture may
be effective, without the prior consent of the holders of at least a majority of
the aggregate Liquidation Amount of all outstanding Series A Capital Securities
affected unless and until the principal of the Series A Subordinated Debentures
and all accrued and unpaid interest thereon have been paid in full and certain
other conditions have been satisfied, and (b) where a consent under the
Indenture would require the consent of each holder of Series A Subordinated
Debentures, no such consent shall be given by the Managing Member without the
prior consent of each holder of Series A Capital Securities.
In addition, the Company and the Debenture Trustee may execute, without the
consent of any holder of Series A Subordinated Debentures, any supplemental
Indenture for the purpose of creating any new series of Junior Subordinated
Debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Series A Subordinated Debentures that has occurred
and is continuing constitutes a "Debenture Event of Default" with respect to the
Series A Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Series A
Subordinated Debentures when due (subject to the deferral of any interest
payment in the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on the Series A
Subordinated Debentures when due whether at maturity or upon redemption; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture or the Series A Subordinated
Debenture for 90 days after written notice to the Company from the
Debenture Trustee or the holders of at least 25% in aggregate outstanding
principal amount of outstanding Series A Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of
Series A Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. Upon certain events of bankruptcy, insolvency or reorganization of the
Company constituting a Debenture Event of Default, the principal amount of all
outstanding Series A Subordinated Debentures shall automatically become
immediately due and payable. The Debenture Trustee or the holders of not less
than 25% in aggregate outstanding principal amount of Series A Subordinated
Debentures may declare the principal due and payable immediately upon any other
Debenture Event of Default, and in the case of Series A Subordinated Debentures
held by Delphi Funding, should the Debenture Trustee or Delphi Funding fail to
make
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such declaration, the holders of at least 25% in aggregate Liquidation Amount of
Series A Capital Securities shall have such right. The holders of a majority in
aggregate outstanding principal amount of Series A Subordinated Debentures may
annul such declaration. In the case of Series A Subordinated Debentures held by
Delphi Funding, should Delphi Funding fail to annul such declaration and waive
such default, the holders of a majority in aggregate Liquidation Amount of the
Series A Capital Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Series A Subordinated Debentures may, on behalf of the holders of all the Series
A Subordinated Debentures, waive any default, except a default in the payment of
principal or interest (unless such default has been cured and a sum sufficient
to pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee) or a default in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each outstanding Series A
Subordinated Debenture. In the case of Series A Subordinated Debentures held by
Delphi Funding, should Delphi Funding fail to waive such default, the holders of
a majority in aggregate Liquidation Amount of the Series A Capital Securities
shall have such right. The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Indenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Series A Subordinated Debentures, Delphi Funding will have the right to
declare the principal of and the interest on the Series A Subordinated
Debentures, and any other amounts payable under the Indenture, to be forthwith
due and payable and to enforce its other rights as a creditor with respect to
the Series A Subordinated Debentures. Under the terms of the L.L.C. Agreement,
the holders of outstanding Series A Capital Securities will have the rights
described under "Certain Terms of Series A Capital Securities -- Voting Rights;
Amendment of L.L.C. Agreement."
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF SERIES A SECURITIES
If a Debenture Event of Default with respect to the Series A Subordinated
Debentures has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Series A Subordinated
Debentures on the date such interest or principal is due and payable, a holder
of Series A Securities may institute a legal proceeding directly against the
Company for enforcement of payment to such holder of the principal of or
interest on the Series A Subordinated Debentures having a principal amount equal
to the aggregate Liquidation Amount of the Series A Capital Securities of such
holder (a "Direct Action"). The Company may not amend the Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all of the Series A Capital Securities outstanding. If the
right to bring a Direct Action is removed, Delphi Funding may become subject to
the reporting obligations under the Exchange Act. The Company shall have the
right under the Indenture to set-off any payment made to such holder of Series A
Capital Securities by the Company in connection with a Direct Action.
The holders of the Series A Capital Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Series A Subordinated Debentures unless there
shall have been an event of default under the L.L.C. Agreement. See "Certain
Terms of Series A Capital Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys or transfers its
properties
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and assets substantially as an entirety to any Person, the successor Person is
organized under the laws of the United States or any state or the District of
Columbia, and such successor Person expressly assumes the Company's obligations
on the Series A Subordinated Debentures issued under the Indenture; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; (iii) in the case of
Series A Subordinated Debentures held by Delphi Funding, such transaction is
permitted under the L.L.C. Agreement and Series A Guarantee and does not give
rise to any breach or violation of the L.L.C. Agreement or Series A Guarantee,
and (iv) certain other conditions as prescribed by the Indenture are met.
The general provisions of the Indenture do not afford holders of the Series
A Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Series A Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Series A
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable, (ii) will become due and payable
at their Stated Maturity within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Debenture
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company and the Company deposits or causes to be
deposited with the Debenture Trustee funds, in trust, for the purpose and in an
amount in the currency or currencies in which the Series A Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Series A Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation, for the principal (and premium, if any) and
interest to the date of the deposit or to the Stated Maturity, as the case may
be, then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and to
provide the officers' certificates and opinions of counsel described therein),
and the Company will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
The Series A Subordinated Debentures are unsecured and subordinated to the
extent set forth in the Indenture, to all Senior Indebtedness (as defined below)
of the Company. In the event that the Company shall default in the payment of
any principal, premium, if any, or interest, if any, on any Senior Indebtedness
when the same becomes due and payable, whether at maturity or at a date fixed
for prepayment or by declaration of acceleration or otherwise, then, unless and
until such default shall have been cured or waived or shall have ceased to exist
or all Senior Indebtedness shall have been paid, no direct or indirect payment
(in cash, property, securities, by set-off or otherwise) shall be made or agreed
to be made for principal, premium, if any, or interest, if any, on the Series A
Subordinated Debentures, or in respect of any redemption, repayment, retirement,
purchase or other acquisition of any of the Series A Subordinated Debentures.
As used herein, "Senior Indebtedness" means any obligation of the Company
to its creditors, whether now outstanding or subsequently incurred, other than
any obligation as to which, in the instrument creating or evidencing the
obligation or pursuant to which the obligation is outstanding, it is provided
that such obligation is not Senior Indebtedness. Senior Indebtedness does not
include trade accounts payable and accrued liabilities arising in the ordinary
course of business or the Series A Subordinated Debentures.
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to the Company, its creditors or its property, (ii) any proceeding for the
liquidation, dissolution or other winding up of the Company, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings,
(iii) any
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assignment by the Company for the benefit of creditors or (iv) any other
marshalling of the assets of the Company, all Senior Indebtedness (including any
interest thereon accruing after the commencement of any such proceedings) shall
first be paid in full before any payment or distribution, whether in cash,
securities or other property, shall be made on account of the principal of or
premium, if any, or interest, if any, on the Series A Subordinated Debentures.
In such event, any payment or distribution on account of the principal of or
premium, if any, or interest, if any, on the Series A Subordinated Debentures,
whether in cash, securities or other property (other than securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in the subordination provisions with respect to the Series A
Subordinated Debentures, to the payment of all Senior Indebtedness at the time
outstanding, and to any securities issued in respect thereof under any such plan
of reorganization or readjustment), which would otherwise (but for the
subordination provisions) be payable or deliverable in respect of the Series A
Subordinated Debentures shall be paid or delivered directly to the holders of
Senior Indebtedness in accordance with the priorities then existing among such
holders until all Senior Indebtedness (including any interest thereon accruing
after the commencement of any such proceedings) shall have been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Series A Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Series A Subordinated Debentures, shall be entitled to be
paid from the remaining assets of the Company the amounts at the time due and
owing on account of unpaid principal of and premium, if any, and interest, if
any, on the Series A Subordinated Debentures and such other obligations before
any payment or other distribution, whether in cash, property or otherwise, shall
be made on account of any capital stock or obligations of the Company ranking
junior to the Series A Subordinated Debentures and such other obligations. If
any payment or distribution on account of the principal of or interest on the
Series A Subordinated Debentures of any character or any security, whether in
cash, securities or other property (other than securities of the Company or any
other corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in the
subordination provisions with respect to the Series A Subordinated Debentures,
to the payment of all Senior Indebtedness at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization or
readjustment) shall be received by any holder of any Series A Subordinated
Debentures in contravention of any of the terms hereof and before all the Senior
Indebtedness shall have been paid in full, such payment or distribution or
security shall be received in trust for the benefit of, and shall be paid over
or delivered and transferred to, the holders of the Senior Indebtedness at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Indebtedness remaining
unpaid to the extent necessary to pay all such Senior Indebtedness in full. By
reason of such subordination, in the event of the insolvency of the Company,
holders of Senior Indebtedness may receive more, ratably, and holders of the
Series A Subordinated Debentures having a claim pursuant to such securities may
receive less, ratably, than the other creditors of the Company. Such
subordination will not prevent the occurrence of any Debenture Event of Default
in respect of the Series A Subordinated Debentures.
The Indenture places no limitation on the amount of additional Senior
Indebtedness that may be incurred by the Company. The Company expects from time
to time to incur additional indebtedness constituting Senior Indebtedness.
GOVERNING LAW
The Indenture and the Series A Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of New York.
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INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Series A Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby.
The Debenture Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Debenture Trustee reasonably believes that repayment or adequate indemnity
is not reasonably assured to it.
CERTAIN TERMS OF SERIES A GUARANTEE
The Series A Guarantee will be executed and delivered by the Company
concurrently with the issuance of the Series A Securities for the benefit of the
holders from time to time of the Series A Securities. Wilmington Trust Company
will act as indenture trustee ("Guarantee Trustee") under the Series A
Guarantee. Although the Series A Guarantee will not be qualified as an indenture
under the Trust Indenture Act, it will be governed by the provisions thereof to
the extent provided in the Series A Guarantee as though it were subject thereto.
This summary of certain provisions of the Series A Guarantee, which summarizes
material terms thereof, does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the Series A
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act, to each of which reference is hereby made. The form of the Series
A Guarantee will be filed as an exhibit to a Current Report on Form 8-K. The
Guarantee Trustee will hold the Series A Guarantee for the benefit of the
holders of the Series A Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Series A Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that Delphi Funding may have or assert
other than the defense of payment. The following payments with respect to the
Series A Securities, to the extent not paid by or on behalf of the related
Issuer (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Series A
Securities, to the extent that Delphi Funding has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Series A
Securities called for redemption, to the extent that Delphi Funding has funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of Delphi Funding (unless the Series A
Subordinated Debentures are distributed to holders of the Series A Securities),
the lesser of (a) the aggregate of the Liquidation Amount and all accumulated
and unpaid Distributions to the date of payment, to the extent that Delphi
Funding has funds on hand available therefor at such time, and (b) the amount of
assets of Delphi Funding remaining available for distribution to holders of the
Series A Securities after satisfaction of liabilities to creditors of Delphi
Funding as required by applicable law. The Company's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Series A Securities or by causing Delphi
Funding to pay such amounts to such holders.
The Series A Guarantee will be an irrevocable guarantee on a subordinated
basis of the related Issuer's obligations under the Series A Securities, but
will apply only to the extent that Delphi Funding has funds sufficient to make
such payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Series A Subordinated
Debentures held by Delphi Funding, Delphi Funding will not be able to pay
Distributions on the Series A Securities and will not have funds legally
available therefor. The Series A Guarantee is unsecured
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and subordinated to all Senior Indebtedness of the Company. See "-- Status of
the Series A Guarantee." Because the Company is a holding company, the right of
the Company to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise, is subject to the
prior claims of creditors of that subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Series A Guarantee will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. The Series A Guarantee does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior
Debt, whether under the Indenture, any other existing indenture or any other
indenture that the Company may enter into in the future or otherwise.
The Company has, through the Series A Guarantee, the L.L.C. Agreement, the
Series A Subordinated Debentures and the Indenture, taken together, fully,
irrevocably and unconditionally guaranteed all of Delphi Funding's obligations
under the Series A Capital Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer's obligations under the Series A Capital Securities. See "Relationship
Among the Series A Capital Securities, the Series A Subordinated Debentures and
the Series A Guarantee."
STATUS OF THE SERIES A GUARANTEE
The Series A Guarantee is an unsecured obligation of the Company and ranks
subordinate to all Senior Indebtedness of the Company in the same manner as the
Series A Subordinated Debentures.
The Series A Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The Series A
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Series A Securities. The Series A Guarantee will not be discharged except
by payment of the Guarantee Payments in full to the extent not paid by the
Issuer or upon distribution to the holders of the Series A Capital Securities of
the Series A Subordinated Debentures. The Series A Guarantee does not limit the
amount of additional Senior Indebtedness that may be incurred by the Company.
The Company expects from time to time to incur additional indebtedness
constituting Senior Indebtedness.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Series A Capital Securities (in which case no vote
will be required), the Series A Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of the outstanding Series A Securities and the Guarantee Trustee. The
manner of obtaining any such approval will be as set forth under "Certain Terms
of Series A Capital Securities -- Voting Rights; Amendment of L.L.C. Agreement."
All guarantees and agreements contained in the Series A Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Company and
shall inure to the benefit of the holders of the Series A Securities then
outstanding.
An event of default under the Series A Guarantee will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate Liquidation
Amount of the Series A Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Series A Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Series A Guarantee.
Any holder of the Series A Securities may institute
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a legal proceeding directly against the Company to enforce its rights under the
Series A Guarantee without first instituting a legal proceeding against Delphi
Funding, the Guarantee Trustee or any other person or entity. If the Company
were to default on its obligation to pay amounts payable under the Series A
Subordinated Debentures, Delphi Funding would lack funds for the payment of
Distributions or amounts payable on redemption of the Series A Securities or
otherwise, and, in such event, holders of the Series A Capital Securities would
not be able to rely upon the Series A Guarantee for payment of such amounts.
Instead, if an event of default under the Indenture shall have occurred and be
continuing and such event is attributable to the failure of the Company to pay
interest on or principal of the Series A Subordinated Debentures on the
applicable payment date, then a holder of Series A Capital Securities may
institute a Direct Action against the Company pursuant to the terms of the
Indenture for enforcement of payment to such holder of the principal of or
interest on such Series A Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Amount of the Series A Capital Securities of
such holder. In connection with such Direct Action, the Company will have a
right of set-off under the Indenture to the extent of any payment made by the
Company to such holder of Series A Capital Securities in the Direct Action.
Except as described herein, holders of Series A Capital Securities will not be
able to exercise directly any other remedy available to the holders of the
Series A Subordinated Debentures or assert directly any other rights in respect
of the Series A Subordinated Debentures. The L.L.C. Agreement provides that each
holder of Series A Securities by acceptance thereof agrees to the provisions of
the Series A Guarantee and the Indenture.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Series A Guarantee, undertakes to
perform only such duties as are specifically set forth in the Series A Guarantee
and, after default with respect to the Series A Guarantee, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Series A Guarantee at the request of any holder of any Series A Capital
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby.
TERMINATION OF THE SERIES A GUARANTEE
The Series A Guarantee will terminate and be of no further force and effect
upon full payment of the Redemption Price of the Series A Securities, upon full
payment of the amounts payable upon liquidation of Delphi Funding or upon
distribution of Series A Subordinated Debentures to the holders of the Series A
Securities in exchange therefor. The Series A Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Series A Securities must restore payment of any sums paid under Series A
Securities or the Series A Guarantee.
GOVERNING LAW
The Series A Guarantee will be governed by and construed in accordance with
the laws of the State of New York.
RELATIONSHIP AMONG THE SERIES A CAPITAL SECURITIES,
THE SERIES A SUBORDINATED DEBENTURES
AND THE SERIES A GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payment of Distributions and other amounts due on the Series A Capital
Securities (to the extent the Issuer has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Certain Terms of Series A Guarantee." Taken together, the
Company's obligations under the Series A Subordinated Debentures, the Indenture,
the L.L.C. Agreement and the Series A Guarantee provide, in the aggregate, a
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full, irrevocable and unconditional guarantee of payments of distributions and
other amounts due on the Series A Capital Securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Issuer's obligations under the Series A Capital Securities. If
and to the extent that the Company does not make payments on the Series A
Subordinated Debentures, Delphi Funding will not pay Distributions or other
amounts due on the Series A Capital Securities. The Series A Guarantee does not
cover payment of Distributions when the related Issuer does not have sufficient
funds to pay such Distributions. In such event, the remedy of a holder of Series
A Capital Securities is to institute a legal proceeding directly against the
Company pursuant to the terms of the Indenture for enforcement of payment of
amounts equal to such Distributions to such holder. The obligations of the
Company under the Series A Guarantee are unsecured and subordinated to all
Senior Indebtedness of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Series A Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Series A Capital Securities,
primarily because (i) the aggregate principal amount of the Series A
Subordinated Debentures will be equal to the sum of the aggregate stated
Liquidation Amount of the Series A Capital Securities and Series A Common
Securities; (ii) the interest rate and interest and other payment dates on the
Series A Subordinated Debentures will match the Distribution rate and
Distribution and other payment dates for the Series A Capital Securities; (iii)
the holders of the Series A Common Securities shall pay for all and any costs,
expenses and liabilities of Delphi Funding except the obligations to holders of
its Series A Capital Securities under such Series A Capital Securities; and (iv)
the L.L.C. Agreement further provides that Delphi Funding will not engage in any
activity that is not consistent with the limited purposes of Delphi Funding.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Series A Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF SERIES A CAPITAL SECURITIES
A holder of Series A Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Series A Guarantee
without first instituting a legal proceeding against the Guarantee Trustee,
Delphi Funding or any other person or entity.
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default under the Indenture. However,
in the event of payment defaults under, or acceleration of, Senior Indebtedness
of the Company, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Series A Subordinated Debentures until
such Senior Indebtedness has been paid in full or any payment default thereunder
has been cured or waived. Failure to make required payments on the Series A
Subordinated Debentures would constitute a Debenture Event of Default under the
Indenture.
LIMITED PURPOSE OF DELPHI FUNDING
The Series A Securities evidence limited liability company interests in
Delphi Funding, and Delphi Funding exists for the sole purpose of issuing its
Series A Capital Securities and Series A Common Securities and investing the
proceeds thereof in Series A Subordinated Debentures. A principal difference
between the rights of a holder of a Series A Capital Security and a holder of a
Series A Subordinated Debenture is that a holder of a Series A Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Series A Subordinated Debentures held, while a holder of
Series A Capital Securities is entitled to receive Distributions from
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Delphi Funding (or from the Company under the Series A Guarantee) if and to the
extent such Issuer has funds available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary dissolution of Delphi Funding involving
the liquidation of the Series A Subordinated Debentures, the holders of the
Series A Capital Securities will be entitled to receive, out of the assets held
by such Issuer, the Liquidation Distribution in cash. See "Certain Terms of
Series A Capital Securities -- Liquidation of Delphi Funding and Distribution of
Series A Subordinated Debentures to Holders." Upon any voluntary or involuntary
liquidation or bankruptcy of the Company, Delphi Funding, as holder of the
Series A Subordinated Debentures, would be a subordinated creditor of the
Company, subordinated in right of payment to all Senior Indebtedness as set
forth in the Indenture, but entitled to receive payment in full of principal and
interest, before any stockholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Series A Guarantee
and the holders of the Series A Common Securities is obligated to pay for all
costs, expenses and liabilities of Delphi Funding (other than Delphi Funding's
obligations to the holders of its Series A Capital Securities), the positions of
a holder of such Series A Capital Securities and a holder of such Series A
Subordinated Debentures relative to other creditors and to stockholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain United States federal income tax
considerations that may be relevant to the purchase, ownership or disposition of
Series A Capital Securities by a beneficial owner acquiring Series A Capital
Securities on their original issue at the original offering price who or that is
(i) an individual citizen or resident of the United States, (ii) a corporation
or partnership created or organized in or under the laws of the United States or
any state thereof or the District of Columbia, (iii) an estate subject to United
States federal income taxation without regard to the source of its income or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more fiduciaries who have authority to
control all substantial decisions of the trust (a "United States Person"). This
discussion does not purport to address all potential tax consequences that may
be applicable to a beneficial owner of a Series A Capital Security, and is not
intended to be wholly applicable to all categories of investors (including
insurance companies, banks, tax-exempt organizations, dealers in securities and
persons acquiring Series A Capital Securities as a straddle or hedge or as part
of a "conversion transaction") or persons whose functional currency is not the
United States dollar.
This discussion is based upon current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service rulings and pronouncements and judicial decisions now in effect, all of
which are subject to change at any time. Such changes may be applied
retroactively in a manner that could cause tax consequences to vary
substantially from the consequences described below. These authorities are
subject to various interpretations and it is therefore possible that the federal
income tax treatment of the Series A Capital Securities may differ from the
treatment described below.
Each prospective purchaser of Series A Capital Securities should consult,
and should depend on, its own tax advisor in analyzing the federal, state, local
and foreign tax consequences of the purchase, ownership or disposition of Series
A Capital Securities.
INCOME FROM SERIES A CAPITAL SECURITIES
In the opinion of Cahill Gordon & Reindel, special tax counsel to the
Company and Delphi Funding, Delphi Funding will be treated as a partnership for
federal income tax purposes. Accordingly, each holder of Series A Capital
Securities (a "Securityholder") will be required to include in gross income its
distributive share of the net income of Delphi Funding. Such income will
generally not exceed the distributions received on such Series A Capital
Securities, except in limited
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circumstances as described below under "-- Potential Deferral of Interest
Payments" and "-- Possible Tax Law Changes Affecting the Series A Capital
Securities." Any amount so included in a Securityholder's gross income will
increase its tax basis in the Series A Capital Securities, and the amount of
cash distributions to the Securityholder will reduce its tax basis in the Series
A Capital Securities. No portion of such income will be eligible for the
dividends received deduction.
SALE OR REDEMPTION OF SERIES A CAPITAL SECURITIES
Gain or loss will be recognized on a sale of Series A Capital Securities,
including a complete redemption for cash, equal to the difference between the
amount realized and the Securityholder's tax basis for the Series A Capital
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
the sale or exchange of a Series A Capital Security held for more than one year
will generally constitute long-term capital gain or loss.
POTENTIAL DEFERRAL OF INTEREST PAYMENTS
Under the terms of the Series A Subordinated Debentures, the Company has
the option to defer interest payments on the Series A Subordinated Debentures
for up to 60 months. In the event the interest payments are deferred, Delphi
Funding will continue to accrue income equal to the amount of the interest
payment due at the end of the deferred interest payment period, based on a
constant yield method, over the length of the deferred interest payment period.
Accrued income for any month will be allocated by Delphi Funding to
Securityholders of record on the record date for dividends in respect of such
month (whether or not dividends are actually paid). As a result, Securityholders
of record during a deferral of interest payments should include in gross income
amounts in respect of interest so allocated to them in advance of the receipt of
cash, and any such Securityholders who dispose of Series A Capital Securities
prior to the record date for the payment of dividends following such deferral of
interest will include interest in gross income but will not receive any cash
related thereto from Delphi Funding. The tax basis of a Series A Capital
Security will be increased by such amounts that are included in income without a
receipt of cash, and will be decreased when and if such cash is subsequently
received from Delphi Funding.
EXCHANGE OF SERIES A CAPITAL SECURITIES FOR SERIES A SUBORDINATED DEBENTURES
Under certain circumstances as described under the caption "Certain Terms
of Series A Capital Securities -- Liquidation of Delphi Funding and Distribution
of Series A Subordinated Debentures to Holders," Series A Capital Securities may
be exchanged for Series A Subordinated Debentures. Under current United States
federal income tax law, such an exchange should be treated as a non-taxable
exchange, in which case each Securityholder would have an aggregate tax basis in
the Series A Subordinated Debentures received equal to such holder's aggregate
tax basis in the Series A Capital Securities exchanged therefor and such
Securityholder's holding period in the Series A Subordinated Debentures so
received would include the period for which the Series A Capital Securities were
held by such Securityholder.
After an exchange of Series A Capital Securities for Series A Subordinated
Debentures, holders of the Series A Subordinated Debentures (including those
otherwise using a cash basis method of accounting) should (except in limited
circumstances) include interest on the Series A Subordinated Debentures in
income as it accrues based on a constant yield method, before the receipt of
payments of interest, including during an interest deferral period.
INFORMATION RETURNS AND AUDIT PROCEDURES
The Managing Member of Delphi Funding will furnish each Securityholder with
a Schedule K-1 each year setting forth such Securityholder's allocable share of
income for the prior calendar year. The Managing Member is required to furnish
such Schedule K-1 as soon as practicable following the end of the year, but in
any event prior to March 31.
Any person who holds Series A Capital Securities as a nominee for another
person is required to furnish to Delphi Funding (a) the name, address and
taxpayer identification number of the
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beneficial owner and the nominee; (b) information as to whether the beneficial
owner is (i) a person that is not a United States Person, (ii) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either the foregoing or (iii) a tax-exempt entity; (c) the
amount and description of Series A Capital Securities held, acquired or
transferred for the beneficial owner; and (d) certain information including the
dates of acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States Persons and certain
information on Series A Capital Securities they acquire, hold or transfer for
their own accounts. A penalty of $50 per failure (up to a maximum of $100,000
per calendar year) is imposed by the Code for failure to report such information
to Delphi Funding. The nominee is required to supply the beneficial owners of
the Series A Capital Securities with the information furnished to Delphi
Funding.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments to
non-corporate United States holders of the proceeds of the sale of Series A
Capital Securities within the United States and "backup withholding" at a rate
of 31% will apply to such payments if the United States holder fails to provide
an accurate taxpayer identification number.
POSSIBLE TAX LAW CHANGES AFFECTING THE SERIES A CAPITAL SECURITIES
The Administration Proposal proposed certain tax law changes that would,
among other things, generally deny interest deductions for interest on an
instrument issued by a corporation that has a maximum term of more than 15 years
and that is not shown as indebtedness on the separate balance sheet of the
issuer or, where the instrument is issued to a related party (other than a
corporation), where the holder or some other related party issues a related
instrument that is not shown as indebtedness on the issuer's consolidated
balance sheet. The above-described provision of the Administration Proposal is
proposed to be effective no earlier than the date of first committee action. To
date, neither the House Ways and Means Committee nor the Senate Finance
Committee has taken action on the Administration Proposal. However, there can be
no assurance that one or the other of such committees will not act prior to the
issuance of the Series A Subordinated Debentures, in which case the Company will
not be able to deduct interest on the Series A Subordinated Debentures.
Furthermore, there can be no assurance that future legislative proposals or
final legislation will not adversely affect the ability of the Company to deduct
interest on the Series A Subordinated Debentures or otherwise affect the tax
treatment of the transaction described herein. Such a change could give rise to
a Tax Event, which, depending on certain circumstances, could permit the Company
to terminate Delphi Funding and cause the Series A Subordinated Debentures to be
distributed to the holders of the Series A Capital Securities in exchange
therefor upon liquidation of Delphi Funding, to shorten the maturity of the
Series A Subordinated Debentures to a date not earlier than March 25, 2012 or to
cause a redemption of the Series A Capital Securities before March 25, 2007. See
"Certain Terms of Series A Subordinated Debentures -- Conditional Right to
Shorten Maturity or Redeem upon a Tax Event" and "-- Redemption."
A shortening of the Stated Maturity of the Series A Subordinated Debentures
might be treated as a taxable exchange resulting in gain or loss to Delphi
Funding, which may increase or decrease a securityholder's distributive share of
the net income of Delphi Funding.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR SITUATION. PROSPECTIVE SECURITYHOLDERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SERIES A CAPITAL
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Series A Capital Securities. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(33) of ERISA), and foreign plans (as described in Section 4(b)(5) of ERISA)
are not subject to the requirements of ERISA or Section 4975 of the Code;
governmental plans may be subject to similar provisions under applicable state
laws.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of Delphi Funding would be deemed to
be "plan assets" of a Plan for purposes of ERISA or Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in Delphi
Funding and no exception were applicable under the Plan Assets Regulation. An
"equity interest" is defined under the Plan Assets Regulation as any interest in
an entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of Delphi Funding would not be deemed to be "plan assets" of investing
Plans if, immediately after the most recent acquisition of any equity interest
in Delphi Funding, less than 25% of the value of each class of equity interests
in Delphi Funding were held by Plans, other employee benefit plans not subject
to ERISA or Section 4975 of the Code (such as governmental, church and foreign
plans), and entities holding assets deemed to be "plan assets" of any Plan
(collectively, "Benefit Plan Investors"), or if the Series A Capital Securities
were "publicly-offered securities" for purposes of the Plan Assets Regulation.
No assurance can be given that the value of the Series A Capital Securities held
by Benefit Plan Investors will be less than 25% of the total value of such
Series A Capital Securities at the completion of the initial offering or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. In addition, no assurance
can be given that the Series A Capital Securities would be considered to be
"publicly-offered securities" under the Plan Assets Regulation. All of the
Series A Common Securities will be purchased and initially held by the Company.
Certain transactions involving Delphi Funding could be deemed to constitute
direct or indirect prohibited transactions under ERISA or Section 4975 of the
Code with respect to a Plan if the Series A Capital Securities were acquired
with "plan assets" of such Plan and the assets of Delphi Funding were deemed to
be "plan assets" of Plans investing in Delphi Funding. For example, if the
Company is a Party in Interest with respect to an investing Plan (either
directly or by reason of its ownership of subsidiaries), extensions of credit
between the Company and Delphi Funding (as represented by the Series A
Subordinated Debentures and the Series A Guarantee) would likely be prohibited
by Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless
exemptive relief were available under an applicable administrative exemption
(see below). In addition, if the Company were considered to be a fiduciary with
respect to Delphi Funding as a result of certain powers it holds, the optional
redemption or acceleration of the Series A Subordinated Debentures
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could be considered to be prohibited transactions under Section 406(a)(b) of
ERISA and Section 4975(c)(1)(E) of the Code.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect prohibited
transactions that may arise from the purchase or holding of the Series A Capital
Securities if assets of Delphi Funding were deemed to be "plan assets" of Plans
investing in Delphi Funding as described above. Those class exemptions are PTCE
96-23 (for certain transactions determined by in-house asset managers), PTCE
95-60 (for certain transactions involving insurance company general accounts),
PTCE 91-38 (for certain transactions involving bank collective investment
funds), PTCE 90-1 (for certain transactions involving insurance company separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified asset managers).
Because the Series A Capital Securities may be deemed to be equity
interests in Delphi Funding for purposes of applying ERISA and Section 4975 of
the Code, the Series A Capital Securities may not be purchased or held by any
Plan, any entity whose underlying assets include "plan assets" by reason of any
Plan's investment in the entity (a "Plan Asset Entity") or any person investing
"plan assets" of any Plan, unless such purchaser or holder is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption. ANY PURCHASER OR HOLDER OF THE SERIES A CAPITAL
SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS
PURCHASE AND HOLDING THEREOF THAT IT EITHER (A) IS NOT A PLAN OR A PLAN ASSET
ENTITY AND IS NOT PURCHASING SUCH SECURITIES ON BEHALF OF OR WITH "PLAN ASSETS"
OF ANY PLAN OR (B) IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER PTCE
96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION WITH RESPECT
TO SUCH PURCHASE OR HOLDING. If a purchaser or holder of the Series A Capital
Securities that is a Plan or a Plan Asset Entity elects to rely on an exemption
other than PTCE 96-23, 95-60, 91-38, 90-1 or 84-14, the Company and Delphi
Funding may require a satisfactory opinion of counsel or other evidence with
respect to the availability of such exemption for such purchase and holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Series A
Capital Securities on behalf of or with "plan assets" of any Plan consult with
their counsel regarding the potential consequences if the assets of Delphi
Funding were deemed to be "plan assets" and the availability of exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or any other applicable
exemption.
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for all of the Series A Capital
Securities. The Series A Capital Securities will be issued only as
fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered global certificates will be issued for
the Series A Capital Securities representing in the aggregate the total number
of Series A Capital Securities, and will be deposited with DTC.
DTC has advised the Company and Delphi Funding as follows: DTC is a limited
purpose trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
Participants deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants" include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
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also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Series A Capital Securities within the DTC system must be made
by or through Direct Participants, which will receive a credit for the Series A
Capital Securities on DTC's records. The ownership interest of each actual
purchaser of each Series A Capital Security ("Beneficial Owner") is in turn to
be recorded on the Direct and Indirect Participants' records. Beneficial Owners
will not receive written confirmation from DTC of their purchases, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participants through which the Beneficial Owners
purchased Series A Capital Securities. Transfers of ownership interests in the
Series A Capital Securities are to be accomplished by entries made on the books
of Participants acting on behalf of Beneficial Owners. Beneficial Owners will
not receive certificates representing their ownership interests in Series A
Capital Securities, except in the event that use of the book-entry system for
the Series A Capital Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Series A
Capital Securities; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Series A Capital Securities are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Series A Capital Securities. If less than all of the Series A Capital
Securities are being redeemed, DTC's current practice is to determine by lot the
amount of the interest of each Direct Participant to be redeemed.
Although voting with respect to the Series A Capital Securities is limited
to the holders of record of the Series A Capital Securities, in those instances
in which a vote is required, neither DTC nor Cede & Co. will itself consent or
vote with respect to Series A Capital Securities. Under its usual procedures,
DTC would mail an omnibus proxy (the "Omnibus Proxy") to the relevant Trustee as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Series A Securities are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Distribution payments on the Series A Capital Securities will be made to
DTC. DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participant and not of DTC, the relevant Trustee, the Issuer thereof or the
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of Distributions to DTC is the responsibility of the
relevant Trustee, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursements of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to the Series A Capital Securities or at any time by giving reasonable
notice to the relevant Trustee and the Company. In the event that a successor
securities depositary is not obtained, definitive certificates representing the
Series A Capital Securities are required to be printed and delivered. The
Company, at its option, may decide to discontinue use of the system of
book-entry transfers through DTC (or a
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successor depositary). After a Debenture Event of Default, the holders of a
majority in aggregate Liquidation Amount of Series A Capital Securities may
determine to discontinue the system of book-entry transfers through DTC. In any
such event, definitive certificates for the Series A Capital Securities will be
printed and delivered.
In the event that the Series A Subordinated Debentures are distributed to
holders of Series A Capital Securities, it is anticipated that the depositary
and other arrangements for the Series A Subordinated Debentures will be
substantially identical to those in effect for the Series A Capital Securities
as applicable.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that Delphi Funding and the Company believe to be
accurate, but Delphi Funding and the Company assume no responsibility for the
accuracy thereof. Neither Delphi Funding nor the Company has any responsibility
for the performance by DTC or its Participants of their respective obligations
as described herein or under the rules and procedures governing their respective
operations.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Pricing Agreement, the Company and Delphi Funding have agreed that
Delphi Funding will sell to Goldman, Sachs & Co. ("Goldman Sachs"), and Goldman
Sachs have agreed to purchase from Delphi Funding, 100,000 Series A Capital
Securities.
Under the terms and conditions of the Underwriting Agreement, Goldman Sachs
are committed to take and pay for all the Series A Capital Securities offered
hereby, if any are taken.
Goldman Sachs propose to offer the Series A Capital Securities in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of $6.00 per Series A Capital Security.
Goldman Sachs may allow, and such dealers may reallow, a concession not in
excess of $2.50 per Series A Capital Security to certain brokers and dealers.
After the Series A Capital Securities are released for sale to the public, the
offering price and other selling terms may from time to time be varied by
Goldman Sachs.
In view of the fact that the proceeds from the sale of the Series A Capital
Securities will be used to purchase the Series A Subordinated Debentures issued
by the Company, the Underwriting Agreement provides that the Company will pay as
Underwriters' compensation for the Underwriters' arranging the investment
therein of such proceeds an amount of $12.50 per Series A Capital Security for
the accounts of Goldman Sachs.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Series A Capital Securities offered hereby as interests in
a direct participation program, the offering is being made in compliance with
Rule 2810 of the NASD's Conduct Rules. Offers and sales of Series A Capital
Securities will be made only to (i) "qualified institutional buyers," as defined
in Rule 144A under the Securities Act of 1933, as amended (the "Act"); (ii)
institutional "accredited investors," as defined in Rule 501(a)(1)-(3) of
Regulation D under the Act or (iii) individual investors for whom an investment
in non-convertible investment grade preferred securities is appropriate. Goldman
Sachs may not confirm sales to any accounts over which they exercise
discretionary authority without the prior written approval of the transaction by
the customer.
The Company and Delphi Funding have agreed that, during the period
beginning from the date of the Pricing Agreement and continuing to and including
the later of (i) the termination of trading restrictions on the Series A Capital
Securities, as determined by Goldman Sachs, and (ii) 30 days after the closing
date, they will not offer, sell, contract to sell or otherwise dispose of any
Series A Capital Securities, any other beneficial interests in the assets of
Delphi Funding, or any preferred securities or any other securities of Delphi
Funding or the Company which are substantially similar to the Series A Capital
Securities, including any guarantee of such securities, or any securities
convertible into or exchangeable for or representing the right to receive
preferred securities or any such substantially similar securities of either
Delphi Funding or the Company, without the prior written consent of Goldman
Sachs, except for the Series A Capital Securities offered in connection with
this offering.
The Series A Capital Securities are a new issue of securities with no
established trading market. Goldman Sachs have advised the Company that they
intend to make a market in the Series A Capital Securities, but are not
obligated to do so and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Series A Capital Securities.
During and after the offering, Goldman Sachs may purchase and sell the
Series A Capital Securities in the open market. These transactions may include
overallotment and stabilizing transactions and purchases to cover short
positions created by Goldman Sachs in connection with the offering. Goldman
Sachs also may impose a penalty bid, whereby selling concessions allowed to
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other broker-dealers in respect of the Series A Capital Securities sold in the
offering may be reclaimed by Goldman Sachs if such securities are repurchased by
Goldman Sachs in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Series A Capital
Securities which may be higher than the price that might otherwise prevail in
the open market. These transactions may be effected in the over-the-counter
market or otherwise, and these activities, if commenced may be discontinued at
any time.
The Company and Delphi Funding have agreed to indemnify Goldman Sachs
against, or contribute to payments that Goldman Sachs may be required to make in
respect of, certain liabilities, including liabilities under the Act.
Goldman Sachs or their affiliates have provided from time to time, and
expect to provide in the future, investment or commercial banking services to
the Company and its affiliates, for which Goldman Sachs or their affiliates have
received or will receive customary fees and commissions.
EXPERTS
The consolidated financial statements and schedules of DFG and subsidiaries
at December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, appearing in DFG's Annual Report (Form 10-K) for the
year ended December 31, 1996, are incorporated by reference in this Prospectus
Supplement and have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon also incorporated by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Series A
Capital Securities, the enforceability of the L.L.C. Agreement and the formation
of Delphi Funding will be passed upon by Morris, Nichols, Arsht & Tunnell, 1201
North Market Street, Wilmington, Delaware 19801, special Delaware counsel to the
Company and Delphi Funding. The validity of the Series A Guarantee and the
Series A Subordinated Debentures will be passed upon for the Company by Cahill
Gordon & Reindel (a partnership including a professional corporation), 80 Pine
Street, New York, New York 10005, and for Goldman Sachs by Sullivan & Cromwell,
125 Broad Street, New York, New York 10004. Certain matters relating to United
States federal income tax considerations will be passed upon for the Company by
Cahill Gordon & Reindel.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission, Washington, D.C. (the "Commission"). Reports, proxy and information
statements and other information filed by the Company in accordance with the
Exchange Act may 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: New York Regional
Office, Seven World Trade Center, Suite 1300, New York, New York 10048; and
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site
that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov. The Company's Class A Common Stock is listed on the
New York Stock Exchange, and such reports and other information concerning
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the Company can be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus Supplement
and the accompanying Prospectus its Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
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 Supplement
and prior to the termination of the offering of the Securities shall be deemed
to be incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus and to be a part hereof and thereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus Supplement and the accompanying
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement and the accompanying
Prospectus.
S-78
<PAGE> 79
ANNEX 1
CERTAIN PROVISIONS OF THE COMPANY'S
SENIOR AND OTHER LONG-TERM INDEBTEDNESS
The following summary of certain covenants included in the Company's debt
instruments does not purport to be complete and is qualified in its entirety by
reference to the Credit Agreement, the Senior Note Indenture (as defined below)
and the SIG Note Purchase Agreement (as defined below), copies of each of which
have been filed or incorporated as exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and are incorporated herein by
reference. Copies of such documents are available from the Company upon request.
See also "Available Information." Capitalized terms used but not otherwise
defined herein have the meanings ascribed thereto in the Prospectus Supplement
to which this Annex 1 is attached. As of December 31, 1996, the Company was in
compliance in all material respects with all restrictions and covenants in the
Credit Agreement and the Senior Notes, and SIG was in compliance in all material
respects with all restrictions and covenants in the SIG Senior Notes.
Credit Agreement. Under the Credit Agreement, DFG may not permit, among
other things, (i) the sum of (A) statutory surplus and (B) the amount of the
interest maintenance reserve plus the amount of the asset valuation reserve
("IMR/AVR") of RSLIC to be less than $150 million at any time or the statutory
surplus of SNCC to be less than $75 million at any time; (ii) the Consolidated
Equity (as defined in the Credit Agreement, which definition includes the Series
A Capital Securities but excludes any unrealized gains or losses under FAS 115)
of the Company to at any time be less than $275 million plus 50% of the
Consolidated Net Income (as defined in the Credit Agreement) of the Company for
the period from January 1, 1997 to the date of calculation; (iii) the ratio of
(A) Statutory Liabilities (as defined in the Credit Agreement) minus IMR/AVR of
RSLIC to (B) statutory surplus plus IMR/AVR of RSLIC to exceed 15.0 to 1 at any
time (as measured as of the end of each fiscal quarter for the fiscal quarter
then ended); (iv) the ratio of Consolidated Funded Debt (as defined in the
Credit Agreement) to the sum of Consolidated Funded Debt plus Consolidated
Equity to exceed .50 to 1 for 1997 or .45 to 1 thereafter (measured as of the
end of each fiscal quarter for the fiscal quarter then ended); (v) the
Risk-Based Capital (as defined in the Credit Agreement) of RSLIC to fall below
140% or the Risk-Based Capital of SNCC to fall below 105%, in each case as
measured as of the end of each fiscal year for the fiscal year then ended; or
(vi) the Cash Coverage Ratio (as defined in the Credit Agreement) of the Company
to be less than 1.4 to 1 as of the end of any fiscal quarter.
DFG Senior Notes. Under the indenture relating to the Senior Notes (the
"Senior Note Indenture"), DFG may not, among other things, (i) incur any
Indebtedness (as defined in the Senior Note Indenture), other than Permitted
Indebtedness (as defined in the Senior Note Indenture), unless the Consolidated
Fixed Charge Coverage Ratio (as defined in the Senior Note Indenture) of DFG and
its Restricted Subsidiaries (as defined in the Senior Note Indenture) for the
preceding four fiscal quarters would have been at least equal to 2.25 to 1 or
(ii) permit any of its Restricted Subsidiaries to incur any Indebtedness other
than Permitted Restricted Subsidiaries Indebtedness (as defined in the Senior
Notes Indenture).
SIG Senior Notes. The purchase agreement relating to the SIG Senior Notes
(the "SIG Note Purchase Agreement") includes covenants that, among other things,
(i) restrict the payment of cash dividends by SIG to DFG and SIG's ability to
make certain investments to 50% of SIG's Net Income (as defined in the SIG Note
Purchase Agreement) computed on a cumulative basis after March 31, 1994; (ii)
maintain the statutory surplus of SNCC of not less than $75.0 million; (iii)
maintain the shareholders' equity of SIG of not less than $40.0 million; (iv)
maintain the ratio of Available Cash Flow (as defined in the SIG Note Purchase
Agreement) to Debt Service (as defined in the SIG Note Purchase Agreement) of
not less than 1.25 to 1; and (v) maintain the ratio of SIG's Consolidated Debt
to Consolidated Total Capitalization (as defined in the SIG Note Purchase
Agreement) of not greater than .40 to 1 subsequent to January 1, 1997.
A-1
<PAGE> 80
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<PAGE> 81
DELPHI FINANCIAL GROUP, INC.
PREFERRED STOCK AND PREFERRED STOCK WARRANTS
CLASS A COMMON STOCK AND CLASS A COMMON STOCK WARRANTS
DEBT SECURITIES AND DEBT WARRANTS
DELPHI FUNDING L.L.C.
PREFERRED SECURITIES
------------------------
Delphi Financial Group, Inc. ("Delphi" or the "Company") may from time to
time offer, in one or more series,
shares of its Preferred Stock, $.01 par value per share (the "Preferred Stock"),
warrants to purchase Preferred Stock ("Preferred Stock Warrants"), shares of its
Class A Common Stock, $.01 par value per share (the "Class A Common Stock"),
warrants to purchase Class A Common Stock ("Common Stock Warrants"), its
unsecured debt securities ("Debt Securities") and warrants to purchase Debt
Securities ("Debt Warrants," and collectively with the Preferred Stock Warrants
and Common Stock Warrants, the "Securities Warrants"), having such prices and
terms as are determined in light of market conditions at the time of sale.
Delphi Funding L.L.C. ("Delphi Funding"), a Delaware limited liability company
and a special purpose subsidiary of Delphi, may also offer, from time to time,
its preferred limited liability company interests ("DF Preferred Securities"),
in one or more series. In connection therewith, Delphi may offer back-up
undertakings ("Backup Undertakings") with respect to the DF Preferred
Securities, as described herein under "Delphi Funding L.L.C." The Preferred
Stock, Class A Common Stock, Debt Securities, Securities Warrants and DF
Preferred Securities and any related Backup Undertakings are collectively called
the "Securities." In the case of Preferred Stock and DF Preferred Securities,
the Prospectus Supplement accompanying this Prospectus sets forth, with respect
to the particular series of Preferred Stock for which this Prospectus and the
Prospectus Supplement are being delivered, the number of shares, designation,
liquidation preference per share, issuance price, dividend rate (or method of
calculation), dividend payment dates, any redemption or sinking fund provisions,
any conversion or exchange rights or other special terms and the names of the
underwriters, if any. In the case of Class A Common Stock, the Prospectus
Supplement accompanying this Prospectus sets forth the number of shares,
issuance price and the names of the underwriters, if any. In the case of Debt
Securities, the Prospectus Supplement accompanying this Prospectus sets forth,
with respect to the particular series of Debt Securities for which this
Prospectus and the Prospectus Supplement are being delivered, the specific
aggregate principal amount, denominations (which may be in United States
dollars, in any other currency or in composite currencies), maturity, rate
(which may be fixed or variable) and time of payment of any interest, purchase
price, any terms for conversion or redemption or other special terms and the
names of the underwriters, if any. The Debt Securities may be unsecured Debt
Securities (the "Senior Debt Securities") or unsecured and subordinated Debt
Securities (the "Subordinated Debt Securities"). The Senior Debt Securities,
when issued, will rank on a parity with all other unsecured and unsubordinated
indebtedness of Delphi, and the Subordinated Debt Securities, when issued, will
be subordinate in right of payment to all obligations of Delphi to its other
creditors, except obligations ranking on a parity with or junior to the
Subordinated Debt Securities. In the case of Securities Warrants, the Prospectus
Supplement accompanying this Prospectus sets forth the duration, offering price,
exercise price, detachability, if applicable, and the names of the underwriters,
if any.
The Securities may be offered as separate series in amounts, at prices and
on terms to be determined in light of market conditions at the time of offering
and set forth in a Prospectus Supplement or Prospectus Supplements. The Company
and/or Delphi Funding may sell Securities to or through underwriters, or to
dealers, acting as principals for their own accounts, and each reserves the
right to sell their Securities directly to other purchasers or through agents on
their own behalf.
------------------------
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.
------------------------
Prior to issuance there will have been no market for the Preferred Stock,
Debt Securities, Securities Warrants or DF Preferred Securities, as the case may
be, and there can be no assurance that a secondary market for any such
Securities will develop. This Prospectus may not be used to consummate sales of
any Securities unless accompanied by a Prospectus Supplement. The Securities may
be offered through one or more different plans of distribution, including
offerings through underwriters. See "Plan of Distribution" herein.
------------------------
The date of this Prospectus is July 15, 1994.
<PAGE> 82
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer contained in 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 underwriters, agents or dealers.
This Prospectus does not constitute an offer to sell or solicitation of an offer
to buy securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company and its subsidiaries
since the date hereof or that the information contained herein is correct at any
time subsequent to the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission, Washington, D.C. (the "Commission"). Reports, proxy and information
statements and other information filed by the Company in accordance with the
Exchange Act may 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: New York Regional
Office, Seven World Trade Center, New York, New York 10048; and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. The Company's Class A Common Stock is listed on the Nasdaq Stock
Market.
The Company has filed with the Commission a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby (the "Registration Statement"). This Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such contract or agreement filed as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed to
be qualified in its entirety by such reference. Reference is made to the
Registration Statement and to the exhibits relating thereto for further
information with respect to the Company and the Securities offered hereby.
No separate financial statements of Delphi Funding have been included
herein. Delphi and Delphi Funding do not consider that such financial statements
would be material to holders of DF Preferred Securities because Delphi Funding
is a newly organized special purpose entity, has no operating history and no
independent operators and is not engaged in, and does not propose to engage in,
any activity other than the issuance of its limited liability company interests
and the lending of the proceeds thereof to Delphi. See "Delphi Funding L.L.C."
Delphi Funding is a limited liability company organized under the laws of the
State of Delaware and will be managed by Delphi, which beneficially owns all of
Delphi Funding's limited liability company interests (other than the DF
Preferred Securities, which are non-transferable).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus its Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 and its
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994.
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 Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by
2
<PAGE> 83
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person to whom
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(not including exhibits to such documents unless exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Delphi Financial Group, Inc., at 1105 North Market Street, Suite 1230, P.O. Box
8985, Wilmington, Delaware 19899, Attention: Secretary. Telephone requests may
be directed to (302) 478-5142.
The terms "Delphi" and the "Company," as used herein, refer to Delphi
Financial Group, Inc. and all its subsidiaries, except where another definition
is indicated or the context otherwise requires.
USE OF PROCEEDS
Except as otherwise stated in the Prospectus Supplement, the net proceeds
to be received by the Company from the sale of the Securities will be added to
the Company's general funds and used for general corporate purposes. Any
specific allocation of the proceeds to a particular purpose that has been made
at the date of any Prospectus Supplement will be described therein.
3
<PAGE> 84
THE COMPANY
Delphi Financial Group, Inc. ("Delphi" or the "Company") is an insurance
holding company engaged through its subsidiaries in offering a diverse portfolio
of life, long-term disability and personal accident insurance products
principally to the employee benefits market. The Company also offers asset
accumulation products (primarily annuities) to individuals and groups. The
Company offers its insurance products in all fifty states and the District of
Columbia. The Company's three product categories are group insurance, individual
insurance and asset accumulation products.
The Company was organized as a Delaware corporation in 1987 for the purpose
of acquiring, through its wholly owned subsidiary, Reliance Standard Life
Insurance Company of Texas, a Texas life insurance company ("RSLIC-Texas"), all
of the common stock of Reliance Standard Life Insurance Company, an Illinois
life insurance company ("RSLIC"), and its subsidiary, First Reliance Standard
Life Insurance Company, a New York life insurance company, which companies had
historically engaged in the sale of insurance products targeted principally to
the employee benefits market.
Rosenkranz & Company, a New York limited partnership, of which Robert
Rosenkranz, Chairman of the Board, President and Chief Executive Officer of the
Company, is managing general partner, has approximately a 48.4% equity interest
and approximately a 90.4% voting interest, on a fully diluted basis, in the
Company.
The Company's principal executive offices are located at 1105 North Market
Street, Suite 1230, P.O. Box 8985, Wilmington, Delaware 19899. Its telephone
number is (302) 478-5142.
INVESTMENT CONSIDERATIONS
An investment in the Securities involves a certain degree of risk.
Prospective investors should carefully evaluate the following considerations in
addition to the other information in this Prospectus and the Prospectus
Supplement before purchasing any of the Securities offered hereby.
Control By Rosenkranz & Company. Each share of Class A Common Stock is
entitled to one vote per share on all matters submitted to a shareholder vote
and each share of Class B Common Stock, par value $.01 per share, of the Company
(the "Class B Common Stock") is entitled to ten votes per share on all such
matters. Each share of Class B Common Stock is convertible at any time into one
share of Class A Common Stock. The holders of the Class A Common Stock vote as a
separate class to elect one director of the Company. See "Description of Capital
Stock of Delphi." As of May 31, 1994, Rosenkranz & Company owns 5,885,657 shares
of the Class B Common Stock. This represents approximately 48.2% of the total
number of shares of Class A and Class B Common Stock outstanding, on a fully
diluted basis. These shares owned by Rosenkranz & Company represent
approximately 90.3% of the combined voting power of the shareholders of the
Company, on a fully diluted basis. Holders of a majority of the voting power of
Company have the power to elect all of the members of the Company's Board of
Directors (other than the director elected by the holders of Class A Common
Stock) and to determine the outcome of fundamental corporate transactions,
including mergers and acquisitions, consolidations and sales of all or
substantially all of the assets of the Company. The Company is a party to
consulting and other agreements with certain affiliates of Rosenkranz & Company
which are expected to continue in accordance with their terms.
Dependence on Key Personnel. The Company is dependent upon the expertise
of certain of its key officers, including Charles O'Brien, President and Chief
Executive Officer of RSLIC, with respect to its insurance operations, and Thomas
Sullivan, President of Delphi Capital Management, Inc. ("DCM"), with respect to
its investment operations. Robert Rosenkranz, President and Chief Executive
Officer of the Company, and Robert Posnak, Vice President of the Company, are
actively involved in major strategic decisions. If the Company were to lose the
services of any of these key officers, its business could be adversely affected.
The Company seeks to retain key personnel through competitive compensation
arrangements, including the granting of stock options and other incentives. In
addition, as the managing partner of Rosenkranz & Company, Mr. Rosenkranz has a
substantial continuing interest in the Company's operations. The Company owns
and is named beneficiary under two life insurance policies issued by The
Prudential Insurance Company of America and Metropolitan Life Insurance Company
insuring Mr. Rosenkranz, each
4
<PAGE> 85
such policy having a face amount of $20.0 million. The Company has entered into
an employment agreement with Mr. Posnak.
Insurance Regulations. The Company is highly regulated by state insurance
authorities in the states in which its insurance subsidiaries are domiciled and
the other states in which they conduct business. Such regulations, among other
things, limit the amount of dividends and other payments that can be made by
such subsidiaries without prior regulatory approval and impose restrictions on
the amount and type of investments such subsidiaries may have. These regulations
also affect many other aspects of the Company's insurance subsidiaries'
businesses, including, for example, risk-based capital requirements, the type
and amount of required asset valuation reserve and interest maintenance reserve
accounts, and the terms and conditions of such subsidiaries' insurance products.
These regulations are intended to protect policyholders rather than investors.
Recently, increased scrutiny has been placed upon the insurance regulatory
framework, and a number of state legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, state authority to
regulate insurance companies. In addition, legislation has been introduced in
Congress that could result in the federal government assuming some role in the
regulation of the insurance industry. In light of these legislative
developments, the National Association of Insurance Commissioners and insurance
regulators are also involved in a process of reexamining existing laws and their
application to insurance companies. In particular, this reexamination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the development
of new laws and the implementation of non-statutory guidelines. These
developments may impact the structure of insurance company investment portfolios
and the earnings thereon. It is not possible to predict the future impact of
changing state and federal regulation on the operations of the Company and its
insurance subsidiaries.
Holding Company Structure. The Company does not anticipate paying any cash
dividends on the Class A Common Stock or the Class B Common Stock in the
foreseeable future. However, if the Company were to change its present dividend
policy, as a holding company, its ability to pay such dividends, as well as to
meet debt service obligations and pay expenses will depend upon receipt of
sufficient funds from its subsidiaries, as well as the Company's financial
resources on a parent company only basis totalling approximately $90.0 million
at March 31, 1994, consisting of cash and equity investments in non-insurance
subsidiaries. In addition, the Company has at the parent company level available
borrowings under its Amended and Restated Credit Agreement dated as of July 13,
1993 among the Company and the lenders named therein.
The Company's other current sources of liquidity include payments made on
surplus debentures issued by RSLIC-Texas (the "Surplus Debentures") and
dividends paid from insurance and non-insurance subsidiaries, primarily
generated from operating cash flows and short-term investments. A substantial
portion of operating funds is derived from the payments made by RSLIC-Texas on
the Surplus Debentures, the unpaid principal balance of which was $93.7 million
at March 31, 1994. These payments are generally funded by dividend payments made
by RSLIC to RSLIC-Texas. These dividends are subject to regulatory restrictions
and, in the absence of regulatory approval, are generally limited within any
12-month period, in the aggregate, to the greater of RSLIC's statutory net
income for the preceding calendar year, or 10% of RSLIC's statutory surplus as
of the preceding December 31, determined in accordance with state insurance
regulations. RSLIC's statutory surplus as of March 31, 1994 was $132.6 million.
The Company's insurance subsidiaries had funds available for payment to the
Company during the remainder of 1994, without prior regulatory approval,
totalling $44.7 million at March 31, 1994. This excludes $2.8 million of
statutory earnings generated by the insurance subsidiaries during the first
three months of 1994, which will be available for payment to the Company in
1995. Additional dividends may also be available to the Company with regulatory
approval.
Investment Performance and Strategy. The market value of the Company's
investments varies depending on economic and market conditions. In addition, in
the event that investments are called or redeemed prior to stated maturity, the
Company may be unable to reinvest the proceeds in securities with comparable
interest rates. The Company may also be required in the future to sell certain
investments at a price and a time when the market value of such investments is
less than the book value of such investments. As of March 31, 1994, 71.1% of the
Company's invested assets (including reverse repurchase agreements) consisted of
mortgage-
5
<PAGE> 86
backed securities which subject the Company to a degree of extension risk or
prepayment risk. As of March 31, 1994, non-investment grade fixed maturity
investments, balances with independent investment managers and investments in
real estate represented 3.1%, 11.4% and 0.1% of total invested assets,
respectively.
Balances with independent investment managers consist primarily of limited
partner interests in limited partnerships employing uncorrelated and inversely
correlated investment strategies. Such strategies include hedging of stocks and
fixed income investments, futures trading, risk arbitrage using common and
preferred stocks, bonds and derivatives, specialized trading of common stocks
including buying and selling short securities and mixed, foreign and distressed
portfolio management. The Company's weighted average pre-tax returns from this
group of investments were 27.5%, 29.2%, 24.5%, 5.7%, 13.4% and 34.5% for the
years ended December 31, 1988, 1989, 1990, 1991, 1992 and 1993, respectively,
and a negative return of 2.5% for the three months ended March 31, 1994,
representing an average annual return of 18.0% over such period. The securities
included in the portfolios of these independent investment managers include both
long and short positions in domestic and foreign debt and equity securities and
commodity, interest rate and currency futures and options. These investments may
expose the Company to currency risks inherent in holding foreign securities, as
well as the credit risk, interest rate risk and liquidity risk generally
associated with fixed maturities and certain futures and options contracts. The
Company, as a limited partner in such limited partnerships, does not control the
selection of securities to be purchased or sold by the limited partnerships.
Because the specific types of securities comprising the portfolios of its
investment managers are generally considered proprietary by the partnerships
holding such portfolios, limited partners, such as the Company, do not have
regular access to information regarding the portfolios; however, such
information may be available upon request. Interim and annual audited financial
statements are received by the Company, but the timing of the receipt of such
information varies among partnerships. Due to the fact that the Company's return
on such investments varies from period to period, no assurances can be given
that the Company's historical performance with respect to such investments will
continue. Significant losses by one or more of these investment managers could
have an adverse effect on the Company's financial condition and results of
operations.
Shares Eligible for Future Sale. As of May 31, 1994, the Company has
outstanding 5,885,657 shares of Class B Common Stock and 405,675 additional
shares of Class B Common Stock reserved for issuance upon exercise of employee
options. All of such Class B Common Stock may be converted into Class A Common
Stock, in whole or in part, at any time by the holders thereof and must be
converted in certain other circumstances, including upon transfer thereof other
than to a limited class of transferees and upon the registration of such shares
under the Securities Act. The Company does not intend to list the Class B Common
Stock on any exchange or to make any other arrangements for secondary trading
thereof. An increase in the number of shares of Common Stock that become
available for sale in the public market may adversely affect the trading price
of the Class A Common Stock in the public market and could impair the Company's
ability to raise additional capital through the sale of its equity securities.
Competition; Other Factors Affecting Business. There are approximately
2,000 life insurance companies in the United States, including other companies
that focus major sales efforts in the employee benefits market or seek to
acquire existing blocks of business. The Company estimates that approximately 40
such companies focus major sales efforts in the group long-term disability
market. In addition, the Company competes with other financial services
companies, such as banks and thrift institutions, which offer investment and
other products similar to those offered by the Company. Many of these companies
are larger or have greater resources than the Company. The Company believes that
its reputation in the marketplace, quality of service and investment returns
have enabled it to compete effectively for new insurance business in its
targeted markets in the past.
A continued economic recession could have an adverse effect on underwriting
results for the Company's insurance products and the returns on the Company's
investment portfolio. The Company's profitability is also significantly affected
by its investment results.
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<PAGE> 87
Lack of Prior Public Market. There is currently no public market for the
Preferred Stock, Debt Securities, Securities Warrants or DF Preferred Securities
offered hereby. There can be no assurance as to the liquidity of the trading
market for any such Securities or that an active public market for any such
Securities will develop. If an active public market does not develop, the market
price and liquidity of any such Securities may be adversely affected. The public
offering price may be determined through negotiations between the Company or
Delphi Funding, as the case may be, and one or more underwriters or dealers and
may not be indicative of the market price for any such Securities after the
offering thereof. See "Plan of Distribution."
RATIOS
The following table sets forth the ratio of earnings to fixed charges and
the ratio of earnings to fixed charges and interest credited to policyholder
accounts of the Company for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, 1992 MARCH 31,
-------------------------------------- --------------
1993 1992 1991 1990 1989 1994 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............ 4.93x 2.79x 2.05x 1.95x 1.91x 3.46x 4.07x
Ratio of earnings to fixed charges and
interest credited to policyholder
accounts.................................... 1.84x 1.40x 1.21x 1.24x 1.28x 1.42x 1.67x
</TABLE>
In computing the ratios of earnings to fixed charges and earnings to fixed
charges and interest credited to policyholder accounts, fixed charges consist of
interest expense on indebtedness, including amortization of debt discount, such
portion of rental expense which is estimated to be representative of the
interest factor and preferred stock dividend requirements, all on a pre-tax
basis. Earnings are pre-tax income from continuing operations, plus fixed
charges or fixed charges and interest credited to policyholder accounts, as
applicable.
DESCRIPTION OF SECURITIES
There may be offered under this Prospectus shares of Preferred Stock, Class
A Common Stock or DF Preferred Securities, certain Debt Securities, Preferred
Stock Warrants, Common Stock Warrants, Debt Warrants, Backup Undertakings or any
combination of the foregoing, either individually or as units consisting of one
or more Securities, provided that the aggregate principal amount of Securities
offered by the Company and Delphi Funding will not exceed $150,000,000. If the
Securities are offered as units, the terms of the units will be set forth in a
Prospectus Supplement.
DESCRIPTION OF CAPITAL STOCK OF DELPHI
The following descriptions and the descriptions contained in "Description
of Preferred Stock" and "Description of Common Stock" do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the more complete descriptions thereof set forth in the following documents: (i)
the Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation"); and (ii) its By-Laws, which documents have been incorporated by
reference as exhibits to the Registration Statement of which this Prospectus
forms a part.
The Company currently is authorized to issue 40,000,000 shares of Class A
Common Stock, 20,000,000 shares of Class B Common Stock (the Class A Common
Stock and Class B Common Stock shall be referred to collectively herein as the
"Common Stock") and 10,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). As of May 31, 1994, there were 5,596,627 shares of
Class A Common Stock and 5,885,652 shares of Class B Common Stock outstanding.
There are no shares of Preferred Stock outstanding.
DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain terms of any series
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of the Preferred Stock offered by any Prospectus Supplement will be described in
the Prospectus Supplement relating to such series of the Preferred Stock. If so
indicated in the Prospectus Supplement relating thereto, the terms of any such
series may differ from the terms set forth below. The description of certain
provisions of the Preferred Stock set forth below and the description of the
terms of a particular series of Preferred Stock set forth in the Prospectus
Supplement relating thereto do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the Certificate of
Incorporation which is incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part, and the Certificate
of Designation relating to such series of Preferred Stock, which will be filed
with the Commission in connection with the offering of such series of Preferred
Stock.
GENERAL
Under the Certificate of Incorporation, the Board of Directors of the
Company is authorized without further shareholder action to provide for the
issuance of up to 10,000,000 shares of Preferred Stock in one or more series,
with such voting powers, full or limited, and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated in the
resolution or resolutions providing for the issue of a series of such stock,
adopted at any time or from time to time by the Board of Directors of the
Company (as used herein the term "Board of Directors of the Company" includes
any duly authorized committee thereof). The Preferred Stock shall rank senior to
the Common Stock as to payments of dividends or payments upon liquidation. The
Company may amend from time to time its Certificate of Incorporation to increase
the number of authorized shares of Preferred Stock. Any such amendment would
require the approval of the holders of a majority of the voting power of the
Class A Common Stock and Class B Common Stock, and the approval of the holders
of a majority of the outstanding shares of all series of preferred stock voting
together as a single class.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in the Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the title of
such Preferred Stock and the number of shares offered; (ii) the liquidation
preference per share; (iii) the price at which such Preferred Stock will be
issued; (iv) the dividend rate (or method of calculation), the dates on which
dividends shall be payable, whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from which dividends shall commence
to cumulate; (v) any redemption or sinking fund provisions; (vi) the terms of
any right to convert or exchange the Preferred Stock into other securities or
property of the Company; and (vii) any additional voting, dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such Preferred Stock.
The Preferred Stock will, when issued, be fully paid and nonassessable and
have no preemptive rights. Unless otherwise specified in the Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and liquidation
rights in all respects with any other series of the Preferred Stock.
DIVIDEND RIGHTS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of assets
of the Company legally available therefor, cash dividends at such rates and on
such dates as are set forth in the Prospectus Supplement relating to such series
of the Preferred Stock. Such rate may be fixed, variable or both. Each such
dividend will be payable to the holders of record as they appear on the stock
record books of the Company on such record dates as will be fixed by the Board
of Directors of the Company. Dividends on any series of the Preferred Stock may
be cumulative or noncumulative, as provided in the Prospectus Supplement
relating thereto.
Each series of Preferred Stock will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of the
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Preferred Stock may be entitled to dividends at different rates or based upon
different methods of determination.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock will be
entitled to receive out of assets of the Company available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Stock or any other class of stock ranking junior to such series of the Preferred
Stock upon liquidation, liquidating distributions in the amount set forth in the
Prospectus Supplement relating to such series of the Preferred Stock plus an
amount equal to accrued and unpaid dividends for the then-current dividend
period and, if such series of the Preferred Stock is cumulative, for all
dividend periods prior thereto, all as set forth in the Prospectus Supplement
relating to such shares.
REDEMPTION
Any series of the Preferred Stock may be redeemable, in whole or in part,
at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times and at the
redemption prices set forth in the Prospectus Supplement relating to such
series.
CONVERSION AND EXCHANGE
The terms, if any, on which shares of any series of the Preferred Stock are
convertible into Class A Common Stock or exchangeable for Debt Securities will
be set forth in the Prospectus Supplement relating thereto. Such terms may
include provisions for conversion or exchange, either mandatory, at the option
of the holder, or at the option of the Company in which case the number of
shares of Class A Common Stock or the amount of Debt Securities to be received
by the holders of Preferred Stock would be calculated as of a time and in the
manner stated in the Prospectus Supplement.
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company will be the transfer agent, registrar
and dividend disbursement agent for the Preferred Stock. The registrar for
shares of Preferred Stock will send notices to shareholders of meetings, if any,
at which holders of the Preferred Stock have the right to elect directors of the
Company or to vote on any other matter.
VOTING RIGHTS
Except as indicated in the Prospectus Supplement relating to a particular
series of Preferred Stock, or except as expressly required by applicable law,
the holders of the Preferred Stock will not be entitled to any voting rights.
In addition to any voting rights that may be described in any Prospectus
Supplement, under the Delaware General Corporation Law, the holders of the
Preferred Stock will have the voting rights set forth under the caption
"General" above with respect to amendments to the Certificate of Incorporation
which would increase the number of authorized shares of Preferred Stock of the
Company.
DESCRIPTION OF COMMON STOCK
GENERAL
Subject to the limitations imposed by the terms of the Company's Preferred
Stock (described above), holders of the Common Stock are entitled to participate
equally in dividends as and when declared by the Board of Directors out of
legally available funds. There are no sinking fund or redemption provisions
applicable to the Common Stock and the shares of Common Stock are not
convertible and do not have any preemptive rights. On liquidation, dissolution,
or winding up of the Company, whether voluntary or
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involuntary, after payments have been made to holders of outstanding shares of
the Company's Preferred Stock, holders of the Common Stock have the right to
share ratably in the remaining net assets available for distribution. All shares
of Class A Common Stock sold hereunder will be fully paid and non-assessable.
State Street Bank and Trust Company is the Transfer Agent for the Common
Stock. The Class A Common Stock is listed on the Nasdaq Stock Market.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
All currently outstanding shares of the Class B Common Stock and shares of
the Class A Common Stock are fully paid and nonassessable. The holders of the
currently outstanding Class B Common Stock and Class A Common Stock do not have
any preemptive rights to subscribe for or purchase any additional securities
issued by the Company. No redemption or sinking fund provisions are associated
with the Class A Common Stock or Class B Common Stock. Cumulative voting is not
permitted by holders of either the Class A Common Stock or Class B Common Stock.
VOTING. Holders of Class A Common Stock are entitled to one vote per
share. Holders of Class B Common Stock are entitled to ten votes per share
(subject to certain limitations in the case of holder of shares held in nominee
name). Proposals submitted to a vote of stockholders will be voted on by holders
of Class A Common Stock and Class B Common Stock voting together as a single
class (subject to any voting rights which may be granted to holders of Preferred
Stock), except that holders of the Class A Common Stock will vote as a separate
class to elect one director (the "Class A Director") so long as the outstanding
shares of Class A Common Stock represent at least 10% of the aggregate number of
outstanding shares of the Company's common stock. At all meetings of the
stockholders of the Company, unless a separate vote of any class is required,
the holders of a majority of the voting power of the Class A Common Stock and
Class B Common Stock, represented in person or by proxy, shall constitute a
quorum for the transaction of business; and, generally, the affirmative vote of
the holders of a majority of the votes cast at a meeting at which a quorum is
present shall be the act of the stockholders of the Company. The superior voting
rights of the Class B Common Stock might discourage unsolicited merger proposals
and unfriendly tender offers and may therefore deprive stockholders of any
opportunity to sell their shares at a premium over prevailing market prices.
TRANSFER. The Certificate of Incorporation does not contain any
restrictions on the transfer of shares of Class A Common Stock. Upon transfer of
shares of Class B Common Stock to any person except to a "Permitted Transferee"
(as defined therein), such shares of Class B Common Stock will automatically be
converted into an equal number of shares of Class A Common Stock. Permitted
Transferees of any holder of Class B Common Stock include persons or entities
who on January 24, 1990 were holders or beneficial owners of Class B Common
Stock or had the right to acquire shares of Class B Common Stock upon the
exercise of warrants, certain relatives of such holder of Class B Common Stock,
the trustee of a trust exclusively for the benefit of such holder of Class B
Common Stock and/or one or more of such holder's Permitted Transferees, the
estate of such holder of Class B Common Stock and certain corporations or
partnerships of which two-thirds of the voting power is controlled by or under
common control with such holder of Class B Common Stock.
CONVERSION. Class A Common Stock has no conversion rights. Class B Common
Stock is convertible into Class A Common Stock, in whole or in part, at any time
and from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. If at any
time the number of outstanding shares of Class B Common Stock falls below 5% of
the aggregate number of issued and outstanding shares of Common Stock or the
Board of Directors and the holders of a majority of the outstanding shares of
Class B Common Stock approve the conversion of all of the Class B Common Stock
into Class A Common Stock, then each outstanding share of Class B Common Stock
shall automatically convert into one share of Class A Common Stock. In the event
of a transfer of shares of Class B Common Stock, other than to a Permitted
Transferee, each share of Class B Common Stock so transferred shall be
automatically converted into one share of Class A Common Stock.
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DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive cash dividends pro rata on a per share basis if and when
such dividends are declared by the Board of Directors of the Company from funds
legally available therefor. In the case of any dividend paid other than in cash,
holders of Class A Common Stock and Class B Common Stock are entitled to receive
such dividend pro rata on a per share basis. Dividends paid in common stock may
be paid (i) in shares of Class A Common Stock on the Class A Common Stock and
Class B Common Stock, (ii) in shares of Class B Common Stock on the Class A
Common Stock and Class B Common Stock and (iii) in shares of Class A Common
Stock on the Class A Common Stock and in shares of Class B Common Stock on the
Class B Common Stock. Under a regulation promulgated by the National Association
of Securities Dealers, Inc., payment of any dividend in shares of Class B Common
Stock would likely result in the shares of Class A Common Stock being ineligible
for continued listing on the Nasdaq Stock Market or for listing on any national
securities exchange.
LIQUIDATION, MERGER OR CONSOLIDATION. Holders of Class A Common Stock and
Class B Common Stock share with each other, after payments of any preferential
amounts to which the holders of Preferred Stock are entitled, on a ratable basis
as a single class, in the net assets of the Company available for distribution
in respect of Class A Common Stock and Class B Common Stock in the event of
liquidation or any payments made on the Common Stock in the event of a merger or
consolidation of the Company.
OTHER TERMS. Neither the Class A Common Stock nor the Class B Common Stock
may be subdivided or combined in any manner unless contemporaneously therewith
the other class of shares is subdivided or combined in the same proportion.
Additional shares of Class B Common Stock may not be issued except (i) in
payment of a stock dividend on then outstanding shares of Class B Common Stock;
(ii) in connection with a stock split, reclassification or other subdivision of
then outstanding shares of Class B Common Stock; and (iii) upon exercise of
options or warrants previously issued to certain key employees of the Company.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE
COMPANY'S CERTIFICATE OF INCORPORATION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
The Certificate of Incorporation prohibits stockholders from taking any
action without a meeting, except upon unanimous written consent. In addition,
special meetings of stockholders may only be called by the Board of Directors.
These provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by the
Board of Directors of the Company. The Certificate of Incorporation also
provides that the Board of Directors has the exclusive power to fill newly
created directorships and vacancies in the Board. The Certificate of
Incorporation provides that directors of the Company will not be personally
liable for monetary damages for breach of the director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchase or
redemptions as provided in section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper personal
benefit. The Certificate of Incorporation provides that the Company shall
indemnify its officers and directors to the fullest extent permitted by Delaware
law.
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DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions may apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.
The Senior Debt Securities are to be issued under an Indenture to be dated
as of a date to be determined (together with any supplements or amendments, the
"Senior Indenture") between the Company and a trustee to be designated (the
"Senior Trustee"). The Subordinated Debt Securities are to be issued under an
Indenture to be dated as of a date to be determined (together with any
supplements or amendments, the "Subordinated Indenture"), between the Company
and a trustee to be designated (the "Subordinated Trustee," and together with
the Senior Trustee, the "Trustees"). The Senior Indenture and the Subordinated
Indenture (collectively, the "Indentures") are exhibits to the Registration
Statement. The particular terms of the Debt Securities will be described in a
Prospectus Supplement and set forth in a final form of the corresponding
Indenture.
The statements in this description of the Debt Securities and the
Indentures pursuant to which they are to be issued are a summary of such
instruments and do not purport to be complete. The terms of the Debt Securities
include those stated in the Indentures and those made part of the Indentures by
reference to the Trust Indenture Act of 1939 as in effect on the date of the
Indentures (the "TIA"). The Debt Securities are subject to all such terms, and
holders of Debt Securities are referred to the Indentures and the TIA for a
statement of such terms. Anyone who receives this Prospectus may obtain a copy
of the proposed Indentures without charge by writing to the Secretary of the
Company at the address set forth under "Incorporation of Certain Documents by
Reference." As used under this caption "Description of Debt Securities," the
terms "Delphi" and the "Company" refer to Delphi Financial Group, Inc. and do
not include the Company's subsidiaries ("Subsidiaries") unless otherwise
indicated by reference to a definition from the Indentures.
GENERAL
The Indentures do not limit the aggregate principal amount of Debt
Securities which may be issued thereunder and each Indenture provides that Debt
Securities may be issued thereunder from time to time in one or more series,
each in an aggregate principal amount authorized by the Company prior to
issuance. Unless otherwise specified in the Prospectus Supplement, the Senior
Debt Securities when issued will be unsecured and unsubordinated obligations of
the Company and will rank equally and ratably with all other unsecured and
unsubordinated indebtedness of the Company. The Subordinated Debt Securities
when issued will be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness (as defined below) of the Company, as described
under "Subordination of Subordinated Debt Securities" and in the Prospectus
Supplement applicable to an offering of Subordinated Debt Securities.
The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms, where applicable, of each of the series of the
Debt Securities: (1) the title of the Debt Securities and the series of which
the Debt Securities shall be a part; (2) any limit on the aggregate principal
amount of any series of the Debt Securities; (3) the price (expressed as a
percentage of the aggregate principal amount thereof) at which the Debt
Securities will be issued; (4) the date or dates (or manner of determining the
same) on which the principal of the Debt Securities is payable; (5) the rate or
rates (which may be fixed, variable or both) per annum (or a manner of
determining the same) at which the Debt Securities will bear interest, if any,
and whether the interest rate on the Debt Securities may be reset upon certain
designated events; (6) the date from which such interest, if any, on the Debt
Securities will accrue, the dates on which such interest, if any, will be
payable, the date on which payment of such interest, if any, will commence and
the record dates for such interest payment dates, if any; (7) the place or
places where principal of (and premium, if any) and interest, if any, on the
Debt Securities will be payable; (8) the period or periods within which, the
price or prices at which, and the terms and conditions upon which the Debt
Securities may be redeemed, in whole or in part, at the option of the Company,
if applicable; (9) the obligations, if any, of the Company to convert Debt
Securities into other securities of the Company at the option of the holder
thereof, the period or periods within
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which, the price or prices at which and the terms and conditions upon which Debt
Securities will be convertible into such other securities and the terms of such
other securities; (10) the obligation, if any, of the Company to redeem or
purchase the Debt Securities at the option of a holder thereof, and the period
or periods within which, the price or prices at which, and the terms and
conditions upon which the Debt Securities will be redeemed or purchased, in
whole or in part, pursuant to any such obligation; (11) the dates, if any, on
which and the price or prices at which the Debt Securities will, pursuant to any
mandatory sinking fund provisions, or may, pursuant to any optional redemption
or sinking fund provisions or pursuant to any purchase fund provisions, be
redeemed by the Company, and the other detailed terms and provisions of such
sinking and/or purchase fund; (12) the denominations in which the Debt
Securities are authorized to be issued; (13) whether the Debt Securities are to
be represented in whole or in part by a Debt Security in global form and, if so,
the identity of the depositary ("Depositary") for any Debt Security in global
form; (14) if other than the full principal amount thereof, the portion of the
principal amount of the Debt Securities which will be payable upon declaration
of acceleration of the maturity thereof; (15) if the amount of payments of
principal of (and premium, if any) or interest, if any, on the Debt Securities
may be determined with reference to an index, the manner in which such amounts
will be determined; (16) whether the Debt Securities are to be issued with
original issue discount within the meaning of Section 1273(a) of the Internal
Revenue Code of 1986, as amended; (17) any addition to, or modification or
deletion of, any Events of Default (as defined herein) or covenants provided for
in the Indenture with respect to the Debt Securities; (18) the classification as
Senior Debt Securities or Subordinated Debt Securities; and (19) any other
specific terms of the offered Debt Securities. Debt Securities may also be
issued under the Indentures in exchange for Preferred Stock, upon the exercise
of warrants or as Payment-In-Kind (as defined herein). Reference is also made to
the Prospectus Supplement for information with respect to any additional
covenants that may be included in the terms of the Debt Securities offered
thereby.
Unless otherwise set forth in the applicable Prospectus Supplement or
Prospectus Supplements, neither the Indentures nor the Debt Securities will
contain provisions which would afford holders of the Debt Securities protection
in the event of a decline in the credit rating of the Company or the Debt
Securities as the result of a takeover, recapitalization or similar
restructuring or a highly leveraged or similar transaction involving the Company
that could adversely affect such holders.
The Debt Securities will bear interest at a rate and on dates to be
determined. Interest will be computed on the basis of a 360-day year of twelve
30-day months. The Company may pay principal and interest by check and may mail
an interest check to a holder's registered address. The Debt Securities will
mature on a date to be determined. Holders must surrender Debt Securities to a
Paying Agent to collect principal payments. Initially, the Trustee will act as
Paying Agent and Registrar. The Company may change any Paying Agent or Registrar
without notice. The Company or any of its Subsidiaries may act as Paying Agent
or Registrar.
Unless otherwise provided in the applicable Prospectus Supplement, the Debt
Securities will be redeemable in whole or from time to time in part, on or after
a date to be determined, at the Company's option, at specified redemption prices
(which may vary according to the date of redemption) plus accrued interest to
the redemption date. Notice of any redemption will be mailed at least 30 days
but not more than 60 days before the redemption date to each holder of Debt
Securities to be redeemed at his or her registered address. Debt Securities in a
denomination larger than $1,000 may be redeemed in part. On and after the
redemption date, interest ceases to accrue on Debt Securities or portions
thereof called for redemption.
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global Debt Securities ("Global Debt Securities") that will
be deposited with, or on behalf of, a Depositary identified in the Prospectus
Supplement relating to the series. Unless otherwise indicated in the Prospectus
Supplement relating to a series, the terms of the depositary arrangement with
respect to any Debt Securities of a series specified in the Prospectus
Supplement as being represented by Global Debt Securities will be as set forth
below under "Global Debt Securities."
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No service charge will be made for any registration of transfer or exchange
of the Debt Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Debt Securities may be sold at a discount (which may be substantial) below
their stated principal amount bearing no interest or interest at a rate which at
the time of issuance is below market rates. Any material United States federal
income tax consequences and other special considerations applicable thereto will
be described in the Prospectus Supplement relating to any such Debt Securities.
The terms of the Debt Securities may allow the Company to pay all or a
portion of an installment of interest, for all or a part of the period of time
such series of Debt Securities is outstanding, through the issuance of
additional Debt Securities of such series in lieu of cash in satisfaction of the
interest payment due ("Payment-in-Kind"), in accordance with the terms of the
relevant Indenture. The terms of such series of Debt Securities will be set
forth in the Prospectus Supplement relating thereto.
If any of the Debt Securities are sold for any foreign currency or currency
unit or if the principal of, or premium or interest, if any, on any of the Debt
Securities is payable in any foreign currency or currency unit, the
restrictions, elections, tax consequences, specific terms and other information
with respect to such Debt Securities and such foreign currency or currency unit
will be set forth in the Prospectus Supplement relating thereto.
Since the Company is a holding company, the rights of the Company, and
hence the right of creditors of the Company (including the holders of Debt
Securities), to participate in any distribution of the assets of any subsidiary
upon its liquidation or reorganization or otherwise is necessarily subject to
the prior claims of creditors of the subsidiary, except to the extent that
claims of the Company itself as a creditor of the subsidiary may be recognized.
In the event that the definitive terms of any Debt Securities provide for
the repurchase thereof by the Company in certain circumstances, the Company will
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable to such repurchase. To the extent that the provisions
of any securities laws or regulations conflict with the relevant provisions of
the Indenture relating to such Debt Securities, the Company shall comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligations under such Indenture provisions by virtue thereof.
EVENTS OF DEFAULT
Unless otherwise specified in the Prospectus Supplement, the following
events are defined in the Indentures as "Events of Default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in payment
of interest on any Debt Security of such series; (b) default in payment of
principal when due (at maturity, upon redemption or otherwise) on any Debt
Security of such series when and as the same shall be due and payable; (c)
failure to perform any other covenant of the Company in the Indentures (other
than a covenant included in the Indentures solely for the benefit of one or more
series of Debt Securities other than that series), continued for 60 days after
written notice as provided in the Indentures; (d) acceleration of in excess of
an aggregate of $10,000,000 of indebtedness for borrowed money of the Company or
any Subsidiary (as defined) that is not rescinded or annulled prior to entry of
a final judgment in favor of the holders thereof; (e) a final judgment for the
payment of $10,000,000 or more rendered against the Company or any Subsidiary in
any court of competent jurisdiction and not fully covered by insurance or not
discharged or stayed within 60 days after the date all rights to appeal have
been extinguished; (f) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or its property; and (g) any other Event of Default as may be specified
with respect to Debt Securities of such series.
No Event of Default with respect to Debt Securities of a particular series
shall necessarily constitute an Event of Default with respect to Debt Securities
of any other series. If an Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the Debt
Securities then
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outstanding of that series may declare 100% of the principal amount (or, if the
Debt Securities of that series are Discounted Securities within the meaning of
the Indenture, such portion of the principal amount as may be specified in the
terms of that series) of all Debt Securities of that series and interest accrued
to the date of acceleration to be due and payable immediately; provided,
however, that under certain circumstances the holders of a majority in aggregate
principal amount of the Debt Securities of that series then outstanding may
rescind or annul such declaration and its consequences. Such declaration may be
annulled and past defaults (except, unless theretofore cured, a default in
payment of principal of or interest on the Debt Securities) may be waived by the
holders of a majority in principal amount of outstanding Debt Securities upon
the conditions provided in the Indentures.
Holders of Debt Securities may not enforce the Indentures or the Debt
Securities except as provided in the Indentures. A Trustee may require indemnity
satisfactory to it before it enforces any Indenture to which it is a party or
corresponding series of Debt Securities. Subject to certain limitations, holders
of a majority in aggregate principal amount of the Debt Securities outstanding
of a series may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from holders of Debt Securities notice of any continuing
default (except a default in payment of principal or interest) if it determines
that withholding notice is in their interest. The Company is required to file
periodic reports with the Trustee regarding compliance by the Company with the
terms of the Indentures and specifying any defaults of which the signers may
have knowledge.
A director, officer, employee or stockholder, as such, of the Company shall
not have any liability for any obligations of the Company under the Debt
Securities or the Indentures or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Debt Securities by
accepting Debt Securities waives and releases all such liability.
TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, the Debt
Securities will be issued only in registered form and in denominations of $1,000
and integral multiples of $1,000. A holder may transfer or exchange any Debt
Security in accordance with the relevant Indenture. The Registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any tax or other governmental charge imposed in relation
thereto. The Registrar need not transfer or exchange any Debt Securities
selected for redemption. Also, it need not transfer or exchange any Debt
Securities for a period of 15 days before a selection of Debt Securities to be
redeemed. The registered holder of Debt Securities may be treated as the owner
of them for all purposes.
AMENDMENT, SUPPLEMENT, WAIVER
Subject to certain exceptions, the Indentures or the Debt Securities may be
amended or supplemented with the consent of the holders of at least a majority
in aggregate principal amount of the outstanding Debt Securities of each series
so affected, and any past default or compliance with any provision may be waived
with the consent of the holders of a majority in aggregate principal amount of
the outstanding Debt Securities of each series so affected, but no reduction of
the percentage required for modification, reduction in the interest rate or
extension of the time of payment of interest, reduction of the principal amount
or extension of the maturity of, or alteration in the redemption provisions of
any Debt Security, waiver of a payment default, change in the stated currency of
the Debt Security, or change to the provisions governing waivers and amendments
in a manner adverse to the holders of Debt Securities will be effective against
any holder of Debt Securities without such holder's consent.
Without the consent of any holder of Debt Securities, the Company may amend
or supplement any of the Indentures or the Debt Securities to cure any
ambiguity, defect or inconsistency, to evidence the succession of another
corporation to the Company, to provide that specific provisions of the
Indentures will not apply to a series not previously issued, to provide for
uncertificated Debt Securities in addition to or in place of certificated Debt
Securities, to create a series and establish its terms, to provide for a
separate Trustee for one or more series, to add to the covenants of the Company
or surrender any right or power conferred upon the
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<PAGE> 96
Company, to evidence or provide for a successor Trustee, or to make any change
that does not materially adversely affect the rights of any holder of Debt
Securities.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of any holder of Debt Securities, may
consolidate with or merge into, or convey, transfer or lease its assets
substantially as an entirety to, any person, provided that the person formed by
such consolidation or into which the Company is merged or which acquires or
leases the assets of the Company substantially as an entirety is a corporation,
partnership or trust organized under the laws of any United States jurisdiction
and assumes by supplemental indenture the Company's obligations on the Debt
Securities and under the Indentures, that after giving effect to the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, and that certain other conditions are met. Upon compliance with
these provisions by a successor person, the Company will be relieved of its
obligations under the Indentures and the Debt Securities.
DISCHARGE AND DEFEASANCE
The Company may terminate its obligations under each Indenture, other than
its obligation to pay the principal of (and premium, if any) and interest on the
Debt Securities of any series and certain other obligations, if it (i)
irrevocably deposits in trust with the Trustee money or U.S. Government
Obligations (as defined herein) maturing as to principal and interest sufficient
to pay the principal of, any interest on, and any mandatory sinking funds in
respect of, all outstanding Debt Securities of such series on the stated
maturity of such payments or on any redemption date and (ii) complies with any
additional conditions specified to be applicable with respect to the covenant
defeasance of Debt Securities of such series.
The terms of any series of Debt Securities may also provide for legal
defeasance pursuant to the relevant Indenture. In such case, if the Company (i)
irrevocably deposits in trust money or U.S. Government Obligations as described
above, (ii) makes a request to the Trustee to be discharged from its obligations
on the Debt Securities of such series and (iii) complies with any additional
conditions specified to be applicable with respect to legal defeasance of Debt
Securities of such series, then the Company shall be deemed to have paid and
discharged the entire indebtedness on all the outstanding Debt Securities of
such series and the obligations of the Company under the applicable Indenture
and the Debt Securities of such series to pay the principal of (and premium, if
any) and interest on the Debt Securities of such series shall cease, terminate
and be completely discharged, and the holders thereof shall thereafter be
entitled only to payment out of the money or U.S. Government Obligations
deposited with the Trustee as aforesaid, unless the Company's obligations are
revived and reinstated because the Trustee is unable to apply such trust fund by
reason of any legal proceeding, order or judgment.
"U.S. Government Obligations" are defined in each Indenture as direct
noncallable obligations of, or noncallable obligations the payment of principal
of and interest on which is guaranteed by, the United States of America, or to
the payment of which obligations or guarantees the full faith and credit of the
United States of America is pledged, or beneficial interests in a trust the
corpus of which consists exclusively of money or such obligations or a
combination thereof.
CONVERSION RIGHTS
The terms, if any, on which Debt Securities of a series may be converted
into shares of Preferred Stock or Class A Common Stock will be set forth in the
Prospectus Supplement relating thereto.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.
The Subordinated Debt Securities will, to the extent set forth in the
Subordinated Indenture, be subordinate in right of payment to the prior payment
in full of all Senior Indebtedness, including the Senior
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<PAGE> 97
Debt Securities. Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshalling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of (and premium, if
any) and interest, if any, on such Senior Indebtedness before the holders of the
Subordinated Debt Securities will be entitled to receive or retain any payment
in respect of the principal of (and premium, if any) or interest, if any, on the
Subordinated Debt Securities.
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are not holders of Senior Indebtedness or
Subordinated Debt Securities may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the holders of the Subordinated
Debt Securities.
In the event of the acceleration of the maturity of any Subordinated Debt
Securities, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of all
amounts due thereon before the holders of the Subordinated Debt Securities will
be entitled to receive any payment upon the principal of (or premium, if any) or
interest, if any, on the Subordinated Debt Securities.
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the Subordinated Debt Securities may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Indebtedness permitting the acceleration of the maturity thereof.
"Senior Indebtedness" means (1) any indebtedness of the Company (i) for
borrowed money or (ii) evidenced by a note, debenture or similar instrument
(including obligations incurred under leases which are or may be capitalized
under generally accepted accounting principles and purchase money obligations)
given in connection with the acquisition of any property or assets, (2) any
indebtedness of others described in the preceding clause (1) for which the
Company is responsible or liable as guarantor or otherwise, (3) any indebtedness
now outstanding or hereafter incurred by the Company in connection with an
acquisition by the Company or a Subsidiary of the stock or substantially all of
the assets of another person or a merger or consolidation to which the Company
or a Subsidiary is a party, for the payment of which the Company is responsible
or liable as obligor, guarantor or otherwise, and (4) all deferrals, renewals,
extensions and refundings of any such indebtedness or obligations; other than
indebtedness as to which, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such indebtedness
is subordinate in right of payment to any other indebtedness of the Company.
GLOBAL DEBT SECURITIES
If Debt Securities of a series are to be issued as Global Debt Securities,
one or more Global Debt Securities will be issued in a denomination or aggregate
denominations equal to the aggregate principal amount of outstanding Debt
Securities of the series to be represented by such Global Debt Security or
Global Debt Securities. Global Debt Securities may be issued in registered and
in either temporary or permanent form.
Ownership of beneficial interests in Global Debt Securities will be limited
to persons that have accounts with the Depositary ("participants") or persons
that may hold interests through participants. Ownership interests in Global Debt
Securities will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by the Depositary or its nominee for
such Global Debt Securities (with respect to a participant's interest) and
records maintained by participants (with respect to interests of persons other
than participants).
Unless otherwise provided in a Prospectus Supplement, payment of principal
of and any premium and interest on the book-entry Debt Securities represented by
a Global Debt Security will be made to the Depositary or its nominee, as the
case may be, as the sole registered owner and the sole holder of the book-entry
Debt Securities represented thereby for all purposes under the Indenture.
Neither the Company or the Trustee, nor any agent of the Company or the Trustee,
will have any responsibility or liability for any acts or
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<PAGE> 98
omissions of the Depositary, for any records of the Depositary relating to
beneficial ownership interests in any Global Debt Security or for any
transactions between the Depositary and beneficial owners.
The Company expects that upon receipt of any payment of principal of or any
premium or interest on a Global Debt Security, the Depositary will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such Global Debt Security as
shown on the records of the Depositary. The Company also expects that payments
by participants to owners of beneficial interests in Global Debt Securities held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for customer
accounts registered in "street name," and will be the sole responsibility of
such participants.
Unless otherwise provided in the Prospectus Supplement, Global Debt
Securities will not be transferred except as a whole by the Depositary to a
nominee of the Depositary. Global Debt Securities will be exchangeable only if
(i) the Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for such Global Debt Securities or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange Act,
(ii) the Company in its sole discretion determines that such Global Debt
Securities shall be exchangeable for definitive Debt Securities in registered
form, or (iii) an Event of Default with respect to the series of Debt Securities
represented by such Global Debt Securities has occurred and is continuing. Any
Global Debt Security that is exchangeable pursuant to the preceding sentence
shall be exchangeable for registered Debt Securities issuable in denominations
of $1,000 and integral multiples thereof and registered in such names as the
Depositary holding such Global Debt Security shall direct. Subject to the
foregoing, the Global Debt Security is not exchangeable, except for a Global
Debt Security of like denomination to be registered in the name of the
Depositary or its nominee.
So long as the Depositary for Global Debt Securities of a series, or its
nominee, is the registered owner of such Global Debt Securities, such Depositary
or such nominee, as the case may be, will be considered the sole holder of Debt
Securities represented by such Global Debt Securities for the purposes of
receiving payment on such Global Debt Securities, receiving notices and for all
other purposes under the related Indenture and such Global Debt Securities.
Except as provided above, owners of beneficial interests in Global Debt
Securities of a series will not be entitled to receive physical delivery of Debt
Securities of such series in definitive form and will not be considered the
holders thereof for any purpose under the Indenture. Accordingly, each person
owning a beneficial interest in a Global Debt Security must rely on the
procedures of the Depositary and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the Indenture. The Depositary may grant
proxies and otherwise authorize participants to give or take any request,
demand, authorization, direction, notice, consent, waiver or other action which
a holder is entitled to give or take under the Indenture. The Company
understands that under existing industry practices, in the event that the
Company requests any action of holders or that an owner of a beneficial interest
in such a Global Debt Security desires to give or take any action which a holder
is entitled to give or take under the Indenture, the Depositary would authorize
the participants holding the relevant beneficial interests to give or take such
action, and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them. The Company, however,
shall have no liability for any Depositary's or participant's failure to so act.
REGARDING THE TRUSTEES
Each Indenture will contain limitations on the right 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. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of all outstanding
Debt Securities of a series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustees. The Indentures will provide that in case an Event of Default shall
occur (which shall
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<PAGE> 99
not be cured), the relevant Trustee will be required to use the degree of care
of a prudent person in the conduct of its own affairs in the exercise of its
power. Subject to such provisions, no Trustee will be under any obligation to
exercise any of its rights or powers under the Indentures at the request of any
of the holders of Debt Securities unless they have offered to each Trustee
security and indemnity satisfactory to it.
GOVERNING LAW
The Indentures are governed by and shall be construed in accordance with
the laws of the State of New York but without regard to principles of conflicts
of laws.
DESCRIPTION OF WARRANTS
The Company may issue Warrants, including Warrants to purchase Debt
Securities ("Debt Warrants"), Warrants to purchase Class A Common Stock or
Preferred Stock ("Stock Warrants") as well as other types of Warrants to
purchase other types of Securities. Warrants may be issued independently or
together with any other Securities and may be attached to or separate from such
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each a "Warrant Agreement") to be entered into between the Company
and a bank or trust company, as warrant agent (the "Warrant Agent"), all as
shall be set forth in the Prospectus Supplement relating to Warrants being
offered pursuant thereto. The following sets forth certain general terms and
provisions of the warrants offered pursuant thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of any Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt Warrants, including the
following: (1) the title of such Debt Warrants; (2) the aggregate number of such
Debt Warrants; (3) the price or prices at which such Debt Warrants will be
issued; (4) the currency or currencies, including composite currencies or
currency units, in which the price of such Debt Warrants may be payable; (5) the
designation, aggregate principal amount and terms of the Debt Securities
purchasable upon exercise of such Debt Warrants, and the procedures and
conditions relating to the exercise of such Debt Warrants; (6) the designation
and terms of any related Debt Securities with which such Debt Warrants are
issued, and the number of such Debt Warrants issued with each such Debt
Security; (7) the currency or currencies, including composite currencies or
currency units, in which the principal of (or premium, if any), or interest, if
any, on the Debt Securities purchasable upon exercise of such Debt Warrants will
be payable; (8) the date, if any, on and after which such Debt Warrants and the
related Debt Securities will be separately transferable; (9) the price at which
and the currency, including composite currency or currency unit, in which such
principal amount of Debt Securities may be purchased upon such exercise; (10)
the date on which the right to exercise such Debt Warrants shall commence, and
the date on which such right shall expire; (11) the maximum or minimum number of
such Debt Warrants which may be exercised at any time; (12) a discussion of
material federal income tax considerations, if any; and (13) any other terms of
such Debt Warrants and terms, procedures and limitations relating to the
exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised, at
the corporate trust office of the Warrant Agent or any other office indicated in
the Prospectus Supplement. Prior to the exercise of their Debt Warrants, holders
of Debt Warrants will not have any of the rights of holders of the Debt
Securities purchasable upon such exercise and will not be entitled to payments
of principal (or premium, if any) or interest, if any, on the Debt Securities
purchasable upon such exercise.
STOCK AND OTHER WARRANTS
The Company may issue other Warrants. The applicable Prospectus Supplement
will describe the following terms of any Stock Warrants or such other Warrants
in respect of which this Prospectus is being delivered: (1) the title of such
Warrants; (2) the Securities (which may include Preferred Stock or Class A
Common Stock) on which such Warrants are exercisable; (3) the price or prices at
which such Warrants will
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<PAGE> 100
be issued; (4) the currency or currencies, including composite currencies or
currency units, in which the price of such Warrants may be payable; (5) if
applicable, the designation and terms of the Preferred Stock or Class A Common
Stock with which such Warrants are issued, and the number of such Warrants
issued with each such share of Preferred Stock or Class A Common Stock; (6) if
applicable, the date on and after which such Warrants and the related Preferred
Stock or Class A Common Stock will be separately transferable; (7) if
applicable, a discussion of material federal income tax considerations; and (8)
any other terms of such Warrants, including terms, procedures and limitations
relating to the exchange and exercise of such Warrants.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount or number of shares, as applicable, of Securities at such
exercise price as shall in each case be set forth in, or be determinable as set
forth in, the Prospectus Supplement relating to the Warrants offered thereby.
Warrants may be exercised at any time up to the close of business on the
expiration date set forth in the Prospectus Supplement relating to the Warrants
offered thereby. After the close of business on the expiration date, unexercised
Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Warrants offered thereby. Upon receipt of payment and the
Warrant certificate properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Securities
purchasable upon such exercise. If less than all of the Warrants represented by
such warrant certificate are exercised, a new warrant certificate will be issued
for the remaining Warrants.
DELPHI FUNDING L.L.C.
GENERAL
Delphi Funding, a subsidiary of Delphi, is a limited liability company
organized under the laws of the State of Delaware. All of its limited liability
company interests (other than DF Preferred Securities) are beneficially owned by
Delphi and are non-transferable. Delphi Funding's registered office in the State
of Delaware is c/o Delphi Financial Group, Inc., 1105 North Market Street, Suite
1230, P.O. Box 8985, Wilmington, Delaware 19899, telephone: (302) 478-5142.
Delphi Funding has no board of directors, and all of its business and affairs
will be conducted by Delphi, as manager (the "Manager"). The location of the
principal executive offices of the Manager is set forth above under "The
Company." Delphi Funding exists solely for the purpose of issuing its DF
Preferred Securities and lending the net proceeds from the sale thereof to
Delphi.
DF PREFERRED SECURITIES
Delphi Funding may, from time to time, issue DF Preferred Securities, in
one or more series, having terms described in the Prospectus Supplement relating
thereto. Under Delphi Funding's Limited Liability Company Agreement, as it will
be amended and restated (the "Limited Liability Company Agreement"), Delphi will
be authorized to establish one or more classes or series of DF Preferred
Securities, having such terms, including dividend, redemption, voting,
liquidation rights and such other preferred, deferred or other special rights or
restrictions as Delphi may determine. All DF Preferred Securities offered hereby
will be guaranteed by Delphi to the limited extent set forth below under
"Guarantee" and may also be entitled to the benefits of certain undertakings of
Delphi as described below under "Backup Undertakings." Any special Federal
income tax, accounting or other considerations applicable to any offering of DF
Preferred Securities and related Backup Undertakings will be described in the
Prospectus Supplement relating thereto.
GUARANTEE
Delphi will irrevocably and unconditionally agree (such agreement, the
"Guarantee"), to the extent set forth herein to pay in full, to the holders of
DF Preferred Securities of any class or series, the Guarantee
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<PAGE> 101
Payments (as defined below), as and when due, regardless of any defense, right
of set-off or counterclaim which Delphi Funding may have or assert. The
Guarantee will constitute a guarantee of payment and not of collection, and may
be enforced by holders of DF Preferred Securities directly against Delphi. The
following payments to the extent not paid by Delphi Funding (the "Guarantee
Payments") will be subject to the Guarantee (without duplication): (i) any
accumulated arrears and accruals of unpaid dividends which have heretofore been
declared on the DF Preferred Securities of such class or series out of moneys
legally available therefor, (ii) the redemption price, including all accumulated
arrears and accruals of unpaid dividends payable, out of moneys legally
available therefor, with respect to any DF Preferred Securities of such class or
series called for redemption, and (iii) upon a liquidation of Delphi Funding,
the greater of (a) the aggregate of the liquidation preference and all
accumulated arrears and accruals of unpaid dividends (whether or not declared)
on the DF Preferred Securities of such class or series to the date of payment
and (b) the amount of assets of Delphi Funding remaining available for
distribution in liquidation to the holders of DF Preferred Securities of such
class or series. In addition, the Prospectus Supplement relating to a class or
series of DF Preferred Securities will describe the rank of the Guarantee and
any additional covenants or other terms of the Guarantee of Delphi with respect
to such class or series.
BACKUP UNDERTAKINGS
In connection with any class or series of DF Preferred Securities, Delphi
may enter into additional agreements with Delphi Funding, including intercompany
loan agreements and amendments to Delphi Funding's Limited Liability Company
Agreement, that operate directly or indirectly for the benefit of the holders of
DF Preferred Securities. The Guarantee described above under "Guarantee" and any
such other arrangements are herein collectively referred to as "Backup
Undertakings" of Delphi and will be described in the Prospectus Supplement
relating to any class or series of DF Preferred Securities.
PLAN OF DISTRIBUTION
The Company and/or Delphi Funding may sell Securities in and/or outside of
the United States to or through one or more underwriters, or to dealers, acting
as principals for their own accounts, and each reserves the right to sell their
Securities directly to other purchasers or through agents on their own behalf.
The distribution of the Securities may be effected from time to time in one or
more transactions at a fixed price or prices which may be changed from time to
time, at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Each Prospectus Supplement
will describe the method of distribution of the Securities.
In connection with the sale of Securities, underwriters and dealers may
receive compensation from the Company and/or Delphi Funding or from purchasers
of Securities for whom they may act as agents, in the form of discounts,
concessions or commissions. Underwriters may sell Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents who
participate in the distribution of Securities may be deemed to be underwriters
under the Securities Act and any discounts or commissions received by them and
any profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. Any such underwriter or
agent will be identified and any such compensation will be described in the
Prospectus Supplement.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase Securities from the Company pursuant to
delayed delivery contracts ("Delayed Delivery Contracts") providing for payment
and delivery on a future date. Institutions with which such Delayed Delivery
Contracts may be made include
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<PAGE> 102
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all cases
such institutions must be approved by the Company.
LEGAL OPINIONS
Certain legal matters in connection with the offering of of the Securities
of Delphi will be passed upon for the Company by Chad W. Coulter, General
Counsel of RSLIC, and certain legal matters in connection with the offering of
the Securities of Delphi and the DF Preferred Securities will be passed upon for
the Company and Delphi Funding by Cahill Gordon & Reindel, a partnership
including a professional corporation, New York, New York.
EXPERTS
The consolidated financial statements and schedules of Delphi Financial
Group, Inc. and subsidiaries appearing in Delphi Financial Group, Inc.'s Annual
Report (Form 10-K) for the year ended December 31, 1993 have been audited by
Ernst & Young, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 103
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ S-5
Risk Factors.............................. S-10
Delphi Financial Group, Inc............... S-17
Delphi Funding L.L.C...................... S-18
Use of Proceeds........................... S-19
Capitalization............................ S-20
Accounting Treatment...................... S-20
Selected Historical Financial Data........ S-21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. S-23
Business.................................. S-29
Management................................ S-41
Certain Terms of Series A Capital
Securities.............................. S-43
Certain Terms of Series A Subordinated
Debentures.............................. S-55
Certain Terms of Series A Guarantee....... S-65
Relationship Among the Series A Capital
Securities, the Series A Subordinated
Debentures and the Series A Guarantee... S-67
Certain Federal Income Tax
Considerations.......................... S-69
Certain ERISA Considerations.............. S-72
Book-Entry Issuance....................... S-73
Underwriting.............................. S-76
Experts................................... S-77
Validity of Securities.................... S-77
Available Information..................... S-77
Incorporation of Certain Documents by
Reference............................... S-78
Annex 1................................... A-1
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 2
Use of Proceeds........................... 3
The Company............................... 4
Investment Considerations................. 4
Ratios.................................... 7
Description of Securities................. 7
Description of Capital Stock of Delphi.... 7
Description of Preferred Stock............ 7
Description of Common Stock............... 9
Description of Debt Securities............ 12
Description of Warrants................... 19
Delphi Funding L.L.C...................... 20
Plan of Distribution...................... 21
Legal Opinions............................ 22
Experts................................... 22
</TABLE>
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$100,000,000
DELPHI FUNDING L.L.C.
9.31% CAPITAL SECURITIES,
SERIES A
FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
DELPHI FINANCIAL GROUP, INC.
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LOGO
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GOLDMAN, SACHS & CO.
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