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Rule 424(b)(1)
Registration Nos. 333-22839
333-22839-01
PROSPECTUS
$100,000,000
INTEGON CAPITAL I
OFFER TO EXCHANGE ITS 10 3/4% CAPITAL SECURITIES, SERIES B, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 10 3/4%
CAPITAL SECURITIES, SERIES A
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY) FULLY AND UNCONDITIONALLY
GUARANTEED BY
INTEGON CORPORATION
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JUNE 30, 1997, UNLESS EXTENDED
Integon Capital I, a Delaware business trust (the "Series B Issuer"), and
Integon Corporation, a Delaware corporation (the "Company"), hereby offer,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal," and
together with this Prospectus, the "Exchange Offer"), to exchange up to
$100,000,000 aggregate Liquidation Amount of 10 3/4% Capital Securities,
Series B, having a Liquidation Amount of $1,000 per security (the "Exchange
Capital Securities"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(as defined herein) of which this Prospectus constitutes a part, for a like
aggregate Liquidation Amount of outstanding 10 3/4% Capital Securities, Series
A, having a Liquidation Amount of $1,000 per security (the "Outstanding
Capital Securities"), of the Series B Issuer, of which $100,000,000 aggregate
Liquidation Amount is outstanding. Pursuant to the Exchange Offer, the Company
is also exchanging its guarantee of the payment of Distributions (as defined
herein) and payments on liquidation, redemption or repurchase of the
Outstanding Capital Securities (the "Outstanding Guarantee") for a like
guarantee of the Exchange Capital Securities (the "Exchange Guarantee"), and
all of its 10 3/4% Junior Subordinated Deferrable Interest Debentures, Series
A (the "Outstanding Junior Subordinated Debentures"), of which $103,093,000
aggregate principal amount is outstanding, for a like aggregate principal
amount of 10 3/4% Junior Subordinated Deferrable Interest Debentures, Series B
(the "Exchange Junior Subordinated Debentures"), which Exchange Guarantee and
Exchange Junior Subordinated Debentures have been registered under the
Securities Act. The Outstanding Capital Securities, the Outstanding Guarantee
and the Outstanding Junior Subordinated Debentures are collectively referred
to herein as the "Outstanding Securities" and the Exchange Capital Securities,
the Exchange Guarantee and the Exchange Junior Subordinated Debentures are
collectively referred to herein as the "Exchange Securities." The terms of the
Exchange Securities are substantially identical to the terms of the
Outstanding Securities, except that the Exchange Securities (i) will have been
registered under the Securities Act and will not contain terms restricting the
transfer of such securities, (ii) will be entitled, to the extent applicable,
to the benefits of qualification of the Trust Agreement (as defined herein)
and the Junior Subordinated Indenture (as defined herein) under the Trust
Indenture Act (as defined herein), and (iii) will not provide for liquidated
damages in certain circumstances under the Registration Rights Agreement (as
defined herein).
The Series B Issuer will accept for exchange any and all Outstanding
Securities that are validly tendered on or prior to 5:00 p.m., New York City
time, on the date the Exchange Offer expires, which will be June 30, 1997,
unless the Exchange Offer is extended (the "Expiration Date"). Tenders of
Outstanding Securities may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the business day prior to the Expiration Date. The Exchange
Offer is not conditioned upon any minimum number of Outstanding Securities
being tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions
of the Registration Rights Agreement. See "Exchange Offer." Outstanding
Securities may be tendered in whole or in part only in the aggregate
Liquidation Amount or principal amount of not less than $100,000 or any
integral multiple of $1,000 in excess thereof; provided that if any
Outstanding Securities are tendered for exchange in part, the untendered
aggregate Liquidation Amount or principal amount thereof must be $100,000 or
any integral multiple of $1,000 in excess thereof. The Company has agreed to
pay the expenses of the Exchange Offer.
Holders of Outstanding Securities whose Outstanding Securities are not
tendered and accepted in the Exchange Offer will continue to hold such
Outstanding Securities. Following consummation of the Exchange Offer, the
holders of Outstanding Securities will continue to be subject to the existing
restrictions upon transfer thereof and the Series B Issuer and the Company
will have no further obligation to such holders to provide for the
registration under the Securities Act of the Outstanding Securities held by
them.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE EXCHANGE SECURITIES.
The Series B Issuer will not receive any proceeds from this Exchange Offer
and no underwriter is being utilized in connection with the Exchange Offer.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is May 30, 1997.
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On February 10, 1997, $100,000,000 aggregate Liquidation Amount of
Outstanding Capital Securities and $103,093,000 aggregate principal amount of
Outstanding Junior Subordinated Debentures were issued and sold in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Outstanding Securities may not be offered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or
unless an applicable exemption from the registration requirements of the
Securities Act is available. Exchange Securities (which includes, in addition
to the Exchange Capital Securities, the Exchange Guarantee and the Exchange
Junior Subordinated Debentures, the rights of holders of Exchange Junior
Subordinated Debentures under the Junior Subordinated Indenture, the rights of
holders of Exchange Capital Securities under the Trust Agreement and under the
Exchange Guarantee, and the Expense Agreement (as hereinafter defined)) are
being offered hereby in order to satisfy the obligations of the Series B
Issuer and the Company under the exchange and registration rights agreement
(the "Registration Rights Agreement"), dated February 10, 1997, among the
Company, the Series B Issuer, Goldman, Sachs & Co., Deutsche Morgan Grenfell
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as initial
purchasers (the "Initial Purchasers"). See "Exchange Offer--Purpose of the
Exchange Offer." Based on no-action letters issued by the staff of the
Securities and Exchange Commission (the "Commission") to third parties, the
Series B Issuer and the Company believe that the Exchange Capital Securities
to be issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof (other than (i) a broker-dealer
who purchases such Exchange Capital Securities directly from the Series B
Issuer or the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an "affiliate" of
the Series B Issuer or the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Exchange Capital
Securities are acquired in the ordinary course of such holders' business and
such holders are not engaged in, and do not intend to engage in, a
distribution of such Exchange Capital Securities and have no arrangements or
understanding with any person to participate in the distribution of such
Exchange Capital Securities. However, the staff of the Commission has not
considered the Exchange Offer in the context of a no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such no-action
letters to third parties. Each eligible holder wishing to accept the Exchange
Offer must represent to the Series B Issuer and the Company that: (i) it is
not an "affiliate" of the Series B Issuer or the Company within the meaning of
Rule 405 under the Securities Act, (ii) any Exchange Capital Securities to be
received by it were acquired in the ordinary course of its business, and (iii)
it is not engaged in, and does not intend to engage in, a distribution of such
Exchange Capital Securities and has no arrangements or understanding with any
person to participate in the distribution of such Exchange Capital Securities.
However, any holder of Outstanding Capital Securities who is an affiliate or
who intends to participate in the Exchange Offer for the purpose of
distributing Exchange Capital Securities, or any broker-dealer who purchased
Outstanding Capital Securities to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (i) will not be able to rely on
the above-mentioned no-action letters of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any sale or other transfer of such Outstanding Capital
Securities unless such sale is made pursuant to an exemption from such
requirements. Each broker-dealer that receives Exchange Capital Securities for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of Exchange Capital
Securities. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The Company and
the Series B Issuer believe that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Capital Securities received in exchange for
Outstanding Capital Securities where such Outstanding Capital Securities were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Series B Issuer and the Company have agreed to
use their best efforts to make this Prospectus available for a period of 180
days following the consummation of the Exchange Offer to broker-dealers who
have identified themselves as such for use in connection with resales by such
broker-dealers of Exchange Capital Securities received in exchange for
Outstanding Capital Securities acquired by such broker-dealers for their own
accounts as a result of market-making or other trading activities. In that
regard, each broker-dealer who surrenders Outstanding Capital Securities
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company or
the Series B Issuer of the occurrence of any event or the discovery of any
fact which makes any statement contained or incorporated by reference in this
Prospectus untrue in any material respect or which
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causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained or incorporated by reference herein, in the
light of the circumstances under which they were made, not misleading, or of
the occurrence of certain other events specified in the Registration Rights
Agreement, such broker-dealer will suspend the sale of Exchange Capital
Securities pursuant to this Prospectus until the Company or the Series B
Issuer has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer, or the Company or the Series B
Issuer has given notice that the sale of the Exchange Capital Securities may
be resumed, as the case may be. See "Plan of Distribution." The Company and
the Series B Issuer have agreed that if any holder of Transfer Restricted
Securities (as defined herein) notifies the Company or the Series B Issuer on
or by the 20th business day following the consummation of the Exchange Offer
that (i) it is prohibited by law or Commission policy from participating in
the Exchange Offer, (ii) it may not resell the Exchange Capital Securities,
the Exchange Guarantee and the Exchange Junior Subordinated Debentures
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement (as defined herein) is not appropriate or available for such resales
or (iii) it is a broker-dealer and owns Outstanding Capital Securities
acquired directly from the Series B Issuer or an affiliate of the Series B
Issuer, then the Company and the Series B Issuer will use their best efforts
as promptly as practicable to file with the Commission and thereafter will use
their best efforts to cause to be declared effective a "shelf" registration
statement on an appropriate form under the Securities Act providing for the
registration of, and the sale on a continuous or delayed basis by the holders
who satisfy certain conditions relating to the provision of information in
connection with such shelf registration statement of, all of the Transfer
Restricted Securities, pursuant to Rule 415 or any similar rule that may be
adopted by the Commission.
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION.
HOLDERS OF OUTSTANDING CAPITAL SECURITIES ARE URGED TO READ THIS PROSPECTUS
AND THE LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OUTSTANDING CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER.
The Exchange Capital Securities and the Outstanding Capital Securities
(together, the "Capital Securities") represent preferred undivided beneficial
interests in the assets of the Series B Issuer. The Capital Securities are
fully and unconditionally guaranteed by the Outstanding Guarantee and the
Exchange Guarantee (together, the "Guarantee") of the Company. The Company is
the owner of all the beneficial interests represented by common securities of
the Series B Issuer (the "Common Securities" and collectively with the Capital
Securities, the "Trust Securities"). First Union National Bank of North
Carolina is the Property Trustee (as defined herein) of the Series B Issuer.
The Series B Issuer exists for the sole purpose of issuing its trust
interests, purchasing the Junior Subordinated Debentures, effecting the
Exchange Offer and engaging in only those other activities necessary or
incidental thereto. All proceeds to the Series B Issuer from the sale of its
Common Securities and Outstanding Capital Securities were invested in the
Outstanding Junior Subordinated Debentures. The Outstanding Junior
Subordinated Debentures and the Exchange Junior Subordinated Debentures
(together, the "Junior Subordinated Debentures") will mature on February 15,
2027 (the "Stated Maturity") (which date may be shortened to a date not
earlier than August 15, 2016 in certain circumstances as described under
"Description of Capital Securities--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). See "Description of Capital
Securities--Conditional Right to Shorten Maturity or Redeem upon a Tax Event."
The Exchange Capital Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the trust interests represented by
the Common Securities. See "Description of Capital Securities--Subordination
of Common Securities."
Holders of the Exchange 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 February 15 and August 15 of
each year, commencing August 15, 1997, at the annual rate of 10 3/4% of the
Liquidation Amount of $1,000 per Exchange Capital Security ("Distributions").
The distribution rate and the distribution payment dates and other payment
dates for the Exchange Capital Securities will correspond to the payments and
payment dates on the Exchange Junior Subordinated Debentures. Subject to
certain exceptions as described herein, the Company has the right to defer
payments of interest on the Exchange Junior Subordinated Debentures by
extending the interest payment period thereon at any time or from time to time
for up to 10 consecutive semi-annual periods with respect to each deferral
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period (each an "Extension Period"), provided that no Extension Period may
extend beyond the Stated Maturity of the Exchange Junior Subordinated
Debentures. Upon termination of any such Extension Period and the payment of
all amounts then due, the Company may elect to begin a new Extension Period
subject to the requirements set forth herein. Accordingly, there could be
multiple Extension Periods of varying lengths throughout the term of the
Exchange Junior Subordinated Debentures. If interest payments on the Exchange
Junior Subordinated Debentures are so deferred, Distributions on the Exchange
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 of the Company that rank pari passu in all respects with or junior
to the Exchange Junior Subordinated Debentures. During an Extension Period,
interest on the Exchange Junior Subordinated Debentures will continue to
accrue (and the amount of Distributions to which holders of the Exchange
Capital Securities are entitled will accumulate) at the rate of 10 3/4% per
annum, compounded semi-annually, and holders of Exchange Capital Securities
will be required to accrue interest income for United States Federal income
tax purposes prior to receipt of cash related to such interest income. See
"Description of Junior Subordinated Debentures--Option to Defer Interest
Payments" and "Certain Federal Income Tax Considerations--Original Issue
Discount." The Company paid $10.75 million of the net proceeds from the sale
of the Outstanding Junior Subordinated Debentures into a Reserve Account (as
defined herein) established and maintained by the Debenture Trustee (as
defined herein), the funds in which will be applied to pay interest on the
Junior Subordinated Debentures on the first two Interest Payment Dates (as
defined herein) for the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures--Reserve Account."
Holders of Outstanding Capital Securities whose Outstanding Capital
Securities are accepted for exchange will be deemed to have waived the right
to receive any payment in respect of any unpaid dividends on the Outstanding
Capital Securities that have accumulated to the date of the issuance of the
Exchange Capital Securities. Consequently, holders who exchange their
Outstanding Capital Securities for Exchange Capital Securities will receive
the same dividends on the Exchange Capital Securities that holders of the
Outstanding Capital Securities who do not accept the Exchange Offer will
receive on the Outstanding Capital Securities.
The Company has, through the Exchange Guarantee, the Trust Agreement, the
Exchange Junior Subordinated Debentures, the Junior Subordinated Indenture and
the Expense Agreement (each as defined herein), taken together, fully,
irrevocably and unconditionally guaranteed all of the Series B Issuer's
obligations under the Exchange Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debentures, the Guarantee and the
Expense Agreement--Full and Unconditional Guarantee." The Exchange Guarantee
guarantees the payment of Distributions and payments on liquidation or
redemption of the Exchange Capital Securities, but only in each case to the
extent of funds held by the Series B Issuer, as described herein. See
"Description of Guarantee." If the Company fails to make interest payments on
the Exchange Junior Subordinated Debentures held by the Series B Issuer, the
Series B Issuer will have insufficient funds to pay Distributions on the
Exchange Capital Securities. The Exchange Guarantee does not cover payment of
Distributions when the Series B Issuer does not have sufficient funds to pay
such distributions. In such event, a holder of Exchange Capital Securities may
institute a legal proceeding directly against the Company to enforce payment
of such Distributions to such holders. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Capital Securities."
The obligations of the Company under the Exchange Guarantee are subordinate
and junior in right of payment to all Senior Indebtedness (as defined herein)
of the Company.
The Exchange Capital Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Exchange Junior Subordinated
Debentures at the Stated Maturity or their earlier redemption. The Exchange
Junior Subordinated Debentures are redeemable prior to the Stated Maturity at
the option of the Company (i) on or after February 15, 2007, in whole at any
time or in part from time to time, or (ii) at any time in certain
circumstances as described under "Description of Capital Securities--
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. See
"Description of Junior Subordinated Debentures--Redemption" and "--Conditional
Right to Shorten Maturity upon a Tax Event."
Each holder of Exchange Capital Securities will have the right, upon a
Change of Control (as defined herein), to cause a repurchase of the Exchange
Capital Securities held by such holder at a repurchase price of 101% of the
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aggregate Liquidation Amount of such Exchange Capital Securities. See
"Description of Capital Securities--Change of Control Repurchase."
The Exchange Junior Subordinated Debentures are unsecured and rank junior
and are subordinated to all Senior Indebtedness of the Company. See
"Description of Junior Subordinated Debentures--Subordination."
The Company, as the holder of the outstanding Common Securities, has the
right at any time to terminate the Series B Issuer. In the event of the
termination of the Series B Issuer, after satisfaction of obligations to
creditors of the Series B issuer as required by applicable law, the holders of
Exchange Capital Securities will be entitled to receive a Liquidation Amount
of $1,000 per Exchange 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 Exchange Junior Subordinated Debentures,
subject to certain exceptions. See "Description of Capital Securities--
Liquidation Distribution Upon Termination."
Pursuant to an Agreement as to Expenses and Liabilities entered into by the
Company under the Trust Agreement (the "Expense Agreement"), the Company will
irrevocably and unconditionally guarantee to each person or entity to whom the
Series B Issuer becomes indebted or liable, the full payment of any costs,
expenses or liabilities of the Series B Issuer, other than obligations of the
Series B Issuer to pay to the holders of the Capital Securities or other
similar interests in the Series B Issuer the amounts due such holders pursuant
to the terms of the Capital Securities or such other similar interests, as the
case may be.
Holders tendering Outstanding Capital Securities in the Exchange Offer must
carefully consider the restrictions set forth in "ERISA Considerations."
The Company will not apply for listing of the Exchange Capital Securities on
any securities exchange or for inclusion of the Exchange Capital Securities on
any automated quotation system.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING CAPITAL SECURITIES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT
BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THE EXCHANGE SECURITIES WILL BE ISSUED, AND MAY BE HELD OR TRANSFERRED, ONLY
IN BLOCKS HAVING A LIQUIDATION AMOUNT OR A PRINCIPAL AMOUNT OF NOT LESS THAN
$100,000. ANY TRANSFER, SALE OR OTHER DISPOSITION OF EXCHANGE SECURITIES IN A
BLOCK HAVING A LIQUIDATION AMOUNT OR A PRINCIPAL AMOUNT OF LESS THAN $100,000,
OR RESULTING IN A HOLDER'S HOLDING EXCHANGE SECURITIES IN A BLOCK HAVING A
LIQUIDATION AMOUNT OR A PRINCIPAL AMOUNT OF LESS THAN $100,000, SHALL BE
DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER, ANY SUCH TRANSFEREE SHALL
BE DEEMED NOT TO BE THE HOLDER OF SUCH EXCHANGE SECURITIES FOR ANY PURPOSE,
INCLUDING BUT NOT LIMITED TO THE RECEIPT OF DISTRIBUTIONS ON SUCH EXCHANGE
SECURITIES, AND SUCH TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER
IN SUCH EXCHANGE SECURITIES.
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FOR NORTH CAROLINA RESIDENTS ONLY
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE NORTH CAROLINA
COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy and information statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Seven World Trade Center, 7th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained upon written request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a site
on the World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Such material may also be inspected and
copied at the offices of the New York Stock Exchange, Inc. (the "New York
Stock Exchange"), 20 Broad Street, New York, New York 10005, on which certain
of the Company's securities are listed.
No separate financial statements of the Series B Issuer are included herein.
The Company considers that such financial statements would not be material to
holders of the Exchange Capital Securities because (i) all of the Common
Securities of the Series B Issuer are owned by the Company, a reporting
company under the Exchange Act; (ii) the Series B Issuer is a newly formed
special purpose entity, has no operating history or independent operations,
but exists for the sole purpose of, and does not propose to engage in any
other activity than, issuing securities representing trust interests
(including the Exchange Capital Securities) in the Series B Issuer and
investing the proceeds thereof in, and holding, the Outstanding Junior
Subordinated Debentures; and (iii) the obligations of the Series B Issuer
under the Exchange Capital Securities, to the extent funds are available
therefor, are fully and unconditionally guaranteed by the Company under the
Exchange Guarantee, the Trust Agreement, the Exchange Junior Subordinated
Debentures, the Junior Subordinated Indenture and the Expense Agreement. See
"Integon Capital I", "Accounting Treatment", "Capitalization", Description of
Capital Securities", "Description of Junior Subordinated Debentures" and
"Description of Guarantee." In addition, the Company does not expect that the
Series B Issuer will be subject to the reporting requirements of the Exchange
Act.
This Prospectus constitutes a part of a registration statement on Form S-4
(the "Registration Statement") filed by the Company and the Series B Issuer
with the Commission under the Securities Act. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and reference is hereby made to the Registration Statement and to
the exhibits relating thereto for further information with respect to the
Company, the Series B Issuer and the Exchange Securities. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents and reports or information filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) The Company's Current Reports on Forms 8-K dated January 28, 1997,
January 31, 1997 and April 28, 1997, on Form 8-A dated January 31, 1997,
and on Forms 8-A/A dated February 6, 1997 and February 20, 1997; and
(c) All documents and reports or information filed by the Company with
the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, subsequent to the date of this Prospectus and prior to the
termination of the offering of securities made by this Prospectus.
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Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other document subsequently filed with the Commission 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 will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference herein (not
including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to: John B. Yorke at 500 West Fifth Street, Winston-
Salem, North Carolina 27152, telephone number (910) 770-2000. In order to
ensure timely delivery of the documents, any request should be made by June
16, 1997.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. See "Glossary of Selected Insurance Terms" for
definitions of certain terms used in this Prospectus. As used in this
Prospectus, unless the context otherwise requires, the term "Company" or
"Integon" includes Integon Corporation and its subsidiaries. This Prospectus
contains forward-looking statements that inherently involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "The Company--Recent History; Strategy" and
"Risk Factors."
THE COMPANY
The Company, through its wholly owned property and casualty insurance
subsidiaries, specializes in the marketing and underwriting of nonstandard
automobile insurance to individuals. To a lesser extent, the Company also
writes specialty automobile insurance and, in North Carolina, preferred risk
automobile insurance. The Company has been writing insurance for more than 25
years and currently markets its products in 30 states through approximately
13,000 independent agencies located principally in the eastern United States.
The Company's nonstandard automobile insurance products are designed for
drivers who are unable to obtain coverage from standard market carriers due to
prior driving records, other underwriting criteria or market conditions. These
drivers are normally charged higher premium rates than the rates charged for
preferred or standard risk drivers and generally obtain lower liability limits
than preferred or standard risk policyholders. The Company's specialty
automobile insurance products include business vehicle insurance designed
primarily for tradespeople and artisans who have small fleets or lightweight
single vehicles, as well as motorcycle insurance.
THE SERIES B ISSUER
Integon Capital I (the "Series B Issuer") is a statutory business trust
created under the laws of the State of Delaware. The Series B Issuer exists for
the purposes of (i) issuing the Capital Securities and Common Securities
representing trust interests in the assets of the Series B Issuer, (ii)
purchasing the Junior Subordinated Debentures with the proceeds from the sale
of the Capital Securities and the Common Securities, (iii) effecting the
Exchange Offer and (iv) engaging in only those other activities necessary or
incidental thereto. All of the Common Securities are owned by the Company. The
Company will pay all fees and expenses related to the Series B Issuer and the
offering of the Exchange Capital Securities.
THE EXCHANGE OFFER
The Exchange Offer.......... Exchange Capital Securities are being offered in
exchange for a like aggregate Liquidation Amount
of Outstanding Capital Securities. Outstanding
Capital Securities may be tendered for exchange
in whole or in part in a Liquidation Amount of
$100,000 (100 Outstanding Capital Securities) or
any integral multiple of $1,000 in excess
thereof; provided that if any Outstanding Capital
Securities are tendered for exchange in part, the
untendered aggregate Liquidation Amount thereof
must be $100,000 or any integral multiple of
$1,000 in excess thereof. As of March 5, 1997,
100,000 Outstanding Capital Securities with an
aggregate Liquidation Amount of $100,000,000 were
issued and outstanding. The Company and the
Series B Issuer have agreed to make the Exchange
Offer in order to satisfy their obligations under
the Registration Rights Agreement. For a
description of the procedures for tendering
Outstanding Capital Securities, see "Exchange
Offer--Procedures for Tendering Outstanding
Capital Securities."
8
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Expiration Date; The Exchange Offer will expire at 5:00 p.m., New
Withdrawal................. York City time, on June 30, 1997, or such later
date and time to which it may be extended in the
sole discretion of the Company and the Series B
Issuer (the "Expiration Date"). Outstanding
Capital Securities tendered pursuant to the
Exchange Offer may be withdrawn at any time prior
to the close of business, New York City time, on
the Expiration Date. Any Outstanding Capital
Security not accepted for exchange for any reason
will be returned without expense to the tendering
holders thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer. See "Exchange Offer--Expiration Date;
Extensions; Termination; Amendments" and
"Exchange Offer--Withdrawal Rights."
Conditions to Exchange The Exchange Offer is subject to certain
Offer...................... conditions. See "Exchange Offer--Certain
Conditions to the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum number
of Outstanding Capital Securities being tendered
for exchange.
Certain Federal Income Tax
Considerations............. The exchange of Exchange Capital Securities for
Outstanding Capital Securities should not be a
taxable event to the holder for federal income
tax purposes, and the holder should not recognize
any taxable gain or loss as a result of such
exchange. See "Certain Federal Income Tax
Considerations."
Procedures for Tendering
Outstanding Capital Tendering holders of Outstanding Capital
Securities................. Securities must complete and sign a Letter of
Transmittal in accordance with the instructions
contained therein and forward the same by mail,
facsimile or hand delivery, together with any
other required documents, to the Exchange Agent,
either with the Outstanding Capital Securities to
be tendered or in compliance with the specified
procedures for guaranteed delivery of Outstanding
Capital Securities. Certain brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. Holders of Outstanding Capital
Securities registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee are urged to contact such person promptly
if they wish to tender Outstanding Capital
Securities pursuant to the Exchange Offer. See
"Exchange Offer--Procedures for Tendering
Outstanding Capital Securities."
Letters of Transmittal and certificates
representing Outstanding Capital Securities
should not be sent to the Company or the Series B
Issuer. Such documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed
to the Exchange Agent. See "Exchange Offer--
Exchange Agent."
Resale of Exchange Capital Based on no-action letters issued by the staff of
Securities................. the Commission to third parties, the Series B
Issuer and the Company believe that the
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<PAGE>
Exchange Capital Securities to be issued pursuant
to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who
purchases such Exchange Capital Securities
directly from the Series B Issuer or the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or
(ii) a person that is an "affiliate" of the
Series B Issuer or the Company within the meaning
of rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such Exchange Capital Securities
are acquired in the ordinary course of such
holders' business and such holders are not
engaged in, and do not intend to engage in, a
distribution of such Exchange Capital Securities
and have no arrangements or understanding with
any person to participate in the distribution of
such Exchange Capital Securities. However, the
staff of the Commission has not considered the
Exchange Offer in the context of a no-action
letter, and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange Offer
as it has in such no-action letters to third
parties. Each eligible holder wishing to accept
the Exchange Offer must represent to the Series B
Issuer and the Company that: (i) it is not an
"affiliate" of the Series B Issuer or the Company
within the meaning of Rule 405 under the
Securities Act, (ii) any Exchange Capital
Securities to be received by it were acquired in
the ordinary course of its business, and (iii) it
is not engaged in, and does not intend to engage
in, a distribution of such Exchange Capital
Securities and has no arrangements or
understanding with any person to participate in
the distribution of such Exchange Capital
Securities. However, any holder of Outstanding
Capital Securities who is an affiliate or who
intends to participate in the Exchange Offer for
the purpose of distributing Exchange Capital
Securities, or any broker-dealer who purchased
Outstanding Capital Securities to resell pursuant
to Rule 144A or any other available exemption
under the Securities Act, (i) will not be able to
rely on the above-mentioned no-action letters of
the Commission and (ii) must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
or other transfer of such Outstanding Capital
Securities unless such sale is made pursuant to
an exemption from such requirements. Each broker-
dealer that receives Exchange Capital Securities
for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of
Exchange Capital Securities. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. The Company and the Series B
Issuer believe that this Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of Exchange Capital Securities received
in exchange for Outstanding Capital Securities
where such Outstanding Capital
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<PAGE>
Securities were acquired by such broker-dealer as
a result of market-making activities or other
trading activities. The Series B Issuer and the
Company have agreed to use their best efforts to
make this Prospectus available for a period of
180 days following the consummation of the
Exchange Offer to broker-dealers who have
identified themselves as such for use in
connection with resales by such broker-dealers of
Exchange Capital Securities received in exchange
for Outstanding Capital Securities acquired by
such broker-dealers for their own accounts as a
result of market-making or other trading
activities.
In that regard, each broker-dealer who surrenders
Outstanding Capital Securities pursuant to the
Exchange Offer will be deemed to have agreed, by
execution of the Letter of Transmittal, that,
upon receipt of notice from the Company or the
Series B Issuer of the occurrence of any event or
the discovery of any fact which makes any
statement contained or incorporated by reference
in this Prospectus untrue in any material respect
or which causes this Prospectus to omit to state
a material fact necessary in order to make the
statements contained or incorporated by reference
herein, in the light of the circumstances under
which they were made, not misleading, or of the
occurrence of certain other events specified in
the Registration Rights Agreement, such broker-
dealer will suspend the sale of Exchange Capital
Securities pursuant to this Prospectus until the
Company or the Series B Issuer has amended or
supplemented this Prospectus to correct such
misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to such
broker-dealer, or the Company or the Series B
Issuer has given notice that the sale of the
Exchange Capital Securities may be resumed, as
the case may be. See "Plan of Distribution." The
Company and the Series B Issuer have agreed that
if any holder of Transfer Restricted Securities
(as defined herein) notifies the Company or the
Series B Issuer on or by the 20th business day
following the consummation of the Exchange Offer
that (i) it is prohibited by law or Commission
policy from participating in the Exchange Offer,
(ii) it may not resell the Exchange Capital
Securities, the Exchange Guarantee and the
Exchange Junior Subordinated Debentures acquired
by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus
contained in the Exchange Offer Registration
Statement is not appropriate or available for
such resales or (iii) it is a broker-dealer and
owns Outstanding Capital Securities acquired
directly from the Series B Issuer or an affiliate
of the Series B Issuer, then the Company and the
Series B Issuer will use their best efforts as
promptly as practicable to file with the
Commission and thereafter will use their best
efforts to cause to be declared effective a
"shelf" registration statement on an appropriate
form under the Securities Act providing for the
registration of, and the sale on a continuous or
delayed basis by the holders who satisfy certain
conditions relating to the provision of
information in connection with such shelf
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<PAGE>
registration statement of, all of the Transfer
Restricted Securities, pursuant to Rule 415 or
any similar rule that may be adopted by the
Commission.
Exchange Agent.............. The Exchange Agent is First Union National Bank
of North Carolina. The address and telephone and
facsimile numbers of the Exchange Agent are set
forth under "Exchange Offer--Exchange Agent" and
in the Letter of Transmittal.
Untendered Outstanding
Capital Securities......... Upon consummation of the Exchange Offer, the
holders of Outstanding Capital Securities, if
any, will have no further registration or other
rights under the Registration Rights Agreement,
except as provided herein. Holders of Outstanding
Capital Securities who do not tender their
Outstanding Capital Securities in the Exchange
Offer or whose Outstanding Capital Securities are
not accepted for exchange will continue to hold
such Outstanding Capital Securities and will be
entitled to all the rights and preferences
thereof and will be subject to all the
limitations applicable thereto, except for any
such rights or limitations which, by their terms,
terminate or cease to be effective as a result of
this Exchange Offer. All untendered and tendered
but unaccepted Outstanding Capital Securities
will continue to be subject to the restrictions
on transfer provided therein. To the extent that
Outstanding Capital Securities are tendered and
accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted
Outstanding Capital Securities could be adversely
affected.
TERMS OF THE EXCHANGE CAPITAL SECURITIES
The terms of the Exchange Capital Securities are substantially identical to
the terms of the Outstanding Capital Securities.
Securities Offered.......... $100,000,000 aggregate Liquidation Amount of 10
3/4% Capital Securities, Series B (Liquidation
Amount $1,000 per Capital Security). The Exchange
Capital Securities will be issued, and the
Outstanding Capital Securities were issued, under
the Trust Agreement. The Exchange Capital
Securities and any Outstanding Capital Securities
which remain outstanding after consummation of
the Exchange Offer will constitute a single
series of Capital Securities under the Trust
Agreement, and, accordingly, will vote together
as a single class for purposes of determining
whether holders of the requisite percentage in
outstanding Liquidation Amount thereof have taken
certain actions or exercised certain rights under
the Trust Agreement. See "Description of Capital
Securities." The terms of the Exchange Capital
Securities are identical in all material respects
to the terms of the Outstanding Capital
Securities except that (i) the Exchange Capital
Securities will have been registered under the
Securities Act and will not contain terms
restricting the transfer of such securities, (ii)
the Exchange Capital Securities will be entitled,
to the extent applicable, to the benefits of the
qualification of the Trust Agreement under the
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<PAGE>
Trust Indenture Act, and (iii) the Exchange
Capital Securities will not provide for
liquidated damages in certain circumstances under
the Registration Rights Agreement. See
"Description of Capital Securities."
Distribution Dates.......... February 15 and August 15 of each year,
commencing August 15, 1997.
Extension Periods........... Distributions on the Exchange Capital Securities
may be deferred for the duration of any Extension
Period selected by the Company with respect to
the payment of interest on the Exchange Junior
Subordinated Debentures. No Extension Period will
exceed 10 consecutive semi-annual periods or
extend beyond the Stated Maturity. See
"Description of Junior Subordinated Debentures--
Option to Defer Interest Payments" and "Certain
Federal Income Tax Considerations--Original Issue
Discount." The Company paid $10.75 million of the
net proceeds from the sale of the Outstanding
Junior Subordinated Debentures into a Reserve
Account established and maintained by the
Debenture Trustee, the funds in which will be
applied to pay interest on the Junior
Subordinated Debentures on the first two Interest
Payment Dates for the Junior Subordinated
Debentures. See "Description of Junior
Subordinated Debentures--Reserve Account."
Ranking..................... The Exchange Capital Securities will rank pari
passu, and payments thereon will be made pro
rata, with the Common Securities except as
described under "Description of Capital
Securities--Subordination of Common Securities."
The Exchange Junior Subordinated Debentures will
rank pari passu with all other subordinated
debentures to be issued by the Company with
substantially similar subordination terms and
which may be issued and sold (if at all) to other
trusts to be established by the Company (if any)
or otherwise, and will be unsecured and
subordinate and junior in right of payment to the
extent and in the manner set forth in the Junior
Subordinated Indenture to all Senior
Indebtedness. See "Description of Junior
Subordinated Debentures." The Exchange Guarantee
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
Indebtedness. See "Description of Guarantee."
Redemption or Repurchase.... The Trust Securities are subject to mandatory
redemption (i) in whole but not in part at the
Stated Maturity upon repayment of the Junior
Subordinated Debentures at the Redemption Price
and (ii) prior to the Stated Maturity and
contemporaneously with the optional redemption by
the Company of the Junior Subordinated Debentures
in whole or in part on or after February 15,
2007, or in whole but not in part within 90 days
following the occurrence and during the
continuation of a Tax Event. See "Description of
Capital Securities--Redemption" and "--
Conditional Right to Shorten Maturity or Redeem
upon a Tax Event." Each holder of Exchange
Capital Securities will have the right, upon a
Change of Control, to cause a repurchase of the
Exchange Capital Securities held by such
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<PAGE>
holder at a repurchase price of 101% of the
aggregate Liquidation Amount of such Exchange
Capital Securities. See "Description of Capital
Securities--Change of Control Repurchase." In
addition, subject to certain conditions, the
Company will have the right at any time to
terminate the Series B Issuer and cause the
Exchange Junior Subordinated Debentures to be
distributed to the holders of the Common
Securities and Exchange Capital Securities. See
"Description of Capital Securities--Liquidation
Distribution Upon Termination." The Stated
Maturity of the Exchange Junior Subordinated
Debentures is February 15, 2027.
Shorten Maturity............ Under certain circumstances upon the occurrence
of a Tax Event, the Company has the right to
shorten the maturity of the Exchange Junior
Subordinated Debentures. See "Description of
Capital Securities--Conditional Right to Shorten
Maturity or Redeem upon a Tax Event" and
"Description of Junior Subordinated Debentures--
Conditional Right to Shorten Maturity upon a Tax
Event."
Transfer Restrictions....... The Exchange Capital Securities will be issued,
and may be transferred, only in blocks having a
Liquidation Amount of $100,000 (100 Exchange
Capital Securities) or any integral multiple of
$1,000 in excess thereof. Any transfer, sale or
other disposition of Exchange Capital Securities
in a block having a Liquidation Amount of less
than $100,000 shall be deemed to be void and of
no legal effect whatsoever. See "Description of
Capital Securities--Restrictions on Transfer."
ERISA Considerations........ Holders tendering Outstanding Capital Securities
in the Exchange Offer must carefully consider the
restrictions set forth under "ERISA
Considerations."
Absence of Market for the
Exchange Capital The Exchange Capital Securities will be a new
Securities................. issue of securities for which there currently is
no market. Although the Initial Purchasers have
informed the Series B Issuer and the Company that
they each currently intend to make a market in
the Exchange Capital Securities, the Initial
Purchasers are not obligated to do so, and any
such market making may be discontinued at any
time without notice. Accordingly, there can be no
assurance as to the development of liquidity of
any market for the Exchange Capital Securities.
The Company will not apply for listing of the
Exchange Capital Securities on any securities
exchange or for inclusion of the Exchange Capital
Securities on any automated quotation system.
For additional information regarding the Exchange Capital Securities, the
Exchange Junior Subordinated Debentures and the Exchange Guarantee, see
"Description of Capital Securities," "Description of Junior Subordinated
Debentures," "Description of Guarantee," "Relationship Among the Capital
Securities, the Junior Subordinated Debentures, the Guarantee and the Expense
Agreement" and "Certain Federal Income Tax Considerations."
RISK FACTORS
Holders tendering Outstanding Capital Securities in the Exchange Offer should
carefully consider the matters set forth under "Risk Factors."
14
<PAGE>
THE COMPANY
OVERVIEW
The Company, through its wholly owned property and casualty insurance
subsidiaries, specializes in the marketing and underwriting of nonstandard
automobile insurance to individuals. To a lesser extent, the Company also
writes specialty automobile insurance and, in North Carolina, preferred risk
automobile insurance. The Company has been writing insurance for more than 25
years and currently markets its products in 30 states through approximately
13,000 independent agencies located principally in the eastern United States.
The Company's nonstandard automobile insurance products are designed for
drivers who are unable to obtain coverage from standard market carriers due to
prior driving records, other underwriting criteria or market conditions. These
drivers are normally charged higher premium rates than the rates charged for
preferred or standard risk drivers and generally obtain lower liability limits
than preferred or standard risk policyholders. The Company's specialty
automobile insurance products include business vehicle insurance designed
primarily for tradespeople and artisans who have small fleets or lightweight
single vehicles, as well as motorcycle insurance.
NONSTANDARD AUTOMOBILE INSURANCE INDUSTRY
The nonstandard automobile insurance market is a fast-growing portion of the
overall automobile insurance industry. Nonstandard automobile industry
premiums written have grown at a compound rate of 11.9% per year from 1990 to
1995, according to an industry source. Total premiums written for this market
in 1995 are estimated to have been $17 billion.
The size of the nonstandard automobile insurance market changes with the
automobile insurance environment generally, but grows when standard coverage
becomes more restrictive. The industry is expected to continue to grow as a
result of stricter enforcement of driving laws, especially those related to
blood alcohol limits, and because of the demographics relating to potential
youthful drivers (ages 16-24). The size of the nonstandard market is also
affected by increases in rates adopted by state administered involuntary
plans, allowing the voluntary nonstandard market to be more price competitive.
The predominant form of distribution in the nonstandard automobile market is
through independent agencies, although the largest company in the industry
markets its products primarily through its captive agencies. The Company
believes that marketing through an independent agency system provides
nonstandard automobile companies with lower fixed costs and a greater ability
to react promptly to changes in the marketplace. However, use of this system
generally results in higher variable costs.
According to an industry source, 43.6% of the premiums written in 1995 for
nonstandard policies were written by four companies, including the Company
(which represented approximately 4.2% of premiums written in 1995). Most of
the rest of the business was written by local and regional companies. This
concentration is attributable, in part, to previous and on-going consolidation
in the industry.
RECENT HISTORY; STRATEGY
In October 1994, the Company acquired Bankers and Shippers Insurance Company
(which changed its name to Integon National Insurance Company in 1996)
("Bankers and Shippers"), for a purchase price of $153.2 million. The
acquisition of Bankers and Shippers, which was also engaged in the nonstandard
automobile insurance business, increased to 19 the number of states in which
the Company then marketed its products and provided significant geographic
diversity. Since the acquisition, the Company has continued to expand into
additional states in its effort to become a national provider of nonstandard
automobile insurance. Currently, the Company is writing business in 30 states.
For the year ended 1995, the Company reported net income of $34.0 million
and net income available to common stockholders of $28.4 million. Net premiums
written grew 70.7% over 1994 to $620.4 million as a result of the Bankers and
Shippers acquisition and increased market penetration in most of the Company's
existing states, as well as in new markets. The GAAP combined ratio for 1995
was 95.0%.
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<PAGE>
For the year ended 1996, the Company reported net income of $170,000 and a
loss to common stockholders of $5.4 million. While net premiums written
increased 28.6% to $798.0 million in 1996 over 1995, the Company's GAAP
combined ratio increased to 102.4% from 95.0% in 1995, attributable primarily
to a significant increase in the loss ratio from 73.4% to 80.0%.
The Company's results for the fourth quarter of 1996 were significantly
below those for the 1996 third quarter and those for the fourth quarter of
1995. The Company recorded a net loss of $16.4 million and net loss to common
stockholders of $17.8 million for the three months ended December 31, 1996,
compared to net income of $10.5 million and net income available to common
stockholders of $9.2 million for the comparable 1995 period, and net income of
$4.9 million and net income available to common stockholders of $3.5 million
for the three months ended September 30, 1996. The Company's loss, expense and
combined ratios were 89.1%, 25.6% and 114.7% for the fourth quarter of 1996,
compared to 76.8%, 21.9% and 98.7% for the third quarter of 1996 and 74.2%,
20.5% and 94.7% for the fourth quarter of 1995. At December 31, 1996 the
Company's statutory premium to surplus ratio increased to 3.248x, compared to
3.03x at September 30, 1996 and 2.74x at December 31, 1995.
The deterioration in fourth quarter results was due to a number of factors,
including increased frequency, an increase in the Company's expense ratio,
deferred acquisition cost writeoffs, an increase in bad debt reserves, a $2.0
million write-down of bonds in its investment portfolio and an increase in the
Company's loss and loss adjustment expense ("LAE") reserves of $12.5 million.
Increased fourth quarter frequency trends were experienced by the Company in
most states, including several of its larger core markets. The loss reserve
increase related primarily to less than adequate reserves being set in earlier
periods in the 1996 accident year, as the Company was writing business at
prices that were inadequate and that attracted segments of business with
higher loss frequencies. In addition, the need for increased use of outside
adjusters following Hurricane Fran in September 1996 adversely affected the
Company's loss and LAE experience in October and November. The Company's
expense ratio was adversely impacted in the fourth quarter by increased
expenses for beginning the modifications necessary to accommodate the Year
2000.
The Company announced that its focus in 1997 would be on restoring
underwriting profits. During the period of October 1996 through March 1997,
the Company increased rates in states representing approximately 95% of 1996
net premiums written. These increases varied by state and ranged from 3% to
20%. Where rates could not be increased within 30 days because of regulatory
constraints, underwriting restrictions were put into place. These restrictions
included requiring higher down payments, reducing the number of payments
permitted, restricting reinstatement provisions and requiring shorter term
policies. Such pricing and underwriting actions may impact the Company's
competitive position, insofar as its competitors may be able to offer more
attractive policy rates and terms.
Management is also continuing to pursue its strategy of the Company being a
low-cost provider of nonstandard automobile insurance while maintaining a
commitment to provide excellent service to both agents and insureds. The
Company is continuing to invest in technology and information systems
personnel, which will enhance its current ability to automate certain
marketing, underwriting, claims and administrative functions to ensure that
the Company will be able to continue to provide excellent service to its
agents and insureds. This new automated technology will reduce the manual
effort of agents to initiate new business, process payments and endorsements,
and communicate with the Company. While such increased investment in
technology has resulted, and may in the future result, in an increase in the
Company's expense ratio, management believes that such continuing investment
is essential for the Company to maintain a competitive position in the
industry.
On April 28, 1997, the Company announced a net loss of $33.4 million or
$(2.21) per share and a net loss to common stockholders of $34.8 million for
the three months ended March 31, 1997, compared to net income of $3.4 million
and net income available to common stockholders of $2.0 million for the three
months ended March 31, 1996. In addition, the Company announced that it had
retained an investment bank to review strategic alternatives, including the
sale of the Company. The Company reported that it is continuing to focus on
restoring profitability through price increases, the tightening of
underwriting restrictions in certain states and raising down payments on some
of its premium payment plans.
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<PAGE>
The results of operations for the three months ended March 31, 1997 included
an increase to loss and LAE payable of $42.0 million or $(1.74) per share,
primarily related to automobile liability coverages. This increase primarily
related to liability coverages on policies written by the Company in 1995 and
1996. The GAAP combined ratio for the three months ended March 31, 1997 was
127.7%, compared to 100.4% for the comparable period in 1996. The loss ratio
for the three months ended March 31, 1997 was 101.6%, compared to 79.2% for
the comparable period in 1996. The Company's loss ratio for the first quarter
of 1997, prior to the increase in loss and LAE payable, was adversely impacted
by an increasing severity of physical damage claims.
Net premiums written for the quarter were $202.5 million, which represented
an increase of 4.3% from the first quarter of 1996. The growth in net premiums
written was primarily attributable to the effects of price increases taken in
the quarter.
The Company's expense ratio for the quarter was 26.1% and included the
write-off of $3.7 million in deferred policy acquisition costs. The increase
in the expense ratio from 21.2% for the first quarter of 1996 was also
attributable to an increase in personnel related and other information system
costs.
Included in the first quarter 1997 results was $990,000, net of applicable
income tax, in distributions on the Outstanding Capital Securities.
In November 1996, John C Head III, Chairman of the Board, was appointed
Chief Executive Officer of the Company, and will continue to serve as Chief
Executive Officer until the Company appoints a replacement pursuant to an on-
going executive search. The Company announced in April that the search may be
delayed.
CORPORATE STRUCTURE
The Company is a Delaware corporation whose principal executive offices are
located at 500 West Fifth Street, Winston-Salem, North Carolina 27152,
telephone number (910) 770-2000. The Company's principal insurance
subsidiaries are Integon Preferred Insurance Company, Integon National
Insurance Company, Integon Casualty Insurance Company, Integon Indemnity
Corporation, Integon General Insurance Corporation, New South Insurance
Company, Integon Specialty Insurance Company (collectively, the "Domestic
Insurance Subsidiaries") and Carolina National, Ltd. (together with the
Domestic Insurance Subsidiaries, the "P&C Subsidiaries"). In addition, through
Salem Underwriters, Inc. ("Salem"), the Company offers premium financing for
the Company's insureds in North Carolina.
INTEGON CAPITAL I
Integon Capital I (the "Series B Issuer") is a statutory business trust
formed under Delaware law. The Series B Issuer's business and affairs are
conducted by two Issuer Trustees and three Administrators: First Union
National Bank of North Carolina, as Property Trustee (the "Property Trustee")
and First Union Bank of Delaware, an affiliate of the Property Trustee, as
Delaware Trustee (collectively, the "Issuer Trustees"), and three individual
administrative trustees who are employees or officers of or affiliated with
the Company (collectively, the "Administrators"). The Series B Issuer was
formed pursuant to (i) a trust agreement (the "Original Trust Agreement")
executed by the Company, as sponsor for the Series B Issuer and as Depositor,
an Administrator and the Delaware Trustee and (ii) the filing of a certificate
of trust with the Delaware Secretary of State on January 27, 1997. Such
Original Trust Agreement was amended and restated in its entirety by an
Amended and Restated Trust Agreement executed on February 10, 1997 by the
Company, the Administrators and the Issuer Trustees (as so amended and
restated, the "Trust Agreement"). The Series B Issuer exists for the exclusive
purposes of (i) issuing the Capital Securities and Common Securities
representing trust interests in the assets of the Series B Issuer, (ii)
purchasing the Junior Subordinated Debentures with the proceeds from the sale
of the Outstanding Capital Securities and the Common Securities, (iii)
effecting the Exchange Offer and (iv) engaging in only those other activities
necessary or incidental thereto. All of the Common Securities are owned
17
<PAGE>
by the Company. The Common Securities rank pari passu, and payments will be
made thereon pro rata, with the Exchange Capital Securities, except that upon
the occurrence and continuance of an Event of Default (as defined herein)
under the Trust Agreement, the rights of the holders of the Common Securities
to payment in respect of distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Exchange Capital Securities. The Company has acquired Common Securities
having an aggregate liquidation amount equal to 3% of the total capital of the
Series B Issuer. The Series B Issuer has a term of approximately 31 years, but
may terminate earlier as provided in the Trust Agreement. The Series B
Issuer's business and affairs are conducted by the Property Trustee and the
Administrators. Unless a Debenture Event of Default has occurred and is
continuing, the holder of the Common Securities will be entitled to appoint,
remove or replace any Issuer Trustee at any time. If a Debenture Event of
Default (as defined herein) has occurred and is continuing, the holders of at
least a majority in Liquidation Amount of the then outstanding Capital
Securities will be entitled to appoint, remove or replace the Property Trustee
or the Delaware Trustee or both of them. The duties and obligations of the
Issuer Trustees are governed by the Trust Agreement. The Company will pay all
fees and expenses related to the Series B Issuer and the offering of the
Exchange Capital Securities. The principal executive office of the Series B
Issuer is 500 West Fifth Street, Winston-Salem, North Carolina 27512,
Attention: General Counsel, telephone number (910) 770-2000.
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RISK FACTORS
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth below and under "The Company--
Recent History; Strategy."
Holders tendering Outstanding Capital Securities in the Exchange Offer
should carefully review the information contained elsewhere in this Prospectus
and should particularly consider the following matters:
Certain Factors Relating to the Company
RESULTS FOR THE QUARTER AND YEAR ENDED DECEMBER 31, 1996 AND QUARTER ENDED
MARCH 31, 1997
The Company recorded a net loss of $16.4 million and net loss to common
stockholders of $17.8 million for the fourth quarter of 1996, compared to net
income of $10.5 million and net income available to common stockholders of
$9.2 million for the fourth quarter of 1995. For the year ended December 31,
1996, the Company recorded net income of $170,000 and a net loss to common
stockholders of $5.4 million, compared to net income of $34.0 million and net
income available to common stockholders of $28.4 million in 1995. The Company
recorded a net loss of $33.4 million and a net loss to common stockholders of
$34.8 million for the first quarter of 1997, compared to net income of $3.4
million and net income available to common stockholders of $2.0 million for
the first quarter of 1996. While the Company is implementing a plan to improve
profitability, which includes introducing premium rate increases, increasing
minimum policy down payments and implementing underwriting restrictions, there
can be no assurances as to the effect of such measures on the Company's
results in future quarterly and annual periods.
LIMITED DIVIDENDS AVAILABLE FROM DOMESTIC INSURANCE SUBSIDIARIES
The Company, a holding company whose principal asset is the capital stock of
the P&C Subsidiaries and Salem, relies primarily on dividends from the
Domestic Insurance Subsidiaries to meet its obligations for payment of
interest and principal on outstanding debt obligations, including its
obligations under the Junior Subordinated Debentures and the Guarantee,
dividends to stockholders and corporate expenses. The ability of the Domestic
Insurance Subsidiaries to pay dividends to the Company is restricted by the
insurance laws of North Carolina, under which the maximum amount of ordinary
dividends that a Domestic Insurance Subsidiary may pay to the Company at any
point in time without regulatory approval is the lesser of (a) 10% of the
policyholders' statutory surplus of such Domestic Insurance Subsidiary as of
the preceding December 31 or (b) the statutory net income of such Domestic
Insurance Subsidiary for the preceding calendar year, less the amount of
dividends paid during the preceding 12 months. In 1996, the maximum amount of
ordinary dividends payable by the Company's Domestic Insurance Subsidiaries
was approximately $22.3 million. The Company's Domestic Insurance Subsidiaries
paid approximately $4.8 million of ordinary dividends in 1996.
After taking into account dividends paid in 1996 and the statutory net
income of the P&C Subsidiaries for 1996, an aggregate of only $7.9 million is
available for the payment of dividends by the Company's Domestic Insurance
Subsidiaries in 1997 without regulatory approval. However, the Company's
existing revolving line of credit (the "Credit Facility") also restricts the
ability of the P&C Subsidiaries to pay dividends to the Company and restricts
the ability of the Company to incur additional indebtedness, and no dividends
may currently be paid under the terms thereof. Commencing in 1997, and taking
into account the issuance of the Junior Subordinated Debentures, annual debt
service and preferred stock dividend requirements of the Company are estimated
to be approximately $30.15 million, including the interest payments on the
Junior Subordinated Debentures of $10.75 million. In addition, corporate
expenses in 1996 were $5.5 million and common stock dividends were $5.7
million. Accordingly, unless the Domestic Insurance Subsidiaries receive
approval for the payment of extraordinary dividends from the North Carolina
Insurance Commissioner, additional borrowings (including borrowings under the
Credit Facility), the issuance of additional securities or obtaining other
funds, including from Salem, will be necessary to pay debt service, including
interest on the Junior Subordinated Debentures, as well as dividends on the
Company's outstanding preferred stock and common stock and other expenses of
the Company.
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No assurance can be given that there will be no further or additional
regulatory actions or developments restricting the ability of the Company and
the Domestic Insurance Subsidiaries to pay dividends or otherwise advance
funds to the Company.
HIGH LEVERAGE
The Company has substantial indebtedness and is highly leveraged. At
December 31, 1996, the Company had total indebtedness of $194.8 million
(including $44.0 million of short-term debt under the Credit Facility) and
stockholders' equity of $215.4 million. Additionally, because the Company may
not receive dividends from the Domestic Insurance Subsidiaries in the near
future without approval from the North Carolina Insurance Commissioner, the
Company may be required, to the extent permitted under the Company's debt
instruments, to incur additional indebtedness to fund its interest payments,
stockholder dividends and operating expenses. The Company's Credit Facility
currently restricts the Company's ability to borrow thereunder if its premiums
written to statutory surplus ratio exceeds 3.25x or its debt to total
capitalization ratio exceeds 55%. The Company's premiums written to statutory
surplus ratio for the year ended December 31, 1996 was approximately 3.248x
and its debt to total capitalization ratio was 47.5%. In addition, the terms
of the Junior Subordinated Debentures restrict the Company's ability to incur
indebtedness. Accordingly, additional indebtedness to fund operating expenses
may not be available.
IMPORTANCE OF MAINTAINING STATUTORY SURPLUS AND RATINGS
The capacity for the Company's growth in premiums, like that of other
insurance companies, is in part a function of its statutory surplus.
Maintaining appropriate levels of statutory surplus is considered important by
the Company's management, state insurance regulatory authorities, and the
agencies that rate insurers' financial strength. Failure to maintain certain
levels of statutory capital and surplus could result in increased scrutiny or,
in some cases, action taken by state regulatory authorities and/or downgrades
in an insurer's ratings. See "-- High Leverage" and "--A.M. Best Rating."
The Company's Domestic Insurance Subsidiaries' financial strength is rated
"B+" (Very Good) by A.M. Best based on a number of factors, including their
first quarter 1997 results of operations, subject to a "negative outlook."
There can be no assurance that the Domestic Insurance Subsidiaries, will be
able to maintain their current A.M. Best ratings. In early December 1996,
Standard & Poor's Ratings Services ("Standard & Poor's") placed the Company's
senior debt and preferred stock ratings on CreditWatch with negative
implications, and on December 31, 1996 lowered such ratings to "BB+" and "BB-"
from "BBB-" and "BB+", respectively. In taking such action, Standard & Poor's
stated that the downgrades reflected greater-than-anticipated deterioration in
the Company's operating performance and the resultant weaker cash flow
available to the Company to service its debt. Standard & Poor's also stated
its view that the Company's combined ratio is not expected to rebound to or
remain at historic levels because of continued strong competition in the
nonstandard auto marketplace. Following the release of first quarter 1997
results, Standard & Poor's lowered such ratings further to "B+" and "B-,"
respectively. The Company's senior debt and preferred stock are currently
rated "B1" and "b3," respectively, by Moody's Investors Service ("Moody's").
These ratings, which were announced following the release of first quarter
1997 results, remain "under review" by Moody's.
Any further downgrade in ratings could materially adversely affect the
Company's business and the value of the Company's securities. In addition,
increased public and regulatory concerns regarding the financial stability of
participants in the insurance industry have resulted in greater emphasis being
placed by policyholders and independent agents upon insurance company ratings
and has created some measure of competitive advantage for insurance carriers
with higher ratings.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The amounts established and to be established by the Company for loss and
LAE reserves are estimates of future costs based on many variables, including
historical and statistical information, inflation, legal developments,
economic conditions and estimates of future trends in claims severity and
frequency. The
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Company has in the past experienced and may in the future experience
cumulative deficiencies in reserving for losses and LAE. In December 1996, the
Company increased its loss and LAE reserves by $12.5 million, primarily with
respect to the 1996 accident year, with $1.9 million attributable to prior
accident years. In each case, such reserve increases reflected the Company's
determination that prior reserve levels for such years were not adequate. The
establishment of appropriate reserves is an inherently uncertain process, and
although, following the recent reserve increases, the Company believes
adequate provision has been made for the Company's loss and LAE reserves,
there can be no assurance that future adjustments to loss and LAE reserves
will not be required.
Shortfalls in the Company's reserve estimates could materially adversely
affect the Company.
COMPETITION
The Company competes with both large national writers and smaller regional
companies in each state in which it operates. Certain of these competitors are
larger and have greater financial resources, higher ratings, superior
technological resources and greater access to sources of capital than the
Company. In addition, certain of such competitors have from time to time
decreased prices in order to gain market share. The Company's recent losses
and resulting efforts to improve profitability through reduced growth,
significant rate increases and implementation of more restrictive policy terms
and underwriting criteria may adversely impact the Company's competitive
position, insofar as its competitors may be able to offer more attractive
policy rates and terms.
REGULATION AND LEGAL PROCEEDINGS
The Company is subject to extensive regulation and supervision in the
jurisdictions in which it does business. This regulatory oversight includes,
by way of example, matters relating to licensing and examination, rate
setting, trade practices, policy forms, limitations on the nature and amount
of certain investments, claims practices, mandated participation in shared
markets and guaranty funds, reserve adequacy, insurer solvency, transactions
between affiliates, the amount of dividends that may be paid, and restrictions
on underwriting standards. Such regulation and supervision are primarily for
the benefit and protection of policyholders and not for the benefit of
investors.
In recent years, the automobile insurance industry has been under pressure
from certain state regulators, legislators and special interest groups to
reduce, freeze or set rates at levels that may not correspond with underlying
costs, including initiatives to roll back automobile and other personal lines
rates. This activity has adversely affected, and may in the future adversely
affect, the profitability of the Company's business in various states because
increasing costs of litigation, combined with rising automobile repair costs,
continue to increase the costs of providing automobile insurance coverage.
Adverse legislative and regulatory activity constraining the Company's ability
to adequately price automobile insurance coverage may occur in the future. The
impact of the automobile insurance regulatory environment on the Company's
results of operations in the future is not predictable.
In recent years the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that alter and, in many cases, increase state authority to
regulate insurance companies and insurance holding company systems. Further,
the National Association of Insurance Commissioners and state insurance
regulators are re-examining existing laws and regulations, specifically
focusing on insurance company investments, issues relating to the solvency of
insurance companies, risk-based capital guidelines, interpretations of
existing laws, the development of new laws, and the definition of
extraordinary dividends. It is presently not possible to predict the outcome
of any of the above matters, or their potential effect on the Company.
Various regulatory, governmental and other legal actions are currently
pending involving or affecting the Company and its subsidiaries and specific
aspects of the conduct of their businesses. Additionally, the Company and
certain of its subsidiaries are defendants in numerous legal actions and
proceedings of a character normally incident to their businesses and certain
of these complainants seek damages of unspecified amounts.
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VOLATILITY OF UNDERWRITING RESULTS
Nonstandard automobile insurers such as the Company are subject to
volatility in their underwriting results, primarily as a result of the
frequency and severity of claims, as well as due to expense ratio
fluctuations. The Company has experienced, and can be expected in the future
to experience, losses from weather-related events, including hurricanes, wind
and hail, and severe winter weather, and the frequency and severity of such
events are inherently unpredictable. The Company's loss experience is also
affected by such factors as changes in automobile repair costs, medical costs,
driving habits and macroeconomic conditions, all of which are largely beyond
the Company's control. To the extent geographically concentrated in the
eastern United States, an area from which the Company drew approximately 75%
of its business in 1995 and 1996, based on nonstandard net premiums written,
the effect of any one of these factors on the Company may be accordingly
exacerbated. The Company's expense levels have also been significantly
affected in recent periods by the need for additional technology investments,
including those for beginning the modifications necessary to accommodate the
Year 2000, and may in the future be affected by additional such expenditures.
POLICYHOLDER RENEWALS
Nonstandard automobile insurance is highly price sensitive. Due to the
nature of the Company's policyholders (for example, insureds seeking the least
expensive insurance which satisfies the requirements of state laws), the
renewal rate of the Company's policyholders is lower than that typically
experienced by preferred and standard risk insurance companies. The success of
the Company's business, therefore, depends on its ability to replace non-
renewing insureds with new policyholders. The Company monitors rates of
retention and the cancellation of its policies and attempts to refine its
products in response to loss experience and rates of retention in particular
markets. Although a majority of the Company's insureds will likely remain
nonstandard risks because of, among other things, their desire for minimum
policy limits, many of the Company's insureds may seek to obtain standard or
preferred policies in order to reduce their cost of insurance. In addition,
the recent actions taken by the Company to improve profitability, including
the implementation of significant rate increases and more restrictive policy
and payment terms, may have the effect of reducing the Company's renewal rates
and decreasing premium volumes in certain states or lines of business. There
can be no assurance that the Company will be successful in its efforts to
improve its renewal rates or to replace non-renewing policyholders.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on the efforts and abilities of its
management, including its Chairman, Chief Executive Officer, Chief Operating
Officer and Chief Financial Officer, and the ability of the Company to attract
and retain qualified personnel. There can be no assurance as to the effect
upon the Company's performance of future changes in senior management,
including the choice of a successor chief executive officer, the timing of
which is not certain. The Company has been seeking a successor chief executive
officer.
INVESTMENTS
Because a significant portion of the Company's revenues are generated from
its invested assets, the performance of its investment portfolio may
materially affect the Company's results of operations and financial condition.
Total pre-tax net realized investment gains were $2.7 million and $9.7 million
in 1996 and 1995, respectively.
All of the Company's fixed income securities have been designated as
"available for sale" pursuant to GAAP. Fixed income securities designated as
"available for sale" are carried in the consolidated financial statements of
the Company at estimated market value, as determined in the aggregate. As of
December 31, 1996, the aggregate market value of fixed income securities
"available for sale" was less than amortized cost by $1.1 million. Future
declines in the market value of such securities could have a material adverse
impact on the Company's financial condition.
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HOLDING COMPANY STRUCTURE
The operations of the Company are conducted through the P&C Subsidiaries.
Except to the extent that the Company may itself be a creditor with recognized
claims against the P&C Subsidiaries, claims of creditors of such subsidiaries
will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including claims
under the Junior Subordinated Debentures and the Guarantee, even though such
subsidiary obligations do not constitute Senior Indebtedness. Statutory
liabilities of the P&C Subsidiaries, including loss reserves and unearned
premium reserves, aggregated $687.4 million at December 31, 1996 and assets of
such subsidiaries totaled $933.3 million at such date.
In addition, in the event of a default on the Company's debt or an
insolvency, liquidation or other reorganization of the Company, creditors of
the Company will have no right to proceed against the assets of the P&C
Subsidiaries or to cause their liquidation under Federal and state bankruptcy
laws. If any of the Company's Domestic Insurance Subsidiaries were to be
liquidated, such liquidation would be conducted under the insurance laws of
North Carolina by the North Carolina Insurance Commissioner as the receiver
with respect to such subsidiary's property and business.
Certain Factors Relating to the Securities
TRADING CHARACTERISTICS OF CAPITAL SECURITIES
The Capital Securities may trade at prices that do not fully reflect the
value of accrued and unpaid interest with respect to the underlying Junior
Subordinated Debentures. However, interest on the Junior Subordinated
Debentures will be included in the gross income of U.S. holders of Capital
Securities as it accrues, rather than when it is paid. See "Certain Federal
Income Tax Considerations--Original Issue Discount" and "--Sale or Redemption
of Capital Securities."
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued by the Company for
the benefit of the holders of the Capital Securities and under the Junior
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all Senior Indebtedness of the Company. As of December 31, 1996,
the Senior Indebtedness of the Company aggregated approximately $194.8
million. In addition, as of such date, the P&C Subsidiaries had total
liabilities of approximately $687.4 million (including estimated liabilities
for insurance claims) to which the Junior Subordinated Debentures will be
effectively subordinated. Accordingly, the Junior Subordinated Debentures and
Guarantee will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries, and holders of Junior Subordinated
Debentures and the Guarantee should look only to the assets of the Company for
payments on the Junior Subordinated Debentures and the Guarantee. See
"Description of Guarantee--Status of the Guarantee" and "Description of Junior
Subordinated Debentures--Subordination." The Junior Subordinated Debentures
contain certain limitations on the Company's ability to incur additional
indebtedness, including indebtedness that ranks senior to the Junior
Subordinated Debentures and the Guarantee. See "Description of Junior
Subordinated Debentures--Certain Covenants."
The ability of the Series B Issuer to pay amounts due on the Capital
Securities is entirely dependent upon the Company making payments on the
Junior Subordinated Debentures as and when required.
OPTION TO DEFER INTEREST PAYMENTS; TAX CONSEQUENCES
So long as no Event of Default under the Junior Subordinated Indenture has
occurred or is continuing, the Company has the right under the Junior
Subordinated Indenture at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest on the Junior 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
Junior Subordinated Debentures. As a consequence of any such deferral, semi-
annual Distributions on the Capital Securities will be
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deferred by the Series B Issuer 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 that rank pari passu in all respects with or junior in interest to
the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by the Company of debt securities of any subsidiary
of the Company if such guarantee ranks pari passu with or junior in interest
to the Junior 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 shareholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, (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 registration of shares of an employee benefit plan
of the Company, related to the issuance of common stock or rights under a
dividend reinvestment plan or stock purchase plan, or related to the issuance
of common stock of the Company (or securities convertible into or exchangeable
for such common stock) as consideration in an acquisition transaction entered
into prior to the applicable Extension Period, and (e) payments of accrued
dividends (and cash in lieu of fractional shares) upon conversion into common
stock of any convertible preferred stock of the Company of any series now or
hereinafter outstanding, in accordance with the terms of such stock). Prior to
the termination of any such Extension Period, the Company may further defer
the payment of interest, provided that no Extension Period may exceed 10
consecutive semi-annual periods or extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin
a new Extension Period subject to the above requirements. See "Description of
Capital Securities--Option to Defer Interest Payments" and "Description of
Junior Subordinated Debentures--Option to Defer Interest Payments."
Should an Extension Period occur, a holder of Capital Securities will
continue to accrue income (in the form of original issue discount) in respect
of its pro rata share of the Junior Subordinated Debentures held by the Series
B Issuer for United States federal income tax purposes. As a result, a holder
of Capital Securities will include such income in gross income for United
States federal income tax purposes in advance of the receipt of cash, and will
not receive from the Series B Issuer cash related to such income if the holder
disposes of the Capital Securities prior to the record date for the payment of
Distributions. See "Certain Federal Income Tax Considerations--Original Issue
Discount" and "--Sale or Redemption of Capital Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Capital Securities is likely to
be affected. A holder that disposes of its Capital Securities during an
Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Capital Securities. In
addition, as a result of the existence of the Company's right to defer
interest payments, the market price of the Capital Securities (which represent
an undivided beneficial interest in the Series B Issuer) may be more volatile
than the market prices of other securities on which original issue discount
accrues that are not subject to such deferrals. The Company paid $10.75
million of the net proceeds from the sale of the Junior Subordinated
Debentures into a Reserve Account established and maintained by the Debenture
Trustee, the funds in which will be applied to pay interest on the Junior
Subordinated Debentures on the first two Interest Payment Dates for the Junior
Subordinated Debentures. See "Description of Junior Subordinated Debentures--
Reserve Account."
TAX EVENT--SHORTENING OF MATURITY OR REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, the Company
has the right, if certain conditions are met, (i) to shorten the maturity of
the Junior Subordinated Debentures to a date not earlier than August 15, 2016
or (ii) to redeem the Junior Subordinated Debentures in whole (but not in
part) within 90 days following the occurrence and during the continuation of
such Tax Event and thereby cause a mandatory
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redemption of the Capital Securities before the Stated Maturity. Any such
redemption shall be at a price equal to the Redemption Price (as defined in
"Description of Capital Securities--Redemption").
A "Tax Event" means, with respect to Junior Subordinated Debentures held by
the Series B Issuer, the receipt by the Series B Issuer of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
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 pronouncement or decision is announced on or after the date of
original issuance of the Capital Securities under the Trust Agreement, there
is more than an insubstantial risk that (i) the Series B Issuer is, or will be
within 90 days of the date of such opinion, subject to United States federal
income tax with respect to income accrued or received on the Junior
Subordinated Debentures, (ii) interest payable by the Company on the Junior
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) the Series B Issuer is, or within 90 days
of the date of such opinion, will be, subject to more than a de minimis amount
of other taxes, duties or other governmental charges. With respect to Junior
Subordinated Debentures which are no longer held by the Series B Issuer, "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 prospective 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 prospective
change, pronouncement or decision is announced on or after the date of
issuance of the Junior Subordinated Debentures under the Junior Subordinated
Indenture, there is more than an insubstantial risk that interest payable by
the Company on the Junior 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 "--Possible Tax Law Changes Affecting Capital Securities" for a
discussion of certain proposals that, if adopted by Congress, could give rise
to a Tax Event, which may permit the Company to shorten the maturity of the
Junior Subordinated Debentures, which would result in the shortening of the
Stated Maturity of the Capital Securities, or to cause a redemption of the
Capital Securities prior to February 15, 2007.
EXCHANGES OF CAPITAL SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
The holders of all of the outstanding Common Securities have the right at
any time to terminate the Series B Issuer and, after satisfaction of the
liabilities and amounts owed to creditors (which are payable by the Company)
of the Series B Issuer as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Series B Issuer.
Under current United States federal income tax law and interpretations, a
distribution of the Junior Subordinated Debentures upon a liquidation of the
Series B Issuer will not be a taxable event to holders of the Capital
Securities. However, if a Tax Event were to occur which would cause the Series
B Issuer to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a
distribution of the Junior Subordinated Debentures by the Series B Issuer
could be a taxable event to the Series B Issuer and the holders of the Capital
Securities. See "Certain Federal Income Tax Considerations--Distribution of
Junior Subordinated Debentures to Holders of Capital Securities."
MARKET PRICES
There can be no assurance as to the market prices for Capital Securities or
Junior Subordinated Debentures that may be distributed in exchange for Capital
Securities if a liquidation of the Series B Issuer occurs.
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Accordingly, the Capital Securities or the Junior Subordinated Debentures that
a holder of Capital Securities may receive on liquidation of the Series B
Issuer may trade at a discount to the price that the investor paid to purchase
the Capital Securities offered hereby. Because holders of Capital Securities
may receive Junior Subordinated Debentures upon a termination of the Series B
Issuer, holders tendering Outstanding Capital Securities in the Exchange Offer
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the
Junior Subordinated Debentures contained herein. See "Description of Junior
Subordinated Debentures."
GUARANTEE COVERS DISTRIBUTIONS AND OTHER PAYMENTS ONLY TO THE EXTENT THE
SERIES B ISSUER HAS AVAILABLE FUNDS; RELATED REMEDIES
First Union National Bank of North Carolina will act as the guarantee
trustee under the Guarantee (the "Guarantee Trustee") and will hold the
Guarantee for the benefit of the holders of the Capital Securities. The
Guarantee guarantees on a subordinated basis to the holders of the Capital
Securities the following payments, to the extent not paid by the Series B
Issuer: (i) any accumulated and unpaid Distributions required to be paid on
the Trust Securities, to the extent the Series B Issuer has funds on hand
available therefor at such time, (ii) the Redemption Price with respect to the
Trust Securities called for redemption or the Repurchase Price with respect to
Capital Securities subject to an election to repurchase, as applicable, in
either case, to the extent the Series B Issuer has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary termination,
winding-up or liquidation of the Series B Issuer (unless the Junior
Subordinated Debentures are distributed to holders of the 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 the Series B
Issuer has funds on hand available therefor at such time, and (b) the amount
of assets of the Series B Issuer remaining available for distribution to
holders of the Trust Securities on liquidation of the Series B Issuer after
satisfaction of liabilities to creditors of such Series B Issuer, as required
by applicable law.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Junior Subordinated Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed
all of the Series B Issuer's obligations under the 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 Series B Issuer's obligations
under the Capital Securities. See "Description of Guarantee" and "Relationship
Among the Capital Securities, the Junior Subordinated Debentures, the
Guarantee and the Expense Agreement."
The Guarantee is subordinate as described under "--Ranking of Subordinated
Obligations under the Guarantee and the Junior Subordinated Debentures." The
holders of not less than a majority in aggregate Liquidation Amount of the
Capital 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 Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Capital Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Series B Issuer, the Guarantee Trustee or any
other person or entity. If the Company were to default on its obligations
under the Junior Subordinated Debentures, the Series B Issuer would lack
available funds for the payment of Distributions or amounts payable on
redemption or repurchase of the Capital Securities or otherwise, and in such
event, holders of the Capital Securities would not be able to rely upon the
Guarantee for payment of such amounts. Instead, in the event a Debenture Event
of Default shall have occurred and be continuing and such event is
attributable to the failure of the Company to pay interest on or principal
(and premium, if any) of the Junior Subordinated Debentures on the date on
which such interest or principal (or premium, if any) is due and payable, then
a holder of Capital Securities may institute a legal proceeding directly
against the Company (without first instituting a legal proceeding directly
against any other person or entity) for enforcement of payment to such holder
of the principal of (and premium, if any) or interest on such Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the related Capital Securities of such holder (a "Direct Action").
In connection with such Direct Action, the
26
<PAGE>
Company will have a right of set-off under the Junior Subordinated Indenture
to the extent of any payment made by the Company to such holder of Capital
Securities in the Direct Action. Except as provided herein, holders of Capital
Securities will not be able to exercise directly any other remedy available to
the holders of the Junior Subordinated Debentures or assert directly any other
rights in respect of the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures--Debenture Events of Default" and "--
Enforcement of Certain Rights by Holders of Capital Securities," and
"Description of Guarantee." The Trust Agreement provides that each holder of
Capital Securities by acceptance thereof agrees to the provisions of the
Guarantee and the Junior Subordinated Indenture.
LIMITED VOTING RIGHTS
Holders of Capital Securities will generally have limited voting rights
relating only to the modification of the Capital Securities and the exercise
of the Series B Issuer's rights as holder of Junior Subordinated Debentures
and the Guarantee. Holders of Capital Securities will not be entitled to
appoint, remove or replace the Property Trustee or the Delaware Trustee except
upon the occurrence of certain events described herein. The Property Trustee,
the Administrators and the holders of all of the Common Securities may amend
the Trust Agreement without the consent of holders of Capital Securities to
ensure that the Series B Issuer will be classified for United States federal
income tax purposes as a grantor trust and not as an association taxable as a
corporation or to ensure that the Series B Issuer will not be required to
register as an "investment company" under the Investment Company Act (as
defined herein). See "Description of Capital Securities--Voting Rights;
Amendment of Trust Agreement" and "--Removal of Issuer Trustees; Appointment
of Successors."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Capital Securities are subject to a prohibition on transfers resulting
in blocks having a Liquidation Amount of less than $100,000 (100 Capital
Securities). See "Description of Capital Securities--Restrictions on
Transfer." There can be no assurance as to the liquidity of any markets that
may develop for the Capital Securities, the ability of the holders to sell
their Capital Securities or at what price holders of the Capital Securities
will be able to sell their Capital Securities. Future trading prices of the
Capital Securities will depend on many factors including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. The Initial Purchasers have informed the Series B Issuer
and the Company that the Initial Purchasers intend to make a market in the
Capital Securities offered hereby; however, the Initial Purchasers are not
obligated to do so and any such market making activity will be subject to the
limits of the Securities Act. The Company will not apply for listing of the
Capital Securities on any securities exchange or for inclusion of the Capital
Securities on any automated quotation system.
The liquidity of, and trading market for, the Capital Securities also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
POSSIBLE TAX LAW CHANGES AFFECTING CAPITAL SECURITIES
On February 6, 1997, President Clinton submitted the fiscal 1998 budget to
Congress, which, among other things, would generally deny interest deductions
for interest on an instrument issued by a corporation that has a maximum term
of more than 15 years and is not shown as indebtedness on the separate balance
sheet of the issuer, or where such 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 proposal would be effective generally for
instruments issued on or after the date of appropriate Congressional action.
If such provision were to apply to the Junior Subordinated Debentures, the
Company would be unable to deduct interest on the Junior Subordinated
Debentures.
Under current law, the Company will be able to deduct interest on the Junior
Subordinated Debentures. There can be no assurance that current or future
legislative proposals or final legislation will not affect the ability
27
<PAGE>
of the Company to deduct interest on the Junior Subordinated Debentures. Such
a change could give rise to a Tax Event, which may permit the Company to
shorten the maturity of the Junior Subordinated Debentures or to cause a
redemption of the Capital Securities, as described more fully under
"Description of Junior Subordinated Debentures--Redemption" and "Description
of Capital Securities--Redemption."
EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE OUTSTANDING
CAPITAL SECURITIES
Issuance of Exchange Capital Securities in exchange for Outstanding Capital
Securities pursuant to the Exchange Offer will be made only after a timely
receipt by the Exchange Agent of such Outstanding Capital Securities, a
properly completed and duly executed Letter of Transmittal and all other
required documents. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance of Outstanding Capital Securities
tendered for exchange will be determined by the Company and the Series B
Issuer in their sole discretion, which determination will be final and binding
on all parties. Holders of Outstanding Capital Securities desiring to tender
such Outstanding Capital Securities in exchange for Exchange Capital
Securities should allow sufficient time to ensure timely delivery. Neither the
Company nor the Series B Issuer is under any duty to give notification of
defects or irregularities with respect to the tenders of Outstanding Capital
Securities for exchange.
Outstanding Capital Securities that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof and therefore
may not be offered, sold or otherwise transferred except in compliance with
the registration requirements of the Securities Act and any other applicable
securities laws, or pursuant to an exemption therefrom or in a transaction not
subject thereto, and in each case in compliance with certain conditions and
restrictions. In addition, upon consummation of the Exchange Offer, the
Company and the Series B Issuer will have no further obligations to provide
for the registration under the Securities Act of such Outstanding Capital
Securities.
To the extent that Outstanding Capital Securities are tendered and accepted
in the Exchange Offer the trading market for untendered and tendered but
unaccepted Outstanding Capital Securities could be adversely affected. See
"Exchange Offer."
The Exchange Capital Securities and any Outstanding Capital Securities which
remain outstanding after consummation of the Exchange Offer will constitute a
single series of Capital Securities under the Trust Agreement and,
accordingly, will vote together as a single class for purposes of determining
whether holders of the requisite percentage in outstanding Liquidation Amount
thereof have taken certain actions or exercised certain rights under the Trust
Agreement. See "Description of Capital Securities."
The Registration Rights Agreement provides that, if, among other things, the
Exchange Offer is not consummated within 30 days after the date hereof, the
Series B Issuer will pay liquidated damages on the Outstanding Capital
Securities at the rate of 0.25% per annum commencing on the 31st day after the
date hereof, until the Exchange Offer is consummated. See "Exchange Offer--
Terms of the Exchange Offer." Following consummation of the Exchange Offer,
the Outstanding Capital Securities will not be entitled to any liquidated
damages thereon. The Exchange Capital Securities will not be entitled to any
such liquidated damages.
28
<PAGE>
USE OF PROCEEDS
No proceeds will be received by the Company and the Series B Issuer from the
Exchange Offer. In consideration for issuing the Exchange Capital Securities
in exchange for the Outstanding Capital Securities as described in this
Prospectus, the Series B Issuer will receive Outstanding Capital Securities in
like aggregate Liquidation Amount. The Outstanding Capital Securities
surrendered in exchange for Exchange Capital Securities will be canceled.
Proceeds to the Series B Issuer from the issuance and sale of the
Outstanding Capital Securities and the Common Securities were used to purchase
the Outstanding Junior Subordinated Debentures. Proceeds to the Company from
the issuance and sale of the Outstanding Junior Subordinated Debentures were
used by the Company (i) to contribute $50,000,000 to the Domestic Insurance
Subsidiaries, (ii) to fund the Reserve Account with $10,750,000, (iii) to
reduce the amount outstanding under the Company's Credit Facility in the
amount of $32,000,000, (iv) to pay $2,250,000 to the Initial Purchasers, and
(v) for general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's consolidated ratios of earnings to fixed charges and
consolidated ratios of earnings to combined fixed charges and preferred stock
dividend requirements for each of the periods indicated are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges.................... --(1) 4.33x 4.27x 9.93x 6.32x
Earnings to Combined Fixed Charges and Pre-
ferred Stock
Dividend Requirements(2).................... --(1) 2.88x 3.78x 9.93x 5.98x
</TABLE>
- -------
(1) Fixed charges for the year ended December 31, 1996 were $16.0 million and
earnings for such year prior to these fixed charges were $14.1 million,
resulting in a deficiency of $1.9 million. Combined fixed charges and
preferred stock dividends for such year were $24.6 million and earnings
prior to these fixed charges were $14.1 million, resulting in a deficiency
of $10.5 million.
(2) The tax rate for preferred stock dividend requirements for 1996 was the
incremental Federal tax rate, and for 1992-95 was the effective tax rate
on continuing operations.
For purposes of computing the ratios of both earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividend requirements,
earnings represent net income plus applicable income taxes and fixed charges.
Fixed charges represent all interest expense, capitalized interest, and the
interest factor included in rents. Combined fixed charges and preferred stock
dividend requirements represent all interest expense, capitalized interest, an
amount equal to the pre-tax earnings required to meet applicable preferred
stock dividend requirements, and the interest factor included in rents.
ACCOUNTING TREATMENT
For financial reporting purposes, the Series B Issuer will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Series B
Issuer will be included in the consolidated financial statements of the
Company. The Capital Securities will be presented in the consolidated balance
sheet of the Company as a separate line item directly above stockholders'
equity under the caption "Company-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely the Company's Junior
Subordinated Deferrable Interest Debentures" and appropriate disclosures about
the Capital Securities, the Guarantee and the Junior Subordinated Debentures
will be included in the notes to the consolidated financial statements of the
Company for financial reporting purposes. In an audited footnote to the
Company's audited financial statements, there will be included a statement
that (i) the Series B Issuer is wholly-owned, (ii) the sole assets of the
Series B Issuer consist of $103,093,000 aggregate principal amount of 10 3/4%
Junior Subordinated Deferrable Interest Debentures Series B of Integon
Corporation, which will mature on February 15, 2027 and (iii) the obligations
of the Series B Issuer under the Capital Securities are fully and
unconditionally guaranteed by the Company under the Guarantee, the Trust
Agreement, the Junior Subordinated Debentures, the Junior Subordinated
Indenture and the Expense Agreement. The Company will record distributions
payable on the Capital Securities as a minority interest expense in the
consolidated statements of income. See "Capitalization."
29
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996 and as adjusted to give effect to the issuance
and sale of the Capital Securities.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-Term Debt under Credit Facility................... $ 44,000 $ 12,000(1)
======== ========
Notes Payable:
Promissory Note....................................... 878 878
8% Senior Notes due 1999.............................. 74,912 74,912
9 1/2% Senior Notes due 2001.......................... 74,970 74,970
-------- --------
Total Notes Payable..................................... 150,760 150,760
-------- --------
Company-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely the
Company's Junior Subordinated Deferrable Interest
Debentures(2)........................................ -- 100,000
-------- --------
Stockholders' Equity:
Convertible Preferred Stock, $.01 par value, 1,437,500
shares authorized, issued and outstanding............ 14 14
Preferred Stock--$0.01 par value per share, 562,500
shares authorized, issued and outstanding--none...... -- --
Common Stock, $.01 par value per share, 35,000,000
shares authorized, 17,303,321 shares issued and
outstanding.......................................... 173 173
Class A Non-Voting Common Stock, $.01 par value per
share, 20,000,000 shares authorized, issued and
outstanding--None.................................... -- --
Additional paid-in capital............................ 147,891 147,891
Net unrealized depreciation of securities............. (700) (700)
Retained earnings..................................... 105,834 105,834
Treasury stock, at cost 1,567,200 shares.............. (37,821) (37,821)
-------- --------
Total Stockholders' Equity.............................. 215,391 215,391
-------- --------
Total Capitalization................................ $366,151 $466,151
======== ========
</TABLE>
- --------
(1) Reflects the application of a portion of the net proceeds from the sale of
the Junior Subordinated Debentures to reduce the amount outstanding under
the Credit Facility. See "Use of Proceeds."
(2) The sole assets of the Series B Issuer consist of $103,093,000 aggregate
principal amount of Junior Subordinated Debentures with an interest rate
of 10 3/4%. The Junior Subordinated Debentures held by the Series B Issuer
will mature on February 15, 2027. The Company initially will own all of
the Common Securities of the Series B Issuer. It is anticipated that the
Series B Issuer will not be subject to the reporting requirements of the
Exchange Act. See "Accounting Treatment."
30
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Direct premiums
written.............. $ 935,011 $ 797,373 $ 545,483 $ 395,767 $ 341,957
Net premiums written.. 797,989 620,447 363,467 246,393 193,459
Total revenues........ 783,411 627,458 369,587 267,510 215,287
Income from continuing
operations........... 170 36,619 22,538 43,286 31,324
Net income............ 170 33,995 23,188 44,196 30,110
Net income (loss)
available to common
stockholders......... (5,400) 28,425 22,306 44,196 29,772
Operating earnings
(loss)............... (1,592) 30,315 23,259 37,008 28,734
PER SHARE
Income from continuing
operations........... $ (.34) $ 1.86 $ 1.38 $ 2.53 $ 1.94
Net income............ (.34) 1.73 1.42 2.58 1.87
Weighted average
shares outstanding... 15,850 19,635 15,750 17,119 15,918
Dividends paid........ .36 .36 .36 .32 .16
Operating earnings.... (.45) 1.54 1.42 2.16 1.78
FINANCIAL POSITION
Cash and invested
assets............... $ 567,892 $ 505,104 $ 420,919 $ 244,588 $ 242,249
Total Assets.......... 1,356,799 1,241,679 1,152,123 656,721 584,070
Short-term debt....... 44,000 16,000 21,000 16,049 --
Notes payable......... 150,760 150,807 150,812 75,826 74,808
Stockholders' equity.. 215,391 234,847 195,259 127,462 115,820
GAAP COMBINED RATIO(1)
Loss ratio............ 80.0% 73.4% 70.4% 62.1% 57.0%
Expense ratio......... 22.4 21.6 22.0 21.9 24.1
----------- ----------- ----------- --------- ---------
Combined ratio........ 102.4% 95.0% 92.4% 84.0% 81.1%
----------- ----------- ----------- --------- ---------
SELECTED INSURANCE
COMPANY STATUTORY
DATA(2)
Loss ratio............ 79.4% 73.2% 70.8% 63.0% 57.0%
Expense ratio......... 22.1 21.5 21.7 22.0 20.9
----------- ----------- ----------- --------- ---------
Combined ratio........ 101.5% 94.7% 92.5% 85.0% 77.9%
----------- ----------- ----------- --------- ---------
Statutory net income.. $ 6,882 $ 41,814 $ 37,883(3) $ 35,097 $ 39,267
Statutory surplus..... 245,919 226,832 198,589 103,033 105,395
Net premiums written
to statutory surplus. 3.248x(3) 2.7x 2.6x(4) 2.4x 1.8x
</TABLE>
- --------
(1) Ratios for 1993 exclude the effect of non-recurring items relating to the
settlement of a premium rate dispute.
(2) Combined ratio for 1994 is computed including the results of Bankers and
Shippers for the period after the acquisition date of October 18, 1994.
(3) After giving effect to the application of the proceeds of the sale of the
Junior Subordinated Debentures, the pro forma ratio would have been 2.7x.
(4) Includes results of Bankers and Shippers and Integon Preferred Insurance
Company for the full year 1994.
31
<PAGE>
EXCHANGE OFFER
GENERAL
The Company and the Series B Issuer hereby offer, upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letter
of Transmittal (which together constitute the Exchange Offer), to exchange
Exchange Capital Securities for a like aggregate Liquidation Amount of
Outstanding Capital Securities properly tendered on or prior to the Expiration
Date and not withdrawn as permitted pursuant to the procedures described
below.
PURPOSE OF THE EXCHANGE OFFER
The Company issued 103,093 Outstanding Junior Subordinated Debentures and
the Series B Issuer issued 100,000 Outstanding Capital Securities on February
10, 1997. The issuance of the Outstanding Capital Securities was not
registered under the Securities Act in reliance upon the exemption provided in
Section 4(2) of the Securities Act. In connection with the issuance and sale
of the Outstanding Capital Securities, the Company and the Series B Issuer
entered into the Registration Rights Agreement, which requires the Company and
the Series B Issuer to (i) use their best efforts to cause to be filed with
the Commission within 90 days after the date of the original issuance of the
Outstanding Capital Securities (February 10, 1997) (such date being referred
to herein as the "Closing Date"), a registration statement (the "Exchange
Offer Registration Statement") relating to a registered Exchange Offer for the
Outstanding Capital Securities under the Securities Act, (ii) use their best
efforts to cause the Exchange Offer Registration Statement to become effective
under the Securities Act within 120 days after the Closing Date and (iii) keep
the Exchange Offer open for a period of not less than 30 days (or longer, if
required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Outstanding Capital Securities.
The form and terms of the Exchange Capital Securities are substantially the
same as the form and terms of the Outstanding Capital Securities except that
the Exchange Capital Securities (i) will have been registered under the
Securities Act and will not contain terms restricting the transfer of such
securities, (ii) will be entitled, to the extent applicable, to the benefits
of qualification of the Trust Agreement under the Trust Indenture Act, and
(iii) will not provide for liquidated damages in certain circumstances under
the Registration Rights Agreement. See "--Terms of the Exchange Offer."
The Company and the Series B Issuer will ensure that (i) any Exchange Offer
Registration Statement and any amendment thereto and any prospectus forming
part thereof and any supplement thereto complies in all material respects with
the Securities Act and the rules and regulations thereunder, (ii) any Exchange
Offer Registration Statement and any amendment thereto does not, when it
becomes effective, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) any prospectus forming part of any
Exchange Offer Registration Statement, and any supplement to such prospectus,
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
Pursuant to the Exchange Offer, the Company will exchange as soon as
practicable after the date hereof, the Exchange Guarantee for the Outstanding
Guarantee and the Exchange Junior Subordinated Debentures for a like aggregate
principal amount of Outstanding Junior Subordinated Debentures.
TERMS OF THE EXCHANGE OFFER
Promptly after the effectiveness of the Exchange Offer Registration
Statement, the Company and the Series B Issuer will offer to the holders of
the Outstanding Capital Securities who are not prohibited by any law or policy
of the Commission from participating in the Exchange Offer the opportunity to
exchange their Outstanding Capital Securities for a like aggregate Liquidation
Amount of Exchange Capital Securities. The Company and the Series B Issuer
will keep the Exchange Offer open for not less than 30 days (or longer, if
32
<PAGE>
required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Outstanding Capital Securities. In the event that
(i) the Company and the Series B Issuer are not required to file the Exchange
Offer Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) for any reason the Exchange Offer Registration Statement is not
declared effective within 120 calendar days after the Closing Date, (iii) the
Company has received an opinion of counsel, rendered by a law firm having a
recognized national tax practice, to the effect that, as a result of the
consummation of the Exchange Offer, there is more than an insubstantial risk
that (x) the Series B Issuer is, or will be, within 90 days of the date of
such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (y) interest
payable by the Company on such Junior 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 (z) the Series B Issuer is, or will be within 90 days of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges, or (iv) any holder of Transfer Restricted Securities
notifies the Company or the Series B Issuer on or by the 20th business day
following the consummation of the Exchange Offer that (A) it is prohibited by
law or Commission policy from participating in the Exchange Offer, (B) it may
not resell the Exchange Capital Securities, the Exchange Guarantee and the
Exchange Junior Subordinated Debentures acquired by it in the Exchange Offer
to the public without delivering a prospectus and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales or (C) it is a broker-dealer and owns Outstanding Capital
Securities acquired directly from the Series B Issuer or an affiliate of the
Series B Issuer, or (v) if the Company so elects, then the Company and the
Series B Issuer will use their best efforts as promptly as practicable to file
with the Commission and thereafter will use their best efforts to cause to be
declared effective a "shelf" registration statement on an appropriate form
under the Securities Act providing for the registration of, and the sale on a
continuous or delayed basis by the holders of, all of the Transfer Restricted
Securities, pursuant to Rule 415 or any similar rule that may be adopted by
the Commission (hereafter, a "Shelf Registration Statement" and, together with
any Exchange Offer Registration Statement, a "Registration Statement").
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 90 calendar days after the Closing Date, (ii) the
Exchange Offer Registration Statement or, as the case may be, the Shelf
Registration Statement, is not declared effective within 120 calendar days
after the Closing Date, (iii) the Exchange Offer is not consummated on or
prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, or (iv) the
Shelf Registration Statement is filed and declared effective within 120
calendar days after the Closing Date but shall thereafter cease to be
effective (at any time that the Company is obligated to maintain the
effectiveness thereof) without being succeeded within 30 calendar days by an
additional Registration Statement filed and declared effective (each such
event referred to in clauses (i) through (iv), a "Registration Default"), the
Company and the Series B Issuer will pay to holders of Transfer Restricted
Securities as liquidated damages, additional interest in respect of the Junior
Subordinated Debentures, and corresponding Distributions shall accumulate on
the Liquidation Amount of Capital Securities, at a rate of 0.25% per annum
until (i) the applicable Registration Statement is filed, (ii) the Exchange
Offer Registration Statement is declared effective and the Exchange Offer is
consummated, (iii) the Shelf Registration Statement is declared effective or
(iv) the Shelf Registration Statement again becomes effective, as the case may
be. Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease. "Transfer Restricted Securities" means each Outstanding
Capital Security, Outstanding Guarantee and Outstanding Junior Subordinated
Debenture until (i) the date on which such securities have been exchanged for
a freely transferable Exchange Capital Security, Exchange Guarantee and
Exchange Junior Subordinated Debenture in the Exchange Offer, (ii) the date on
which such securities have been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement or
(iii) the date on which such securities are distributed to the public pursuant
to Rule 144 under the Securities Act or are salable pursuant to Rule 144(k)
under the Securities Act. The Company and the Series B Issuer will not be
required to pay liquidated damages to the holder of Transfer Restricted
Securities if such holder failed to comply with its obligations to make
certain representations set forth in the Registration Rights Agreement or
failed to provide the information required to be provided by it, if any, under
the Registration Rights Agreement.
33
<PAGE>
Based on no-action letters issued by the staff of the Commission to third
parties, the Company and the Series B Issuer believe that the Exchange Capital
Securities issued pursuant to the Exchange Offer in exchange for Outstanding
Capital Securities may be offered for resale, resold and otherwise transferred
by holders thereof (other than (i) a broker-dealer who purchases such Exchange
Capital Securities directly from the Series B Issuer to resell pursuant to
Rule 144A under the Securities Act ("Rule 144A") or any other available
exemption under the Securities Act or (ii) a person that is an affiliate of
the Company or the Series B Issuer within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange
Capital Securities are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
a distribution of such Exchange Capital Securities and have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Capital Securities. However, the staff of the Commission has not
considered the Exchange Offer in the context of a no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such no-action
letters to third parties. Any holder of Outstanding Capital Securities who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Capital Securities could not rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Thus, any Exchange Capital Securities
acquired by such holders will not be freely transferable except in compliance
with the Securities Act. Each broker-dealer that receives Exchange Capital
Securities for its own account in exchange for Outstanding Capital Securities
where such Outstanding Capital Securities were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Capital Securities. See "Plan of Distribution."
The Registration Rights Agreement requires the Company and the Series B
Issuer to keep the Exchange Offer Registration Statement effective for a
period beginning when the Exchange Capital Securities are first issued in the
Exchange Offer and ending upon the earlier of (i) either (a) the expiration of
the 180th day after the Exchange Offer has been completed or (b) in the event
the Company and the Series B Issuer have at any time suspended the use of the
prospectus contained in the Exchange Offer Registration Statement, the day
beyond the 180th day after the Exchange Offer has been completed that reflects
an additional period of days equal to the number of days during all of the
periods from and including the dates the Company and the Series B Issuer give
notice to and including the date when broker-dealers receive an amended or
supplemented prospectus necessary to permit resales of Exchange Capital
Securities or to and including the date on which the Company and the Series B
Issuer give a Resumption Notice (as defined herein) or (ii) such time as such
broker-dealers no longer own any Exchange Capital Securities whose resales by
them are subject to the prospectus delivery requirements under the Securities
Act. "Resumption Notice" means the written notice by the Company to the
holders of Outstanding Capital Securities that the use of the applicable
prospectus may be resumed.
Holders may tender their Outstanding Capital Securities for exchange in
whole or in part having a Liquidation Amount of not less than $100,000 (100
Outstanding Capital Securities) or any integral multiple of $1,000 (1
Outstanding Capital Security) in excess thereof; provided that if any
Outstanding Capital Securities are tendered for exchange in part, the
untendered aggregate Liquidation Amount thereof must be $100,000 or any
integral multiple of $1,000 in excess thereof.
NONE OF THE BOARD OF DIRECTORS OF THE COMPANY, THE ISSUER TRUSTEES OR THE
ADMINISTRATORS OF THE SERIES B ISSUER MAKE ANY RECOMMENDATION TO HOLDERS OF
OUTSTANDING CAPITAL SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING CAPITAL SECURITIES PURSUANT
TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY
SUCH RECOMMENDATION. HOLDERS OF OUTSTANDING CAPITAL SECURITIES MUST MAKE THEIR
OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE
AGGREGATE LIQUIDATION AMOUNT OF OUTSTANDING CAPITAL SECURITIES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH
THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND
REQUIREMENTS.
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EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M., New York City time, on June 30,
1997, unless the Company and the Series B Issuer, in their sole discretion,
have extended the period of time (as described below) for which the Exchange
Offer is open (such date, as it may be extended, is referred to herein as the
"Expiration Date"). The Expiration Date will be at least 20 business days
after the commencement of the Exchange Offer in accordance with Rule 14e-1(a)
under the Exchange Act. The Company and the Series B Issuer expressly reserve
the right, at any time or from time to time, to extend the period of time
during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Outstanding Capital Securities by giving oral notice
(confirmed in writing) or written notice to the Exchange Agent and by press
release or other public announcement made, unless otherwise required by
applicable law or regulation, in each case, no later than 9:00 A.M. New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that the Company and the Series B Issuer are
extending the Exchange Offer for a specified period of time. During any such
extension, all Outstanding Capital Securities previously tendered will remain
subject to the Exchange Offer. If the Exchange Offer is amended in a manner
determined by the Company and the Series B Issuer to constitute a material
change, or if the Company and the Series B Issuer waive a material condition
of the Exchange Offer, the Company and the Series B Issuer will promptly
disclose such amendment by means of a post-effective amendment to this
Registration Statement and will distribute an amended or supplemented
Prospectus to the registered holders of the Outstanding Capital Securities,
and the Company and the Series B Issuer will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
In addition, the Company and the Series B Issuer expressly reserve the right
to terminate or amend the Exchange Offer and not to accept for exchange any
Outstanding Capital Securities not theretofore accepted for exchange upon the
occurrence of any of the events specified below under "--Certain Conditions to
the Exchange Offer." If any such termination or amendment occurs, the Company
and the Series B Issuer will notify the Exchange Agent and will either issue a
press release or give oral or written notice to the holders of the Outstanding
Capital Securities as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a federal holiday, and consists of the time period
from 12:01 A.M. through 12:00 midnight, New York City time.
PROCEDURES FOR TENDERING OUTSTANDING CAPITAL SECURITIES
The tender to the Company or the Series B Issuer of Outstanding Capital
Securities by a holder thereof as set forth below and the acceptance thereof
by the Company and the Series B Issuer will constitute a binding agreement
between the tendering holder and the Company or the Series B Issuer upon the
terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal.
A holder of Outstanding Capital Securities may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile
thereof (all references in this Prospectus to the Letter of Transmittal shall
be deemed to include a facsimile thereof) and delivering the same, together
with the certificate or certificates representing the Outstanding Capital
Securities being tendered and any required signature guarantees, to the
Exchange Agent at its address set forth below on or prior to 5:00 p.m., New
York City time, on the Expiration Date (or complying with the procedure for
book-entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
THE METHOD OF DELIVERY OF OUTSTANDING CAPITAL SECURITIES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, OR AN OVERNIGHT OR HAND
DELIVERY SERVICE, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OUTSTANDING CAPITAL SECURITIES OR LETTER OF
TRANSMITTAL SHOULD BE SENT TO THE COMPANY OR THE SERIES B ISSUER.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Outstanding Capital Securities
surrendered for exchange pursuant thereto are tendered (i) by a registered
holder of Outstanding Capital Securities who has not completed the box
entitled "Special Issuance
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Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution (as defined herein). In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantees must be by a
firm which is a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the
United States (each an "Eligible Institution"). If Outstanding Capital
Securities are registered in the name of a person other than a signer of the
Letter of Transmittal, the Outstanding Capital Securities surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company or the Series B Issuer in their sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Outstanding Capital
Securities at the book-entry transfer facility, The Depository Trust Company,
for the purpose of facilitating the Exchange Offer, and subject to the
establishment thereof, any financial institution that is a participant in the
book-entry transfer facility's system may make book-entry delivery of
Outstanding Capital Securities by causing such book-entry transfer facility to
transfer such Outstanding Capital Securities into the Exchange Agent's account
with respect to the Outstanding Capital Securities in accordance with the
book-entry transfer facility's procedures for such transfer. Although delivery
of Outstanding Capital Securities may be effected through book-entry transfer
in the Exchange Agent's account at the book-entry transfer facility, an
appropriate Letter of Transmittal with any required signature guarantee and
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Outstanding Capital Securities to reach the Exchange
Agent before the Expiration Date or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if the
Exchange Agent has received at its address or facsimile number set forth below
on or prior to the Expiration Date a letter, telegram or facsimile from an
Eligible Institution setting forth the name and address of the tendering
holder, the name in which the Outstanding Capital Securities are registered
and, if possible, the certificate number or numbers of the certificate or
certificates representing the Outstanding Capital Securities to be tendered,
and stating that the tender is being made thereby and guaranteeing that within
three business days after the Expiration Date the Outstanding Capital
Securities in proper form for transfer (or a confirmation of book-entry
transfer of such Outstanding Capital Securities into the Exchange Agent's
account at the book-entry transfer facility), will be delivered by such
Eligible Institution together with a properly completed and duly executed
Letter of Transmittal (and any other required documents). Unless Outstanding
Capital Securities being tendered by the above-described method are deposited
with the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company and the Series B Issuer may, at their option, reject
the tender. Copies of a Notice of Guaranteed Delivery which may be used by an
Eligible Institution for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Outstanding Capital Securities (or a confirmation of book-
entry transfer of such Outstanding Capital Securities into the Exchange
Agent's account at the book-entry transfer facility) is received by the
Exchange Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or
facsimile to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of Exchange Capital Securities in
exchange for Outstanding Capital Securities tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile to similar effect (as
provided above) by an Eligible Institution will be made only against deposit
of the Letter of Transmittal (and any other required documents) and the
tendered Outstanding Capital Securities.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Outstanding Capital Securities tendered for
exchange will be determined by the Company and the Series B Issuer in their
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sole discretion, which determination will be final and binding on all parties.
The Company and the Series B Issuer reserve the right to reject any and all
tenders of any particular Outstanding Capital Securities not properly tendered
or reject any particular Outstanding Capital Securities the acceptance of
which might, in the judgment of the Company and the Series B Issuer or their
counsel, be unlawful. The Company and the Series B Issuer also reserve the
absolute right to waive any defects or irregularities or condition of the
Exchange Offer as to any particular Outstanding Capital Securities either
before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Outstanding Capital Securities
in the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company and the Series B Issuer shall be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Outstanding Capital Securities for exchange must be cured within
such time as the Company and the Series B Issuer shall determine. None of the
Company, the Series B Issuer, nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of
Outstanding Capital Securities for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal or any Outstanding Capital Securities or powers
of attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company or the Series B Issuer, proper evidence
satisfactory to the Company or the Series B Issuer of their authority to so
act must be submitted.
By tendering, each holder that is not a broker-dealer or is a broker-dealer
but is not receiving Exchange Capital Securities for its own account will
represent to the Company and the Series B Issuer that, among other things, the
Exchange Capital Securities to be received by it pursuant to the Exchange
Offer are being acquired in the ordinary course of such holder's business,
that such holder is not engaged in, and does not intend to engage in, a
distribution of such Exchange Capital Securities and has no arrangement or
understanding with any person to participate in the distribution of the
Exchange Capital Securities within the meaning of the Securities Act and that
such holder is not an "affiliate" of the Company or the Series B Issuer within
the meaning of Rule 405 under the Securities Act or, if it is an affiliate,
such holder will comply with the registration and prospectus delivery
requirements of the Securities Act, to the extent applicable. Each broker-
dealer that receives Exchange Capital Securities for its own account in
exchange for Outstanding Capital Securities where such Outstanding Capital
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Capital
Securities. See "Plan of Distribution."
In addition, the Company and the Series B Issuer reserve the right in their
sole discretion to (a) purchase or make offers for any Outstanding Capital
Securities that remain outstanding subsequent to Expiration Date, or, as set
forth under "--Certain Conditions to the Exchange Offer," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase
Outstanding Capital Securities in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers may
differ from the terms of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of Outstanding Capital Securities may be withdrawn at any time prior
to the close of business, New York City time, on the Expiration Date. For a
withdrawal to be effective, a written notice of withdrawal sent by letter,
telegram or facsimile must be received by the Exchange Agent prior to the
close of business, New York City time, on the Expiration Date at its address
or facsimile number set forth below. Any such notice of withdrawal must (i)
specify the name of the person having tendered the Outstanding Capital
Securities to be withdrawn (the "Depositor"), (ii) identify the Outstanding
Capital Securities to be withdrawn (including the certificate number or
numbers of the certificate or certificates representing such Outstanding
Capital Securities and number of such Outstanding Capital Securities), (iii)
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Outstanding Capital Securities were
tendered
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(including any required signature guarantees) or be accompanied by documents
of transfer sufficient to permit the Transfer Agent with respect to the
Outstanding Capital Securities to register the transfer of such Outstanding
Capital Securities into the name of the person withdrawing the tender and (iv)
specify the name in which any such Outstanding Capital Securities are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Company and the Series B Issuer in their
sole discretion, which determination will be final and binding on all parties.
Any Outstanding Capital Securities so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no Exchange
Capital Securities will be issued with respect thereto unless the Outstanding
Capital Securities so withdrawn are validly retendered. Any Outstanding
Capital Securities which have been tendered but which are withdrawn will be
returned to the holder thereof without cost to such holder as soon as
practicable after such withdrawal. Properly withdrawn Outstanding Capital
Securities may be retendered by following one of the procedures described
above under "--Procedures for Tendering Outstanding Capital Securities" at any
time prior to the Expiration Date.
ACCEPTANCE OF OUTSTANDING CAPITAL SECURITIES FOR EXCHANGE; DELIVERY OF
EXCHANGE CAPITAL SECURITIES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company and the Series B Issuer will accept, promptly after the Expiration
Date, all Outstanding Capital Securities properly tendered and will issue the
Exchange Capital Securities promptly after acceptance of the Exchange Offer.
See "--Certain Conditions to the Exchange Offer" below. For purposes of the
Exchange Offer, the Company and the Series B Issuer will be deemed to have
accepted properly tendered Outstanding Capital Securities for exchange when
the Company and the Series B Issuer have given oral or written notice thereof
to the Exchange Agent.
In all cases, issuance of the Exchange Capital Securities in exchange for
Outstanding Capital Securities pursuant to the Exchange Offer will be made
only after timely receipt by the Company or the Series B Issuer of such
Outstanding Capital Securities, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Outstanding
Capital Securities are not accepted for exchange for any reason set forth in
the terms and conditions of the Exchange Offer, such unaccepted Outstanding
Capital Securities will be returned without expense to the tendering holder
thereof as promptly as practicable after the rejection of such tender or the
expiration or termination of the Exchange Offer.
UNTENDERED OUTSTANDING CAPITAL SECURITIES
Holders of Outstanding Capital Securities whose Outstanding Capital
Securities are not tendered or are tendered but not accepted in the Exchange
Offer will continue to hold such Outstanding Capital Securities and will be
entitled to all the rights and preferences and subject to the limitations
applicable thereto. Following consummation of the Exchange Offer, the holders
of Outstanding Capital Securities will continue to be subject to the existing
restrictions upon transfer thereof and the Company and the Series B Issuer
will have no further obligation to such holders to provide for the
registration under the Securities Act of the Outstanding Capital Securities
held by them. To the extent that Outstanding Capital Securities are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Outstanding Capital Securities could be adversely
affected.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company and the
Series B Issuer will not be required to accept for exchange, or issue Exchange
Capital Securities in exchange for, any Outstanding Capital Securities, and
may terminate or amend the Exchange Offer, if at any time before the
acceptance of such Outstanding Capital Securities for exchange, any of the
following events shall occur:
(A) an action or proceeding shall have been instituted or threatened in
any court or before any governmental agency or body with respect to the
Exchange Offer which, in the Company's and the Series B Issuer's judgment,
would reasonably be expected to prohibit, prevent or otherwise impair the
ability of the Company or the Series B Issuer to proceed with the Exchange
Offer;
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(B) there shall occur a change in the current interpretation of the staff
of the Commission which current interpretation permits the Exchange Capital
Securities issued pursuant to the Exchange Offer in exchange for the
Outstanding Capital Securities to be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer
who purchases such Exchange Capital Securities directly from the Company or
the Series B Issuer to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an affiliate of
the Company or the Series B Issuer within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange
Capital Securities are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to
participate in the distribution of Exchange Capital Securities;
(C) a law, statute, rule or regulation shall have been adopted or enacted
which, in the Company's and the Series B Issuer's judgment, would
reasonably be expected to impair the ability of the Company or the Series B
Issuer to proceed with the Exchange Offer;
(D) trading on the New York Stock Exchange or generally in the United
States over-the-counter market shall have been suspended by order of the
Commission or any other governmental authority which, in the Company's and
the Series B Issuer's judgment, would reasonably be expected to impair the
ability of the Company or the Series B Issuer to proceed with the Exchange
Offer;
(E) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement or proceedings shall have been initiated or, to the knowledge of
the Company or the Series B Issuer, threatened for that purpose, or any
governmental approval has not been obtained, which approval the Company and
the Series B Issuer shall, in their sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby; or
(F) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company and the Series B
Issuer, might materially impair the ability of the Company or the Series B
Issuer to proceed with the Exchange Offer.
The foregoing conditions are for the sole benefit of the Company and the
Series B Issuer and may be asserted or waived by the Company and the Series B
Issuer in whole or in part at any time and from time to time if they determine
in their reasonable discretion that any of the foregoing events or conditions
has occurred or exists or has not been satisfied, subject to applicable law.
The failure by the Company and the Series B Issuer at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and
each such right shall be deemed an ongoing right which may be asserted at any
time and from time to time.
If the Company and the Series B Issuer determine that they may terminate the
Exchange Offer, as set forth above, the Company and the Series B Issuer may
(i) refuse to accept any Outstanding Capital Securities and return any
Outstanding Capital Securities that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Outstanding Capital Securities
tendered prior to the Expiration Date, subject to the rights of such holders
of tendered Outstanding Capital Securities to withdraw their tendered
Outstanding Capital Securities, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Outstanding
Capital Securities that have not been withdrawn or otherwise amend the terms
of the Exchange Offer in any respect. If such waiver or amendment constitutes
a material change in the Exchange Offer, the Company and the Series B Issuer
will disclose such change by means of a post-effective amendment to this
Registration Statement and will distribute an amended or supplemented
Prospectus to each registered holder of Outstanding Capital Securities, and
the Company and the Series B Issuer will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver or amendment and the manner of disclosure to the registered holders of
the Outstanding Capital Securities, if the Exchange Offer would otherwise
expire during such period.
In addition, the Company and the Series B Issuer will not accept for
exchange any Outstanding Capital Securities tendered, and no Exchange Capital
Securities will be issued in exchange for any such Outstanding Capital
Securities, if at any time any stop order shall be threatened by the
Commission or in effect with respect to the Registration Statement.
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The Exchange Offer is not conditioned on any minimum number of shares of
Outstanding Capital Securities being tendered for exchange.
EXCHANGE AGENT
First Union National Bank of North Carolina has been appointed as Exchange
Agent for the Exchange Offer. Questions regarding Exchange Offer procedures
and requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
By Mail:
By Hand or Overnight Delivery:
First Union National Bank of North First Union National Bank of North
Carolina Carolina 230 South Tryon Street, 9th
230 South Tryon Street, 9th Floor Floor
Charlotte, NC 28288-1179 Charlotte, NC 28288-1179
Attention: Mike Klotz Attention: Mike Klotz
By Facsimile:
(704) 383-7199
Confirm by Telephone:
(704) 383-4105
First Union National Bank of North Carolina is also the Transfer Agent for
the Capital Securities.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company and the Series B Issuer have not retained any dealer-manager in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse the Exchange Agent for its reasonable out-
of-pocket expenses in connection therewith. The cash expenses to be incurred
by the Company in connection with the Exchange Offer will be paid by the
Company.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Outstanding Capital Securities pursuant to the Exchange Offer. If, however,
certificates representing Exchange Capital Securities or Outstanding Capital
Securities not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the Outstanding Capital Securities tendered, or if
tendered Outstanding Capital Securities are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Outstanding
Capital Securities pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment
of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
and the Series B Issuer upon the consummation of the Exchange Offer. Expenses
incurred in connection with the issuance of the Exchange Capital Securities
will be amortized by the Company over the term of the Exchange Capital
Securities under generally accepted accounting principles. See "Accounting
Treatment" for a description of the accounting treatment of the Series B
Issuer and the Exchange Capital Securities.
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DESCRIPTION OF CAPITAL SECURITIES
The Property Trustee and the Administrators on behalf of the Series B Issuer
have issued the Outstanding Capital Securities and the Common Securities and
will issue the Exchange Capital Securities under the Trust Agreement. The
Capital Securities will represent preferred undivided beneficial interests in
the assets of the Series B Issuer and the holders thereof will be entitled to
a preference in certain circumstances with respect to Distributions and
amounts payable on redemption, repurchase or liquidation over the Common
Securities of the Series B Issuer, as well as other benefits as described in
the Trust Agreement. This summary of the material terms and provisions of the
Capital Securities, the Common Securities and the Trust Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Trust Agreement (a copy of which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part), including the definitions therein of certain terms and
the Trust Indenture Act. Wherever particular defined terms of the Trust
Agreement (as amended or supplemented from time to time) are referred to
herein, such defined terms are incorporated herein by reference.
The Trust Agreement has been qualified under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), upon effectiveness of this
Registration Statement.
GENERAL
The form and terms of the Exchange Capital Securities are substantially the
same as the form and terms of the Outstanding Capital Securities, except that
(i) the Outstanding Capital Securities have not been registered under the
Securities Act and are subject to certain restrictions on transfer, (ii) the
Outstanding Capital Securities are entitled to certain rights under the
Registration Rights Agreement (which rights will terminate upon consummation
of the Exchange Offer), and (iii) the Registration Rights Agreement provides
for the distribution of liquidated damages to the holders of Outstanding
Capital Securities under circumstances set forth thereunder. See "Exchange
Offer--Terms of the Exchange Offer." Accordingly, holders tendering
Outstanding Capital Securities in the Exchange Offer should review the
information set forth under "Risk Factors--Exchange Offer Procedures; Certain
Consequences of a Failure to Exchange Outstanding Capital Securities" and
"Exchange Offer--Terms of the Exchange Offer." Based on no-action letters
issued by the staff of the Commission to third parties, the Company and the
Series B Issuer believe that the Exchange Capital Securities issued pursuant
to the Exchange Offer in exchange for outstanding Capital Securities may be
offered for resale, resold and otherwise transferred by holders thereof (other
than (i) a broker-dealer who purchases such Exchange Capital Securities
directly from the Series B Issuer to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company or the Series B Issuer within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Capital Securities are acquired in the ordinary course of such
holders' business and such holders are not engaged in, and do not intend to
engage in, a distribution of such Exchange Capital Securities and have no
arrangement or understanding with any person to participate in the
distribution of such Exchange Capital Securities. See "Exchange Offer--Terms
of the Exchange Offer."
The Capital Securities will be limited to $100,000,000 aggregate Liquidation
Amount outstanding. The Capital Securities will rank pari passu, and payments
will be made thereon pro rata, with the Common Securities except as described
under "--Subordination of Common Securities." Legal title to the Junior
Subordinated Debentures will be held by the Property Trustee in trust for the
benefit of the holders of the Capital Securities and Common Securities. The
Guarantee Agreement executed by the Company for the benefit of the holders of
the Capital Securities 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, repurchase or liquidation of
such Capital Securities when the Series B Issuer does not have funds on hand
available to make such payments. See "Description of Guarantee."
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DISTRIBUTIONS
The Capital Securities represent preferred undivided beneficial interests in
the assets of the Series B Issuer, and Distributions on each Capital Security
will be payable at the annual rate of 10 3/4% of the stated Liquidation Amount
of $1,000, payable semi-annually in arrears on February 15 and August 15 of
each year (each a "Distribution Date"), to the holders of the Capital
Securities at the close of business on the relevant record dates. The record
dates for Capital Securities will be, for so long as the Capital Securities
remain in book-entry form, one Business Day (as defined below) prior to the
relevant Distribution Dates and, in the event any Capital Securities are not
held in book-entry form, the date which is fifteen days next preceding the
relevant Distribution Date. Distributions on the Capital Securities will be
cumulative. Distributions will accumulate from the date of original issuance.
The first Distribution Date for the Capital Securities will be August 15,
1997. The amount of Distributions payable for any period less than a full
Distribution period will be computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in a period.
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by two. In the event that any date on which
Distributions are payable on the Capital Securities is not a Business Day,
then payment on 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 originally was payable.
Business Day means a day other than (i) a Saturday or Sunday, (ii) a day on
which banking institutions in the City of New York are authorized or required
by law or executive order to remain closed or (iii) a day on which First Union
National Bank of North Carolina's Corporate Trust Office or the Corporate
Trust Office of the Debenture Trustee is closed for business.
OPTION TO DEFER INTEREST PAYMENTS
So long as no Event of Default under the Junior Subordinated Indenture has
occurred and is continuing, the Company has the right under the Junior
Subordinated Indenture to defer the payment of interest on the Junior
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 Junior Subordinated Debentures. As a consequence of any such
deferral, semi-annual Distributions on the Capital Securities will be deferred
by the Series B Issuer during any such Extension Period. Distributions to
which holders of the Capital Securities are entitled will accumulate
additional Distributions thereon at the rate per annum of 10 3/4% thereof,
compounded semi-annually from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in a period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by two. 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 that
rank pari passu in all respects with or junior in interest to the Junior
Subordinated Debentures or (iii) make any guarantee payments with respect to
any guarantee by the Company of debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior 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 shareholders' rights plan, or the issuance of
stock under any such plan in the future, or the redemption or repurchase of
any such rights pursuant thereto, (c) payments under the Guarantee,
(d) purchases of common stock related to the issuance of common stock or
rights or option under any of the Company's benefit plans for its directors,
officers, employees or other persons within the definition of "employee" for
purposes of registration of shares of an employee benefit plan of the Company,
related to the issuance of common stock or rights under a dividend
reinvestment plan or stock purchase plan, or related to the issuance of common
stock of the Company (or securities convertible into or exchangeable for such
common stock) as consideration in an acquisition transaction entered into
prior to the applicable Extension Period, and
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(e) payments of accrued dividends (and cash in lieu of fractional shares) upon
conversion into common stock of any convertible preferred stock of the Company
of any series now or hereinafter outstanding in accordance with the terms of
such stock). Prior to the termination of any such Extension period, the
Company may further defer the payment of interest, provided that no Extension
Period may exceed 10 consecutive semi-annual periods or extend beyond the
Stated Maturity of the Junior Subordinated Debentures. Upon the termination of
any such Extension Period and the payment of all amounts then due, 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,
subject to the above requirements. See "Description of Junior Subordinated
Debentures--Option To Defer Interest Payments" and "Certain Federal Income Tax
Considerations--Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. The Company paid $10.75 million of the net proceeds
from the sale of the Outstanding Junior Subordinated Debentures into a Reserve
Account established and maintained by the Debenture Trustee, the funds in
which will be applied to pay interest on the Junior Subordinated Debentures on
the first two Interest Payment Dates for the Junior Subordinated Debentures.
See "Description of Junior Subordinated Debentures--Reserve Account."
The revenue of the Series B Issuer available for distribution to holders of
the Capital Securities will be limited to payments under the Junior
Subordinated Debentures. See "Description of Junior Subordinated Debentures--
General." If the Company does not make interest payments on the Junior
Subordinated Debentures, the Series B Issuer will not have funds available to
pay Distributions on the Capital Securities. The payment of Distributions and
other amounts payable on the Capital Securities (if and to the extent the
Series B Issuer 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 "Description of
Guarantee."
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such
repayment or redemption shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice, at a redemption price (the "Redemption Price")
equal to the aggregate Liquidation Amount of such Trust Securities plus
accumulated but unpaid Distributions thereon to the date of redemption (the
"Redemption Date") and related amount of premium, if any, paid by the Company
upon the concurrent redemption of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--Redemption." If less than all
of the Junior 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 Capital Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures prior
to the Stated Maturity, (i) on or after February 15, 2007 in whole at any time
or in part from time to time or (ii) in whole (but not in part), at any time,
in certain circumstances described under "--Conditional Right to Shorten
Maturity or Redeem upon a Tax Event" within 90 days following the occurrence
and during the continuation of a Tax Event. A redemption of the Junior
Subordinated Debentures would cause a mandatory redemption of a Like Amount of
the Capital Securities and Common 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 Liquidation Amount
(as defined below), together with accumulated Distributions to but excluding
the Redemption Date. If redeemed during the 12-month period beginning February
15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2007.............................................................. 105.375%
2008.............................................................. 104.838
2009.............................................................. 104.300
2010.............................................................. 103.763
2011.............................................................. 103.225
2012.............................................................. 102.688
2013.............................................................. 102.150
2014.............................................................. 101.613
2015.............................................................. 101.075
2016.............................................................. 100.538
</TABLE>
and at 100% on or after February 15, 2017.
The Redemption Price, in the case of a redemption following a Tax Event (as
described under (ii) above) shall be equal to the aggregate Liquidation Amount
of such Capital Securities plus accumulated and unpaid Distributions thereon
to the Redemption Date.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having an aggregate Liquidation Amount equal to that portion
of the aggregate principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated
Indenture, allocated to the Common Securities and to the 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 the Trust
Securities, (ii) with respect to a distribution of Junior Subordinated
Debentures to holders of Trust Securities in connection with a dissolution or
liquidation of the Series B Issuer, Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed and (iii) with respect to a repurchase of Junior Subordinated
Debentures following a Change of Control, Junior Subordinated Debentures
having an aggregate principal amount equal to the aggregate Liquidation Amount
of the Capital Securities of Electing Holders (as defined herein).
"Liquidation Amount" means the stated amount of $1,000 per Trust Security.
"Tax Event" means, with respect to Junior Subordinated Debentures held by
the Series B Issuer, the receipt by the Series B Issuer of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
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 pronouncement or decision is announced on or after the
date of original issuance of the Capital Securities under the Trust Agreement,
there is more than an insubstantial risk that (i) the Series B Issuer is, or
will be within 90 days of the date of such opinion, subject to United States
federal income tax with respect to income received or accrued on the Junior
Subordinated Debentures, (ii) interest payable by the Company on the Junior
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) the Series B Issuer is, or will be within
90 days of the date of such opinion, subject to more than a de minimis amount
of other taxes, duties or other governmental charges. With respect to Junior
Subordinated Debentures which are no longer held by the Series B Issuer, "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
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amendment to, or change (including any announced prospective 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 pronouncement or decision is announced on or after the date of original
issuance of the Junior Subordinated Debentures under the Junior Subordinated
Indenture, there is more than an insubstantial risk that interest payable by
the Company on the Junior 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").
Possible Tax Law Changes Affecting Capital Securities. On February 6, 1997,
President Clinton submitted the fiscal 1998 budget to Congress, which, among
other things, would generally deny interest deductions for interest on an
instrument issued by a corporation that has a maximum term of more than 15
years and is not shown as indebtedness on the separate balance sheet of the
issuer, or where such 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 proposal would be effective generally for instruments
issued on or after the date of appropriate Congressional action. If such
provision were to apply to the Junior Subordinated Debentures, the Company
would be unable to deduct interest on the Junior Subordinated Debentures.
Under current law, the Company will be able to deduct interest on the Junior
Subordinated Debentures. There can be no assurance that current or future
legislative proposals or final legislation will not affect the ability of the
Company to deduct interest on the Junior Subordinated Debentures. Such a
change could give rise to a Tax Event, which may permit the Company to shorten
the maturity of the Junior Subordinated Debentures or to cause a redemption of
the Capital Securities, as described more fully under "Description of Junior
Subordinated Debentures--Redemption" and "Description of Capital Securities--
Redemption." See also "Certain Federal Income Tax Considerations--Possible Tax
Law Changes."
Payment of Additional Sums. In the event a Tax Event has occurred and is
continuing and the Series B Issuer is the holder of all of the Junior
Subordinated Debentures, the Company will pay Additional Sums, if any (as
defined below), on the Junior Subordinated Debentures. "Additional Sums" means
the additional amounts as may be necessary in order that the amount of
Distributions then due and payable by the Series B Issuer on the outstanding
Capital Securities and Common Securities of the Series B Issuer shall not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the Series B Issuer has become subject as a result of a Tax
Event.
REDEMPTION PROCEDURES
Capital Securities redeemed on each Redemption Date shall be redeemed at the
Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Capital
Securities shall be made and the Redemption Price shall be payable on the
Redemption Date only to the extent that the Series B Issuer has funds on hand
available for the payment of such Redemption Price. See also "--Subordination
of Common Securities."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Capital
Securities to be redeemed at its registered address. If the Series B Issuer
gives a notice of redemption in respect of the Capital Securities, then, by
12:00 noon, New York City time, on the Redemption Date, to the extent funds
are available, in the case of Capital Securities held in book-entry form, the
Property Trustee will deposit irrevocably with DTC funds sufficient to pay the
applicable Redemption Price and will give DTC irrevocable instructions and
authority to pay the Redemption Price to the holders of the Capital
Securities. With respect to Capital Securities not held in book-entry form,
the Property Trustee, to the extent funds are available, will irrevocably
deposit with the Paying Agent (as defined herein) funds sufficient to
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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 the Capital
Securities. Notwithstanding the foregoing, Distributions payable on or prior
to the Redemption Date for any Capital Securities called for redemption shall
be payable to the holders of the 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 such Capital Securities so called for
redemption will cease, except the right of the holders of such Capital
Securities to receive the Redemption Price, but without interest on such
Redemption Price and such Capital Securities will cease to be outstanding. In
the event that any date fixed for redemption of 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 each case with the same force and
effect as if made on such date. In the event that payment of the Redemption
Price in respect of Capital Securities called for redemption is improperly
withheld or refused and not paid either by the Series B Issuer or by the
Company pursuant to the Guarantee as described under "Description of
Guarantee," Distributions on such Capital Securities will continue to
accumulate at the then applicable rate, from the Redemption Date originally
established by the Series B Issuer for such 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 laws), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the
open market or by private agreement.
If less than all of the outstanding Capital Securities and Common Securities
are to be redeemed on the Redemption Date, then the aggregate Liquidation
Amount of such Capital Securities and Common Securities to be redeemed shall
be allocated pro rata to the Capital Securities and the Common Securities
based upon the relative Liquidation Amounts of such classes. The particular
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 Property Trustee from
the outstanding Capital Securities not previously called for redemption, by
such method as the Property Trustee 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
Capital Securities of a denomination larger than $1,000, or, if the Capital
Securities are then held in the form of a Global Capital Security (as defined
below), in accordance with DTC's customary procedures, provided in each case
that any holder of the Capital Securities after the redemption has at least
100 Capital Securities remaining after the redemption. The Property Trustee
shall promptly notify the securities registrar in writing of the Capital
Securities selected for redemption and, in the case of any Capital Securities
selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of the Trust Agreement, unless the context
otherwise requires, all provisions relating to the redemption of Capital
Securities shall relate, in the case of any Capital Securities redeemed or to
be redeemed only in part, to the portion of the aggregate Liquidation Amount
of Capital Securities which has been or is to be redeemed.
Unless the Company defaults in payment of the Redemption Price on the Junior
Subordinated Debentures, on and after the Redemption Date interest will cease
to accrue on the Junior Subordinated Debentures or portions thereof (and,
unless payment of the Redemption Price in respect of the Capital Securities is
withheld or refused and not paid either by the Series B Issuer or the Company
pursuant to the Guarantee, Distributions will cease to accumulate on the
Capital Securities or portions thereof) called for redemption.
Payment of the Redemption Price on the Capital Securities and any
distribution of Junior Subordinated Debentures to holders of Capital
Securities shall be made to the applicable recordholders thereof as they
appear on the register for such Capital Securities on the relevant record
date, which shall be one Business Day prior to the relevant Redemption Date or
liquidation date, as applicable; provided, however, that in the event that any
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Capital Securities are not in book-entry form, the relevant record date for
such Capital Securities shall be 15 days prior to the Redemption Date or
liquidation date, as applicable.
CHANGE OF CONTROL REPURCHASE
Upon the occurrence of a Change of Control, each holder of Capital
Securities will have the right, at such holder's option, to require the
Property Trustee to cause the Company to repurchase a Like Amount of Junior
Subordinated Debentures corresponding to the Liquidation Amount of Capital
Securities which such holder seeks to have repurchased, which Liquidation
Amount may represent all or any portion of the Liquidation Amount of the
Capital Securities held by such holder that is equal to $1,000 or integral
multiples of $1,000 in excess thereof, provided that in the case of any
partial repurchase by a holder, such holder after the repurchase has at least
100 Capital Securities remaining. Such repurchase will be at a price (the
"Repurchase Price") equal to 101% of the aggregate Liquidation Amount of such
Capital Securities plus accumulated and unpaid Distributions thereon to the
repurchase date (the "Repurchase Date").
Within 10 business days following a Change of Control, notice (a "Change of
Control Notice") will be sent to each holder of Capital Securities stating,
among other things: (i) that a Change of Control has occurred and that such
holder has the right to cause the repurchase of its Capital Securities at the
Repurchase Price; (ii) the circumstances and relevant facts regarding such
Change of Control (including any relevant information with respect to the
transaction giving rise to such Change of Control); (iii) the instructions
that a holder must follow in order to have its Capital Securities accepted for
repurchase; and (iv) the Repurchase Date (which shall not be less than 30 days
nor more than 60 days from the date of such notice).
"Change of Control" means the occurrence of one or more of the following
events (whether or not approved by the Board of Directors of the Company): (a)
an event or series of events by which any Person or group of Persons within
the meaning of Section 13(d) of the Exchange Act shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated
purchases, merger, consolidation, issuances of securities by the Company or
otherwise, be or become, directly or indirectly, the beneficial owner (within
the meaning of Rule 13d-3 and Rule 13d-5 under the Exchange Act, whether or
not applicable, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time) of 50% or more of the combined voting power of the then outstanding
voting stock of the Company, (b) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors
(as defined herein), (c) the stockholders of the Company shall approve any
plan or proposal for the liquidation or dissolution of the Company or (d) the
direct or indirect sale, assignment, lease, exchange, disposition or other
transfer, in one transaction or a series of related transactions, of all or
substantially all of the property or assets of the Company to any Person.
"Continuing Director" means any member of the Board of Directors of the
Company who was a member of such Board of Directors on the date of original
issuance of the Capital Securities, and, as of any determination date
thereafter, shall include any member of the Board of Directors of the Company
who was nominated for election or appointed to such Board of Directors with
the affirmative vote of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or appointment.
Clause (d) of the definition of Change of Control set forth in the preceding
paragraph includes a sale, assignment, lease, exchange, disposition or other
transfer of all or substantially all of the Company's assets. Although there
is a developing body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Capital Securities to require the
repurchase of such Capital Securities as a result of a sale, assignment,
lease, exchange, disposition or other transfer of the Company's assets to
another Person may be uncertain.
The Company's ability to repurchase a Like Amount of Junior Subordinated
Debentures upon a Change of Control in order to permit the repurchase of
Capital Securities may be limited by, among other things, the Company's
financial resources at the time of repurchase and the terms of the Junior
Subordinated Indenture which prevent any payments in respect of the Junior
Subordinated Debentures if the Company is in default in
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the payment of any amount due on any Senior Indebtedness. See "Description of
Junior Subordinated Debentures--Subordination." There can be no assurance that
the Company will have the financial resources or be able to arrange financing
on acceptable terms to pay the Repurchase Price for all of the Capital
Securities as to which the repurchase right is exercised. Both the Company's
Credit Facility and the Junior Subordinated Debentures restrict the Company's
ability to incur additional indebtedness, and the ability of the Domestic
Insurance Subsidiaries to pay dividends to the Company is restricted by the
insurance laws of North Carolina. See "Risk Factors--Limited Dividends
Available from Domestic Insurance Subsidiaries" and "--High Leverage."
Except in the case of a "Change of Control", the general provisions of the
Trust Agreement and the Junior Subordinated Indenture do not afford holders of
the Capital Securities or the Junior Subordinated Debentures protection in the
event of a highly leveraged or other transaction involving the Company that
may adversely affect holders of the Capital Securities or the Junior
Subordinated Debentures.
REPURCHASE PROCEDURES
Capital Securities repurchased on a Repurchase Date shall be repurchased at
the Repurchase Price with the applicable proceeds from the contemporaneous
repurchase of the Junior Subordinated Debentures. Repurchases of Capital
Securities shall be made and the Repurchase Price shall be payable on the
Repurchase Date only to the extent that the Series B Issuer has funds on hand
available for the payment of such Repurchase Price.
Holders ("Electing Holders") wishing to exercise their right to cause a
repurchase of Capital Securities shall notify the Property Trustee within 30
days of the receipt of the Change of Control Notice of their irrevocable
election (a "Repurchase Election") to do so. If the Electing Holders make a
Repurchase Election, then, by 12:00 noon, New York City time, on the
Repurchase Date, to the extent funds are available, in the case of Capital
Securities held in book-entry form, the Property Trustee will deposit
irrevocably with DTC funds sufficient to pay the applicable Repurchase Price
and will give DTC irrevocable instructions and authority to pay the Repurchase
Price to the Electing Holders. With respect to Capital Securities not held in
book-entry form, the Property Trustee, to the extent funds are available, will
irrevocably deposit with the Paying Agent funds sufficient to pay the
applicable Repurchase Price and will give such Paying Agent irrevocable
instructions and authority to pay the Repurchase Price to the Electing Holders
thereof upon surrender of their certificates evidencing the Capital
Securities. Notwithstanding the foregoing, Distributions payable on or prior
to the Repurchase Date for any Capital Securities of Electing Holders shall be
payable to such Electing Holders on the relevant record dates for the related
Distribution. If Repurchase Elections shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
Electing Holders in respect of the Capital Securities subject to Repurchase
Elections will cease, except the right of the Electing Holders to receive the
Repurchase Price, but without interest on such Repurchase Price, and the
Capital Securities of the Electing Holders subject to such Repurchase
Elections will cease to be outstanding. In the event that any date fixed for
repurchase of Capital Securities is not a Business Day, then payment of the
Repurchase 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 each case with the same force and effect as if made on such date. In
the event that payment of the Repurchase Price in respect of Capital
Securities of any Electing Holders is improperly withheld or refused and not
paid either by the Series B Issuer or by the Company pursuant to the Guarantee
as described under "Description of Guarantee," Distributions on Capital
Securities of such Electing Holders will continue to accumulate at the then
applicable rate, from the Repurchase Date originally established by the Series
B Issuer for such Capital Securities to the date such Repurchase Price is
actually paid, in which case the actual payment date will be the date fixed
for repurchase for purposes of calculating the Repurchase Price. The Property
Trustee shall promptly notify the securities registrar in writing of the
Capital Securities subject to Repurchase Elections. For all purposes of the
Trust Agreement, unless the context otherwise requires, all provisions
relating to the repurchase of Capital Securities shall relate, in the case of
any Capital Securities repurchased or to be repurchased only in part, to the
portion of the aggregate Liquidation Amount of Capital Securities which has
been or is to be repurchased.
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Repurchase of Capital Securities will result in a repurchase of a pro rata
Liquidation Amount of Common Securities.
Unless the Company defaults in payment of the Repurchase Price on the Junior
Subordinated Debentures, on and after the Repurchase Date interest will cease
to accrue on the Junior Subordinated Debentures or portions thereof (and,
unless payment of the Repurchase Price in respect of the Capital Securities
subject to repurchase is withheld or refused and not paid by the Series B
Issuer or the Company pursuant to the Guarantee, Distributions will cease to
accumulate on the Capital Securities or portions thereof) subject to
repurchase.
Payment of the Repurchase Price on the Capital Securities subject to
Repurchase Elections shall be made to the applicable recordholders thereof as
they appear on the register for such Capital Securities on the relevant record
date, which shall be one Business Day prior to the relevant Repurchase Date;
provided, however, that in the event that any Capital Securities are not held
in book-entry form, the relevant record date for such Capital Securities shall
be 15 days prior to the Repurchase Date.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to securityholders in the event of an issuer tender offer and may
apply in the event the repurchase option becomes available to holders of the
Capital Securities. The Company will comply with the provisions of Rule 13e-4
and any other tender offer rules under the Exchange Act including, without
limitation, Rule 14e-1, which may then be applicable.
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 the Series B Issuer and the distribution of the Junior
Subordinated Debentures to the holders of the Capital Securities in exchange
therefor, be more than an insubstantial risk that an Adverse Tax Consequence
(as defined in "Risk Factors--Tax Event--Shortening of Maturity or
Redemption") would continue to exist or (ii) the Junior Subordinated
Debentures are not held by the Series B Issuer, then the Company shall have
the right (a) to shorten the Stated Maturity of the Junior Subordinated
Debentures to the minimum extent required, but in any event to a date not
earlier than August 15, 2016 (the action referred to in this clause (a) being
referred to herein as a "Maturity Advancement"), such that, in the opinion of
counsel to the Company experienced in such matters, after advancing the Stated
Maturity, interest paid on the Junior 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 Junior
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 "Description of Capital Securities--Redemption" and
"Description of Junior Subordinated Debentures--General" and "--Redemption".
Holders of Capital Securities should consult their own tax advisors
regarding the tax consequences to them of a Maturity Advancement.
See "Certain Federal Tax Law Considerations--Possible Tax Law Changes" for a
discussion of certain proposals that, if adopted by Congress, could give rise
to a Tax Event, which may permit the Company to shorten the Stated Maturity of
the Junior Subordinated Debentures or cause a redemption of the Capital
Securities prior to February 15, 2007.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price or Repurchase Price
of, the Capital Securities and Common Securities, as applicable, shall be made
pro rata based on the Liquidation Amount of such Capital Securities and Common
Securities; provided, however, that if on any Distribution Date, Redemption
Date or Repurchase Date a Debenture Event of Default shall have occurred and
be continuing as a result of any failure
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by the Company to pay any amount in respect of the Junior Subordinated
Debentures when due, no payment of any Distribution on, or Redemption Price or
Repurchase Price of, any of the Common Securities, and no other payment on
account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated
and unpaid Distributions on all of the outstanding 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 Capital Securities then called for redemption, or in
the case of payment of the Repurchase Price, the full amount of such
Repurchase Price on all Capital Securities subject to Repurchase Elections,
shall have been made or provided for, and all funds available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Capital Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
such Capital Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Capital Securities have been so cured, waived or otherwise eliminated, the
Property Trustee shall act solely on behalf of the holders of such Capital
Securities and not on behalf of the Company as holder of the Common
Securities, and only the holders of such Capital Securities will have the
right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The amount payable on the Capital Securities in the event of any liquidation
of the Series B Issuer is $1,000 per Capital Security plus accumulated and
unpaid Distributions, subject to certain exceptions, which may be in the form
of a distribution of such amount in Junior Subordinated Debentures.
The holders of all of the outstanding Common Securities have the right at
any time to terminate the Series B Issuer and, after satisfaction of the
liabilities and amounts owed to creditors of the Series B Issuer as provided
by applicable law, cause the Junior Subordinated Debentures to be distributed
to the holders of the Capital Securities and Common Securities in liquidation
of the Series B Issuer.
Pursuant to the Trust Agreement, the Series B Issuer shall automatically
terminate upon expiration of its term and shall terminate on the first to
occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company; (ii) the distribution of a Like Amount of the Junior Subordinated
Debentures to the holders of its Trust Securities, if the holders of Common
Securities have given written direction to the Property Trustee to terminate
the Series B Issuer (which direction, subject to the foregoing restrictions,
is optional and wholly within the discretion of the holders of Common
Securities); (iii) redemption of all of the Capital Securities in connection
with the redemption or maturity of all of the Junior Subordinated Debentures
as described under "Description of Capital Securities--Redemption"; (iv)
repurchase of all the Capital Securities in connection with a Change of
Control as described under "Description of Capital Securities--Change of
Control Repurchase" and (v) the entry of an order for the dissolution of the
Series B Issuer by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (v)
above, the Series B Issuer shall be liquidated by the Property Trustee and the
Administrators as expeditiously as the Property Trustee and the Administrators
determine to be possible by distributing, after satisfaction of liabilities to
creditors of the Series B Issuer as provided by applicable law, to the holders
of such Trust Securities a Like Amount of the Junior Subordinated Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of the Series B Issuer available for distribution to holders, after
satisfaction of liabilities to creditors of the Series B Issuer as provided by
applicable law, an amount equal to, in the case of holders of Capital
Securities, the aggregate of the Liquidation Amount plus accumulated 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 the Series B Issuer has insufficient assets available to pay
in full the aggregate Liquidation Distribution, then the amounts payable
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directly by the Series B Issuer on its Capital Securities shall be paid on a
pro rata basis. The holder(s) of the Common Securities will be entitled to
receive distributions upon any such liquidation pro rata with the holders of
the Capital Securities, except that if a Debenture Event of Default has
occurred and is continuing as a result of any failure by the Company to pay
any amount in respect of the Junior Subordinated Debentures when due, the
Capital Securities shall have a priority over the Common Securities.
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures (i) the Capital Securities will no longer be deemed to be
outstanding, (ii) DTC or its nominee, as the registered holder of the Capital
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Capital Securities held by DTC or its nominee and
(iii) any certificates representing the Capital Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Capital Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Capital Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
maturity and the Series B Issuer is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Capital Securities, the
Capital Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution
to the holders of the Capital Securities.
There can be no assurance as to the market prices for the Capital Securities
or the Junior Subordinated Debentures that may be distributed in exchange for
Capital Securities if a dissolution and liquidation of the Series B Issuer
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
on dissolution and liquidation of the Series B Issuer, may trade at a discount
to the price that the investor paid to purchase the Capital Securities offered
hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Capital Securities
(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 Junior
Subordinated Indenture (see "Description of Junior Subordinated
Debentures--Debenture Events of Default"); or
(ii) default by the Property Trustee in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price or Repurchase Price of any Trust Security when such price becomes due
and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees and the Administrators in
the Trust 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 Issuer Trustees or Administrators by the holders of at least 25%
in aggregate Liquidation Amount of the outstanding 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
Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 90 days thereof.
Within 10 Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of Trust Securities,
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the Administrators and the Company as Depositor, unless such Event of Default
shall have been cured or waived. The Company, as Depositor, and the
Administrators are required to file annually with the Property Trustee a
certificate as to whether or not they are in compliance with all of the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amount in respect of the Junior
Subordinated Debentures when due, the Capital Securities shall have a
preference over the Common Securities upon termination of the Series B Issuer
as described above. See "--Liquidation Distribution Upon Termination." The
existence of an Event of Default does not entitle the holders of Capital
Securities to accelerate the maturity thereof.
REMOVAL OF ISSUER TRUSTEES; APPOINTMENT OF SUCCESSORS
Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee or Administrator may be removed at any time by the
holder(s) of the Common Securities. If a Debenture Event of Default has
occurred and is continuing, the Property Trustee or the Delaware Trustee or
both of them may be removed at such time by the holders of a majority in
Liquidation Amount of the outstanding Capital Securities. In no event will the
holders of Capital Securities have the right to vote to appoint, remove or
replace the Administrators, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. If an Issuer Trustee resigns
or is removed by the holders of Capital Securities, the successor will be
appointed by the holders of a majority in Liquidation Amount of Capital
Securities. If a successor has not been appointed by the holders, any holder
of Capital Securities or Common Securities may petition a court in the State
of Delaware to appoint a successor. Any Delaware Trustee must meet the
applicable requirements of Delaware Law. No resignation or removal of an
Issuer Trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance
with the provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Trustee
shall be a party, or any entity succeeding to all or substantially all the
corporate trust business of such Trustee, shall be the successor of such
Trustee under the Trust Agreement, provided such entity shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE SERIES B ISSUER
The Series B Issuer 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 entity, except as described below or as
otherwise set forth in the Trust Agreement. The Series B Issuer may, at the
request of the holders of the Common Securities and with the consent of the
holders of at least a majority in aggregate Liquidation Amount of the
outstanding 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 trust organized as such under the laws of
any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Series B Issuer with respect to the
Capital Securities or (b) substitutes for the Capital Securities other
securities having substantially the same terms as the Capital Securities (the
"Successor Securities") so long as the Successor Securities rank the same as
the Capital Securities rank in priority with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) a trustee of such
successor entity is appointed by the Company as Depositor possessing the same
powers and duties as the Property Trustee as the holder of the Junior
Subordinated Debentures, (iii) the Successor Securities are listed or traded,
or any Successor Securities will be listed upon notification of such issuance,
on any national securities exchange or other organization on which the Capital
Securities are then listed or traded, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Capital Securities (including any Successor Securities) to be
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downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Capital Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of the Series B Issuer, (vii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Company has received an opinion from independent counsel experienced in such
matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Capital Securities
(including any Successor Securities) in any material respect and (b) following
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, neither the Series B Issuer nor such successor entity will be required
to register as an investment company under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), and (viii) the Company or any
permitted successor or assignee owns all of the 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 Guarantee.
Notwithstanding the foregoing, the Series B Issuer shall not, except with the
consent of holders of 100% in aggregate Liquidation Amount of the 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
the Series B Issuer or the successor entity to be taxable as a corporation or
to be classified as other than a grantor trust for United States federal
income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by holders of a
majority of the Common Securities, the Administrators and the Property
Trustee, without the consent of the holders of the Capital Securities (i) to
cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the Trust
Agreement, which shall not be inconsistent with the other provisions of the
Trust Agreement, or (ii) to modify, eliminate or add to any provisions of the
Trust Agreement to such extent as shall be necessary to ensure that the Series
B Issuer will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation at all times
that any Trust Securities are outstanding or to ensure that the Series B
Issuer will not be required to register as an "investment company" under the
Investment Company Act; provided, however, that such action shall not
adversely affect in any material respect the interests of any holder of
Capital Securities, and any amendments of the Trust Agreement shall become
effective when notice thereof is given to the holders of Trust Securities. The
Trust Agreement may be amended by holders of a majority of the Common
Securities, the Administrators and the Issuer Trustees with (i) the consent of
holders representing not less than a majority (in aggregate Liquidation
Amount) of the outstanding Capital Securities and (ii) receipt by the Issuer
Trustees and the Administrators of an opinion of counsel to the effect that
such amendment or the exercise of any power granted to the Issuer Trustees and
the Administrators in accordance with such amendment will not affect the
Series B Issuer's status as a grantor trust for United States federal income
tax purposes or the Series B Issuer's exemption from status as an "investment
company" under the Investment Company Act, provided that without the consent
of each holder of Trust Securities, the Trust Agreement may not be amended to
(i) change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
Notwithstanding the above, no amendment to the Trust Agreement may be made
if, as a result of such amendment, the Series B Issuer would fail to be
classified as a grantor trust for United States federal income tax
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purposes, would be taxable as a corporation or would fail to qualify for the
exemption form status of an investment company under the Investment Company
Act.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Property Trustee and the Administrators shall not (i) direct the
time, method and place of conducting any proceeding for any remedy available
to the Debenture Trustee, or execute any trust or power conferred on the
Debenture Trustee with respect to the Junior Subordinated Debentures, (ii)
waive any past default that is waivable under Section 5.13 of the Junior
Subordinated Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of at least a majority in
aggregate Liquidation Amount of all outstanding Capital Securities; provided,
however, that where a consent under the Junior Subordinated Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of the Capital Securities. The Property Trustee
and the Administrators shall not revoke any action previously authorized or
approved by a vote of the holders of the Capital Securities except by
subsequent vote of the holders of the Capital Securities. The Property Trustee
shall notify each holder of Capital Securities of any notice of default with
respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Capital Securities, prior to taking
any of the foregoing actions, the Property Trustee shall obtain an opinion of
counsel experienced in such matters to the effect that the Series B Issuer
will not fail to be classified as a grantor trust and will not be classified
as an association taxable as a corporation for United States federal income
tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at a
meeting of holders of Capital Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of 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 Capital Securities in the manner set forth
in the Trust Agreement.
No vote or consent of the holders of Capital Securities will be required to
redeem and cancel Capital Securities in accordance with the Trust Agreement.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned by the Company, the Administrators, the Issuer
Trustees or any affiliate of the Company, the Administrators or any Issuer
Trustees, shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
BOOK-ENTRY, DELIVERY AND FORM
The Capital Securities will be issued in fully registered form, only in
blocks having a Liquidation Amount of not less than $100,000 (100 Capital
Securities) and the Capital Securities must at all times be held in blocks of
at least 100 Capital Securities.
Exchange Capital Securities that are issued in registered, global form will
be evidenced by a global Capital Security (the "Global Capital Security")
which will be deposited with, or on behalf of, DTC and registered in the name
of Cede & Co. ("Cede") as DTC's nominee. Except as set forth below, record
ownership of the Global Capital Security may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee
and only in amounts that would not cause a holder to own less than 100 Capital
Securities.
A holder may hold its interest in the Global Capital Security directly
through DTC if such holder is a participant in DTC, or indirectly through
organizations which are participants in DTC ("Participants"). Transfers
between Participants will be effected in the ordinary way in accordance with
DTC rules and will be settled in same-day funds. The laws of some states
require that certain persons take physical delivery of securities in
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definitive form. Consequently, the ability to transfer beneficial interests in
the Global Capital Security to such persons may be limited.
Holders who are not Participants may beneficially own interests in the
Global Capital Security held by DTC only through Participants or certain
banks, brokers, dealers, trust companies and other parties that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC,
is the registered owner of the Global Capital Security, Cede for all purposes
will be considered the sole holder of the Global Capital Security. Except as
provided below, owners of beneficial interests in the Global Capital Security
will not be entitled to have certificates registered in their names, will not
receive or be entitled to receive physical delivery of certificates in
definitive form and will not be considered holders thereof.
Payment of Distributions on, the Redemption Price and the Repurchase Price
of, the Global Capital Security will be made to Cede, the nominee for DTC, as
the registered owner of the Global Capital Security, by wire transfer of
immediately available funds on each Distribution Date, Redemption Date or
Repurchase Date. None of the Company, the Issuer Trustees, or the
Administrators (or any registrar, paying agent or distribution agent under the
Trust Agreement) will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Capital Security, for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
the performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
The Company and the Series B Issuer have been informed by DTC that, with
respect to any payment of Distributions on, the Redemption Price or the
Repurchase Price of, the Global Capital Security, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the Capital
Securities represented by the Global Capital Security, as shown on the records
of DTC (adjusted as necessary so that such payments are made with respect to
whole Capital Securities only), unless DTC has reason to believe that it will
not receive payment on such payment date. Payments by Participants to owners
of beneficial interests in Capital Securities represented by the Global
Capital Security held through such Participants will be the responsibility of
such Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Capital Securities represented by the Global
Capital Security to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing
such interest.
DTC has advised the Company and the Series B Issuer that it will take any
action permitted to be taken by a holder of Capital Securities (including,
without limitation, the presentation of Capital Securities for exchange as
described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Capital Security are credited and
only in respect of the Liquidation Amount of the Capital Securities
represented by the Global Capital Security as to which such Participants has
or have given such direction.
DTC has advised the Company and the Series B Issuer as follows: DTC is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the Initial Purchasers. Certain of
such Participants (or their representatives), together with other entities,
own DTC. Indirect access to the DTC system is available to others
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such as banks, brokers, dealers and trust companies that clear through, or
maintain a custodial relationship with, a Participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Capital Security among Participants of
DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. The Global
Capital Security is exchangeable for definitive Capital Securities in
registered certificated form if (i) DTC advises the Company and the Property
Trustee that it is no longer willing or able to properly discharge its
responsibilities with respect to the Global Capital Security, and the Property
Trustee is unable to locate a qualified successor, (ii) the Series B Issuer at
its option advises DTC in writing that it elects to terminate the book-entry
system through DTC or (iii) after the occurrence of a Debenture Event of
Default. In addition, beneficial interests in a Global Capital Security may be
exchanged for certificated Capital Securities upon request but only upon at
least 20 days' prior written notice given to the Property Trustee by or on
behalf of DTC in accordance with its customary procedures. In all cases,
certificated Capital Securities delivered in exchange for any Global Capital
Security or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of DTC (in
accordance with its customary procedures) and will bear the restrictive legend
referenced to in "Notice to Investors," unless the Property Trustee (based
upon an opinion of counsel) determines otherwise in compliance with applicable
law.
So long as DTC or its nominee is the registered owner of the Global Capital
Security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Capital Securities represented by the Global Capital
Security for all purposes under the Trust Agreement governing the Capital
Securities. Except as provided above, owners of beneficial interests in the
Global Capital Security will not be entitled to have any of the individual
Capital Securities represented by the Global Capital Security registered in
their names, will not receive or be entitled to receive physical delivery of
any such Capital Securities in definitive form and will not be considered the
owners or holders thereof under the Trust Agreement.
Exchange Capital Securities that are issued in definitive registered form
may be issued in exchange for Capital Securities represented by the Global
Capital Security under the circumstances set forth above.
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the 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 the Property Trustee and any co-
paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Administrators may remove the Paying Agent if they
determine in their sole discretion that the Paying Agent has failed to perform
its obligations under the Trust Agreement in any material respect. The Paying
Agent shall be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee, the Administrators and the Company. In the
event that the Property Trustee shall no longer be the Paying Agent, the
Administrators shall appoint a successor (which shall be a bank or trust
company reasonably acceptable to the Property Trustee) to act as Paying Agent.
RESTRICTIONS ON TRANSFER
The Capital Securities will be issued, and any may be transferred only, in
blocks having a Liquidation Amount of not less than $100,000 (100 Capital
Securities) or any integral multiple of $1,000 in excess thereof. Any
attempted transfer, sale or other disposition of Capital Securities in a block
having a Liquidation Amount of less than $100,000 shall be deemed to be void
and of no legal effect whatsoever. Any such transferee shall be deemed not to
be the holder of such Capital Securities for any purpose, including but not
limited to the receipt of Distributions on such Capital Securities, and such
transferee shall be deemed to have no interest whatsoever in such Capital
Securities.
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REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Series B Issuer, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Series B Issuer will not be required to register or cause to
be registered the transfer of its Capital Securities after such Capital
Securities have been called for redemption or are the subject of a Repurchase
Election.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
Any Property Trustee must be a national or state chartered bank and at the
time of appointment have securities rated in one of the three highest rating
categories by a nationally recognized statistical rating organization and have
combined capital and surplus of at least $50,000,000.
The Property Trustee, other than during the occurrence and continuance of an
Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, 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 Property Trustee is under no obligation to exercise any of the powers
vested in it by the Trust Agreement at the request of any holder of Capital
Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative courses of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Capital
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee shall request written instructions from the Company as Depositor as to
the course of action to be taken and, if the Property Trustee does not receive
such instructions as provided under the Trust Agreement, it shall take such
action as it deems advisable and in the best interests of the holders of the
Trust Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
MISCELLANEOUS
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Series B Issuer in such a way that
the Series B Issuer will not be deemed to be an "investment company" required
to be registered under the Investment Company Act or classified as an
association taxable as a corporation for United States federal income tax
purposes and so that the Junior Subordinated Debentures will be treated as
indebtedness of the Company for United States federal income tax purposes. In
this connection, the Property Trustee and the holders of Common Securities are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Series B Issuer or the Trust Agreement, that the
Property Trustee and the holders of Common Securities determine in their
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 Capital Securities.
Holders of the Capital Securities have no preemptive or similar rights.
The Series B Issuer may not borrow money or issue debt or mortgage or pledge
any of its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Outstanding Junior Subordinated Debentures were issued, and the Exchange
Junior Subordinated Debentures will be issued, under the Junior Subordinated
Indenture, dated as of February 10, 1997, as supplemented from time to time
(as so supplemented, the "Junior Subordinated Indenture"), between the Company
and First Union National Bank of North Carolina, as trustee (the "Debenture
Trustee"). This summary of the material terms and provisions of the Junior
Subordinated Debentures and the Junior Subordinated Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by
reference to, the Junior Subordinated Indenture (a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part), including the definitions therein of certain terms and the Trust
Indenture Act. Whenever particular defined terms of the Junior Subordinated
Indenture (as supplemented or amended from time to time) are referred to
herein, such defined terms are incorporated herein by reference.
The Junior Subordinated Indenture has been qualified under the Trust
Indenture Act upon effectiveness of this Registration Statement.
GENERAL
The Junior Subordinated Debentures will bear interest, accruing from
February 10, 1997, at the annual rate of 10 3/4% of the principal amount
thereof, payable semi-annually in arrears on February 15 and August 15 of each
year (each, an "Interest Payment Date"), commencing August 15, 1997, to the
person in whose name such Junior Subordinated Debenture is registered at the
close of business on the relevant record dates. The record dates for Junior
Subordinated Debentures will be, for so long as the Junior Subordinated
Debentures remain in book-entry form, one Business Day prior to the relevant
Interest Payment Dates and, in the event the Junior Subordinated Debentures
are not in book-entry form, the date which is fifteen days next preceding such
Interest Payment Date. It is anticipated that, until the liquidation, if any,
of the Series B Issuer, each Junior Subordinated Debenture will be held in the
name of the Property Trustee in trust for the benefit of the holders of the
Capital Securities. The amount of interest payable for any period less than a
full interest period will be computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in a period. In
the event that any date on which interest is payable on the Junior
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) 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 10 3/4% thereof,
compounded semi-annually and computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in a period. 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.
The Junior Subordinated Debentures will mature on February 15, 2027.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. 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 (and thus the ability
of holders of the Capital Securities to benefit indirectly from such
distribution), 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. In addition, there are also various regulatory and
contractual limitations on the extent to which the Company's insurance
subsidiaries may pay dividends or otherwise supply funds to the Company or
various of its affiliates. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries, including liabilities and obligations relating to
insurance claims, and holders of Junior Subordinated Debentures should look
only to the assets of the Company for payments on the Junior Subordinated
Debentures. The Junior Subordinated Indenture contains certain limitations on
the incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Indebtedness, whether under the Junior Subordinated Indenture
or any existing or other indenture that the Company may enter into in the
future or otherwise. See "--Certain Covenants--Limitation on Indebtedness" and
"--Subordination."
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OPTION TO DEFER INTEREST PAYMENTS
So long as no Event of Default under the Junior Subordinated Indenture has
occurred and is continuing, the Company has the right under the Junior
Subordinated Indenture at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest on the Junior 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
Junior Subordinated Debentures; provided, however, that during such Extension
Periods, the Company shall have the right to make partial payments of interest
on any Interest Payment Date. At the end of any such Extension Period, the
Company must pay all interest then accrued and unpaid. During an Extension
Period, interest will continue to accrue and holders of Junior Subordinated
Debentures (or holders of Capital Securities while outstanding) will be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Considerations--Original Issue
Discount."
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 that rank pari passu in all respects with or
junior in interest to the Junior 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 Junior Subordinated Debentures (other than
(a) dividends or distributions in capital stock of the Company, (b) any
declaration of a dividend in connection with implementation of a shareholders'
rights plan, or the issuance of stock under any such plan in the future, or
the redemption or repurchase of any such rights pursuant thereto, (c) payments
under the Guarantee, (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 registration of shares of an employee benefit plan
of the Company, related to the issuance of common stock or rights under a
dividend reinvestment plan or stock purchase plan, or related to the issuance
of common stock of the Company (or securities convertible into or exchangeable
for such common stock) as consideration in an acquisition transaction entered
into prior to the applicable Extension Period and (e) payments of accrued
dividends (and cash in lieu of fractional shares) upon conversion into common
stock of any convertible preferred stock of the Company of any series now or
hereinafter outstanding, in accordance with the terms of such stock). Prior to
the termination of any such Extension Period, the Company may further defer
the payment of interest, provided that no Extension Period may exceed 10
consecutive semi-annual periods or extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, 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 holders of Junior Subordinated Debentures and the
Debenture Trustee notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the next succeeding date on which the
Distributions on the Capital Securities would have been payable except for the
election to begin such Extension Period or (ii) the date the Administrators or
the Debenture Trustee are required to give notice to any securities exchange
or other applicable self-regulatory organization or to holders of the Capital
Securities of the record date or 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 Capital Securities. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period.
RESERVE ACCOUNT
The Company paid $10.75 million of the net proceeds from the sale of the
Outstanding Junior Subordinated Debentures into an escrow account established
and maintained by the Debenture Trustee (the "Reserve Account"), the funds in
which will be applied by the Debenture Trustee to pay interest on the Junior
Subordinated Debentures on the first two Interest Payment Dates for the Junior
Subordinated Debentures. No
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further amounts will be required to be paid into the Reserve Account. In the
event the Junior Subordinated Debentures are redeemed, any amounts then
remaining in the Reserve Account shall be remitted to the Company. Funds on
deposit in the Reserve Account may be invested at the direction of the Company
in (a) obligations issued or guaranteed by the United States or any agency or
instrumentality thereof, (b) certificates of deposit of or accounts with
national banks or corporations endowed with trust powers having capital and
surplus in excess of $100,000,000; (c) commercial paper of the highest rating
available from Standard & Poor's or Moody's or (d) fixed-income securities of
the three highest ratings available from Standard & Poor's or Moody's or of
comparable quality, having a maturity of five years or less.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to the Stated
Maturity at the option of the Company (i) on or after February 15, 2007 in
whole at any time or in part from time to time or (ii) in whole (but not in
part), at any time, in certain circumstances described under "Description of
Capital Securities--Conditional Right to Shorten Maturity or Redeem upon a Tax
Event" within 90 days following the occurrence and during the continuation of
a Tax Event (as defined under "Description of Capital Securities--
Redemption"), in each case at the redemption price described below. The
proceeds of any such redemption will be used by the Series B Issuer to redeem
the Capital Securities.
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 and unpaid interest up to but excluding the Redemption
Date. If redeemed during the 12-month period beginning February 15 of the
years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2007.............................................................. 105.375%
2008.............................................................. 104.838
2009.............................................................. 104.300
2010.............................................................. 103.763
2011.............................................................. 103.225
2012.............................................................. 102.688
2013.............................................................. 102.150
2014.............................................................. 101.613
2015.............................................................. 101.075
2016.............................................................. 100.538
</TABLE>
and at 100% on or after February 15, 2017.
The Redemption Price, in the case of a redemption following a Tax Event as
described under (ii) above, shall be equal to 100% of the principal amount of
such Junior Subordinated Debentures plus accrued and unpaid interest thereon
to but excluding the Redemption Date.
CONDITIONAL RIGHT TO SHORTEN MATURITY UPON A TAX EVENT
The maturity of the Junior Subordinated Debentures may be shortened at the
option of the Company under the circumstances described under "Description of
Capital Securities--Conditional Right to Shorten Maturity or Redeem upon a Tax
Event." Upon the exercise of the right to shorten the maturity of the Junior
Subordinated Debentures, the Company will no longer have the right to redeem
the Junior Subordinated Debentures prior to the new Stated Maturity upon the
occurrence of a Tax Event or to further shorten the maturity of the Junior
Subordinated Debentures.
See "Description of Capital Securities--Redemption--Possible Tax Law Changes
Affecting 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 maturity of the Junior Subordinated Debentures.
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ADDITIONAL SUMS
The Company has covenanted in the Junior Subordinated Indenture that so long
as no Debenture Event of Default has occurred and is continuing, if (i) the
Series B Issuer is the holder of all outstanding Junior Subordinated
Debentures and (ii) a Tax Event has occurred and is continuing in respect of
such outstanding Junior Subordinated Debentures, the Company will pay to the
Series B Issuer together with any payment of principal of (or premium, if any)
or interest on such Junior Subordinated Debentures such Additional Sums (as
defined under "Description of Capital Securities--Redemption--Payment of
Additional Sums") as may be necessary.
CHANGE OF CONTROL REPURCHASE
Upon the occurrence of a Change of Control, the holders of the Junior
Subordinated Debentures (initially the Series B Issuer) will have the right to
cause the Company to repurchase a Like Amount of Junior Subordinated
Debentures corresponding to the Liquidation Amount of Capital Securities that
are the subject of Repurchase Elections, or in the event the Junior
Subordinated Debentures are distributed to holders of Capital Securities, such
holders will have the right to cause the Company to repurchase all or any
portion of the aggregate principal amount of the Junior Subordinated
Debentures held by such holders at a repurchase price equal to 101% of the
aggregate principal amount of such Junior Subordinated Debentures plus accrued
and unpaid interest thereon to the repurchase date. See "Description of
Capital Securities--Change of Control Repurchase."
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will be registered in the name of the
Series B Issuer. In the event that the Junior Subordinated Debentures are
distributed to holders of Capital Securities, it is anticipated that the
depositary arrangements for the Junior Subordinated Debentures will be
substantially identical to those in effect for the Capital Securities. See
"Description of Capital Securities--Book-Entry, Delivery and Form."
Although DTC has agreed to the foregoing procedures, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, the Company will cause the Junior Subordinated
Debentures to be issued in definitive form.
Payments on Junior Subordinated Debentures represented by a global security
will be made to DTC, as the depositary for the Junior Subordinated Debentures.
In the event Junior Subordinated Debentures are issued in definitive form,
principal and interest will be payable, the transfer of the Junior
Subordinated Debentures will be registrable, and Junior Subordinated
Debentures will be exchangeable for Junior Subordinated Debentures of other
authorized denominations of a like aggregate principal amount, at the
corporate trust office of the Debenture Trustee in New York, New York, or at
the offices of any paying agent or transfer agent appointed by the Company,
provided that payment of interest may be made at the option of the Company by
check mailed to the address of the persons entitled thereto or by wire
transfer.
The Junior Subordinated Debentures will be issuable only in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000 in
excess thereof. Junior Subordinated Debentures will be exchangeable for other
Junior Subordinated Debentures, of any authorized denominations, of a like
aggregate principal amount.
Junior 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 Securities Registrar (as defined below)
or at the office of any transfer agent designated by the Company for such
purpose without service charge and upon payment of any taxes and other
governmental charges as described in the Junior Subordinated Indenture. The
Company will appoint the Debenture Trustee as Securities Registrar (the
"Securities Registrar") under the Junior Subordinated Indenture. The Company
may at any time designate additional transfer agents with respect to the
Junior Subordinated Debentures.
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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
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated Debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
Any moneys deposited with the Debenture Trustee or any paying agent, or then
held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and
remaining unclaimed for two years after such principal (and premium, if any)
or interest has become due and payable shall, at the request of the Company,
be repaid to the Company (or if then held by the Company shall be discharged
from such trust) and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
CERTAIN COVENANTS
Limitation on Indebtedness
The Company and its subsidiaries will not be permitted to incur any Debt
unless, immediately after giving effect to the incurrence of such Debt and the
receipt and application of the proceeds thereof, the Consolidated Cash Flow
Ratio for the four full fiscal quarters for which quarterly or annual
financial statements are available next preceding the incurrence of such Debt,
calculated on a pro forma basis as if such Debt had been incurred at the
beginning of such four full fiscal quarters, would be greater than 1.5 to 1
for the period ending on the first anniversary of the date of issuance of the
Junior Subordinated Debentures; 1.75 to 1 for the period from the first
anniversary of the date of issuance of the Junior Subordinated Debentures and
ending on the second anniversary of the date of issuance of the Junior
Subordinated Debentures, and 2.0 to 1 thereafter; provided, however, that
notwithstanding the foregoing limitations, the Company may incur Debt (x) of
up to $75,000,000 under its Credit Facility or any renewal, extension,
refinancing or refunding thereof and (y) of up to an amount equal to the
aggregate principal amount of the Company's 9 1/2% Senior Notes due October
15, 2001 (the "9 1/2% Senior Notes") and 8% Senior Notes due August 15, 1999
(the "8% Senior Notes") to the extent incurred in connection with the
refunding or refinancing thereof, plus the amount of any premium required to
be paid in connection therewith and the reasonable expenses incurred in
connection therewith. For purposes of the foregoing, the Consolidated Cash
Flow Ratio for any period from January 1, 1997 to December 31, 1997, shall be
calculated on an annualized basis as follows: (i) at any time prior to the
Company's financial statements for the second fiscal quarter of 1997 being
available, by annualizing the Company's first 1997 fiscal quarter; (ii) at any
time after the Company's financial statements for the second fiscal quarter of
1997 are available and prior to the Company's financial statements for the
third fiscal quarter of 1997 being available, by annualizing the Company's
first and second 1997 fiscal quarters; (iii) at any time thereafter and prior
to the Company's 1997 results being available, by annualizing the Company's
first three 1997 fiscal quarters, and (iv) with respect to any Person acquired
by the Company or a Subsidiary of the Company during such period, the
Consolidated Cash Flow Ratio shall be calculated utilizing financial
information with respect to such Person for the four full fiscal quarters for
which quarterly or annual financial statements are available next preceding
the incurrence of such Debt.
The Junior Subordinated Indenture will provide that the foregoing covenant
will be applicable to the Company unless and until the Company reaches
Investment Grade Status. Upon reaching Investment Grade Status, the Company
will be released from its obligation to comply with such covenant. The Company
will continue to remain obligated to comply with the covenant described below
upon reaching Investment Grade Status.
Reports to Holders of Capital Securities
The Company will file with the Commission all information, documents and
reports required to be filed with the Commission pursuant to Section 13 or
15(d) of the Exchange Act, whether or not the Company is subject to such
filing requirements, so long as the Commission will accept such filings. The
Company will file
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with the Property Trustee, within 15 days after it files them with the
Commission, copies of the annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may be rules and regulations prescribe) which the Company files
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Regardless of whether the Company is required to furnish such reports to its
stockholders pursuant to the Exchange Act, the Company will cause its
consolidated financial statements, comparable to that which would have been
required to appear in annual or quarterly reports filed with the Commission,
to be delivered to the Property Trustee, and the Property Trustee will deliver
the same to holders of the Capital Securities.
Certain Definitions
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required
to be classified and accounted for as a capital lease or a liability on the
face of a balance sheet of such Person in accordance with generally accepted
accounting principles. The stated maturity of such obligation shall be the
date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person.
"Consolidated Cash Flow Available for Fixed Charges" of any Person means for
any period the Consolidated Net Income for such period increased by the sum of
(i) Consolidated Interest Expense of such Person for such period, plus (ii)
Consolidated Income Tax Expense of such Person for such period, plus (iii) the
consolidated depreciation and amortization expense included in the income
statement of such Person for such period, plus (iv) other non-cash charges of
such Person for such period deducted from consolidated revenues in determining
Consolidated Net Income for such period, minus (v) non-cash items of such
Person for such period increasing consolidated revenues in determining
Consolidated Net Income for such period (other than unearned premiums).
"Consolidated Cash Flow Ratio" of any Person means for any period the ratio
of (i) Consolidated Cash Flow Available For Fixed Charges of such Person for
such period to (ii) the sum of (A) Consolidated Interest Expense of such
Person for such period plus (B) the annual interest expense (including the
amortization of debt discount) with respect to any Debt proposed to be
incurred by such Person or its Subsidiaries plus (C) the annual interest
expense (including the amortization of debt discount) with respect to any
other Debt incurred by such Person or its Subsidiaries since the end of such
period to the extent not included in Clause (ii)(A) minus (D) Consolidated
Interest Expense of such Person to the extent included in Clause (ii)(A) with
respect to any Debt that will no longer be outstanding as a result of the
incurrence of the Debt proposed to be incurred; provided, however, that in
making such computation, the Consolidated Interest Expense of such Person
attributable to interest on any Debt bearing a floating interest rate shall be
computed on a pro forma basis as if the rate in effect on the date of
computation had been the applicable rate for the entire period; provided
further that, in the event such Person or its Subsidiaries has made asset
dispositions or acquisitions of assets not in the ordinary course of business
(including acquisitions of other Persons by merger, consolidation or purchase
of Capital Stock) during or after such period, such computation shall be made
on a pro forma basis as if the asset dispositions or acquisitions had taken
place on the first day of such period.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person for such period
calculated on a consolidated basis in accordance with generally accepted
accounting principles.
"Consolidated Interest Expense" for any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person for such period
calculated on a consolidated basis in accordance with generally accepted
accounting principles, including
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without limitation or duplication (or, to the extent not so included, with the
addition of), (i) the amortization of Debt discounts; (ii) any payments or
fees with respect to letters of credit, bankers acceptances or similar
facilities; (iii) fees with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements; (iv)
Preferred Stock dividends declared and payable in cash; and (v) the portion of
any rental obligation allocable to interest expense.
"Consolidated Net Income" of any Person means for any period the
consolidated net income (or loss) of such Person for such period determined on
a consolidated basis in accordance with generally accepted accounting
principles; provided that there shall be excluded therefrom (a) the net income
(or loss) of any Person acquired by such Person or a Subsidiary of such Person
in a pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the net income (or loss) of any Person that is not a
Subsidiary of such Person except to the extent of the amount of dividends or
other distributions actually paid to such Person by such other Person during
such period, (c) the cumulative effect of changes in accounting principles and
(d) all extraordinary gains and extraordinary losses.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or
not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations Incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
every obligation of such Person issued or assumed as the deferred purchase
price of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business), (v) every Capital
Lease Obligation of such Person, (vi) the maximum fixed redemption or
repurchase price of Redeemable Stock of such Person at the time of
determination, (vii) every obligation to pay rent or other payment amounts of
such Person with respect to any Sale and Leaseback Transaction to which such
Person is a party and (viii) every obligation of the type referred to in
Clauses (i) through (vii) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise.
"Investment Grade Status", with respect to the Company, shall occur when the
9 1/2% Senior Notes and the 8% Senior Notes (and any other unsecured senior
indebtedness) receive a rating of "BBB-" or higher from Standard & Poor's or a
rating of "Baa3" or higher from Moody's.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the final
stated maturity of the Junior Subordinated Debentures or is redeemable at the
option of the holder thereof at any time prior to the final stated maturity of
the Junior Subordinated Debentures.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 270 days
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any person
to whom funds have been or are to be advanced by such lender or investor on
the security of such property or asset. The stated maturity of such
arrangement shall be the date of the last payment of rent or any other amount
due under such arrangement prior to the first date on which such arrangement
may be terminated by the lessee without payment of a penalty.
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RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN OTHER COVENANTS OF THE COMPANY
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 of or interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank pari passu in all respects with
or junior in interest to the Junior 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 Junior Subordinated Debentures (other than
(a) payments on dividends or distributions in capital stock of the Company,
(b) any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee, (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 registration of shares of an
employee benefit plan of the Company, related to the issuance of common stock
or rights under a dividend reinvestment plan 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,
and (e) payments of accrued dividends (and cash in lieu of fractional shares)
upon conversion into Common Stock of any convertible preferred stock of the
Company of any series now or hereinafter outstanding in accordance with the
terms of such stock), if at such time (i) there shall have occurred any event
of which the Company has actual knowledge that (a) with the giving of notice
or the lapse of time, or both, would constitute an "Event of Default" under
the Junior Subordinated Indenture with respect to the Junior Subordinated
Debentures and (b) in respect of which the Company shall not have taken
reasonable steps to cure, (ii) if such Junior Subordinated Debentures are held
by the Series B Issuer, the Company shall be in default with respect to its
payment of any obligations under the Guarantee relating to the Capital
Securities or (iii) the Company shall have given notice of its selection of an
Extension Period as provided in the Junior Subordinated Indenture with respect
to the Junior Subordinated Debentures and shall not have rescinded such
notice, or such Extension Period, or any extension thereof, shall be
continuing.
The Company also covenants with each holder of Junior Subordinated
Debentures (i) to maintain directly or indirectly 100% ownership of the Common
Securities of the Series B Issuer; provided, however, that any permitted
successor of the Company may succeed to the Company's ownership of such Common
Securities, (ii) not to voluntarily terminate, wind-up or liquidate such
Series B Issuer, except (a) in connection with a distribution of the Junior
Subordinated Debentures to the holders of the Trust Securities of such Series
B Issuer in liquidation of such Series B Issuer or (b) in connection with
certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms
and provisions of such Trust Agreement, to cause the Series B Issuer to remain
classified as a grantor trust and not be taxable as a corporation for United
States federal income tax purposes.
MODIFICATION OF JUNIOR SUBORDINATED INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Junior Subordinated Indenture for specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies
(provided that any such action does not materially adversely affect the
interest of the holders of the Junior Subordinated Debentures or the holders
of the Capital Securities so long as they remain outstanding) and following
the Exchange Offer qualifying, or maintaining the qualification of, the
indenture under the Trust Indenture Act. The Junior Subordinated 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 the
Junior Subordinated Debentures, to modify the Junior Subordinated Indenture in
a manner adversely affecting the rights of the holders of the Junior
Subordinated Debentures in any material respect; provided, that no such
modification may, without the consent of the holder of each outstanding Junior
Subordinated Debenture so affected, (i) change the Stated Maturity of the
Junior Subordinated Debentures, or reduce the principal amount thereof, the
rate of interest thereon or any
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premium payable upon the redemption thereof, or change the place of payment
where, or the currency in which, any such amount is payable or impair the
right to institute suit for the enforcement of any Junior Subordinated
Debenture or (ii) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Junior Subordinated Indenture, provided that, so long
as any of the Capital Securities remain outstanding, no such modification may
be made that adversely affects the holders of such Capital Securities in any
material respect, and no termination of the Junior Subordinated Indenture may
occur, and no waiver of any Debenture Event of Default or compliance with any
covenant under the Junior Subordinated Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of such Capital Securities unless and until the principal
of the Junior Subordinated Debentures and all accrued and unpaid interest
thereon have been paid in full and certain other conditions are satisfied and,
where a consent under the Junior Subordinated Indenture would require the
consent of each holder of Junior Subordinated Debentures, no such consent
shall be given by the Property Trustee without the prior consent of each
holder of Capital Securities.
In addition, the Company and the Debenture Trustee may execute, without the
consent of any holder of Junior Subordinated Debentures, any supplemental
Indenture for any purpose set forth under the Junior Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes a "Debenture Event of Default"
with respect to the Junior Subordinated Debentures, whether voluntary or
involuntary or effected by operation of law or pursuant to any judgment or
decree of any court or regulation of any administrative or governmental body:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration of acceleration or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Junior Subordinated Indenture for 90 days after
written notice to the Company from the Debenture Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of at least a majority in aggregate outstanding principal amount
of Junior Subordinated Debentures have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Debenture Trustee as provided under the Junior Subordinated Indenture. Upon
certain events of bankruptcy, insolvency or reorganization of the Company
constituting a Debenture Event of Default, the principal amount of all
outstanding Junior Subordinated Debentures shall automatically become
immediately due and payable. Except as set forth above, the Debenture Trustee
or the holders of not less than 25% in aggregate outstanding principal amount
of Junior Subordinated Debentures may declare the principal amount due and
payable immediately upon a Debenture Event of Default, and, should the
Debenture Trustee or such holders of Junior Subordinated Debentures fail to
make such declaration, the holders of at least 25% in aggregate Liquidation
Amount of the Capital Securities shall have such right. The holders of a
majority in aggregate outstanding principal amount of Junior Subordinated
Debentures may annul such declaration and waive the default if all defaults
(other than the non- payment of the principal of Junior Subordinated
Debentures which has become due solely by such acceleration) have 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. Should the holders of Junior Subordinated Debentures fail to annul
such declaration and waive such default, the holders of a majority in
aggregate Liquidation Amount of the Capital Securities shall have such right.
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The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders
of all the Junior Subordinated Debentures, waive any past default, except a
default in the payment of principal (or premium, if any) 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 Junior Subordinated Indenture cannot be
modified or amended without the consent of the holder of each outstanding
Junior Subordinated Debenture. 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 of the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
In case a Debenture Event of Default shall occur and be continuing, the
Property Trustee will have the right to declare the principal of and the
interest on the Junior Subordinated Debentures, and any other amounts payable
under the Junior Subordinated Indenture, to be forthwith due and payable and
to enforce its other rights as a creditor with respect to the Junior
Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date on which such
amounts are otherwise payable, a holder of Capital Securities may institute a
legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of (and premium, if any) or interest on such
Junior Subordinated Debentures having a principal amount equal to the
aggregate Liquidation Amount of the related Capital Securities of such holder
(a "Direct Action"). The Company may not amend the Junior Subordinated
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Capital Securities
outstanding. The Company shall have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Capital Securities by
the Company in connection with a Direct Action.
The holders of the Capital Securities would not be able to exercise directly
any remedies other than those set forth in the preceding paragraph available
to the holders of the Junior Subordinated Debentures unless there shall have
been an Event of Default under the Trust Agreement, see "Description of
Capital Securities--Events of Default; Notice," or unless there shall have
been a continuing Debenture Event of Default and the Debenture Trustee shall
have failed to act upon written request of holders of at least 25% in
Liquidation Amount of the outstanding Capital Securities.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Junior Subordinated Indenture provides that the Company shall not
consolidate with or merge into any other entity or convey, transfer or lease
its properties and assets substantially as an entirety to any entity, and no
entity 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
entity or conveys, transfers or leases its properties and assets substantially
as an entirety to any entity, the successor entity is organized under the laws
of the United States or any state or the District of Columbia, and such
successor entity expressly assumes the Company's obligations on the Junior
Subordinated Debentures issued under the Junior Subordinated 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 happened and be continuing; (iii) such
transaction is permitted under the Trust Agreement and Guarantee and does not
give rise to any breach or violation of the Trust Agreement or Guarantee; and
(iv) certain other conditions as prescribed in the Junior Subordinated
Indenture are met.
The general provisions of the Junior Subordinated Indenture do not afford
holders of the Junior Subordinated Debentures protection in the event of a
highly leveraged or other transaction involving the Company that may adversely
affect holders of the Junior Subordinated Debentures, unless such transaction
results in a Change of Control. See "--Change of Control Repurchase."
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SATISFACTION AND DISCHARGE
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable or (ii) will become
due and payable at their Stated Maturity within one year or are to be called
for redemption within one year under arrangements satisfactory to the
Debenture Trustee, and the Company deposits or causes to be deposited with the
Debenture Trustee as trust funds, in trust, for the purpose and in an amount
sufficient to pay and discharge the entire indebtedness on the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal (and premium, if any) and interest and
Additional Sums to the date of the deposit or to the Stated Maturity or
Redemption Date, as the case may be, then the Subordinated Indenture will
cease to be of further effect (except as to the Company's obligations to pay
all other sums due pursuant to the Junior Subordinated 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 Junior
Subordinated Indenture.
SUBORDINATION
The Junior Subordinated Debentures shall be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated 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, or any other amount 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 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 Junior
Subordinated Debentures, or in respect of any redemption, repayment,
retirement, purchase or other acquisition of any of the Junior Subordinated
Debentures.
As used herein, "Senior Indebtedness" means any indebtedness of the Company
to its creditors (other than trade creditors), whether now outstanding or
subsequently incurred, other than any indebtedness as to which, in the
instrument creating or evidencing the indebtedness or pursuant to which the
indebtedness is outstanding, it is provided that such indebtedness is not
Senior Indebtedness. Indebtedness means with respect to any person (i) every
obligation of such person for money borrowed, (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
(iii) every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account of
such person, (iv) every obligation of such person issued or assumed as the
deferred purchase price of property or services, (v) every capital lease
obligation of such person, (vi) every hedging obligation, (vii) every
obligation of others secured by a lien on any asset of such person, (viii)
every obligation of the type referred to in clauses (i) through (vii) of
another person the payment of which such person has guaranteed or is
responsible or liable and (ix) any and all deferrals, renewals, extensions and
refundings of or amendments or supplements to any liability of the kind
described in any of the preceding clauses (i) through (viii). Senior
Indebtedness does not include the Junior Subordinated Debentures, but does
include the 8% Senior Notes and 9 1/2% Senior Notes and intercompany
indebtedness. As of December 31, 1996, the Company had approximately
$194,760,000 of Senior Indebtedness outstanding.
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceedings
relating to the Company, its creditors or its assets, (ii) liquidation,
dissolution or other winding up of the Company, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings or (iii) any
assignment for the benefit of creditors or any other marshaling of the assets
of the Company, all amounts due or to become due on or in respect of 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 Junior 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 Junior Subordinated
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Debentures (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 Junior 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 Junior 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 Junior Subordinated
Debentures, together with the holders of any obligations of the Company
ranking on a parity with the Junior 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 Junior 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 Junior Subordinated
Debentures and such other obligations. If any payment or distribution on
account of the principal of or interest on the Junior 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 or reorganization or readjustment the payment of which
is subordinate, at least to the extent provided in the subordination
provisions with respect to the Junior 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 Junior 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 Junior 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 Event of Default in
respect of the Junior Subordinated Debentures.
The Junior Subordinated Indenture places certain limitations on the amount
of additional Senior Indebtedness that may be incurred by the Company. See "--
Certain Covenants--Limitation on Indebtedness." The Company expects from time
to time to incur additional indebtedness constituting Senior Indebtedness.
GOVERNING LAW
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
Any Debenture Trustee must be authorized to exercise corporate trust powers
and have a combined capital and surplus of at least $50,000,000. The Debenture
Trustee, other than during the occurrence and continuance of a default by the
Company in the performance of the obligations under the Junior Subordinated
Debentures, is under no obligation to exercise any of the powers vested in it
by the Junior Subordinated Indenture at the request or direction of any holder
of Junior Subordinated Debentures, unless offered reasonable security or
indemnity by such holder against the costs, expenses and liabilities which
might be accrued thereby. The Debenture Trustee is not required to expend or
risk its own funds or otherwise incur financial liability in the performance
of its duties if the Debenture Trustee reasonably believes that repayment or
adequate indemnity against such risk or liability is not reasonably assured to
it. After a Debenture Event of Default, the Debenture Trustee must use the
same
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degree of care and skill in the exercise of its rights and powers as a prudent
person would exercise or use under the circumstances in the conduct of his or
her own affairs.
The Debenture Trustee may resign at any time and may be removed at any time
by the holders of a majority in principal amount of outstanding Junior
Subordinated Debentures or by the Company as set forth under the Junior
Subordinated Indenture.
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DESCRIPTION OF GUARANTEE
The Exchange Guarantee will be delivered by the Company concurrently with
the issuance by the Series B Issuer of its Exchange Capital Securities for the
benefit of the holders from time to time of such Exchange Capital Securities.
First Union National Bank of North Carolina will act as trustee ("Guarantee
Trustee") under the Guarantee. This summary of certain provisions of the
Guarantee does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all of the provisions of such Guarantee
Agreement (a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part), including the definitions
therein of certain terms. The Guarantee Trustee will hold the Guarantee for
the benefit of the holders of the Capital Securities.
GENERAL
The Company will irrevocably and unconditionally 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 Capital Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Series B
Issuer may have or assert other than the defense of payment. The following
payments with respect to the Capital Securities, to the extent not paid by or
on behalf of the Series B Issuer (the "Guarantee Payments"), will be subject
to the Guarantee: (i) any accumulated and unpaid Distributions required to be
paid on the Trust Securities, to the extent that the Series B Issuer has funds
on hand available therefor at such time, (ii) the Redemption Price with
respect to any Trust Securities called for redemption or the Repurchase Price
with respect to any Capital Securities subject to a Repurchase Election, as
applicable, in either case, to the extent that the Series B Issuer has funds
on hand available therefor at such time or (iii) upon a voluntary or
involuntary termination, winding up or liquidation of the Series B Issuer
(unless the Junior Subordinated Debentures are distributed to holders of the
Capital Securities), the lesser of (a) the aggregate Liquidation Distribution,
to the extent that the Series B Issuer has funds on hand available therefor at
such time, and (b) the amount of assets of the Series B Issuer remaining
available for distribution to holders of Trust Securities on liquidation of
the Series B Issuer after satisfaction of liabilities to creditors of the
Series B Issuer 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 Common Securities and Capital
Securities or by causing the Series B Issuer to pay such amounts to such
holders.
The Guarantee will be an irrevocable and unconditional guarantee on a
subordinated basis of the Series B Issuer's obligations under the Capital
Securities, but will apply only to the extent that the Series B Issuer has
funds sufficient to make such payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Series B Issuer, the Series B Issuer will not be able
to pay any amounts payable in respect of the Capital Securities and will not
have funds legally available therefor. The Guarantee will rank subordinate and
junior in right of payment to all Senior Indebtedness of the Company. See
"Status of the 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 obligation under the 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 Guarantee does not limit the incurrence or issuance
of other secured or unsecured debt of the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any other
indenture that the Company may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Junior Subordinated Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed
all of the Series B Issuer's obligations under the 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 provides a full, irrevocable and
unconditional guarantee of
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the Series B Issuer's obligations under the Capital Securities. See
"Relationship Among the Capital Securities, the Junior Subordinated
Debentures, the Guarantee and the Expense Agreement."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as Junior Subordinated
Debentures, except those made pari passu or subordinate to such obligations.
The 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
Guarantee will be held for the benefit of the holders of the Capital
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Series B Issuer or
upon distribution to the holders of the Capital Securities of the Junior
Subordinated Debentures as provided in the Trust Agreement. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness. The Guarantee does not place a limitation on the amount of
additional indebtedness that may be incurred by the Company.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of the Capital Securities (in which case no vote will be required),
the 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 Capital Securities and of the Guarantee Trustee. The manner of
obtaining any such approval will be as set forth under "Description of the
Capital Securities--Voting Rights; Amendment of Trust Agreement." All
guarantees and agreements contained in the Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Company
and shall inure to the benefit of the holders of the Capital Securities then
outstanding.
EVENTS OF DEFAULT
An event of default under the 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
outstanding Capital 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 Guarantee or to direct the exercise of any trust or
power conferred upon the Guarantee Trustee under the Guarantee.
Any registered holder of the Capital Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Series B
Issuer, the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee must be eligible to act as such under the Trust
Indenture Act, must be a corporation meeting the requirements of Section
310(a) of the Trust Indenture Act and must have a combined capital and surplus
of at least $50,000,000.
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of any of its obligations under the
Guarantee, undertakes to perform only such duties as are specifically set
forth in each Guarantee and, after the occurrence of an event of default with
respect to the Guarantee, must exercise the same degree of care and skill as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to this provision, the Guarantee Trustee is
under
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no obligation to exercise any of the rights or powers vested in it by the
Guarantee at the request or direction of any holder of any Capital Securities
unless it is offered reasonable security and indemnity against the costs,
expenses and liabilities that might be incurred thereby.
The Guarantee Trustee may resign and be removed without cause at any time by
the Company.
For information concerning the relationship between First Union National
Bank of North Carolina, the Property Trustee, and the Company, see
"Description of Junior Subordinated Debentures--Information Concerning the
Debenture Trustee."
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Trust Securities or the Repurchase
Price in respect of all outstanding Capital Securities, upon full payment of
the amounts payable with respect to the Trust Securities upon liquidation of
the Series B Issuer or upon distribution of Junior Subordinated Debentures to
the holders of the Trust Securities in exchange therefor. The Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the Capital Securities must restore payment of any sums
paid under the Capital Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
THE EXPENSE AGREEMENT
Pursuant to an Agreement as to Expenses and Liabilities entered into by the
Company under the Trust Agreement (the "Expense Agreement"), the Company will
irrevocably and unconditionally guarantee to each person or entity to whom the
Series B Issuer becomes indebted or liable, the full payment of any costs,
expenses or liabilities of the Series B Issuer, other than obligations of the
Series B Issuer to pay to the holders of the Capital Securities or other
similar interests in the Series B Issuer of the amounts due such holders
pursuant to the terms of the Capital Securities or such other similar
interests, as the case may be. The Expense Agreement will constitute an
unsecured obligation of the Company and will rank subordinate and junior in
right of payment to all Senior Indebtedness of the Company in the same manner
as the Guarantee and the Junior Subordinated Debentures.
RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES,
THE GUARANTEE AND THE EXPENSE AGREEMENT
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Series B Issuer has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Junior Subordinated
Indenture, the Trust Agreement, the Expense Agreement and the Guarantee
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the 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 provides a full, irrevocable and
unconditional guarantee of the Series B Issuer's obligations in respect of the
Capital Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Series B Issuer will not
have sufficient funds to pay Distributions or other amounts due on the Capital
Securities. The Guarantee does not cover payment of amounts payable with
respect to the Capital Securities when the Series B Issuer does not have
sufficient funds to pay
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such amounts. In such event, the remedy of a holder of the Capital Securities
is to institute a legal proceeding directly against the Company for
enforcement of payment of such Distributions to such holder. The obligations
of the Company under the Guarantee are subordinate and junior in right of
payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Junior Subordinated Debentures,
such payments will be sufficient to cover Distributions and other payments due
on the Capital Securities, primarily because (i) the aggregate principal
amount of the Junior Subordinated Debentures will be equal to the sum of the
aggregate Liquidation Amount of the Capital Securities and Common Securities;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the Distribution rate, Distribution Dates
and other payment dates for the Capital Securities; (iii) the Company shall
pay for all and any costs, expenses and liabilities of the Series B Issuer
except the Series B Issuer's obligations to holders of its Capital Securities;
and (iv) the Trust Agreement further provides that the Series B Issuer will
not engage in any activity that is not consistent with the limited purposes of
the Series B Issuer.
Notwithstanding anything to the contrary in the Junior Subordinated
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 Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Series B
Issuer 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. However, in the event of
payment defaults under, or acceleration of, Senior Indebtedness of the
Company, the subordination provisions of the Junior Subordinated Indenture
provide that no payments may be made in respect of the Junior Subordinated
Debentures until such Senior Indebtedness has been paid in full or any payment
default thereunder has been cured and waived.
LIMITED PURPOSE OF SERIES B ISSUER
The Capital Securities represent preferred undivided beneficial interests in
the assets of the Series B Issuer, and the Series B Issuer exists for the sole
purpose of issuing its Capital Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Capital Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of Capital
Securities is entitled to receive Distributions from the Series B Issuer (or
from the Company under the Guarantee) only if and to the extent the Series B
Issuer has funds available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Series B Issuer, other than any such termination, winding-up or
liquidation involving the distribution of the Junior Subordinated Debentures,
after satisfaction of the liabilities to creditors of the Series B Issuer as
required by applicable law, the holders of the Capital Securities will be
entitled to receive, out of assets held by the Series B Issuer, the
Liquidation Distribution in cash. See "Description of Capital Securities--
Liquidation Distribution Upon Termination." Upon any voluntary or involuntary
liquidation or bankruptcy of the Company, the Property Trustee, as holder of
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the Junior Subordinated Debentures, would be a subordinated creditor of the
Company, subordinated and junior in right of payment to all Senior
Indebtedness as set forth in the Junior Subordinated Indenture, but entitled
to receive payment in full of all amounts payable with respect to the Junior
Subordinated Debentures, before any stockholders of the Company receive
payments or distributions. Since the Company is the guarantor under the
Guarantee and has agreed to pay for all costs, expenses and liabilities of the
Series B Issuer (other than the Series B Issuer's obligations to the holders
of its Capital Securities), the positions of a holder of the Capital
Securities and a holder of Junior 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.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Capital
Securities. This summary addresses only the tax consequences to a person that
acquires Capital Securities on their original issue at their original offering
price and does not address the tax consequences to persons that may be subject
to special treatment under United States federal income tax law, such as
banks, insurance companies, thrift institutions, regulated investment
companies, real estate investment trusts, tax- exempt organizations, dealers
in securities or currencies, persons that will hold Capital Securities as part
of a position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for federal income tax purposes, persons
that do not hold Capital Securities as capital assets or, except with respect
to the discussion under the caption "United States Alien Holders," persons
whose functional currency is not the United States dollar.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to
the Company and the Series B Issuer. This summary is based upon 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 the tax consequences to
vary substantially from the consequences described below, possibly adversely
affecting a beneficial owner of Capital Securities. In particular, legislation
has been proposed that could adversely affect the Company's ability to deduct
interest on the Junior Subordinated Debentures, which may in turn permit the
Company to cause a redemption of the Capital Securities. See "--Possible Tax
Law Changes." The authorities on which this summary is based are subject to
various interpretations, and it is therefore possible that the federal income
tax treatment of the purchase, ownership and disposition of Capital Securities
may differ from the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES AS WELL AS
THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF CAPITAL SECURITIES
The exchange of Exchange Capital Securities for the Outstanding Capital
Securities should not be a taxable event to a holder of such securities for
United States federal income tax purposes. Accordingly, a holder will have the
same adjusted basis and holding period in the Exchange Capital Securities as
such holder had in the Outstanding Capital Securities immediately prior to the
exchange.
CLASSIFICATION OF THE SERIES B ISSUER
Under current law and assuming compliance with the terms of the Trust
Agreement, the Series B Issuer will be classified as a grantor trust and not
as an association taxable as a corporation for United States federal income
tax purposes. As a result, each beneficial owner of Capital Securities (a
"Securityholder") will be treated as owning an undivided beneficial interest
in the Junior Subordinated Debentures and accordingly will be required to
include in its gross income its pro rata share of the original issue discount
accrued with respect to the Junior Subordinated Debentures whether or not cash
is actually distributed to the Securityholders. See "--Original Issue
Discount." No amount included in income with respect to the Capital Securities
will be eligible for the dividends-received deduction.
ORIGINAL ISSUE DISCOUNT
Under the Junior Subordinated Indenture, the Company has the right to defer
the payment of interest on the Junior 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
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Stated Maturity of the Junior Subordinated Debentures. Because of this option,
all interest payable on the Junior Subordinated Debentures will be treated as
"original issue discount" ("OID") for federal income tax purposes.
Accordingly, a Securityholder will recognize income (in the form of OID) on a
daily basis under a constant yield method over the term of the Junior
Subordinated Debentures (including during any Extension Period), regardless of
the receipt of cash with respect to the period to which such income is
attributable. (Subsequent uses of the term "interest" in this summary shall
include income in the form of OID.) The possible payment of additional
interest upon a Registration Default should not be taken into account in
computing the amount of OID required to be accrued by Securityholder. The
amount of OID that accrues in any semi-annual period (other than during an
Extension Period) will equal approximately the amount of the interest that
accrues on the Junior Subordinated Debentures in that semi-annual period at
the stated interest rate.
In the event that the interest payment period is extended, each
Securityholder will include interest in gross income in advance of the receipt
of cash, and any Securityholder who disposes of the Capital Securities prior
to the record date for the payment of Distributions following such Extension
Period will include interest in gross income but will not receive any cash
related thereto from the Series B Issuer. Any amount of OID included in a
Securityholder's gross income (whether or not during the Extension Period)
will increase such Securityholder's tax basis in its Capital Securities, and
the amount of Distributions received by a Securityholder will reduce such
Securityholder's tax basis in its Capital Securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF CAPITAL
SECURITIES
Under current law, a distribution by the Series B Issuer of the Junior
Subordinated Debentures as described under the caption "Description of Capital
Securities--Liquidation Distribution Upon Termination" will be non- taxable
and will result in the Securityholder receiving directly its pro rata share of
the Junior Subordinated Debentures previously held indirectly through the
Series B Issuer, with a holding period and aggregate tax basis equal to the
holding period and aggregate tax basis such Securityholder had in its Capital
Securities before such distribution. A Securityholder will accrue interest in
respect of the Junior Subordinated Debentures received from the Series B
Issuer in the manner described above under "--Original Issue Discount."
SALES OR REDEMPTION OF CAPITAL SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of the Capital
Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized and such Securityholder's adjusted tax
basis in the Capital Securities sold or redeemed. Gain or loss recognized by a
Securityholder on the Capital Securities held for more than one year will
generally be taxable as long-term capital gain or loss.
The Capital Securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A Securityholder that disposes of its Capital
Securities between record dates for payments of Distributions (and
consequently does not receive a Distribution from the Series B Issuer for the
period prior to such disposition) will nevertheless be required to include in
income as ordinary income accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition and add such amount to
its adjusted tax basis in its Capital Securities disposed of. Such
Securityholder will recognize a capital loss on the disposition of its Capital
Securities to the extent the selling price (which may not fully reflect the
value of accrued but unpaid interest) is less than the Securityholder's
adjusted tax basis in the Capital Securities (which will include accrued but
unpaid interest). Subject to certain limited exceptions, capital losses cannot
be applied to offset ordinary income for federal income tax purposes.
POSSIBLE TAX LAW CHANGES
On February 6, 1997, President Clinton submitted the fiscal 1998 budget to
Congress, which, among other things, would generally deny interest deductions
for interest on an instrument issued by a corporation that has a maximum term
of more than 15 years and is not shown as indebtedness on the separate balance
sheet of the issuer, or where such instrument is issued to a related party
(other than a corporation) where the holder or some
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other related party issues a related instrument that is not shown as
indebtedness on the issuer's consolidated balance sheet. The proposal would be
effective generally for instruments issued on or after the date of appropriate
Congressional action. If such provision were to apply to the Junior
Subordinated Debentures, the Company would be unable to deduct interest on the
Junior Subordinated Debentures.
Under current law, the Company will be able to deduct interest on the Junior
Subordinated Debentures. There can be no assurance that current or future
legislative proposals or final legislation will not affect the ability of the
Company to deduct interest on the Junior Subordinated Debentures. Such a
change could give rise to a Tax Event, which may permit the Company to shorten
the maturity of the Junior Subordinated Debentures or to cause a redemption of
the Capital Securities, as described more fully under "Description of Junior
Subordinated Debentures--Redemption" and "Description of Capital Securities--
Redemption."
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a
foreign partnership or a non-resident fiduciary of a foreign estate or trust.
Under present United States federal income tax law: (i) payments by the
Series B Issuer or any of its paying agents to any Securityholder who or which
is a United States Alien Holder will not be subject to United States federal
withholding tax, provided that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (b) the Securityholder is
not a controlled foreign corporation that is related to the Company through
stock ownership and (c) either (A) the Securityholder certifies to the Series
B Issuer or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Capital Security in such capacity, certifies to
the Series B Issuer or its agent, under penalties of perjury, that such
statement has been received from the Securityholder by it or by a Financial
Institution holding such security for the Securityholder and furnishes the
Series B Issuer or its agent with a copy thereof; and (ii) a United States
Alien Holder of a Capital Security will not be subject to federal withholding
tax on any gain realized upon the sale or other disposition of a Capital
Security.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (i)(c) above. The Proposed
Regulations also would require, in the case of Capital Securities held by a
foreign partnership, that (x) the certification described in clause (i)(c)
above be provided by the partners rather than by the foreign partnership and
(y) the partnership provide certain information, including a United States
taxpayer identification number. A look-through rule would apply in the case of
tiered partnerships. The Proposed Regulations are proposed to be effective for
payments made after December 31, 1997. There can be no assurance that the
Proposed Regulations will be adopted or as to the provisions that they will
include if and when adopted in temporary or final form.
INFORMATION REPORTING TO SECURITYHOLDERS
Generally, income on the Capital Securities will be reported on Forms 1099,
which forms should be mailed to Securityholders by January 31 following each
calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale (including redemption) of, the
Capital Securities may be subject to a "backup" withholding tax of 31% unless
the Securityholder complies with certain certification requirements. Any
withheld amounts will be allowed as credit against the Securityholder's United
States federal income tax, provided the required information is provided to
the Internal Revenue Service on a timely basis.
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ERISA CONSIDERATIONS
GENERAL
A fiduciary of an employee benefit plan subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") should consider
fiduciary standards under ERISA in the context of the particular circumstances
of such plan before authorizing an investment in the Exchange Capital
Securities. Such fiduciary should consider whether the investment satisfies
ERISA's diversification and prudence requirements, whether the investment
constitutes unauthorized delegation of fiduciary authority and whether the
investment is in accordance with the documents and instruments governing the
plan. In addition, ERISA and the Code prohibit a wide range of transactions
("Prohibited Transactions") involving the assets of a plan subject to ERISA or
the assets of an individual retirement account or plan subject to Section 4975
of the Code (hereinafter an "ERISA Plan") and persons who have certain
specified relationships to the ERISA Plan ("parties in interest," within the
meaning of ERISA, and "disqualified persons," within the meaning of the Code).
Such transactions may require "correction" and may cause the ERISA Plan
fiduciary to incur certain liabilities and the parties in interest or
disqualified persons to be subject to excise taxes.
The acquisition of any Exchange Capital Security by any person who is using
for such acquisition the assets of an ERISA Plan shall constitute a
representation by such person to the Company that (i) if the Company is a
"party in interest" or a "disqualified person" with respect to such ERISA
Plan, then such security is being acquired pursuant to an exemption from the
Prohibited Transaction rules under ERISA and the Code (as discussed below),
and (ii) the Company is not a "fiduciary," within the meaning of Section 3(21)
of ERISA and the regulations thereunder, with respect to such person's
interest in the Exchange Capital Securities.
Governmental plans and certain church plans (each as defined under ERISA)
are not subject to the Prohibited Transaction rules. Such plans may, however,
be subject to federal, state or local laws or regulations which may affect
their investment in the Exchange Capital Securities. Any fiduciary of such a
governmental or church plan considering an investment in the Exchange Capital
Securities should determine the need for, and the availability, if necessary,
of any exemptive relief under such laws or regulations.
THE DISCUSSION HEREIN OF ERISA IS GENERAL IN NATURE AND IS NOT INTENDED TO
BE ALL INCLUSIVE. ANY FIDUCIARY OF AN ERISA PLAN, GOVERNMENTAL PLAN OR CHURCH
PLAN CONSIDERING AN INVESTMENT IN THE EXCHANGE CAPITAL SECURITIES SHOULD
CONSULT WITH ITS LEGAL ADVISORS REGARDING THE CONSEQUENCES OF SUCH INVESTMENT.
PROHIBITED TRANSACTIONS
The Company may be a party in interest or a disqualified person with respect
to an ERISA Plan investing in the Exchange Capital Securities, and, therefore,
such investments by an ERISA Plan may give rise to a Prohibited Transaction.
Consequently, before investing in the Exchange Capital Securities, any person
who is, or who in acquiring such Securities is using the assets of, an ERISA
Plan should determine that an administrative exemption from the Prohibited
Transaction rules discussed below or otherwise available is applicable to such
person's investment in the Exchange Capital Securities, or that its investment
in such securities will not result in a Prohibited Transaction.
Certain administrative exemptions from the Prohibited Transaction rules
under ERISA and the Code may be available to an ERISA Plan which is investing
in the Exchange Capital Securities. Included in these exemptions are:
Prohibited Transaction Class Exemption ("PTE") 90-1, regarding investments by
insurance company pooled separate accounts; PTE 91-38, regarding investments
by bank collective investment funds; PTE 84-14, regarding transactions
effected by qualified professional asset managers; PTE 96-23, regarding
transactions effected by in-house asset managers; or PTE 95-60, regarding
investments by insurance company general accounts.
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TRUST ASSETS AS "PLAN ASSETS"
The Department of Labor has issued final regulations (the "Regulations") as
to what constitutes assets of an employee benefit plan ("plan asset") under
ERISA. The Regulations provide that, as a general rule, when an ERISA Plan
acquires an equity interest in an entity and such interest does not represent
a "publicly offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA Plan's assets
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the
entity is an operating company or that equity participation in the entity by
"benefit plan investors" (e.g., ERISA Plans, governmental plans, church plans
and foreign plans) is not "significant." For purposes of the Regulations, the
Series B Issuer will not be an investment company nor an operating company. As
discussed below, at the time of the Exchange Offer, the Exchange Capital
Securities may qualify as "publicly offered securities" for purposes of the
Regulations, but such result cannot be assured.
Under the Regulations, equity participation by benefit plan investors will
not be considered "significant" on any date only if, immediately after the
most recent acquisition of Exchange Capital Securities, the aggregate interest
in the Exchange Capital Securities held by benefit plan investors will be less
than 25% of the value of the Exchange Capital Securities. Although it is
possible that the equity participation by benefit plan investors on any date
will not be "significant" for purposes of the Regulations, such result cannot
be assured. Consequently, if ERISA Plans acquire the Exchange Capital
Securities, the Series B Issuer's assets could be deemed to be "plan assets"
of such ERISA Plans for purposes of the fiduciary responsibility provisions of
ERISA and the Code. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of an ERISA
Plan is considered to be a fiduciary of such ERISA Plan. For example, the
Property Trustee could therefore become a fiduciary of the ERISA Plans that
invest in the Exchange Capital Securities and be subject to the general
fiduciary requirements of ERISA in exercising its authority with respect to
the management of the assets of the Series B Issuer. In addition, if the
Company were considered to be a fiduciary with respect to the Series B Issuer
as a result of certain powers it holds (such as the powers to remove and
replace the Property Trustee and the Administrative Trustees), the optional
redemption or acceleration of the Junior Subordinated Debentures to the
Exchange Junior Subordinated Debentures could be considered to be Prohibited
Transactions. Inasmuch as the Property Trustee or another person with
authority or control respecting the management or disposition of the Series B
Issuer's assets may become a fiduciary with respect to the ERISA Plans that
will acquire the Exchange Capital Securities, there may be an improper
delegation by such ERISA Plans of the responsibility to manage plan assets.
The Exchange Capital Securities are being distributed pursuant to an
effective registration statement under the Securities Act and subsequently
will be registered under the Exchange Act. The Exchange Capital Securities may
qualify as "publicly offered securities" under the Regulations if, in addition
to such distribution and registration, at the time of the Exchange Offer they
are also "widely held" and "freely transferable." Under the Regulations, a
class of securities is "widely held" only if it is a class of securities that
is owned by 100 or more investors independent of the issuer and of one
another. Although it is possible that at the time of the Exchange Offer the
Exchange Capital Securities will be "widely held," such result cannot be
assured. Whether a security is "freely transferable" for purposes of the
Regulations is a factual question to be determined on the basis of all
relevant facts and circumstances. If at the time of the Exchange Offer the
Exchange Capital Securities qualify as "publicly offered securities," the
assets of the Series B Issuer should not be "plan assets" as of such time. If
at the time of the Exchange Offer the Exchange Capital Securities do not
qualify as "publicly offered securities," the "plan asset" considerations
discussed in the immediately preceding paragraph could be applicable in
connection with the investment by ERISA Plans in the Exchange Capital
Securities.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Capital Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Capital Securities.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of Exchange Capital
Securities received in exchange for Outstanding Capital Securities where such
Outstanding Capital Securities were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until August 28, 1997, all dealers
effecting transactions in the Exchange Capital Securities may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Capital
Securities by broker- dealers. Exchange Capital Securities received by broker-
dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange
Capital Securities or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such Exchange Capital Securities. Any broker-dealer that
resells Exchange Capital Securities that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Capital Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Capital Securities and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Each broker-dealer who surrenders
Outstanding Capital Securities pursuant to the Exchange Offer will be deemed
to have agreed, by execution of the Letter of Transmittal, that, upon receipt
of notice from the Company or the Series B Issuer of the occurrence of any
event or the discovery of any fact which makes any statement contained or
incorporated by reference in this Prospectus untrue in any material respect or
which causes this Prospectus to omit to state a material fact necessary in
order to make the statements contained or incorporated by reference herein, in
the light of the circumstances under which they were made, not misleading, or
of the occurrence of certain other events specified in the Registration Rights
Agreement, such broker-dealer will suspend the sale of Exchange Securities
pursuant to this Prospectus until the Company or the Series B Issuer has
amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such broker- dealer, or the Company or the Series B Issuer has given notice
that the sale of the Exchange Securities may be resumed, as the case may be.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Outstanding Capital Securities) other than commissions or concessions of
any brokers or dealers and will indemnify the holders of the Outstanding
Capital Securities (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
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VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Exchange
Capital Securities will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, counsel to the Company and the Series B Issuer. The
validity of the Exchange Guarantee and the Exchange Junior Subordinated
Debentures and certain matters relating to United States federal income tax
considerations will be passed upon on behalf of the Series B Issuer and the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Paul,
Weiss, Rifkind, Wharton & Garrison may rely upon the opinion of Richards,
Layton & Finger, P.A. as to matters of Delaware law.
EXPERTS
The financial statements of the Company and its consolidated subsidiaries as
of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 and the related financial statement schedules appearing in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 incorporated by reference in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report.
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GLOSSARY OF SELECTED INSURANCE TERMS
Combined ratio................. 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 by which
the combined ratio deviates from 100%
indicates relative underwriting profit or
loss.
Direct premiums written........ Total premiums written by an insurer other
than premiums for reinsurance assumed by an
insurer.
Expense ratio.................. Under statutory accounting, the ratio of
underwriting expenses to net premiums
written. Under GAAP accounting, the ratio of
underwriting expenses to premiums earned.
GAAP........................... Generally accepted accounting principles.
Loss adjustment expenses The expenses of settling claims, including
("LAE")........................ legal and other fees and expenses, and the
portion of general expenses allocated to
claim settlement costs.
Loss ratio..................... The ratio of incurred losses and loss
adjustment expenses to premium earned.
Loss reserves.................. Estimated liabilities established by insurers
to reflect the estimated cost of claims
payments and the related expenses that the
insurer will ultimately be required to pay
in respect of insurance it has written.
Reserves are established for losses and for
loss adjustment expenses.
Net premiums written........... The portion of direct premiums written
retained by an insurer after deducting
premiums on business ceded.
Premiums earned................ The portion of net premiums written
applicable to the expired period of
policies.
Reinsurance.................... A procedure whereby an insurer transfers
("cedes") to another insurer all or a
portion of the risk insured in consideration
of a premium. Reinsurance can be effected by
a "treaty," where reinsurance automatically
covers a portion of all risks of a defined
category, amount and type, or by
"facultative" reinsurance, where reinsurance
is negotiated on a contract-by- contract
basis. Although reinsurance does not legally
discharge the ceding insurer from primary
liability for the full amount of the
policies ceded, the assuming reinsurer is
liable to the extent of the coverage ceded.
Retention...................... The amount or portion of risk which an
insurer assumes for its own account. Losses
in excess of the retention level are paid by
the reinsurer. In proportional treaties, the
retention may be a percentage of the
original policy's limit. In excess of loss
treaties, the retention is a dollar amount
of loss, a loss ratio or a percentage.
83
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SERIES B ISSUER. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY OR THE SERIES B ISSUER SINCE THE DATE HEREOF. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE SE-
CURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
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<S> <C>
Available Information..................................................... 6
Incorporation of Certain Documents by Reference........................... 6
Prospectus Summary........................................................ 8
The Company............................................................... 15
Integon Capital I......................................................... 17
Risk Factors.............................................................. 19
Use of Proceeds........................................................... 29
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.................................... 29
Accounting Treatment...................................................... 29
Capitalization............................................................ 30
Selected Financial Information............................................ 31
Exchange Offer............................................................ 32
Description of Capital Securities......................................... 41
Description of Junior Subordinated Debentures............................. 58
Description of Guarantee.................................................. 71
The Expense Agreement..................................................... 73
Relationship Among the Capital Securities, the Junior Subordinated
Debentures, the Guarantee and the Expense Agreement...................... 73
Certain Federal Income Tax Considerations................................. 76
ERISA Considerations...................................................... 79
Plan of Distribution...................................................... 81
Validity of Securities.................................................... 82
Experts................................................................... 82
Glossary of Selected Insurance Terms...................................... 83
</TABLE>
UNTIL AUGUST 28, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENT.
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$100,000,000
INTEGON CAPITAL I
OFFER TO EXCHANGE ITS 10 3/4% CAPITAL SECURITIES, SERIES B WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 10 3/4%
CAPITAL SECURITIES, SERIES A
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY) FULLY AND UNCONDITIONALLY
GUARANTEED BY
INTEGON CORPORATION
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PROSPECTUS
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MAY 30, 1997
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