<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1998
REGISTRATION NO. 333-46213
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C>
LIFE RE CORPORATION DELAWARE 01-0437851
LIFE RE CAPITAL TRUST II DELAWARE TO BE APPLIED FOR
(EXACT NAME OF THE REGISTRANTS (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
AS SPECIFIED IN THEIR RESPECTIVE INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
CHARTERS)
</TABLE>
969 HIGH RIDGE ROAD
STAMFORD, CONNECTICUT 06905
(203) 321-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF EACH
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
W. WELDON WILSON
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
LIFE RE CORPORATION
969 HIGH RIDGE ROAD
STAMFORD, CONNECTICUT 06905
(203) 321-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE FOR EACH REGISTRANT)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. ROBERTS ALAN J. SINSHEIMER
DAVID P. STONE WILLIAM D. TORCHIANA
WEIL, GOTSHAL & MANGES LLP SULLIVAN & CROMWELL
767 FIFTH AVENUE 125 BROAD STREET
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10004
(212) 310-8000 (212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(1)(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units(3)...................................... 1,725,000 $66.50 $114,712,500 $33,840.50
- ----------------------------------------------------------------------------------------------------------------------------------
Quarterly Income Preferred Securities of
Life Re Capital Trust II(3)(4)............
- ----------------------------------------------------------------------------------------------------------------------------------
Purchase Contracts of Life Re
Corporation(3)(5).........................
- ----------------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Debentures of Life Re
Corporation(6)............................
- ----------------------------------------------------------------------------------------------------------------------------------
Life Re Corporation Guarantee with respect
to the Quarterly Income Preferred
Securities of Life Re Capital Trust
II(7).....................................
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, of Life Re
Corporation(8)................................ 1,725,000 $66.50 $114,712,500 $33,840.50
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................................... $229,425,000 $67,681.00(9)
==================================================================================================================================
</TABLE>
(1) Includes 225,000 Units that the Underwriters' may purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), under the Securities Act of 1933, as amended, based
upon the average of the high and low sales prices of Common Stock of Life Re
Corporation as reported on the New York Stock Exchange on February 10, 1998.
The Stated Amount of the Units will be set to equal the last reported sale
price of the Common Stock on the New York Stock Exchange on the date of such
determination. Each Purchase Contract will be settled on the Stock Purchase
Date for up to one share of Common Stock based upon the Settlement Rate.
(3) Each Unit consists initially of a QUIPS and a Purchase Contract.
(4) Each QUIPS represents a preferred undivided beneficial interest in the
assets of Life Re Capital Trust II.
(5) Each Purchase Contract obligates Life Re Corporation to sell, and the holder
thereof to purchase, on the Stock Purchase Date such number of shares of
Common Stock of Life Re Corporation equal to the Settlement Rate.
(6) The Junior Subordinated Debentures to be issued by Life Re Corporation will
be purchased by Life Re Capital Trust II with the proceeds of the sale of
the QUIPS, and may be later distributed among the holders of the QUIPS for
no separate consideration upon a dissolution of Life Re Capital Trust II and
the distribution of the assets thereof.
(7) No separate consideration will be received for the Guarantee of Life Re
Corporation.
(8) Such currently indeterminate number of shares of Common Stock (not to exceed
1,725,000 shares) as will be issued by Life Re Corporation upon settlement
of the Purchase Contracts.
(9) Previously paid.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1998
1,500,000 UNITS
LIFE RE CORPORATION
LIFE RE CAPITAL TRUST II
% ADJUSTABLE CONVERSION-RATE EQUITY SECURITY UNITS
[LIFE RE CORPORATION LOGO]
------------------------
Each Unit will have a Stated Amount of $ (equal to the last reported per
share sale price of the Common Stock on the New York Stock Exchange on the date
of this Prospectus). Each Unit will initially consist of (a) a Purchase Contract
under which the holder will purchase from the Company on the Stock Purchase Date
of , 2001, for cash in an amount equal to the Stated Amount, between
of a share and one share of Common Stock (depending on the Applicable Market
Value of the Common Stock on the Stock Purchase Date, as described herein),
subject to adjustment in certain circumstances, and (b) Quarterly Income
Preferred Securities ("QUIPS"(SM)*) of the Trust having a QUIPS Liquidation
Amount equal to the Stated Amount, a QUIPS Distribution Rate of % per annum
and a QUIPS and Debenture Maturity Date of , 2003, subject to a Call
Option granted by the holder of the Unit to the Call Option Holder under which
the Call Option Holder will be entitled to acquire such QUIPS. For so long as
any Purchase Contract remains in effect, such Purchase Contract and the QUIPS or
other Pledged Securities securing it (and, until the Call Option relating to
such Pledged Securities is exercised or expires, the obligations of the holder
to the Call Option Holder thereunder) will not be separable and may be
transferred only as an integrated Unit. See "Description of the Units".
For the period from the date of issuance of the Units to the Stock Purchase
Date, each holder of a Unit will be entitled to receive cash payments of %
of the Stated Amount per annum, payable in arrears on the Quarterly Payment
Dates of , , and of each year
(unless deferred as described herein). Such payments will consist of payments on
the QUIPS or other Pledged Securities plus Contract Fees payable by the Company
or net of Contract Fees payable by the holders, as the case may be. If a holder
of a Unit does not provide cash to settle the underlying Purchase Contract in
the manner described herein on the Stock Purchase Date, cash proceeds from the
QUIPS or other Pledged Securities underlying such Unit will be applied on the
Stock Purchase Date to the purchase of Common Stock pursuant to such Purchase
Contract. See "Description of the Units".
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE UNITS.
Concurrently with the offering made hereby, the Company and certain selling
stockholders are offering shares of Common Stock for sale. The Common Stock
Offering is being made by a separate prospectus. Neither the Common Stock
Offering nor the offering made hereby is conditioned on the consummation of the
other offering.
Prior to the offering made hereby there has been no public market for the
Units. Application will be made to list the Units on the NYSE under the symbol
" ". The last reported sale price of the Common Stock, which is listed under
the symbol "LRE", on the NYSE on February 17, 1998 was $64 1/4 per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC PROCEEDS
OFFERING FROM SALE OF UNDERWRITING PROCEEDS TO
PRICE OF UNITS(1) CALL OPTIONS DISCOUNT(2) COMPANY(1)(3)
----------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Per Unit....................................... $ $ $ $
Total(4)....................................... $ $ $ $
</TABLE>
- ---------------
(1) Plus accrued distributions on the QUIPS and plus or net of accrued Contract
Fees, if any, from , 1998.
(2) The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $ payable by the Company.
(4) The Company and the Trust have granted the Underwriters an option for 30
days with respect to an additional 225,000 Units, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price of Units, proceeds from sale of Call Options,
underwriting discount and proceeds to Company will be $ ,
$ , $ and $ , respectively. See "Underwriting".
------------------------
The Units offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Units
will be ready for delivery in book entry form only through the facilities of The
Depository Trust Company in New York, New York, on or about , 1998,
against payment therefor in immediately available funds.
- ---------------
*QUIPS is a servicemark of Goldman, Sachs & Co.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
FORWARD-LOOKING STATEMENTS
The statements included or incorporated in this Prospectus regarding future
financial performance and results and the other statements that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such statements may include, but are not limited to, projections of
earnings, revenues, income or loss, capital expenditures, plans for future
operations and financing needs or plans, as well as assumptions relating to the
foregoing. The words "expect", "project", "estimate", "predict", "anticipate",
"believes" and similar expressions are also intended to identify forward-looking
statements. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results, performance and achievements could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements. Such factors include, but are not limited to, the uncertainties
relating to general economic and business conditions which may impact the need
and/or financial ability to obtain reinsurance, insurance or retrocessional
reinsurance; changes in laws and government regulations applicable to the
Company; the ability of the Company to implement its operating strategies
successfully; the ability of the Company to execute Administrative
Reinsurance(SM)transactions and the amount, timing and returns therefrom;
material fluctuations in interest rate levels; material changes in mortality and
morbidity experience; material changes in persistency; material changes in the
level of operating expenses; and the success or failure of certain of the
Company's clients in premium writing, and other risks and uncertainties
described in this Prospectus and in the Company's other filings with the
Securities and Exchange Commission (the "Commission"). Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE UNITS OR
THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
------------------------
The Company owns, directly or indirectly, all of the outstanding voting
securities of its insurance subsidiaries, TexasRe Life Insurance Company
("TexasRe"), Life Reassurance Corporation of America ("Life Reassurance"),
Reassure America Life Insurance Company ("REALIC") and 79% of the outstanding
voting securities of its insurance subsidiary, American Merchants Life Insurance
Company ("AML"), which are domiciled in Texas, Connecticut, Illinois and
Illinois, respectively. Under the Connecticut, Illinois and Texas insurance
laws, unless (i) certain filings are made with the Connecticut Insurance
Department, the Illinois Department of Insurance or the Texas Department of
Insurance, as the case may be, (ii) certain requirements are met, including, in
the case of Texas, a public hearing and/or (iii) approval or exemption is
granted by the applicable insurance commissioner, no person may acquire any
voting security or security convertible into a voting security of an insurance
holding company, such as the Company, which controls a Connecticut insurance
company or an Illinois insurance company or a Texas insurance company, or merge
with such a holding company, if as a result of such transaction such person
would "control" the insurance holding company. "Control" is presumed to exist in
Connecticut, Illinois and Texas if a person directly or indirectly owns or
controls 10% or more of the voting securities of another person. Any purchase of
shares of the Company's Common Stock, par value $.001 per share (the "Common
Stock"), that would result in the purchaser's owning 10% or more of the voting
power of the Company will be presumed to result in the acquisition of control of
the Company's insurance subsidiaries. Such an acquisition of Common Stock would
require prior regulatory approval unless
i
<PAGE> 4
the insurance commissioner in each state in which the Company's insurance
subsidiaries are domiciled or deemed to be commercially domiciled determines
otherwise. In addition, many state insurance regulatory laws contain provisions
that require prenotification to state agencies of a change of control of a
non-domestic insurance company licensed in that state in the event specified
market concentration thresholds are triggered by an acquisition. See
"Business -- Regulation -- Insurance Holding Company Regulations".
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's regional offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. In addition, such reports, proxy statements
and other information may be accessed electronically at the Commission's site on
the World Wide Web at http://www.sec.gov. The Company's reports are also on file
at the offices of the New York Stock Exchange ("NYSE"), 20 Broad Street, New
York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits, referred to herein as the
"Registration Statement") filed by the Company and the Trust (as defined herein)
with the Commission under the Securities Act with respect to the Units (as
defined herein). This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company, the Trust
and the securities being offered hereby, reference is made to the Registration
Statement which can be inspected at the public reference facilities at the
offices of the Commission set forth above. Any statements contained herein
concerning the provision of any document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission or incorporated by reference
herein are not necessarily complete, and, in each instance, reference is made to
the copy of such document so filed for a more complete description of the matter
involved. Each such reference is qualified in its entirety by such reference.
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the QUIPS because (i) all of the voting securities of
the Trust will be owned, directly or indirectly, by the Company, a reporting
company under the Exchange Act, (ii) the Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged in
and under the terms of the Declaration (as defined herein) is prohibited from
engaging in any activity other than holding the Junior Subordinated Debentures
(as defined herein) and issuing securities representing undivided beneficial
interests in its assets and investing the proceeds thereof in the Junior
Subordinated Debentures and (iii) the Company's obligations described herein
under the Declaration (including the obligation to pay expenses of the Trust),
the Indenture (as defined herein) and any supplemental indentures thereto, the
Junior Subordinated Debentures issued to the Trust and the Guarantee (as defined
herein) taken together, constitute a full and unconditional guarantee by the
Company of payments due on the QUIPS. See "The Trust", "Description of the
Units -- Description of the Junior Subordinated Debentures" and "Description of
the Units -- Description of the Guarantee".
The Trust is not currently subject to the information reporting
requirements of the Exchange Act. The Trust will become subject to such
requirements upon the effectiveness of the Registration Statement, although the
Trust intends to seek and expects to receive an exemption therefrom.
ii
<PAGE> 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 1-11340) with the
Commission pursuant to the Exchange Act are incorporated by reference herein and
made a part hereof:
(1) Annual Report on Form 10-K for the fiscal year ended December 31,
1996;
(2) Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(3) Current Reports on Form 8-K filed with the Commission on June 10,
1997 and February 13, 1998; and
(4) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed with the
Commission on August 13, 1992, including any amendments or reports
filed for the purpose of updating such description.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities being
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents,
unless any such document shall expressly state that it is not to be incorporated
by reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any amendment
or supplement hereto.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents. Requests for such documents
should be directed to: Life Re Corporation, 969 High Ridge Road, Stamford,
Connecticut 06905, Attention: W. Weldon Wilson, Esq., Legal Department,
telephone number: (203) 321-3000.
iii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including the information set
forth under the caption "Risk Factors" and the Company's consolidated financial
statements and notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. The information presented in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised. Life Re
Corporation ("Life Re" or the "Company") was organized as a Delaware corporation
in 1988 to serve as a holding company for all of the common stock of TexasRe, a
Texas insurance company, which in turn owns all of the common stock of Life
Reassurance, a Connecticut insurance company, which in turn owns all of the
common stock of REALIC, an Illinois insurance company. Life Re also owns 79% of
the common stock of AML, an Illinois insurance company. Unless the context
otherwise requires, references in this Prospectus to the "Company" or "Life Re"
shall mean Life Re, TexasRe, Life Reassurance, REALIC and AML, collectively, and
the term "Subsidiaries" shall mean TexasRe, Life Reassurance, REALIC and AML,
collectively. For an index of certain defined terms used herein, see "Index of
Defined Terms" on page 93.
THE COMPANY
Life Re, through its principal wholly-owned subsidiary, Life Reassurance,
is a leading provider of life reinsurance in the United States, with over $145
billion of Life Reinsurance in force and assets of $3.7 billion at December 31,
1997. Management believes the Company is the largest independent publicly traded
Life Reinsurer in the United States, and that it ranks fifth overall among U.S.
Life Reinsurers as measured by life reinsurance in force. The Company's
operating strategy has been to focus on two core lines of business: (i)
Traditional Life Reinsurance, which involves the transfer to the Company of
mortality risks on new sales from primary (or ceding) insurers of ordinary and
group life insurance policies and (ii) Administrative Reinsurance(SM), which
involves the acquisition of blocks of life insurance in force and, frequently,
the assumption of administrative responsibility for life insurance in force by
the Company. During the five year period ending December 31, 1997, the Company's
operating earnings per share and book value per share (excluding realized and
unrealized investment gains and losses) have grown at 19% and 16% compound
annual growth rates, respectively, and return on average equity (excluding
realized and unrealized investment gains and losses) has averaged 15%.
Management estimates that between 1993 and 1996, new ordinary insurance in
force ceded to the life reinsurance market grew from $166 billion to $343
billion, representing a 27% compound annual growth rate. In addition, over the
same period, management believes there has been an expansion in the number of
opportunities to acquire blocks of life insurance in force. The Company believes
that certain dynamics in the life insurance industry have contributed to the
Company's growth over time in Traditional Life Reinsurance and Administrative
Reinsurance. These dynamics include: (i) an increasing use of life reinsurance
by primary companies as a means of managing risk-based capital pressures by
shifting mortality risk and distribution costs to reinsurers and (ii) an
increasing focus by primary companies on asset accumulation products and a
desire to eliminate or minimize mortality risk taking. Moreover, primary
companies increasingly are seeking to sell blocks of life insurance in force in
order to realize value and release capital embedded in non-core businesses or to
ease administrative burdens and costs associated with maintaining outdated or
inefficient systems.
The Company derived approximately 62% of its revenues for the year ended
December 31, 1997, and the majority of its pre-tax operating income for the same
period, from Traditional Life Reinsurance. The Company provides life reinsurance
primarily for mortality risk with respect to both ordinary and group life
insurance products on an automatic treaty basis. Substantially all of the
Company's Traditional Life Reinsurance business is marketed directly by the
Company without the use of intermediaries. Between 1993 and 1996, the Company's
new sales of ordinary life reinsur-
1
<PAGE> 7
ance, as measured by insurance in force assumed, grew at a compound annual
growth rate of 29%. The Company's first year premium growth, another measure of
new life insurance sales, has grown consistently over the past several years,
from $13 million in 1993 to $61 million in 1997.
The Company derived approximately 18% of its revenues for the year ended
December 31, 1997 from Administrative Reinsurance. Management expects the
Administrative Reinsurance line of business to be an important source of
additional growth in the Company's pre-tax operating income. Through
Administrative Reinsurance, the Company is able to benefit from the increasing
consolidation in the life insurance industry by focusing on acquiring non-core
or smaller blocks of life insurance in force. In July 1995, the Company acquired
REALIC, which served as its initial platform for Administrative Reinsurance.
With the acquisition of REALIC, the Company obtained primary insurance licenses
and began outsourcing administrative services for acquired blocks of insurance
in force on a variable cost basis. Since 1995, the Company has acquired or is
under contract to acquire a total of 10 blocks of life insurance in force,
representing in excess of $2.0 billion in assets.
In 1997, the Company made a strategic decision to withdraw from the group
accident and health and special risk reinsurance business. This line of business
provided approximately 20% of revenues for the year ended December 31, 1997. The
decision to exit this line of business primarily was motivated by the need for
additional capital in its Traditional Life Reinsurance and Administrative
Reinsurance lines of business and the deterioration in accident and health
morbidity experience. The Company does not expect this line of business to
affect materially future results.
Life Re was founded in 1988 by Rodney A. Hawes, Jr., Douglas M. Schair and
Jacques E. Dubois, each of whom has over 25 years of insurance industry
experience, for the purpose of acquiring Life Reassurance from General
Reinsurance Corporation. Life Re currently has a rating of A+ (Superior) by A.M.
Best Company, Inc. ("A.M. Best"). A.M. Best ratings are based upon an insurance
company's financial strength regarding its ability to pay obligations to
policyholders and are not directed toward the protection of investors.
Life Re maintains its principal executive offices at 969 High Ridge Road,
Stamford, Connecticut 06905, and its telephone number is (203) 321-3000.
BUSINESS STRATEGY
The Company has established the following strategic priorities which the
Company believes will allow it to maximize stockholder value:
CAPITALIZE ON CONTINUED GROWTH IN TRADITIONAL LIFE REINSURANCE. The
Company believes that aggregate life reinsurance assumed, as a percentage of new
ordinary life insurance face amount written in the United States, grew from
approximately 15% in 1993 to approximately 30% in 1996. The Company expects that
the life reinsurance market will continue to grow as primary insurers seek to
manage risk-based capital levels and redeploy capital away from
mortality-related businesses and into their core lines of business, which
increasingly include asset accumulation businesses such as annuities and
universal life insurance.
INCREASE PENETRATION IN TRADITIONAL LIFE REINSURANCE. The Company has
experienced strong growth in first year life premiums, which have increased from
$13 million in 1993 to $61 million in 1997. The Company believes it has been
able to achieve this growth through its increased focus on marketing for new
treaties. Toward this end, in January 1996 the Company created its Office of
Life Marketing, a coordinated team of actuarial, legal, marketing and
underwriting professionals, in order to increase its focus on life reinsurance
growth. The Company intends to leverage its relationships within the life
insurance industry to further penetrate existing accounts and to expand its
customer base. Of the aggregate of $61 million of first year life premiums
assumed by the Company in 1997, approximately 50% was assumed pursuant to
treaties with seven of the largest 25 life insurance companies in the United
States, as measured by total premiums written for the year ended
2
<PAGE> 8
December 31, 1996. The Company continues to focus on enhancing existing
relationships as well as pursuing new clients for sources of first year premium
growth.
PARTICIPATE IN CONSOLIDATION OF LIFE INSURANCE INDUSTRY. The Company
expects to capitalize upon the consolidation of the life insurance industry
through the acquisition of insurance companies and/or reinsurance of life
insurance in force as insurers seek to dispose of non-core businesses. Through
Administrative Reinsurance, since 1995 the Company has acquired or is under
contract to acquire a total of 10 blocks of life insurance in force, including
three since December 1997. The Company believes that its success in this line of
business is due to its experience in identifying and executing transactions as
well as its market knowledge and contacts. Further, the Company believes that
its strategy of outsourcing administrative services for direct insurance in
force allows it to efficiently integrate acquisitions and to retain the capacity
to pursue multiple acquisition opportunities simultaneously.
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS
On February 12, 1998, the Company announced its unaudited financial results
for the fourth quarter of 1997 and the year ended December 31, 1997. The
Company's unaudited financial results indicate that for the year ended December
31, 1997, operating earnings (net income excluding after-tax realized investment
gains) totaled $46.6 million, or $3.28 per share, compared to $38.3 million, or
$2.75 per share in 1996, representing a 19% increase on a per share basis. Net
income for the yearly periods totaled $49.5 million and $54.2 million,
respectively. After-tax realized investment gains were $2.9 million in 1997 and
$15.9 million in 1996, with 1996 gains including a $13.5 million gain resulting
from the sale of a strategic investment.
Fourth quarter operating earnings totaled $13.5 million, or $.94 per share,
compared to $12.2 million, or $.88 per share in last year's fourth quarter,
representing a 7% increase on a per share basis. For the same periods, net
income totaled $14.6 million, or $1.01 per share, and $13.2 million, or $.95 per
share. After-tax realized investment gains were $1.1 million and $1.0 million in
each of the respective quarterly periods.
ADMINISTRATIVE REINSURANCE TRANSACTIONS
Since December 1997, the Company has entered into three Administrative
Reinsurance transactions in which the Company has acquired or expects to acquire
approximately $1.1 billion in assets and approximately 385,000 policies for
administration. In December 1997, the Company (a) entered a coinsurance
transaction whereby the Company and Employers Reassurance Corporation ("ERAC")
will coinsure a block of life insurance and annuity business from Allianz Life
Insurance Company of North America ("Allianz"), with the Company's portion of
business reinsured increasing from 20% to 60% over the term of the agreement,
and (b) entered into an agreement to acquire Mission Life Insurance Company
("Mission Life") for a purchase price of approximately $60 million. Mission
Life's business is concentrated in life insurance policies designed to meet
final expenses. In February 1998, the Company entered into an agreement to
acquire Lincoln Liberty Life Insurance Company ("Lincoln Liberty") and First
Delaware Life Insurance Company ("First Delaware"), for an aggregate purchase
price of approximately $50 million. Lincoln Liberty's and First Delaware's
businesses primarily consist of traditional and universal life insurance
policies. These transactions had no impact on the Company's 1997 results of
operations, but are anticipated to contribute to 1998 results of operations.
For additional information with respect to the above recent developments,
see "Recent Developments".
3
<PAGE> 9
THE TRUST
Life Re Capital Trust II (the "Trust") is a statutory business trust
created under the laws of the State of Delaware pursuant to (i) a declaration of
trust, dated as of February 10, 1998, executed by the Company, as sponsor (the
"Sponsor"), and certain of the trustees of the Trust (the "Issuer Trustees") and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on February 10, 1998. Such declaration of trust will be
amended and restated in its entirety (as so amended and restated, the
"Declaration") substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Declaration will be
qualified as an indenture under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities (as defined herein) representing undivided
beneficial interests in the assets of the Trust, (ii) investing the proceeds of
the Trust Securities in the Junior Subordinated Debentures and (iii) engaging in
only those other activities necessary or incidental thereto. Accordingly, the
Junior Subordinated Debentures will be the sole assets of the Trust and payments
under the Junior Subordinated Debentures will be the sole revenue of the Trust.
All of the Common Trust Securities (as defined herein) will be directly or
indirectly owned by the Company. See "The Trust".
THE OFFERING
THE UNITS
Securities Offered......... % Adjustable Conversion-rate Equity Security
Units (the "Units", as more fully defined below).
Issuers.................... Life Re Corporation and Life Re Capital Trust II.
Stated Amount.............. $ per Unit (the "Stated Amount").
Payments on the Units...... For the period from the date of issuance of the
Units to the Stock Purchase Date (as defined
herein), each holder of a Unit will be entitled to
receive cash payments of % of the Stated
Amount per annum, payable in arrears. Such payments
will consist of payments on the QUIPS or other
Pledged Securities (as defined herein) plus
Contract Fees (as defined herein) payable by the
Company or net of Contract Fees payable by the
holders, as the case may be.
Quarterly Payment Dates.... , , and
of each year (the "Quarterly Payment
Dates"), subject to the deferral provisions
described below.
Stock Purchase Date........ , 2001 (the "Stock Purchase Date").
If a holder of a Unit does not provide cash to
settle the underlying Purchase Contract (as defined
herein) in the manner described herein, cash
proceeds from the exercise of the Junior
Subordinated Debenture Put Option (as defined
herein) or from other Pledged Securities underlying
such Unit will be applied on the Stock Purchase
Date to the purchase of Common Stock pursuant to
such Purchase Contract.
Settlement Rate............ The number of shares of Common Stock issuable upon
settlement of each Purchase Contract (the
"Settlement Rate") will be between of a
share and one share of Common Stock (subject
4
<PAGE> 10
to adjustment under certain circumstances). More
specifically, the Settlement Rate will be
calculated as follows:
(a) if the Applicable Market Value (as defined
herein) is greater than or equal to $ (the
"Threshold Appreciation Price") (i.e.,
approximately % higher than the Stated
Amount), the Settlement Rate will be ;
(b) if the Applicable Market Value is less than the
Threshold Appreciation Price but greater than the
Stated Amount, the Settlement Rate will equal the
Stated Amount divided by the Applicable Market
Value (i.e., the Settlement Rate will be calculated
so that the Applicable Market Value of the Common
Stock purchasable under each Purchase Contract
would equal the Stated Amount payable therefor);
and
(c) if the Applicable Market Value is less than or
equal to the Stated Amount, the Settlement Rate
will be one.
"Applicable Market Value" means the average of the
Closing Prices (as defined herein) per share of
Common Stock on each of the twenty consecutive
Trading Days (as defined herein) ending on the last
Trading Day immediately preceding the Stock
Purchase Date.
Relationship of Units to
Common Stock............... Cash payments on the Units (consisting of payments
on the QUIPS plus or net of Contract Fees) will
accrue at a rate per annum that is greater than the
current dividend yield on the Common Stock.
However, since the number of shares of Common Stock
issuable upon settlement of each Purchase Contract
may decline by up to % as the Applicable
Market Value increases, the opportunity for equity
appreciation afforded by an investment in the Units
is less than that afforded by a direct investment
in the Common Stock.
Components of the Units.... Each Unit will initially consist of:
(a) a Purchase Contract ("Purchase Contract") under
which (i) the holder will purchase from the Company
on the Stock Purchase Date, for cash in an amount
equal to the Stated Amount, a number of shares of
Common Stock equal to the Settlement Rate, and (ii)
contract fees ("Contract Fees") will be payable at
the rate of % of the Stated Amount per annum
(the "Contract Fee Rate") as described below, and
(b) Quarterly Income Preferred Securities
("QUIPS"(SM), which term may refer to a single
security or more than one security as the context
may require) of the Trust having a QUIPS
Liquidation Amount (as defined herein) equal to the
Stated Amount, a QUIPS Distribution Rate (as
defined herein) of % per annum and a QUIPS and
Debenture Maturity Date (as defined herein) of
, 2003, subject to a call option
("Call Option") granted by the holder of the Unit
to Goldman, Sachs & Co. (in its capacity as the
holder of the Call Options, the "Call Option
Holder") which (when aggregated with the Call
Options underlying all other Units) will entitle
the Call Option Holder to acquire the QUIPS
underlying the Units (or the
5
<PAGE> 11
Junior Subordinated Debentures substituted
therefor), on or before , 2001 (the
"Call Option Expiration Date", which is 90 days
before the Stock Purchase Date), in exchange for a
package of consideration (the "Aggregate
Consideration Deliverable on Exercise of the Call
Options") which will include U.S. Treasury
Securities ("Treasury Securities") that will
provide payments matching the aggregate
distributions due on the QUIPS through the Stock
Purchase Date and Treasury Securities that will
provide payments equal to the aggregate Stated
Amount of the Units on the Stock Purchase Date.
The QUIPS underlying a Unit will be pledged to
, as collateral agent for the Company
and the Call Option Holder (together with any
successor thereto in such capacity, the "Collateral
Agent"), to secure the holder's obligations to the
Company and the Call Option Holder under the
Purchase Contract and Call Option underlying such
Unit. The QUIPS, or any securities substituted
therefor as securities pledged to the Collateral
Agent to secure such obligations, are herein
referred to as "Pledged Securities". If Treasury
Securities are exchanged for Pledged Securities
upon exercise of the Call Options or Junior
Subordinated Debentures are distributed in respect
of Pledged Securities upon dissolution of the
Trust, the Treasury Securities so exchanged or the
Junior Subordinated Debentures so distributed will
automatically be substituted as Pledged Securities
in place of the securities that theretofore had
been Pledged Securities. The holder will also have
the right to substitute Treasury Securities as
Pledged Securities in place of the QUIPS or Junior
Subordinated Debentures that theretofore had been
Pledged Securities and obtain the release of such
QUIPS or Junior Subordinated Debentures from the
pledge arrangement as described herein.
Prior to the earlier of the exercise of the Call
Options and the Call Option Expiration Date, such
right to substitute Treasury Securities for QUIPS
or Junior Subordinated Debentures as Pledged
Securities may not be exercised without the consent
of the Call Option Holder. The Call Option Holder
is under no obligation to grant such consent, and
there can be no assurance that such consent will be
granted if a holder desires to exercise this
substitution right.
The obligations of the holders of Units under the
Purchase Contracts, if not paid in cash by such
holders, will be funded out of payments made in
respect of the Pledged Securities.
For so long as a Purchase Contract remains in
effect, such Purchase Contract and the QUIPS or
other Pledged Securities securing it (and, until
the Call Option relating to such Pledged Securities
is exercised or expires, the obligations of the
holder to the Call Option Holder thereunder) will
not be separable and may be transferred only as an
integrated Unit.
6
<PAGE> 12
Formation of the Units..... At the closing of the offering made hereby, the
Underwriters specified herein (the "Underwriters")
will (a) enter into Purchase Contracts with the
Company and (b) purchase QUIPS from the Trust for
cash. The Underwriters will fund that cash in part
by the sale of the Units offered hereby to the
initial investors thereof and in part by the sale
of Call Options (on behalf of such initial
investors) to the Call Option Holder. The QUIPS
will then be pledged to the Collateral Agent as
contemplated above. The Trust will use that cash to
purchase Junior Subordinated Debentures from the
Company.
The rights to purchase Common Stock under a
Purchase Contract, together with the QUIPS or other
Pledged Securities pledged to secure the
obligations referred to in (a) and (b) below,
subject to (a) the obligations owed to the Company
under such Purchase Contract, (b) the obligations
owed to the Call Option Holder under the Call
Option relating to such QUIPS or other Pledged
Securities and (c) the pledge arrangements securing
the foregoing obligations, are collectively
referred to herein as a "Unit".
Contract Fees.............. The holders of Units may be required to pay
Contract Fees to the Company, or the Company may be
required to pay Contract Fees to the holders of
Units, as specified in the final Prospectus for the
offering made hereby.
Any obligation of the holders of Units to pay
Contract Fees to the Company will be funded out of
payments made in respect of the Pledged Securities.
If payments made in respect of the Pledged
Securities are insufficient to cover the obligation
of the holders of the Units to pay Contract Fees,
such obligation will be deferred until the earlier
of the date sufficient cash is available and the
Stock Purchase Date.
Any obligation of the Company to pay Contract Fees
to the holders of Units will be unsecured and
junior in right of payment to all Senior
Indebtedness (as defined herein) of the Company.
The Company will generally have the right to defer
the payment of Contract Fees at any time or from
time to time for a period not extending beyond the
Stock Purchase Date.
Any deferred Contract Fees payable by the holders
of Units or the Company will bear additional
Contract Fees at the Contract Fee Rate (compounding
on each succeeding Quarterly Payment Date) until
paid.
Termination................ The Purchase Contracts (including the right to
receive and the obligation to pay accrued or
deferred Contract Fees and the right and obligation
to purchase Common Stock) will automatically
terminate upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with
respect to the Company. Upon such termination, the
Call Options will terminate and the Collateral
Agent will release the Pledged Securities held by
it to the Unit Agent for distribution to the
holders.
7
<PAGE> 13
THE QUIPS
The Trust.................. The QUIPS will be issued by the Trust, a Delaware
statutory business trust. The Junior Subordinated
Debentures due , 2003 (the "Junior
Subordinated Debentures") of the Company will be
the sole assets of the Trust, and payments on those
Junior Subordinated Debentures will be the sole
revenue of the Trust. The Company will own all of
the common undivided beneficial interests in the
assets of the Trust (the "Common Trust Securities"
and, collectively with the QUIPS, the "Trust
Securities").
The QUIPS.................. The QUIPS will represent preferred undivided
beneficial interests in the assets of the Trust.
Distributions on the QUIPS will be cumulative, will
accrue from the first date of issuance of the QUIPS
and will be payable at the annual rate of %
(the "QUIPS Distribution Rate") of the liquidation
amount of $ per QUIPS (the "QUIPS
Liquidation Amount"), payable quarterly in arrears
on each Quarterly Payment Date, subject to the
deferral provisions described below.
Interest and QUIPS
Distribution Deferral
Provisions................. The Company will generally have the right to defer
the payments of interest on the Junior Subordinated
Debentures at any time or from time to time for a
period not extending beyond the QUIPS and Debenture
Maturity Date. Upon any such deferral, quarterly
distributions on the QUIPS by the Trust will be
deferred. However, deferred payments of interest on
the Junior Subordinated Debentures and deferred
distributions on the QUIPS will bear additional
interest or distributions at a rate per annum equal
to the QUIPS Distribution Rate (compounding on each
succeeding Quarterly Payment Date) until paid.
Mandatory Redemption....... The QUIPS will be mandatorily redeemable in whole
on , 2003 (the "QUIPS and Debenture
Maturity Date"), at a redemption price equal to the
aggregate QUIPS Liquidation Amount thereof plus
unpaid distributions accrued thereon to such date,
out of the proceeds of the repayment of the Junior
Subordinated Debentures at maturity.
Exchange of QUIPS for
Junior
Subordinated Debentures.... The Company will have the right at any time to
terminate the Trust and cause the Junior
Subordinated Debentures to be distributed to the
holders of the QUIPS and Common Trust Securities in
liquidation of the Trust.
Right to Exercise Junior
Subordinated Debenture Put
Options.................... Each holder of QUIPS will have the option to
require the Trust to distribute the underlying
Junior Subordinated Debentures to the Put Agent (as
defined herein), on the Stock Purchase Date or on
the date that is three months after the Stock
Purchase Date, in exchange for such QUIPS, in
connection with the concurrent exercise by the Put
Agent on behalf of such holder of the Junior
Subordinated Debt Put Option related thereto.
8
<PAGE> 14
Junior Subordinated
Debentures................. The Junior Subordinated Debentures will be issued
by the Company under an indenture (the "Indenture")
between The Bank of New York, as trustee (together
with any successor thereto in such capacity, the
"Debenture Trustee"), and the Company, in an
aggregate principal amount equal to the aggregate
liquidation amount of the Trust Securities. The
Junior Subordinated Debentures will bear interest
at a rate per annum that is equal to the QUIPS
Distribution Rate, payable quarterly in arrears on
the Quarterly Payment Dates, subject to the
deferral provisions described above. The Junior
Subordinated Debentures will mature on the QUIPS
and Debenture Maturity Date and will not be
redeemable at the option of the Company prior to
such date. The Junior Subordinated Debentures will
be unsecured and junior in right of payment to all
Senior Indebtedness of the Company.
Junior
Subordinated Debenture Put
Options.................... Each holder of Junior Subordinated Debentures will
have the right to require the Company to repurchase
such Junior Subordinated Debentures, in whole or in
part, on the Stock Purchase Date or on the date
that is three months after the Stock Purchase Date,
for a purchase price equal to the Applicable Put
Price (as defined herein) for such Junior
Subordinated Debentures. The Applicable Put Price
for any Junior Subordinated Debentures being sold
on the Stock Purchase Date will equal the aggregate
principal amount of such Junior Subordinated
Debentures plus unpaid interest accrued thereon to
the Stock Purchase Date. The Applicable Put Price
for any Junior Subordinated Debentures being sold
on the date that is three months after the Stock
Purchase Date will be calculated based on a formula
which is expected to result in a premium over the
aggregate principal amount of such Junior
Subordinated Debentures plus unpaid interest
accrued thereon. See "Description of the
Units -- Description of the Junior Subordinated
Debentures -- Junior Subordinated Debenture Put
Options".
The Guarantee.............. Pursuant to a guarantee agreement (the "Guarantee")
between the Company and The Bank of New York, as
trustee (together with any successor thereto in
such capacity, the "Guarantee Trustee"), the
Company will guarantee the payment of distributions
and other payments on the QUIPS to the extent that
the Trust has funds on hand sufficient therefor.
GENERAL
Listing.................... Application will be made to list the Units on the
New York Stock Exchange.
Federal Income
Tax Consequences........... For a discussion of the United States Federal
income tax consequences associated with the
purchase, ownership and disposition of the Units,
QUIPS, Purchase Contracts and Common Stock, see
"Certain Federal Income Tax Consequences".
Prospective investors should be aware that no
statutory, judicial or administrative authority
directly addresses the tax treatment of Units or
instru-
9
<PAGE> 15
ments similar to Units for United States Federal
income tax purposes. ACCORDINGLY, PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE TAX CONSEQUENCES OF AN INVESTMENT IN
THE UNITS, INCLUDING THE APPLICATION OF STATE,
LOCAL AND FOREIGN OR OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
Use of Proceeds............ The Company intends to use the net proceeds of the
offering made hereby and the Common Stock Offering
(as defined herein) to provide additional capital
to its Subsidiaries to support recently announced
and recently completed transactions and the
continued growth of its businesses, as well as for
general corporate purposes.
Common Stock Offering...... Concurrently with the offering made hereby, the
Company also is offering 3,300,000 shares of Common
Stock and certain stockholders of the Company are
offering 200,000 shares of Common Stock (725,000
shares of Common Stock if the over-allotment option
granted by such selling stockholders to the
underwriters thereof is exercised in full (such
offerings collectively, the "Common Stock
Offering")). The Common Stock Offering is being
made by means of a separate prospectus. Neither the
Common Stock Offering nor the offering made hereby
is conditioned on consummation of the other
offering. There can be no assurance that the Common
Stock Offering will be consummated. This Prospectus
does not constitute an offer to sell or the
solicitation of an offer to buy the Common Stock
being offered in the Common Stock Offering.
10
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data below should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference". The summary consolidated financial data at and for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the consolidated
financial statements of the Company. The summary consolidated financial data at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
derived from the unaudited condensed consolidated financial statements of the
Company, which have been prepared on the same basis as the Company's audited
consolidated financial statements and, in the opinion of management, contain all
adjustments consisting of only normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations for these
periods. The results of operations for the nine months ended September 30, 1997
may not be indicative of results for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Policy revenues............................ $360.9 $328.9 $451.0 $383.2 $350.9 $289.0 $250.9
Investment income.......................... 110.0 89.9 124.3 98.6 82.4 73.5 72.6
Realized investment gains.................. 2.9 15.7 17.2 3.7 0.1 21.0 27.1
Equity in earnings of investee............. -- -- -- -- -- -- 4.3
------ ------ ------ ------ ------ ------
Total revenues....................... 473.8 434.5 592.5 485.5 433.4 383.5 354.9
------ ------ ------ ------ ------ ------
Benefits and Expenses:
Policy benefits............................ 252.5 245.6 332.5 281.5 245.8 208.7 171.5
Policy acquisition costs................... 105.1 81.6 111.9 95.7 88.7 71.1 65.5
Interest credited to policyholder
accounts................................. 28.6 24.1 34.6 21.2 15.0 15.0 15.0
Interest expense........................... 6.0 6.5 8.4 10.7 9.1 9.9 18.9
Distributions on capital securities........ 2.8 -- -- -- -- -- --
Other operating expenses................... 25.0 21.0 29.0 21.6 22.0 18.1 15.4
------ ------ ------ ------ ------ ------
Total benefits and expenses.......... 420.0 378.8 516.5 430.8 380.6 322.8 286.3
------ ------ ------ ------ ------ ------
Income before federal income taxes and
extraordinary charge....................... 53.8 55.8 76.1 54.8 52.8 60.6 68.6
Provision for federal income taxes........... 18.8 14.8 21.9 19.2 18.5 21.4 23.5
------ ------ ------ ------ ------ ------
Income before extraordinary charge........... 34.9 41.0 54.2 35.6 34.3 39.2 45.0
Extraordinary charge, net of federal income
tax benefit................................ -- -- -- 1.0 -- -- 8.6
------ ------ ------ ------ ------ ------
Net income................................... $ 34.9 $ 41.0 $ 54.2 $ 34.6 $ 34.3 $ 39.2 $ 36.4
====== ====== ====== ====== ====== ======
Net income (excluding realized investment
gains and extraordinary charge)............ $ 33.1 $ 26.0 $ 38.3 $ 33.2 $ 34.3 $ 25.8 $ 27.0
====== ====== ====== ====== ====== ======
Diluted earnings per share(1):
Income before extraordinary charge......... $ 2.47 $ 2.94 $ 3.89 $ 2.39 $ 2.21 $ 2.50 $ 3.45
Extraordinary charge, net of federal income
tax benefit.............................. -- -- -- (0.07) -- -- (0.76)
------ ------ ------ ------ ------ ------
Net income................................. $ 2.47 $ 2.94 $ 3.89 $ 2.32 $ 2.21 $ 2.50 $ 2.69
Net income (excluding realized investment
gains and extraordinary charge)(2)....... $ 2.34 $ 1.87 $ 2.75 $ 2.22 $ 2.21 $ 1.63 $ 2.11
Common dividends per share................... $ 0.39 $ 0.30 $ 0.40 $ 0.28 $ 0.24 $ 0.20 --
Preferred stock dividends.................... -- -- -- -- -- -- $ 5.7
Weighted average common and common equivalent
shares..................................... 14.2 13.9 13.9 14.9 15.5 15.7 11.4
</TABLE>
11
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Invested assets............................. $ 2,156.5 $1,833.2 $1,504.2 $ 998.5 $ 944.6 $ 845.2
Total assets................................ 2,908.4 2,519.3 2,024.1 1,442.3 1,339.7 1,167.2
Loans payable............................... 125.0 125.0 140.0 140.0 150.0 165.0
Capital securities.......................... 100.0 -- -- -- -- --
Common shareholders' equity................. 344.0 290.1 279.3 194.9 230.7 170.8
Common shareholders' equity (excluding
unrealized investment gains and losses)... 296.7 265.3 229.9 228.8 198.2 162.1
OTHER FINANCIAL DATA (AS OF OR FOR THE
PERIOD ENDED):
Return on average shareholders' equity(3)... 16% 15% 14% 16% 14% *
Book value per common share(4).............. $ 21.8 $ 19.6 $ 16.5 $ 14.8 $ 12.8 $ 10.4
First year premiums assumed................. 45.4 38.2 22.6 19.3 13.6 14.8
Capital invested in Administrative
Reinsurance transactions(5)............... 34.4 32.0 35.9 -- -- --
Life insurance in force(6).................. ** 116,012 91,283 81,213 79,652 74,408
Statutory capital and surplus(6)............ 266.0 209.3 208.2 193.8 187.4 214.1
</TABLE>
- ---------------
* Not meaningful.
** Not available.
(1) Diluted earnings per share have been calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Basic earnings per share in accordance with SFAS 128 for the nine
months ended September 30, 1997 and 1996 were $2.99 and $2.57, respectively,
and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were
$3.97, $2.32, $2.21, $2.53 and $3.82, respectively. The adoption of SFAS 128
did not result in the restatement of previously reported earnings per share,
as diluted earnings per share calculated in accordance with SFAS 128 results
in the same per share amounts as previously reported by the Company.
(2) Net income per share (excluding realized investment gains and extraordinary
charge) for the year ended December 31, 1992 has been adjusted to reflect
the refinancings of debt and preferred stock and the initial public
offering.
(3) Return on average shareholders' equity is calculated by dividing net income
(excluding realized investment gains and extraordinary charge) by average
shareholders' equity for the period (which is the simple average of
beginning and end of period shareholders' equity excluding unrealized
investment gains or losses). Return on average shareholders' equity for the
nine months ended September 30, 1997 has been annualized.
(4) Book value per common share is calculated by dividing end of period
shareholders' equity (excluding unrealized investment gains and losses) by
end of period common shares outstanding.
(5) Capital invested in Administrative Reinsurance transactions represents the
sum of the consideration paid for life insurance in force acquired and the
related capital to support the business.
(6) Amounts have been derived from the Annual Statements of Life Reassurance,
REALIC and TexasRe, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices. For purposes of
this presentation, capital and surplus are defined as statutory capital and
surplus of Life Reassurance only, as its capital and surplus materially
reflect that of Life Reassurance, REALIC and TexasRe, plus the Asset
Valuation Reserve ("AVR") and the Interest Maintenance Reserve ("IMR") of
Life Reassurance and REALIC.
12
<PAGE> 18
RISK FACTORS
Before purchasing any of the Units offered hereby, prospective purchasers
of Units should consider, in addition to the other information with respect to
the Company and its business contained or incorporated by reference in this
Prospectus, the following factors relating to the corporate structure of the
Company and the terms of the Units offered hereby.
HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS FROM INSURANCE SUBSIDIARIES
The Company is a holding company and 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 Units to benefit indirectly from such distribution) is subject to
the prior claim of creditors of that subsidiary, except to the extent that the
Company may itself be recognized as a creditor of that subsidiary. Accordingly,
the Junior Subordinated Debentures will be effectively subordinated to all
existing and future liabilities of the subsidiaries of the Company, and holders
of Junior Subordinated Debentures should look only to the assets of the Company
for payments on the Junior Subordinated Debentures. At September 30, 1997, the
subsidiaries of the Company had total liabilities on a statutory basis
(excluding liabilities owed to the Company and intercompany transactions) of
approximately $2.1 billion.
The Company's principal asset is the common stock of TexasRe, which in turn
owns all the common stock of Life Reassurance. In July 1995, Life Reassurance
acquired all of the common stock of John Deere Life Insurance Company (now known
are REALIC). The primary sources of funds for the Company to make payments of
principal, interest and dividends are payments from TexasRe under two Surplus
Debentures (as defined herein) and dividends paid by TexasRe. TexasRe's
principal sources of funds are dividends from Life Reassurance and distributions
from Life Reassurance under a Tax Allocation Agreement effective as of the first
day of the consolidated return taxable year beginning January 1, 1994 (the "Tax
Allocation Agreement"), by and among the Company, TexasRe and Life Reassurance.
Current Connecticut and Texas insurance laws permit the payment of a
dividend or distribution which, together with dividends or distributions paid
during the preceding twelve months, does not exceed the greater of (i) 10% of
statutory capital and surplus as of the preceding December 31 and (ii) statutory
net gain from operations for the preceding calendar year. Any proposed dividend
in excess of this amount is designated an "extraordinary dividend" and may not
be paid until it has been approved, or a 30-day waiting period shall have passed
during which it has not been disapproved, by the Insurance Commissioner of the
State of Connecticut (the "Connecticut Insurance Commissioner") or the
Commissioner of Insurance of the State of Texas (the "Texas Insurance
Commissioner"), as the case may be. In addition, Connecticut law provides that
an insurance company may not pay dividends in an amount exceeding its earned
surplus without prior regulatory approval. Life Reassurance has received
approval from the Connecticut Department of Insurance to define its earned
surplus for this purpose to include amounts of paid in surplus in excess of
$125.0 million, and as of September 30, 1997, such earned surplus was $99.6
million. Currently, no prior approval of the Texas Department of Insurance is
required to pay scheduled principal or interest on the Surplus Debentures
provided that, after giving effect to any such payment, the statutory surplus of
TexasRe exceeds $125.0 million.
Under such insurance laws, Life Reassurance was permitted to pay dividends
of $23.2 million, $34.8 million, $30.9 million and $15.8 million in 1997, 1996,
1995 and 1994, respectively, without the prior approval of the Connecticut
Insurance Commissioner. Life Reassurance actually paid dividends of $23.2
million, $14.9 million, $30.9 million and $13.5 million in 1997, 1996, 1995 and
1994, respectively. TexasRe was permitted to pay dividends of $16.3 million,
$27.1 million, $28.2 million and $15.4 million in 1997, 1996, 1995 and 1994,
respectively, without the prior approval of the Texas Insurance Commissioner.
TexasRe paid dividends of $16.3 million, $12.1 million, $15.0 million and $0.0
in 1997, 1996, 1995 and 1994, respectively.
13
<PAGE> 19
In the event that the ability of either TexasRe or Life Reassurance to pay
dividends is reduced or eliminated, the Company's ability to pay interest on the
Junior Subordinated Debentures would be materially and adversely affected,
depending upon the extent of such reduction. The Company is not aware of any
current actions regarding such regulatory changes.
The Texas and Connecticut insurance laws and regulations require that the
statutory surplus of TexasRe and Life Reassurance, as the case may be, following
any dividend or distribution, be reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The Texas Insurance
Commissioner or the Connecticut Insurance Commissioner may bring an action to
enjoin or rescind the payment of a dividend or distribution by TexasRe or Life
Reassurance that would cause it statutory surplus to be unreasonable or
inadequate under this standard.
RISK OF DECLINE IN EQUITY VALUE
The market value of the Common Stock receivable upon settlement of the
Purchase Contracts may be materially different than the purchase price payable
for such Common Stock. If the Applicable Market Value of the Common Stock on the
Stock Purchase Date is less than the Stated Amount (i.e., less than the Closing
Price of the Common Stock on the date of this Prospectus), each holder of Units
will, on the Stock Purchase Date, be required to purchase shares of Common Stock
for an amount greater than the aggregate Applicable Market Value of such shares.
Accordingly, a holder of Units assumes the risk that the market value of the
Common Stock may decline, and such decline could be substantial.
LIMITATION ON EQUITY APPRECIATION POTENTIAL
Since the number of shares of Common Stock issuable upon settlement of each
Purchase Contract may decline by up to % as the Applicable Market Value
increases, the opportunity for equity appreciation afforded by an investment in
the Units is less than that afforded by a direct investment in the Common Stock.
LIMITATION ON VALUE OF QUIPS AS A RESULT OF CALL OPTIONS
If the value of the QUIPS underlying the Units is greater than the
Aggregate Consideration Payable on Exercise of the Call Options (as expected),
it is likely that the Call Option Holder will exercise its Call Options. In that
case, the Call Option Holder rather than holders of Units will realize the
benefit of that greater value.
PLEDGED SECURITIES ENCUMBERED
Although holders of Units will be beneficial owners of the underlying
Pledged Securities, those Pledged Securities will be pledged with the Collateral
Agent to secure the obligations of the holders under the Purchase Contracts and
the Call Options. Thus, for so long as the Purchase Contracts remain in effect,
holders will not be entitled to withdraw their Pledged Securities from this
pledge arrangement.
SUBORDINATION OF COMPANY OBLIGATIONS
The ability of the Trust to pay amounts due on the QUIPS (including,
without limitation, the ability of the Trust to pay amounts due upon exercise of
any Junior Subordinated Debenture Put Options) is dependent upon the Company
making payments on the Junior Subordinated Debentures as and when required.
The obligations of the Company under the Junior Subordinated Debentures and
the Guarantee will be unsecured and subordinate and rank junior in right of
payment to all present and future Senior Indebtedness of the Company to the
extent and in the manner set forth in the Indenture and the Guarantee,
respectively. In addition, if Contract Fees are payable by the Company on the
14
<PAGE> 20
Purchase Contracts, the obligations of the Company to pay Contract Fees will be
unsecured and subordinate and rank junior in right of payment to all present and
future Senior Indebtedness of the Company to the extent and in the manner set
forth in the Master Unit Agreement (as defined herein). No payments on account
of principal of, premium, if any, or interest on the Junior Subordinated
Debentures (including payments on exercise of Junior Subordinated Debenture Put
Options) may be made if there shall have occurred and be continuing a default in
any payment with respect to Senior Indebtedness, or an event of default with
respect to any Senior Indebtedness resulting in the acceleration of the maturity
thereof, or if any judicial proceeding shall be pending with respect to any
default. In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of all
amounts due in respect of such Senior Indebtedness before the holders of Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of Junior Subordinated Debentures. Notwithstanding the foregoing,
amounts that would be due and payable by the Company to holders of Units or
Pledged Securities in the absence of the foregoing subordination provisions may
be applied by such holders to offset their obligations under their respective
Purchase Contracts.
None of the Indenture, the Guarantee, the Declaration or the Master Unit
Agreement places any limitation on the amount of secured or unsecured debt,
including Senior Indebtedness, that may be incurred by the Company or any of its
subsidiaries. See "Description of the Units -- Description of the Junior
Subordinated Debentures -- Subordination" and "Description of the Guarantee --
Status". At December 31, 1997, the Company had $125.0 million of Senior
Indebtedness outstanding.
OPTION TO DEFER PAYMENTS
The Company will generally have the right to defer payments of interest on
the Junior Subordinated Debentures at any time or from time to time for a period
not extending beyond the QUIPS and Debenture Maturity Date. Upon any such
deferral, quarterly distributions on the QUIPS by the Trust will be deferred.
However, deferred payments of interest on the Junior Subordinated Debentures and
deferred distributions on the QUIPS will bear additional interest or
distributions at a rate per annum equal to the QUIPS Distribution Rate
(compounding on each succeeding Quarterly Payment Date) until paid. See
"Description of the Units -- Description of the QUIPS -- Distributions" and
"-- Description of the Junior Subordinated Debentures -- Option to Extend
Interest Payment Date".
If Contract Fees are payable by the Company on the Purchase Contracts, the
Company will generally have the right to defer the payment of such Contract Fees
at any time or from time to time for a period not extending beyond the Stock
Purchase Date. However, deferred payments of Contract Fees will bear additional
Contract Fees at the rate of % per annum (compounding on each succeeding
Quarterly Payment Date) until paid. If the Purchase Contracts are terminated
(upon the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company), the right to receive Contract Fees,
including deferred Contract Fees, will terminate.
The Company believes that the likelihood that it will exercise its right to
defer payments of interest on the Junior Subordinated Debentures is remote and
that, therefore, the Junior Subordinated Debentures should not be considered to
be issued with original issue discount ("OID") unless it actually exercises such
deferral right. There is no assurance that the Internal Revenue Service (the
"IRS") will agree with such position. See "Certain Federal Income Tax
Consequences -- Interest Received on the QUIPS".
Should the Company elect to exercise its right to defer payments of
interest on the Junior Subordinated Debentures or Contract Fees, the market
price of the QUIPS or Junior Subordinated Debentures or, for so long as the
Purchase Contracts remain in effect, the Units is likely to be affected. A
holder that disposes of its QUIPS, Junior Subordinated Debentures or Units
during such
15
<PAGE> 21
deferral period, therefore, might not receive the same return on its investment
as a holder that continues to hold its QUIPS, Junior Subordinated Debentures or
Units. In addition, the mere existence of the Company's right to defer such
payments may cause the market price of the QUIPS, Junior Subordinated Debentures
or Units to be more volatile than the market prices of other securities that are
not subject to such deferrals.
For information about certain adverse tax consequences that would result if
the Company exercises its right to defer payments of interest on the Junior
Subordinated Debentures, see "-- Tax Matters" and "Certain Federal Income Tax
Consequences -- Distributions on the QUIPS".
MASTER UNIT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF UNIT AGENT
Although the QUIPS constituting a part of the Units will be issued pursuant
to a Declaration qualified as an indenture under the Trust Indenture Act, the
Master Unit Agreement relating to the Units and the appointment of the Unit
Agent (as defined herein) as the agent and attorney-in-fact for the holders of
the Units will not be qualified as an indenture under the Trust Indenture Act,
and the Unit Agent will not be required to qualify as a trustee thereunder.
Accordingly, holders of the Units will not have the benefits of the protections
of the Trust Indenture Act. Under the terms of the Master Unit Agreement, the
Unit Agent will have only limited obligations to the holders of the Units. See
"Description of the Units -- Certain Provisions of the Principal
Agreements -- Information Concerning the Unit Agent".
RIGHTS UNDER THE GUARANTEE
The Guarantee will guarantee payments due in respect of the QUIPS to the
holders of the QUIPS, but only to the extent that the Trust has funds on hand
legally available therefor. If the Company defaults on its obligation to pay
amounts payable in respect of the Junior Subordinated Debentures, the Trust will
not have sufficient funds to make the corresponding payments due in respect of
the QUIPS, and, in such event, holders of the QUIPS will not be able to rely
upon the Guarantee for payment of such amounts.
LIMITED ENFORCEMENT RIGHTS IN RESPECT OF JUNIOR SUBORDINATED DEBENTURES
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
principal or interest on the Junior Subordinated Debentures on the respective
dates such principal or interest is payable (after giving effect to any
permitted deferral), then a holder of record of QUIPS (or, for so long as QUIPS
underlie Units, a holder of record of Units) may institute a legal proceeding
directly against the Company for enforcement of payment to such holder of the
portion of such principal or interest attributable to Junior Subordinated
Debentures having a principal amount equal to the aggregate QUIPS Liquidation
Amount of the QUIPS held by such holder (or underlying such holder's Units) (a
"Direct Action"). Except as described herein, holders of QUIPS will not be able
to exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or to assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of the Units -- Description of
the Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders
of the QUIPS" and "-- Debenture Events of Default" and "-- Description of the
Guarantee". The Declaration will provide that each holder of QUIPS (including
each holder of Units for so long as Units include QUIPS) by acceptance thereof
agrees to the provisions of the Indenture and the Guarantee.
LIMITED VOTING AND OTHER RIGHTS
Holders of QUIPS (including holders of Units for so long as Units include
QUIPS) generally will have voting rights with respect to the QUIPS relating only
to the modification of the terms of the QUIPS and the exercise of the Trust's
rights as holder of the Junior Subordinated Debentures.
16
<PAGE> 22
Holders of QUIPS will not be entitled to vote to appoint, remove or replace, or
to increase or decrease the number of, the Issuer Trustees or Administrators,
which voting rights are vested exclusively in the holder of the Common Trust
Securities, except as described under "Description of the Units -- Description
of the QUIPS -- Removal of Issuer Trustees and Administrators". See "Description
of the Units -- Description of the QUIPS -- Voting Rights; Amendment of the
Declaration".
Holders of Units will not be entitled to any rights with respect to the
Common Stock (including, without limitation, voting rights or rights to receive
any dividends or other distributions in respect thereof) until such time as the
Company shall have delivered shares of Common Stock upon settlement of the
Purchase Contracts on the Stock Purchase Date.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
The Units are novel securities for which there is currently no secondary
market. It is not possible to predict how the Units will trade in the secondary
market or whether the market for the Units will be liquid or illiquid.
Application will be made to list the Units on the NYSE. The Underwriters have
advised the Company and the Trust that the Underwriters intend to make a market
for the Units; however, the Underwriters are not obligated to do so and any
market making may be discontinued at any time.
TAX MATTERS
Should the Company exercise its right to defer payments of interest on the
Junior Subordinated Debentures, each holder of QUIPS (including each holder of
Units for so long as Units include QUIPS) will be required to accrue income (as
OID) in respect of the deferred stated interest allocable to its QUIPS for
United States Federal income tax purposes. As a result, during a deferred
period, each holder of QUIPS will recognize income for United States Federal
income tax purposes in advance of the receipt of cash and will not receive the
cash related to such income from the Trust if the holder disposes of the QUIPS
prior to the record date for the payment of distributions thereafter. See
"Certain Federal Income Tax Consequences -- Interest Received on the QUIPS".
In the event that holders of Units are required to pay Contract Fees to the
Company, it is unlikely such holders will be entitled to a current deduction for
such payments. As a result, although the amount of cash distributions made to
holders will be reduced by the amount of Contract Fees payable to the Company,
holders will nevertheless recognize income each quarter equal to the full amount
of interest received or accrued with respect to the QUIPS underlying the Units
held by such holder. See "Certain Federal Income Tax Consequences -- Contract
Fees".
Because income with respect to the QUIPS will not be considered dividends
for United States Federal income tax purposes, corporate holders of Units or
QUIPS will not be entitled to a dividends-received deduction in respect of such
income.
17
<PAGE> 23
THE TRUST
Life Re Capital Trust II is a statutory business trust created under the
laws of the State of Delaware pursuant to (i) a declaration of trust, dated as
of February 10, 1998, executed by the Company, as Sponsor, and certain of the
Issuer Trustees and (ii) the filing of a certificate of trust with the Secretary
of State of the State of Delaware on February 10, 1998. Such declaration of
trust will be amended and restated in its entirety by the Declaration. The
Declaration will be qualified as an indenture under the Trust Indenture Act. The
Trust exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided beneficial interests in the assets of the Trust, (ii)
investing the proceeds of the Trust Securities in the Junior Subordinated
Debentures and (iii) engaging in only those other activities necessary or
incidental thereto. Accordingly, the Junior Subordinated Debentures will be the
sole assets of the Trust and payments under the Junior Subordinated Debentures
will be the sole revenues of the Trust. The Trust has a term of approximately
seven (7) years, but may dissolve earlier as provided in the Declaration. All of
the Common Trust Securities will be directly or indirectly owned by the Company.
The Common Trust Securities will rank pari passu, and payments will be made
thereon pro rata, with the QUIPS, except that, if an event of default under the
Declaration has occurred and is continuing, the rights of the holders of the
Common Trust 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 QUIPS. Although, upon issuance of the QUIPS, the holders of the
Units will be beneficial owners of the underlying QUIPS, the QUIPS will be
pledged with the Collateral Agent to secure the obligations of the holders under
the Purchase Contracts. The Company will directly or indirectly acquire Common
Trust Securities in an aggregate liquidation amount equal to 3% of the total
capital of the Trust.
The Trust's business and affairs will be conducted by the Issuer Trustees
and Administrators appointed by the Company as the holder of the Common Trust
Securities. The Issuer Trustees will be The Bank of New York, as the Property
Trustee (the "Property Trustee"), and The Bank of New York (Delaware), as the
Delaware Trustee (the "Delaware Trustee"), and the Administrators will be three
individuals who are employees of the Company (the "Administrators"). The Bank of
New York, as the Property Trustee, will act as sole indenture trustee under the
Declaration for purposes of compliance with the provisions of the Trust
Indenture Act. The Bank of New York will also act as the Guarantee Trustee under
the Guarantee and the Indenture, until removed or replaced by the holder of the
Common Trust Securities. See "Description of the Units -- Description of the
Guarantee" and "Description of the Units -- Description of Junior Subordinated
Debentures". The Company, as the direct or indirect holder of the Common Trust
Securities, or if an event of default under the Declaration has occurred and is
continuing, the holders of a majority in Liquidation Amount of the Trust
Securities, will be entitled to appoint, remove or replace the Property Trustee
and/or the Delaware Trustee. In no event will the holders of the QUIPS (or
Units) have the right to vote to appoint, remove or replace the Administrators;
such voting rights will be vested exclusively in the Company, as the direct or
indirect holder of the Common Trust Securities. The duties and obligations of
each Issuer Trustee and Administrator are governed by the Declaration. The
Company will pay directly all fees, expenses, debts and obligations (other than
the Trust Securities) related to the Trust and the offering of the Units,
including all ongoing costs, expenses and liabilities of the Trust. Under the
Declaration, all parties to the Declaration will agree, and the holders of the
Units upon purchase of their Units will be deemed to have agreed, for United
States Federal income tax purposes, to treat the Trust as a grantor trust, the
Junior Subordinated Debentures as indebtedness and the Trust Securities as
evidence of indirect beneficial ownership in the Junior Subordinated Debentures.
See "Description of the Units -- Description of the Guarantee" and
"-- Description of the QUIPS".
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities and the Property Trustee
will have the power to exercise all rights, powers and privileges under the
Indenture as the holder of the Junior Subordinated Debentures. In addition, the
Property Trustee will maintain exclusive control of a segregated non-interest
bearing
18
<PAGE> 24
bank account (the "Property Account") to hold all payments made in respect of
the Junior Subordinated Debentures for the benefit of the holders of the Trust
Securities. The Property Trustee will make payments of distributions and
payments on liquidation, redemption and otherwise to the holders of the Trust
Securities out of funds from the Property Account. The Guarantee Trustee will
hold the Guarantee for the benefit of the holders of the QUIPS. See "Description
of the Units -- Description of the Junior Subordinated Debentures".
The rights of the holders of the QUIPS, including economic rights, rights
to information and voting rights, are set forth in the Declaration, the Delaware
Business Trust Act and the Trust Indenture Act. See "Description of the
Units -- Description of the QUIPS".
The principal place of business of the Trust is Life Re Capital Trust II,
c/o Life Re Corporation, 969 High Ridge Road, Stamford, Connecticut 06905, and
its telephone number is (203) 321-3000.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Units,
after deducting estimated underwriting discounts and expenses of the offering
made hereby payable by the Company, are expected to be $93.0 million
(approximately $107.0 million if the Underwriters' over-allotment option is
exercised in full). The net proceeds to the Company from the Common Stock
Offering (assuming it is consummated), after deducting estimated underwriting
discounts and expenses of the Common Stock Offering payable by the Company, are
expected to be $201.4 million. The proceeds to be received by the Trust from the
sale of the QUIPS will be invested by the Trust in the Junior Subordinated
Debentures of the Company. The Company intends to use such net proceeds from the
offering made hereby and the Common Stock Offering to provide additional capital
to its Subsidiaries to support recently announced and recently completed
transactions and the continued growth of its businesses, as well as for general
corporate purposes. Funds not required immediately for such purposes may be
invested in short-term obligations or used to reduce the future level of the
Company's indebtedness.
The offering made hereby and the Common Stock Offering are independent
offerings and consummation of either of the offerings is not conditioned upon
consummation of the other offering. There can be no assurance that the Common
Stock Offering will be consummated.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratios of earnings to fixed
charges for the years and periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges:
Excluding interest on annuities and
financial products (1)................... 7.0x 9.8 x 6.0 x 6.6 x 6.9 x 4.2 x
Including interest on annuities and
financial products (2)................... 2.4x 2.8 x 2.7 x 3.2 x 3.4 x 2.8 x
</TABLE>
- ---------------
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes and extraordinary charge (1995 and 1992), plus fixed
charges. Fixed charges consist of interest expense on debt, distributions on
capital securities, dividends on preferred stock of TexasRe (1992) and the
portion of operating leases that are representative of the interest factor.
(2) Same as the ratio of earnings to fixed charges, excluding interest on
annuities and financial products, except fixed charges and earnings include
interest on annuities and financial products.
19
<PAGE> 25
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock of the Company has been listed for trading on the NYSE
since October 28, 1992, the date of the Company's initial public offering, under
the symbol LRE. Based upon information reported in the Bloomberg consolidated
transaction reporting system, the high and low sales prices for each quarterly
period from January 1, 1996 to the date hereof were:
<TABLE>
<CAPTION>
PRICE RANGE
------------
HIGH LOW
--- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First quarter....................................................... $27 3/8 $22 1/2
Second quarter...................................................... 31 27 1/2
Third quarter....................................................... 36 26 5/8
Fourth quarter...................................................... 38 5/8 33 3/4
YEAR ENDED DECEMBER 31, 1997
First quarter....................................................... 45 3/8 38 5/8
Second quarter...................................................... 48 1/8 37 3/8
Third quarter....................................................... 56 46 5/8
Fourth quarter...................................................... 65 3/8 52 1/16
YEAR ENDED DECEMBER 31, 1998
First quarter (through February 17, 1998)........................... 67 5/8 57 1/2
</TABLE>
As of February 17, 1998, there were approximately 3,200 holders of the
outstanding shares of Common Stock, including individual participants in
securities position listings. The last reported sales price of the Common Stock
on the NYSE on February 17, 1998 was $64 1/4 per share.
Dividends of $0.07 per share, $0.10 per share and $0.13 per share were
declared in each calendar quarter of 1995, 1996 and 1997, respectively. On
February 12, 1998, the Company's Board of Directors declared a dividend of $0.15
per share to be paid on March 25, 1998 to shareholders of record as of March 4,
1998.
The declaration and payment of future dividends to holders of its Common
Stock by the Company will be at the discretion of the Board of Directors and
will depend upon the Company's earnings and financial condition, capital
requirements of its Subsidiaries, regulatory considerations and other factors
the Board of Directors deems relevant. The Company's general policy is to retain
most of its earnings to finance the growth and development of its business.
Because the Company is a holding company, it is dependent upon its
Subsidiaries to provide funding for the Company's operating expenses and for the
payment by the Company of debt service and dividends. State insurance laws
applicable to the Company's Subsidiaries limit the payment of dividends and
other distributions by such Subsidiaries to the Company and may therefore limit
the ability of the Company to make dividend payments. See "Risk
Factors -- Holding Company Structure; Reliance on Dividends from Insurance
Subsidiaries" and "Business -- Regulation -- Restrictions on Dividends and
Distributions".
20
<PAGE> 26
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1997 and as adjusted to reflect the sale by the Company
of the 1,500,000 Units offered hereby (at an assumed initial public offering
price of $64 1/4 and assuming the Underwriter's over-allotment option is not
exercised) and the sale by the Company of 3,300,000 shares of Common Stock in
the Common Stock Offering (at an assumed initial public offering price of
$64 1/4), and the application of the net proceeds therefrom, after deducting
estimated underwriting discount and expenses of the offering made hereby and the
Common Stock Offering. The capitalization information set forth in the table
below is qualified by, and should be read in conjunction with, the more detailed
consolidated financial statements and notes thereto incorporated by reference
herein. See "Use of Proceeds".
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Loans payable............................................... $125,000 $ 125,000
Company-obligated, mandatorily redeemable capital securities
of Life Re Capital Trust I................................ 100,000 100,000
Company-obligated, mandatorily redeemable capital securities
of Life Re Capital Trust II............................... -- 96,375
Shareholders' equity:
Common Stock, par value $.001 per share; authorized
40,000,000 shares; 15,830,785 shares issued, actual;
and 19,130,785 issued, as adjusted(1).................. 16 19
Paid-in capital........................................... 107,974 309,395
Net unrealized appreciation of securities................. 47,278 47,278
Retained earnings......................................... 236,460 236,460
Treasury stock, at cost (2,196,469 shares)................ (47,762) (47,762)
-------- --------
Total shareholders' equity........................... 343,966 545,390
-------- --------
Total capitalization.............................. $568,966 $ 866,765
======== ========
</TABLE>
- ---------------
(1) Does not include (i) 2,828,275 shares of Common Stock issuable upon exercise
of outstanding stock options or (ii) up to 1,500,000 shares (1,725,000
shares if the Underwriters' over-allotment option is exercised in full) of
Common Stock issuable on the Stock Purchase Date of , 2001 upon
settlement of the Purchase Contracts.
21
<PAGE> 27
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in the Company's
consolidated financial statements, with the QUIPS shown on the Company's balance
sheet under the caption "Company-obligated, mandatorily redeemable capital
securities of subsidiary trust". The financial statement footnotes to the
Company's consolidated financial statements will reflect that the sole asset of
the Trust will be the Junior Subordinated Debentures. Dividends on the QUIPS
will be reflected as a charge to the Company's consolidated income, identified
as "Distributions on capital securities", whether paid or accrued.
The Purchase Contracts are forward transactions in the Company's Common
Stock. Under generally accepted accounting principles, the Purchase Contracts
will not be recorded on the Company's consolidated balance sheets but will be
disclosed in the notes to the Company's consolidated financial statements. Upon
settlement of a Purchase Contract, the Company will receive the Stated Amount on
such Purchase Contract and will issue the requisite number of shares of Common
Stock. The Stated Amount thus received will be credited to shareholders' equity
allocated between the common stock and paid-in capital accounts.
Prior to the issuance of shares of Common Stock upon settlement of the
Purchase Contracts, it is anticipated that the Units will be reflected in the
Company's diluted earnings per share calculations using the treasury stock
method. Under this method, the number of shares of Common Stock used in
calculating diluted earnings per share is deemed to be increased by the excess,
if any, of the number of shares issuable upon settlement of the Purchase
Contracts over the number of shares that could be purchased by the Company in
the market (at the average market price during the period) using the proceeds
receivable upon settlement. Consequently, it is anticipated there will be no
dilutive effect on the Company's diluted earnings per share except during
periods when the average market price of Common Stock is above the Threshold
Appreciation Price.
22
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and Quarterly Report on Form 10-Q for the quarter ended September 30,
1997 incorporated by reference herein. See "Incorporation of Certain Documents
by Reference". The selected historical financial data at and for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the consolidated
financial statements of the Company. The selected consolidated financial data at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
derived from the unaudited condensed consolidated financial statements of the
Company, which have been prepared on the same basis as the Company's audited
consolidated financial statements and, in the opinion of management, contain all
adjustments consisting of only normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations for these
periods. The results of operations for the nine months ended September 30, 1997
may not be indicative of results for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Policy revenues............................ $360.9 $328.9 $451.0 $383.2 $350.9 $289.0 $250.9
Investment income.......................... 110.0 89.9 124.3 98.6 82.4 73.5 72.6
Realized investment gains.................. 2.9 15.7 17.2 3.7 0.1 21.0 27.1
Equity in earnings of investee............. -- -- -- -- -- -- 4.3
------ ------ ------ ------ ------ ------ ------
Total revenues....................... 473.8 434.5 592.5 485.5 433.4 383.5 354.9
------ ------ ------ ------ ------ ------ ------
Benefits and Expenses:
Policy benefits............................ 252.5 245.6 332.5 281.5 245.8 208.7 171.5
Policy acquisition costs .................. 105.1 81.6 111.9 95.7 88.7 71.1 65.5
Interest credited to policyholder accounts
......................................... 28.6 24.1 34.6 21.2 15.0 15.0 15.0
Interest expense........................... 6.0 6.5 8.4 10.7 9.1 9.9 18.9
Distributions on capital securities........ 2.8 -- -- -- -- -- --
Other operating expenses .................. 25.0 21.0 29.0 21.6 22.0 18.1 15.4
------ ------ ------ ------ ------ ------ ------
Total benefits and expenses.......... 420.0 378.8 516.5 430.8 380.6 322.8 286.3
------ ------ ------ ------ ------ ------ ------
Income before federal income taxes and
extraordinary charge....................... 53.8 55.8 76.1 54.8 52.8 60.6 68.6
Provision for federal income taxes........... 18.8 14.8 21.9 19.2 18.5 21.4 23.5
------ ------ ------ ------ ------ ------ ------
Income before extraordinary charge........... 34.9 41.0 54.2 35.6 34.3 39.2 45.0
Extraordinary charge, net of federal income
tax benefit................................ -- -- -- 1.0 -- -- 8.6
------ ------ ------ ------ ------ ------ ------
Net income................................... $ 34.9 $ 41.0 $ 54.2 $ 34.6 $ 34.3 $ 39.2 $ 36.4
====== ====== ====== ====== ====== ====== ======
Net income (excluding realized investment
gains and extraordinary charge)............ $ 33.1 $ 26.0 $ 38.3 $ 33.2 $ 34.3 $ 25.8 $ 27.0
====== ====== ====== ====== ====== ====== ======
Diluted earnings per share(1):
Income before extraordinary charge......... $ 2.47 $ 2.94 $ 3.89 $ 2.39 $ 2.21 $ 2.50 $ 3.45
Extraordinary charge, net of federal income
tax benefit.............................. -- -- -- (0.07) -- -- (0.76)
------ ------ ------ ------ ------ ------ ------
Net income................................. $ 2.47 $ 2.94 $ 3.89 $ 2.32 $ 2.21 $ 2.50 $ 2.69
Net income (excluding realized investment
gains and extraordinary charge)(2)....... $ 2.34 $ 1.87 $ 2.75 $ 2.22 $ 2.21 $ 1.63 $ 2.11
Common dividends per share................... $ 0.39 $ 0.30 $ 0.40 $ 0.28 $ 0.24 $ 0.20 --
Preferred stock dividends.................... -- -- -- -- -- -- $ 5.7
Weighted average common and common equivalent
shares..................................... 14.2 13.9 13.9 14.9 15.5 15.7 11.4
</TABLE>
23
<PAGE> 29
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
SEPTEMBER 30, ---------- --------- --------- --------- ---------
1997
-------------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD
END):
Invested assets................ $ 2,156.5 $ 1,833.2 $ 1,504.2 $ 998.5 $ 944.6 $ 845.2
Total assets................... 2,908.4 2,519.3 2,024.1 1,442.3 1,339.7 1,167.2
Loans payable.................. 125.0 125.0 140.0 140.0 150.0 165.0
Capital securities............. 100.0 -- -- -- -- --
Common shareholders' equity.... 344.0 290.1 279.3 194.9 230.7 170.8
Common shareholders' equity
(excluding unrealized
investment gains and
losses)...................... 296.7 265.3 229.9 228.8 198.2 162.1
OTHER FINANCIAL DATA (AS OF OR
FOR THE PERIOD ENDED):
Return on average shareholders'
equity(3).................... 16% 15% 14% 16% 14% *
Book value per common
share(4)..................... $ 21.8 $ 19.6 $ 16.5 $ 14.8 $ 12.8 $ 10.4
First year premiums assumed.... 45.4 38.2 22.6 19.3 13.6 14.8
Capital invested in
Administrative Reinsurance
transactions(5).............. 34.4 32.0 35.9 -- -- --
Life insurance in force(6) .... ** 116,012 91,283 81,213 79,652 74,408
Statutory capital and
surplus(6)................... 266.0 209.3 208.2 193.8 187.4 214.1
</TABLE>
- ---------------
* Not meaningful.
** Not available.
(1) Diluted earnings per share have been calculated in accordance with SFAS 128.
Basic earnings per share in accordance with SFAS 128 for the nine months
ended September 30, 1997 and 1996 were $2.99 and $2.57, respectively, and
for the years ended 1996, 1995, 1994, 1993 and 1992 were $3.97, $2.32,
$2.21, $2.53 and $3.82, respectively. The adoption of SFAS 128 did not
result in the restatement of previously reported earnings per share, as
diluted earnings per share calculated in accordance with SFAS 128 results in
the same per share amounts as previously reported by the Company.
(2) Net income per share (excluding realized investment gains and extraordinary
charge) for the year ended December 31, 1992 has been adjusted to reflect
the refinancings of debt and preferred stock and the initial public
offering.
(3) Return on average shareholders' equity is calculated by dividing net income
(excluding realized investment gains and extraordinary charge) by average
shareholders' equity for the period (which is the simple average of
beginning and end of period shareholders' equity excluding unrealized
investment gains or losses). Return on average shareholders' equity for the
nine months ended September 30, 1997 has been annualized.
(4) Book value per common share is calculated by dividing end of period
shareholders' equity (excluding unrealized investment gains and losses) by
end of period common shares outstanding.
(5) Capital invested in Administrative Reinsurance transactions represents the
sum of the consideration paid for life insurance in force acquired and the
related capital to support the business.
(6) Amounts have been derived from the Annual Statements of Life Reassurance,
REALIC and TexasRe, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices. For purposes of
this presentation, capital and surplus are defined as statutory capital and
surplus of Life Reassurance only, as its capital and surplus materially
reflect that of Life Reassurance, REALIC and TexasRe, plus the AVR and the
IMR of Life Reassurance and REALIC.
24
<PAGE> 30
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS (UNAUDITED)
On February 12, 1998, the Company announced that for the year ended
December 31, 1997, operating earnings (net income excluding after-tax realized
investment gains) totaled $46.6 million, or $3.28 per share, compared to $38.3
million, or $2.75 per share in 1996, representing a 19% increase on a per share
basis. Net income for the yearly periods totaled $49.5 million and $54.2
million, respectively. After-tax realized investment gains were $2.9 million in
1997 and $15.9 million in 1996, with 1996 gains including a $13.5 million gain
resulting from the sale of a strategic investment.
Fourth quarter operating earnings totaled $13.5 million, or $.94 per share,
compared to $12.2 million, or $.88 per share in last year's fourth quarter,
representing a 7% increase on a per share basis. For the same periods, net
income totaled $14.6 million, or $1.01 per share, and $13.2 million, or $.95 per
share. After-tax realized investment gains were $1.1 million and $1.0 million in
each of the respective quarterly periods.
Total revenues for the year were $645.8 million, an increase of 9% over
last year's total of $592.5 million. Total revenues in 1997 include realized
investment gains of $4.5 million compared to $17.2 million in 1996. Policy
revenues increased by 9% for the same period to $490.3 million from $451.0
million last year. Ordinary life policy revenues increased by 17% to $336.6
million from $286.9 million and group policy revenues decreased by 6% to $153.6
million from $164.1 million. Investment income increased by 21% to $151.0
million from $124.3 million last year.
Revenues totaled $172.0 million in the fourth quarter compared to $158.0
million last year, an increase of 9%. This increase is mainly attributable to
investment earnings which increased by 19% to $40.9 million from $34.5 million.
Policy revenues increased by 6% to $129.4 million from $122.0 million and
realized investment gains were basically level. Ordinary life policy revenues
increased by 17% to $90.1 million from $77.2 million, and group policy revenues
decreased by 12% to $39.3 million from $44.9 million.
In 1997, the Company made a strategic decision to withdraw from the group
accident and health and special risk reinsurance business. Group accident and
health and special risk revenues for 1997 were $121.2 million, compared to
$139.7 million for 1996, representing a 13% decrease. The Company anticipates
further decreases of 50% in 1998 and 80% in 1999. The Company does not expect
this line of business to affect materially future results.
25
<PAGE> 31
UNAUDITED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996
------ ------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Policy revenues.................................................... $490.3 $451.0
Investment income.................................................. 151.0 124.3
Realized investment gains.......................................... 4.5 17.2
------ ------
Total revenues............................................. 645.8 592.5
Benefits and expenses:
Policy claims and benefits......................................... 341.0 332.5
Policy acquisition costs........................................... 142.1 111.9
Interest credited to policyholder accounts......................... 40.7 34.6
Interest expense................................................... 8.0 8.4
Distributions on capital securities................................ 5.0 --
Other operating expenses........................................... 32.7 29.0
------ ------
Total benefits and expenses................................ 569.5 516.5
------ ------
Income before federal income taxes................................... 76.2 76.1
Provision for federal income taxes................................... 26.7 21.9
------ ------
Net income........................................................... $ 49.5 $ 54.2
====== ======
Earnings per share:
Basic earnings per share........................................... $ 3.64 $ 3.97
Diluted earnings per share......................................... $ 3.48 $ 3.89
Diluted earnings per common share, excluding realized investment
gains........................................................... $ 3.28 $ 2.75
Dividends per share.................................................. $ 0.52 $ 0.40
Weighted average shares outstanding (diluted)........................ 14.2 13.9
POLICY REVENUES:
Ordinary life reinsurance
First year......................................................... $ 58.1 $ 36.2
Renewal............................................................ 246.1 232.7
Group life reinsurance............................................... 15.2 23.2
Administrative Reinsurance........................................... 32.4 18.0
Automobile credit life and disability................................ 17.3 1.2
Group accident and health and special risk reinsurance............... 121.2 139.7
------ ------
Total policy revenues...................................... $490.3 $451.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(IN
MILLIONS)
<S> <C>
BALANCE SHEET AND OTHER FINANCIAL DATA:
Invested assets
At fair value................................................................ $2,784.6
At book value................................................................ 2,683.2
Total assets................................................................... 3,700.2
Loans payable.................................................................. 125.0
Capital securities............................................................. 100.0
Common shareholders' equity:
Including unrealized investment gains and losses............................. 373.8
Excluding unrealized investment gains and losses............................. 312.4
Return on average shareholders' equity (excluding realized and unrealized
investment gains and losses)................................................. 16%
</TABLE>
26
<PAGE> 32
ADMINISTRATIVE REINSURANCE TRANSACTIONS
Through its acquisition of REALIC in 1995, the Company put into place a
platform for acquiring and administering blocks of insurance in force. This
platform, known as Administrative Reinsurance, provides a mechanism for an
insurer to transfer to the Company administrative responsibilities to facilitate
the insurer's exit from a line of business by means of reinsurance or sale.
Since December 1997, the Company has entered into three Administrative
Reinsurance transactions in which the Company has acquired or expects to acquire
approximately $1.1 billion in assets and approximately 385,000 policies for
administration.
In December 1997, the Company entered a coinsurance transaction whereby the
Company and ERAC will coinsure a block of life insurance and annuity business
from Allianz. Under the transaction, the Company, in conjunction with ERAC, will
coinsure certain universal life and traditional life insurance policies and
annuity contracts. The Company's agreement with ERAC provides that the Company
initially will reinsure 20% of the total block of business. Based on the terms
of its agreement, the Company expects that its share of the total block of
business being reinsured will increase to 60% over a period of several years.
The total block of business being coinsured entails $1.1 billion of life
insurance and annuity reserves, $90 million of annualized premiums and
approximately 225,000 policies. Under its agreement with ERAC, the Company will
have the primary responsibility for management oversight and administration of
the block of business. The transaction closed in December 1997.
Also in December 1997, the Company entered into an agreement to acquire
Mission Life for a purchase price of approximately $60 million. Mission Life's
business is concentrated in life insurance policies designed to meet final
expenses. As of September 30, 1997, Mission Life had statutory assets of $225
million, and statutory capital and surplus including AVR of $27 million. Mission
Life's estimated 1997 premium income is $38 million, with over 130,000 policies
in force.
In February 1998, the Company entered into an agreement to acquire Lincoln
Liberty and First Delaware for an estimated purchase price of $50 million,
including adjusted capital and surplus and AVR of approximately $29 million.
Lincoln Liberty's and First Delaware's businesses primarily consist of
traditional and universal life insurance policies. For the year ended December
31, 1997, on a combined basis, Lincoln Liberty and First Delaware had estimated
premiums of $7 million and, at year end, estimated total assets, including
adjusted capital and surplus, of $219 million. The agreement, which is subject
to certain conditions including insurance regulatory approvals, targets a
closing date in the first quarter of 1998.
These transactions had no impact on the Company's 1997 results of
operations, but are anticipated to contribute to 1998 results of operations.
OTHER
On February 12, 1998, the Company's Board of Directors authorized and
declared an increase in the Company's annualized cash dividend to $0.60 per
share from $0.52 per share, or to $0.15 per share per quarter from $0.13. The
increase is effective with the first quarter 1998 dividend payment. The first
quarter dividend for 1998 is payable on March 25, 1998 to stockholders of record
at the close of business on March 4, 1998. Furthermore, the Board of Directors
of the Company has elected to discontinue the Company's stock repurchase
program. In addition, the Board of Directors approved an amendment to the
Company's stock option plan, to be effective as of the date it is approved by
stockholders, whereby 1,500,000 additional shares will be allocated to the plan.
The Company traditionally awards options pursuant to its stock option plan
to members of senior management in January of each year. The next such grant
will be in January 1999. These grants are intended to reinforce the executives'
common interests with stockholders, provide additional incentive to increase
stockholder value and to help retain key executive talent.
27
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information has been derived from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997 and has
been included herein for the convenience of the reader.
GENERAL
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
developed by management. Any adjustments to reported bases of assets or
liabilities resulting from changes in estimates are reflected in earnings in the
period the estimates are revised. Certain management estimates are based, in
part, on information provided by ceding companies. As is usual in the
reinsurance business, the Company's ceding companies periodically update, refine
and revise reinsurance information provided to the Company. The financial
effects resulting from the incorporation of revised data are reflected in
earnings as changes in estimates.
Mortality and morbidity experience, both significant factors in the
determination of the results of operations of the Company, generally are
predictable over time but are subject to fluctuations from year to year and
quarter to quarter. Significant fluctuations from period to period could
adversely affect the Company's results of operations.
The Company's reinsurance agreements frequently provide for rights of
recapture, which permit the ceding company to increase the amount of liability
it retains on the reinsured policies after the policies have remained in force
for a designated period of time (generally ten to twenty years). Accordingly, an
increase in the amount of liability retained by the ceding company will decrease
both the Company's insurance in force and premiums to be received from the
reinsured policies. To date, recaptures have not had a material impact on the
Company's results of operations.
The Company retrocedes portions of certain risks in excess of a
predetermined retention amount for which it has accepted liability. From time to
time, the Company also has entered into quota share retrocessional agreements,
and maintained catastrophe reinsurance to protect against catastrophic event
risks. Failure of a retrocessionaire to honor its obligations could result in
material losses to the Company; to date, no such losses have occurred. No
amounts due the Company from its retrocessionaires were deemed uncollectible at
December 31, 1996.
The Company is party to several reinsurance agreements for which
transactions are denominated in Canadian currency. The assets and liabilities
related to such reinsurance agreements are remeasured in U.S. dollars, the
functional currency, at current exchange rates as of the end of each reporting
period. Deterioration in the exchange rate of Canadian currency could have an
adverse effect on results of operations. At December 31, 1996, the Company had
$37.2 million of net assets denominated in Canadian currency. The Company has
not engaged in hedging or any other activities to mitigate the effect on
earnings of a deterioration in the exchange rate of Canadian currency.
The Company's total policy revenues have increased in each year since 1992.
However, should the Company be unable to generate sufficient new business to
offset the expected future decline in policy revenues associated with the
current business in force due to lapsation and mortality, the Company's results
of operations could be adversely affected.
In 1996, the Company derived approximately 60% of its policy revenues from
the reinsurance of ordinary life insurance policies under agreements with ceding
companies which cover new business to be written by the client and/or existing
blocks of in force business. This business generally is written on a direct
basis and is written under agreements with approximately 450 ceding companies.
In 1996, forty-five ceding companies each accounted for at least $1.0 million of
ordinary life reinsurance policy revenues and in the aggregate represented
approximately 89% of the Company's ordinary life reinsurance policy revenues.
28
<PAGE> 34
The Company's group life reinsurance business, which accounted for
approximately 5% of policy revenues in 1996, is written on a direct basis and
generally is excess of loss and often includes experience rating provisions.
Approximately 30% of the Company's policy revenues were generated from
group accident and health and special risk reinsurance in 1996. This business
generally is written on an annual basis through reinsurance facilities which are
managed by managing general underwriters. Generally the risks are shared by
several reinsurers on a quota share basis.
The remainder of 1996 policy revenues was derived from Administrative
Reinsurance. This business represents the acquisition of closed blocks of
primary insurance policies (both interest sensitive and traditional) and annuity
contracts and is expected to become a more significant component of policy
revenues in the future.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
RECENT TRANSACTIONS
Through its acquisition of REALIC in 1995, The Company put into place a
platform for acquiring and administering blocks of insurance in force. This
platform, known as Administrative Reinsurance, provides a mechanism for an
insurer to transfer to REALIC administrative responsibilities to facilitate the
insurer's exit from a line of business by means of reinsurance or sale.
During 1996, the Company, through REALIC, completed several such
transactions (collectively, "Transactions"). The Transactions increased total
assets and liabilities by approximately $400 million. The assets received
consisted primarily of cash and high quality investments and the liabilities
assumed consisted primarily of future policy benefits on traditional life
insurance policies and account values on annuities and interest sensitive life
insurance policies. For 1996, the Transactions contributed policy revenues
totaling $10.9 million and approximately $10.8 million of investment income.
RESULTS OF OPERATIONS
NET INCOME. Net income increased by $19.6 million in 1996 to $54.2
million, or $3.89 per share, compared with $34.6 million, or $2.32 per share, in
1995 and $34.3 million, or $2.21 per share, in 1994. Included in these results
were after-tax realized investment gains of $15.9 million and $2.4 million in
1996 and 1995, respectively. In March 1996, the Company realized a gain of $13.5
million from the sale of its equity investment in Nacolah Holding Corporation
("Nacolah"), parent of The North American Company for Life and Health Insurance.
The Company utilized existing tax net operating loss carryforwards to offset the
taxes otherwise payable in connection with the gain, and reversed an existing
deferred tax valuation allowance, resulting in a tax benefit of $4.8 million.
Net income in 1995 also included an extraordinary charge amounting to $1.0
million, which resulted from the write-off of unamortized loan costs associated
with amending and restating the 1992 Credit Agreement.
Earnings before realized investment gains and federal income taxes
increased by $7.8 million to $58.9 million in 1996 compared with $51.1 million
in 1995 and $52.7 million in 1994. The increase in 1996 was primarily due to
earnings from the Transactions and increased business in force within ordinary
reinsurance.
29
<PAGE> 35
POLICY REVENUES. Policy revenues by major source for the three year period
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Ordinary reinsurance................................... $268.9 $243.7 $225.0
Group reinsurance...................................... 164.1 136.8 125.9
Administrative Reinsurance............................. 18.0 2.7 --
------ ------ ------
Total........................................ $451.0 $383.2 $350.9
====== ====== ======
</TABLE>
The growth in ordinary reinsurance revenues was largely due to new
reinsurance agreements entered into during the last two years, as first year
premiums totaled $36.2 million in 1996 and increased by 68% and 17% during 1996
and 1995, respectively. The ordinary reinsurance lapse rate has ranged from
9-11% during the last three years.
Group reinsurance policy revenues consist of life, accident and health,
special risk and credit coverages. During the last three years, the Company's
group accident and health and special risk reinsurance business increased
substantially over previous levels. Group accident and health and special risk
reinsurance policy revenues increased from $102.0 million in 1994 to $112.4
million in 1995 and $139.7 million in 1996. This growth resulted principally
from increased participation in major medical and accident reinsurance pools and
quota share arrangements, which are organized and managed by professional
managing general underwriters. The rate of growth experienced in accident and
health and special risk policy revenues is not expected to continue due to
management's decision to selectively reduce or eliminate participation in
certain pool arrangements to better balance the mix of risks reinsured.
The growth in Administrative Reinsurance policy revenues has been due to
the Transactions. Future revenue growth from Administrative Reinsurance depends
on the Company's ability to identify and complete similar transactions.
INVESTMENT INCOME. Investment income increased by 26% in 1996 to $124.3
million and by 20% in 1995 to $98.6 million. These increases were largely due to
the growth in invested assets from the REALIC acquisition in 1995 and the
Transactions completed in 1996. This rate of growth is dependent on new
Administrative Reinsurance transactions and, to a lesser extent, new ordinary
reinsurance business. The weighted average portfolio yield rate (amortized cost
basis) was 7.8% in 1996 and 8.2% in 1995 and 1994.
POLICY BENEFITS. Policy benefits increased by 18% in 1996 and 15% in 1995.
These increases resulted from higher volumes of group business and increased
life insurance in force, which was significantly impacted by the acquisition of
REALIC and the completion of the Transactions. As a percentage of policy
revenues, policy benefits were 74% in each of 1996 and 1995 and 70% in 1994. The
increase experienced in the last two years was primarily due to an increase in
revenues generated under reinsurance treaties with no acquisition costs,
coinsurance involving paid-up insurance and Administrative Reinsurance, which
produces no new business and, therefore, generally has a higher ratio of
benefits to policy revenues.
POLICY ACQUISITION COSTS. Policy acquisition costs increased by 17% in
1996 and 8% in 1995. These increases reflect the higher volumes of ordinary and
group accident and health reinsurance business and the Transactions. As a
percentage of policy revenues, policy acquisition costs were 25% in each of
1996, 1995 and 1994.
INTEREST CREDITED TO POLICYHOLDER ACCOUNTS. Interest credited to
policyholder accounts increased by 63% to $34.6 million in 1996 and by 42% to
$21.2 million in 1995. These increases are attributable to the acquisition of
REALIC and the Transactions as the majority of the policy benefit liabilities
acquired in these transactions are interest sensitive.
30
<PAGE> 36
INTEREST EXPENSE. Interest expense, including facility fees and agency
fees, decreased to $8.4 million in 1996 from $10.7 million in 1995 and $9.1
million in 1994. This decrease was due to (i) a decrease in the weighted average
variable rate charged on outstanding debt, which decreased to 6.2% in 1996 from
7.1% in 1995 and (ii) a decrease in the outstanding principal balance to $125.0
million resulting from the first quarter of 1996 repayment of $15.0 million. The
effective interest rate as of December 31, 1996 was 6.0%.
OTHER OPERATING EXPENSES. Other operating expenses increased significantly
in 1996 mainly due to (i) third party administration fees incurred by REALIC,
(ii) higher compensation costs related to the Transactions and (iii) higher
staffing levels. REALIC utilizes the services of a third party administrator to
administer all of its business; accordingly, to the extent the Company is
successful in expanding Administrative Reinsurance, its operating expenses will
continue to increase. Other operating expenses were essentially level in 1995
and 1994 as Canadian currency remeasurement losses incurred in 1994 totaling
$4.2 million were partially offset by third party administrator fees incurred in
connection with Administrative Reinsurance and by higher employee-related and
consulting costs in 1995.
The effective federal income tax rate was 29% in 1996 compared with the
statutory rate of 35%. The federal income tax expense is net of a $4.8 million
tax benefit resulting from the reversal of a deferred tax valuation allowance in
connection with the realized investment gain on the Nacolah transaction. In 1995
and 1994, the effective federal income tax rate was 35%.
FINANCIAL CONDITION AND LIQUIDITY
INVESTMENTS. Invested assets at fair value amounted to $1,833.2 million
and $1,504.2 million at December 31, 1996 and 1995, respectively. The increase
in invested assets in 1996 resulted from the Transactions partially offset by a
decrease in unrealized investment gains. Net unrealized gains on invested assets
totaled $39.7 million and $82.5 million at year end 1996 and 1995, respectively,
and generally reflect the increase in interest rates from period to period.
The Company's investment policy is designed to maintain a high quality
portfolio, maximize current income, maintain a high degree of liquidity, and
match the cash flows of the portfolio to the required cash flows of the
Company's liabilities.
The Company does not engage in trading activities to generate realized
investment gains and, thus, does not have a trading portfolio. However, the
Company evaluates the desirability of continuing to hold a security when market
conditions, creditworthiness or other measurement factors change. These changes
may relate to a change in the credit risk of an issuer and a decision to sell
may be made to avoid further declines in realizable value. Securities also may
be sold prior to maturity to provide liquidity should the need arise.
The Company's fixed maturity securities, which constituted 94%, or $1,720.6
million, of the total fair value of its invested assets as of December 31, 1996,
are predominantly investment grade, liquid securities with varying maturity
dates. The fair value of such investments may vary depending on economic and
market conditions, the level of interest rates and the perceived
creditworthiness of the issuer.
At December 31, 1996, approximately $75.8 million (at fair value), or 4%,
of the Company's invested assets consisted of below investment grade securities.
The Company generally limits its investments in fixed maturities that are rated
below investment grade, as these investments are subject to a higher degree of
credit risk than investment grade securities. The Company closely monitors its
below investment grade securities as well as the creditworthiness of the
portfolio as a whole. When fair values decline for reasons other than changes in
interest rates or other perceived temporary conditions, the security is written
down to its net realizable value. In 1996, 1995 and 1994, the Company wrote down
the value of certain securities by $0.5 million, $0.9 million, and $1.3 million,
respectively. The Company had no fixed maturities in default at December 31,
1996.
31
<PAGE> 37
The results of operations and the financial condition of the Company are
significantly affected by the performance of its investments and by changes in
interest rates. During a period of declining interest rates, if the Company's
investments are prematurely sold, called, prepaid or redeemed, the Company would
be unable to reinvest the proceeds in securities with comparable rates of
return. During a period of rising interest rates, the fair value of the
Company's invested assets could decline. In addition, rising interest rates
could also cause disintermediation which in turn could cause the Company to be
required to sell investments at prices and times when the fair values of such
investments are less than their amortized cost. The Company believes that its
traditional life insurance liabilities are not highly interest sensitive and,
therefore, the effects of fluctuating interest rates on these liability cash
flows are not significant. For interest sensitive liabilities, the Company
utilizes asset/liability management to minimize the impact of changes in
interest rates. The Company has not engaged in hedging activities to mitigate
the effects of interest rate changes on its invested assets.
At December 31, 1996, collateralized mortgage obligations and
mortgage-backed pass-through securities represented approximately 21% of the
Company's invested assets. Certain of such investments may be subject to
significant prepayment risk and, therefore, are susceptible to fluctuations in
the level of interest rates.
During 1996, 1995 and 1994, proceeds from sales of fixed maturities
amounted to $253.4 million, $370.8 million and $134.8 million, respectively. The
net gains realized from such sales were $1.8 million, $4.5 million and $0.4
million for the respective periods. The majority of the 1996 and 1995 sales was
attributable to the restructuring of portfolios acquired in connection with the
acquisition of REALIC and the completion of the Transactions.
Real estate and mortgages (at cost) totaled $7.0 million at December 31,
1996 and were acquired as part of the Transactions. Mortgage loans comprise the
majority of this amount.
POLICY BENEFIT LIABILITIES. The Company's obligations for policy benefit
liabilities increased by 33% and 42% during 1996 and 1995, respectively. These
increases resulted from the acquisition of REALIC and the Transactions and
increased reinsurance of new and in force life insurance business. Policy
benefits consist of the present value of net future benefits under traditional
ordinary and group life insurance policies, account values under interest
sensitive life and annuity contracts, group accident and health claim reserves,
life claims payable and other miscellaneous liabilities. Through REALIC and the
Transactions, the relative proportion of interest sensitive and annuity policy
benefit liabilities to the total has increased significantly and, at December
31, 1996, totaled approximately half of the policy benefits under life insurance
contracts.
Asset/liability management techniques are utilized by the Company to
minimize the risks associated with interest rate fluctuations. For interest
sensitive policy benefits, the Company seeks to invest in assets with equal
durations while attaining a targeted rate of return. The Company currently does
not engage in hedging transactions to mitigate the effects of interest rate
fluctuations.
DEBT AND SHAREHOLDERS' EQUITY. In 1995, the Company amended and restated
the 1992 Credit Agreement to convert the facility to a senior secured revolving
and term loan with a stated maturity of January 5, 2002. The two year revolving
loan has a commitment amount of $160.0 million and may be extended for up to two
one-year periods with bank consent. During 1996, the Company received bank
consent to extend the maturity date by one year. At December 31, 1996, loans
totaling $125.0 million were outstanding.
Interest rates on the loans are variable and, subject to certain
restrictions, the Company may select the applicable interest rate index and the
period of applicability.
The 1995 Credit Agreement contains certain covenants which, among other
things, restrict under certain circumstances the payment of dividends and
repurchase of treasury stock. Further, certain actions of the Company are
limited, including those related to mergers, acquisitions,
32
<PAGE> 38
indebtedness and investments. The Company and its subsidiaries are required to
meet certain financial ratios and maintain a minimum level of statutory surplus.
Shareholders' equity increased by $10.8 million to $290.1 million at
December 31, 1996 from $279.3 million at December 31, 1995, primarily as a
result of net income of $54.2 million, partially offset by a decrease in net
unrealized appreciation of securities of $24.5 million, treasury stock purchases
of $17.0 million and common shareholder dividends of $5.5 million.
Under the stock repurchase program initially approved by the Company's
Board of Directors during 1995, approximately 2.1 million shares have been
purchased under a total authorization of 3.0 million shares. The Company may use
internally generated funds or borrowings under the 1995 Credit Agreement to
finance additional purchases of shares, if any, under the repurchase program.
Dividends paid to common shareholders reflect an annual rate of $.40 per
share in 1996 and $.28 per share in 1995; effective in the first quarter of
1997, the Company increased its annual dividend rate to $.52 per share.
Debt to total capitalization (outstanding debt divided by outstanding debt
plus shareholders' equity) decreased significantly during the last two years. As
a percentage, these amounts were 30%, 33% and 42% at year-end 1996, 1995 and
1994, respectively. Management believes that, to best balance leverage and
regulatory targets, a debt to total capitalization ratio in the range of 25-35%
is appropriate.
LIQUIDITY. Sources of liquidity are available to the Company in the form
of cash and short-term investments and, if necessary, the sale of invested
assets. The Company also may borrow an additional $35.0 million under the 1995
Credit Agreement and may enter into reverse repurchase agreements to fund
short-term cash needs. In addition to its debt servicing and dividend
obligations, the Company's financial obligations consist of policy benefit and
acquisition costs, taxes and general operating expenses. During the next twelve
months, management believes these obligations will be adequately provided for by
policy revenues and investment income.
The primary sources of funds for Life Re Corporation (the "Parent") consist
of dividends and surplus debenture principal and interest payments from TexasRe,
which are further funded by dividends from Life Reassurance to TexasRe. The
ability of the Parent to make payments of principal and interest as well as to
continue to pay common stock dividends is ultimately dependent on the statutory
earnings and surplus of its subsidiaries. The following table shows surplus
debenture principal and interest payments received and dividends received by the
Parent for the last three years as well as dividends available for payment in
that year without prior approval of state regulatory authorities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Surplus debenture amounts received from TexasRe:
Interest................................................. $10.0 $19.4 $2.3
Principal................................................ -- 10.0 5.0
----- ----- -----
10.0 29.4 7.3
Dividends received from TexasRe............................ 12.1 15.0 --
----- ----- -----
$22.1 $44.4 $7.3
===== ===== =====
Dividends available for payment by TexasRe................. $27.1 $28.2 $15.4
===== ===== =====
</TABLE>
The unpaid principal amount of the surplus debentures at December 31, 1996
was $160.5 million. The interest rate payable under the terms of the surplus
debentures is the same as the interest rate under the 1995 Credit Agreement. In
1995, the principal amortization terms of the surplus debentures were changed to
conform to the terms of the 1995 Credit Agreement.
33
<PAGE> 39
Currently, no prior approval of the Texas Insurance Commissioner is
required to prepay or pay scheduled interest or principal on the surplus
debentures provided that, after giving effect to any such payment, the statutory
surplus of TexasRe exceeds $125.0 million.
TexasRe relies primarily on dividends from Life Reassurance to meet its
obligations under the surplus debentures as well as to pay dividends to the
Company. TexasRe received dividends from Life Reassurance during 1996, 1995 and
1994 of $14.9 million, $30.9 million, and $13.5 million, respectively.
The payments of dividends by TexasRe and Life Reassurance are subject to
restrictions set forth in Texas and Connecticut insurance laws and regulations.
Under Connecticut law, no dividend in an amount exceeding Life Reassurance's
earned surplus may be paid without prior regulatory approval. Approval has been
received from the Connecticut Department of Insurance to define earned surplus
for this purpose to include amounts of paid in surplus in excess of $125.0
million.
Purchases and sales of fixed maturities increased substantially in 1996 and
1995 due primarily to restructuring of portfolios related to REALIC and the
Transactions. The completion of these types of transactions generally produces a
cash outlay for acquisitions and a net cash inflow upon reinsurance of insurance
in force. During 1996, net cash of $59.7 million was generated by the receipt of
cash as consideration for the assumption of insurance liabilities partially
offset by the purchase price paid in acquiring companies. Financing cash flows
include debt prepayments of $15.0 million in 1996 and $10.0 million in 1994.
Withdrawals from annuity and interest sensitive life insurance contracts totaled
$74.7 million in 1996 compared to $30.7 million in 1995 due to increased volumes
of business resulting from the Transactions and an increase in the related rate
of lapsation.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
During 1997 and 1996, the Company completed several transactions through
which it acquired blocks of insurance in force. The 1997 Transactions, which
were the purchase of AML and a coinsurance agreement with UNUM Life Insurance
Company of America and First UNUM Life Insurance Company, increased total assets
by approximately $240 million. The 1996 Transactions increased total assets by
approximately $400 million.
RESULTS OF OPERATIONS
NET INCOME. Net income totaled $34.9 million for the nine months ended
September 30, 1997 compared to $41.0 million for the same period last year.
Included in the 1996 results was an after-tax realized gain of $13.5 million
from the sale of a strategic investment. In conjunction therewith, the Company
utilized existing tax net operating loss carryforwards to offset the taxes
otherwise payable in connection with the gain and reversed an existing deferred
tax valuation allowance, resulting in a tax benefit of $4.8 million. Income
before federal income taxes and excluding realized investment gains was $50.9
million in the current nine month period compared to $40.0 million in the same
period last year. The increase in earnings is largely attributable to higher in
force volumes in ordinary life reinsurance and comparatively favorable
mortality, contributions from Administrative Reinsurance as a result of the 1996
Transactions and income from an automobile credit reinsurance agreement
effective July 1996. These favorable results were partially offset by higher
morbidity in the group accident and health and special risk pool business.
Morbidity experience within the group accident and health and special risk pool
business is not expected to improve materially in the near term.
POLICY REVENUES. Policy revenues increased by $32.0 million, or 10%, to
$360.9 million in 1997 from $328.9 million in 1996. Ordinary life reinsurance
policy revenues increased by $25.5 million, or 13%, to $224.8 million due to an
increase in first year premiums of $17.5 million and higher renewal premiums
resulting from higher in force amounts. An increase in Administrative
Reinsurance policy revenues of $11.4 million is attributable to the
Transactions. Future revenue growth from Administrative Reinsurance is dependent
on the completion of similar transactions.
34
<PAGE> 40
Group policy revenues decreased by $4.9 million, or 4%. Of the group policy
revenues, premiums of $13.3 million in the 1997 period were generated from
automobile credit reinsurance. Group life premiums declined by $7.2 million
period to period due to treaty terminations. Group accident and health and
special risk premiums decreased by $11.0 million, or 11%, primarily as a result
of an agreement, effective January 1, 1997, to retrocede 50% of 1997 group
accident and health and special risk reinsurance risks. Also contributing to the
decline were reductions in certain pool participations which were offset by
higher premium from remaining business. In October 1997, the Company announced
its withdrawal from the group accident and health and special risk pool
reinsurance marketplace. The Company will not renew or accept new participations
in group accident and health and special risk pools. The Company anticipates a
decline in policy revenues in these lines of approximately 20% for the full year
1997 from 1996 policy revenues, 50% in 1998 from 1997 policy revenues and 80% in
1999 from 1998 policy revenues, as the existing business runs off. The Company
expects no adverse financial impact from its withdrawal from this business.
INVESTMENT INCOME. Investment income increased by 22% to $110.0 million as
a result of assets received in conjunction with the Transactions, the automobile
credit reinsurance agreement and proceeds from the Company's issuance in June
1997 of capital securities, offset by a decrease in the weighted average
portfolio yield rate, which was 7.49% and 7.61% at September 30, 1997 and 1996,
respectively. Future investment income growth is dependent on, among other
factors, the completion of additional Administrative Reinsurance transactions
and continued growth in ordinary life reinsurance and automobile credit
reinsurance business.
POLICY BENEFITS. Policy benefits increased by $6.9 million from the prior
period due to higher volumes of business in force; however, as a percentage of
policy revenues, policy benefits improved to 70% in 1997 from 75% in 1996.
Contributing to the lower percentage is a shift in the mix of business from
excess reinsurance to first dollar quota share reinsurance; under first dollar
quota share reinsurance, typically a higher proportion of the reinsurance
premium funds acquisition costs and a lesser proportion funds mortality costs.
Also, improved mortality in ordinary life reinsurance was partially offset by a
deterioration in group accident and health and special risk morbidity
experience.
POLICY ACQUISITION COSTS. Policy acquisition costs as a percentage of
policy revenues were 29% for the nine months ended September 30, 1997 compared
to 25% for the same period of 1996. The increase is largely due to higher
ultimate commission rates on ordinary life reinsurance resulting from the shift
of the mix of business.
INTEREST CREDITED TO POLICYHOLDER ACCOUNTS. Interest credited to
policyholder accounts increased to $28.6 million in 1997 from $24.1 million in
1996 corresponding to the growth in interest sensitive business resulting from
the Transactions. These results were partially offset by a revised estimate of
certain bonus interest provisions and the lapsation of business in force.
INTEREST EXPENSE. Interest expense declined by $.5 million as a result of
a $15.0 million principal repayment in March 1996 and a decline in the weighted
average variable rate to 6.0% from 6.2%.
DISTRIBUTIONS ON CAPITAL SECURITIES. Distributions on capital securities
of $2.8 million were incurred from the issuance in June 1997 of $100 million of
8.72% capital securities by a subsidiary trust as further described in
"-- Financial Condition and Liquidity" below.
OTHER OPERATING EXPENSES. Other operating expenses increased by $4.0
million to $25.0 million partly as a result of increased fees for third party
administration of Administrative Reinsurance, which fees increased as a result
of greater in force volumes resulting from the Transactions. The Company's
higher compensation costs also contributed to the increase in operating
expenses.
FEDERAL INCOME TAXES. Federal income taxes were provided at the federal
statutory rate of 35% for 1997. The 1996 rate was 27% due to the previously
mentioned tax benefit from utilization of operating loss carryforwards.
35
<PAGE> 41
FINANCIAL CONDITION AND LIQUIDITY
INVESTMENTS. Invested assets grew to $2,156.4 million at September 30,
1997 from $1,833.2 million at December 31, 1996 as a result of the issuance of
$100 million of capital securities, net assets of approximately $200.0 million
received from the Transactions in 1997, the reinvestment of operating cash flows
of $40.6 million and a $38.8 million interest rate related fair value increase,
partially offset by net withdrawals from policyholder accounts of $47.7 million.
The Company's fixed maturity portfolio (including the fixed maturity
securities which are included in assets held by ceding company under reinsurance
treaty) constituted 94% of invested assets at September 30, 1997, of which $69.0
million, or 3.2% of invested assets, consisted of below investment grade
securities. At September 30, 1997, the weighted average quality rating of the
fixed maturities portfolio was "A" and no fixed maturities were in default.
LIQUIDITY. Sources of liquidity are available to the Company in the form
of cash and short-term investments and, if necessary, the sale of invested
assets. The Company may enter into reverse repurchase agreements to fund
short-term cash needs and can also borrow an additional $35.0 million under its
revolving credit agreement. Effective May 1, 1997, the credit agreement was
amended to reduce the margin over an index rate that determines the amount of
interest paid by the Company. In addition, the Company may defer the
commencement of principal amortization until January 2001. As of September 30,
1997 and December 31, 1996, the weighted average interest rate on long-term debt
was 6.0%. In addition to debt servicing and dividend obligations, the Company's
financial obligations consist of policy benefit and acquisition costs, taxes and
general operating expenses. Management believes that these obligations will be
adequately provided for by policy revenues and investment income for the next
twelve months.
The ability of the Company to make principal and interest payments under
its credit agreement and fund capital security distributions as well as to
continue to pay common stock dividends ultimately is dependent on the statutory
earnings and surplus of the insurance subsidiaries. The transfer of funds from
the subsidiaries to Life Re Corporation is subject to applicable insurance laws
and regulations. Pursuant to a stock repurchase program approved by the
Company's Board of Directors under which a total 3.0 million shares have been
authorized for purchase, the Company has repurchased approximately 2.2 million
shares for an aggregate purchase price of $46.6 million.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statements No.
128, 130 and 131. These statements concern the calculation of earnings per share
and the presentation of comprehensive income and segment reporting,
respectively. These statements will not affect the Company's financial condition
or results of operations.
36
<PAGE> 42
BUSINESS
Life Re, through its principal wholly-owned subsidiary, Life Reassurance,
is a leading provider of life reinsurance in the United States, with over $145
billion of life reinsurance in force and assets of $3.7 billion at December 31,
1997. Management believes the Company is the largest independent publicly traded
life reinsurer in the United States, and that it ranks fifth overall among U.S.
life reinsurers as measured by life reinsurance in force. The Company's
operating strategy has been to focus on two core lines of business: (i)
Traditional Life Reinsurance, which involves the transfer to the Company of
mortality risks on new sales from primary (or ceding) insurers of ordinary and
group life insurance policies and (ii) Administrative Reinsurance(SM), which
involves the acquisition of blocks of life insurance in force and, frequently,
the assumption of administrative responsibility for life insurance in force by
the Company. During the five year period ending December 31, 1997, the Company's
operating earnings per share and book value per share (excluding realized and
unrealized investment gains and losses) have grown at 19% and 16% compound
annual growth rates, respectively, and return on average equity (excluding
realized and unrealized investment gains and losses) has averaged 15%.
Management estimates that between 1993 and 1996, new ordinary insurance in
force ceded to the life reinsurance market grew from $166 billion to $343
billion, representing a 27% compound annual growth rate. In addition, over the
same period, management believes there has been an expansion in the number of
opportunities to acquire blocks of life insurance in force. The Company believes
that certain dynamics in the life insurance industry have contributed to the
Company's growth over time in Traditional Life Reinsurance and Administrative
Reinsurance. These dynamics include: (i) an increasing use of life reinsurance
by primary companies as a means of managing risk-based capital pressures by
shifting mortality risk and distribution costs to reinsurers and (ii) an
increasing focus by primary companies on asset accumulation products and a
desire to eliminate or minimize mortality risk taking. Moreover, primary
companies increasingly are seeking to sell blocks of life insurance in force in
order to realize value and release capital embedded in non-core businesses or to
ease administrative burdens and costs associated with maintaining outdated or
inefficient systems.
The Company derived approximately 62% of its revenues for the year ended
December 31, 1997, and the majority of its pre-tax operating income for the same
period, from Traditional Life Reinsurance. The Company provides life reinsurance
primarily for mortality risk with respect to both ordinary and group life
insurance products on an automatic treaty basis. Substantially all of the
Company's Traditional Life Reinsurance business is marketed directly by the
Company without the use of intermediaries. Between 1993 and 1996, the Company's
new sales of ordinary life reinsurance, as measured by insurance in force
assumed, grew at a compound annual growth rate of 29%. The Company's first year
premium growth, another measure of new life insurance sales, has grown
consistently over the past several years, from $13 million in 1993 to $61
million in 1997.
The Company derived approximately 18% of its revenues for the year ended
December 31, 1997 from Administrative Reinsurance. Management expects the
Administrative Reinsurance line of business to be an important source of
additional growth in the Company's pre-tax operating income. Through
Administrative Reinsurance, the Company is able to benefit from the increasing
consolidation in the life insurance industry by focusing on acquiring non-core
or smaller blocks of life insurance in force. In July 1995, the Company acquired
REALIC, which served as its initial platform for Administrative Reinsurance.
With the acquisition of REALIC, the Company obtained primary insurance licenses
and began outsourcing administrative services for acquired blocks of insurance
in force on a variable cost basis. Since 1995, the Company has acquired or is
under contract to acquire a total of 10 blocks of life insurance in force,
representing in excess of $2.0 billion in assets.
In 1997, the Company made a strategic decision to withdraw from the group
accident and health and special risk reinsurance business. This line of business
provided approximately 20% of revenues for the year ended December 31, 1997. The
decision to exit this line of business primarily
37
<PAGE> 43
was motivated by the need for additional capital in its Traditional Life
Reinsurance and Administrative Reinsurance lines of business and the
deterioration in accident and health morbidity experience. The Company does not
expect this line of business to affect materially future results.
Life Re was founded in 1988 by Rodney A. Hawes, Jr., Douglas M. Schair and
Jacques E. Dubois, each of whom has over 25 years of insurance industry
experience, for the purpose of acquiring Life Reassurance from General
Reinsurance Corporation. Life Re currently has a rating of A+ (Superior) by A.M.
Best. A.M. Best ratings are based upon an insurance company's financial strength
regarding its ability to pay obligations to policyholders and are not directed
toward the protection of investors.
------------------------
The following information has been derived from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997 and has
been included herein for the convenience of the reader.
BUSINESS WRITTEN
GENERAL
The business of reinsurance generally consists of reinsurers, such as the
Company, who enter into contractual arrangements (treaties) with primary
insurers (ceding companies) whereby the reinsurer agrees to indemnify the ceding
company for all or a portion of the risk associated with the underlying
insurance policy in exchange for a reinsurance premium payable to the reinsurer.
Reinsurers also may enter into retrocessional reinsurance arrangements with
other reinsurers, which operate in a manner similar to the underlying
reinsurance arrangement described above. Under retrocessional reinsurance
arrangements, the reinsurer shifts a portion of the risk associated with the
underlying insurance policy to the retrocessionaires.
Reinsurance agreements may be written on an automatic treaty basis or
facultative basis, and reinsurance may be marketed directly by the reinsurer or
through reinsurance intermediaries or brokers. An automatic treaty provides for
a ceding company to cede contractually agreed-upon risks on specific blocks of
business to a reinsurer and binds that reinsurer without obtaining further
approval from that reinsurer. Facultative reinsurance is the reinsurance of
individual risks whereby a reinsurer has the opportunity to analyze and
separately underwrite a risk prior to agreeing to accept the risk. In addition,
both automatic treaty and facultative reinsurance may be written on either a
quota share basis (a percentage of each risk in the reinsured class of risk is
assumed by the reinsurer from the ceding company with premiums proportional to
such assumed risk being paid to reinsurers) or an excess of loss basis
(reinsurers indemnify the ceding company up to a contractually-specified amount
for a portion of loss exceeding a specified loss retention amount in
consideration of non-proportional premiums being paid).
The Company's operating strategy has been to focus on two core lines of
business: (i) Traditional Life Reinsurance and (ii) Administrative Reinsurance.
Traditional Life Reinsurance includes ordinary life reinsurance and group life
reinsurance. Administrative Reinsurance includes automobile credit life and
disability. These two core lines of business cover the following risks: (i)
mortality and morbidity, (ii) investment, (iii) lapsation, and (iv) medical
expense, disability and accident. The Company writes reinsurance predominantly
on a direct basis with primary life insurance companies. Life Reassurance has a
closed block of primary insurance in force consisting of single premium
annuities issued prior to 1986. In addition, the Administrative Reinsurance line
of business, which focuses on administering primary life insurance in force,
includes closed blocks of directly written life insurance. In 1997, the Company
made a strategic decision to withdraw from the group accident and health and
special risk reinsurance business.
38
<PAGE> 44
The following table sets forth selected information for the indicated
periods concerning the Company's insurance operations:
DISTRIBUTION OF POLICY REVENUES AND INSURANCE IN FORCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(IN THOUSANDS, EXCEPT IN FORCE DATA)
<S> <C> <C> <C> <C> <C> <C>
Policy revenues:
Ordinary life reinsurance........... $268,902 59.6% $243,672 63.6% $224,998 64.1%
Group life reinsurance.............. 23,213 5.2 24,442 6.4 23,913 6.8
Administrative Reinsurance.......... 18,013 4.0 2,714 0.7
Automobile credit life and
disability........................ 1,211 0.2 -- 0.0 -- 0.0
Group accident and health and
special risk reinsurance.......... 139,653 31.0 112,403 29.3 101,964 29.1
-------- ----- -------- ----- -------- -----
Total policy revenues........ $450,992 100.0% $383,231 100.0% $350,875 100.0%
======== ===== ======== ===== ======== =====
Insurance in force at end of year (in
millions and before reinsurance
ceded):
Ordinary life reinsurance........... $103,560 $ 83,668 $ 74,167
Group life reinsurance.............. 7,933 6,430 7,046
Administrative Reinsurance.......... 4,519 1,185 --
-------- -------- --------
Total insurance in force............ $116,012 $ 91,283 $ 81,213
======== ======== ========
Ordinary life lapse ratio............. 9.4% 10.8% 9.9%
</TABLE>
ORDINARY LIFE REINSURANCE
Ordinary life reinsurance is generally the reinsurance of individual term
life insurance policies, whole life insurance policies, universal life insurance
policies, and joint and survivor insurance policies. The Company's ordinary life
line of business includes all of these products.
Substantially all of the Company's policy revenues with respect to ordinary
life reinsurance are written on an automatic treaty basis. Ordinary life
reinsurance is written on a facultative basis only in limited circumstances,
generally for primary insurers with which the Company has automatic treaty
reinsurance business. Facultative reinsurance is individually underwritten by
the Company for each policy to be reinsured, with the pricing and other terms
established at the time the policy is underwritten based upon rates negotiated
in advance. Most of the Company's ordinary life reinsurance business is written
on a quota share basis. The Company generally requires ceding companies to
retain at least 10% of every risk, whether the business is written on an excess
or quota share basis. The Company generally limits its own net liability on any
one ordinary life risk to $1.0 million. The Company's reinsurance agreements
frequently provide for rights of recapture, which permit the ceding company to
increase the amount of liability it retains on the reinsured policies after the
policies have remained in force for a designated period of time (generally
between ten and twenty years). Accordingly, an increase in the amount of
liability retained by the ceding company will decrease both the Company's
insurance in force and premiums to be received from the reinsured policies.
The Company's ordinary life reinsurance agreements typically remain in
force for the life of the underlying policies reinsured. The Company is entitled
to renewal policy revenues absent the death of the insured, voluntary surrender
or lapse of the policy due to nonpayment of premium or the recapture by the
ceding company of the risks reinsured.
39
<PAGE> 45
The following table sets forth the Company's policy revenues on ordinary
life reinsurance first year business and renewal business for the periods
indicated:
DISTRIBUTION OF FIRST YEAR AND RENEWAL POLICY REVENUES
FOR ORDINARY LIFE REINSURANCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Ordinary life reinsurance
policy revenues:
First year(1).............. $ 36,217 13.5% $ 17,736 7.3% $ 13,248 5.9%
Renewal.................... 232,685 86.5 225,936 92.7 211,750 94.1
-------- ----- -------- ----- -------- -----
Total ordinary life
reinsurance policy
revenues................... $268,902 100.0% $243,672 100.0% $224,998 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) First year policy revenues are premiums received within one year of the date
of issuance of the underlying policy, whether reinsured by treaties entered
into prior to or during the indicated period.
As of December 31, 1996, the Company reinsured ordinary life insurance
business under treaties with approximately 450 ceding companies. In 1996, 45
ceding companies each accounted for at least $1.0 million of ordinary life
reinsurance policy revenues and in the aggregate represented approximately 89%
of the Company's ordinary life reinsurance policy revenues. The Company markets
its ordinary life reinsurance to a broad cross section of companies, which vary
in size, corporate structure and geographic location. No ordinary life ceding
company accounted for more than 10% of the Company's policy revenues in 1996.
The Company occasionally reinsures ordinary life insurance business on an
experience rated basis, whereby the ceding company receives a refund of a
portion of the profits resulting from favorable claims experience with respect
to the underlying policies. Experience rating refunds amounted to $5.1 million,
$4.4 million and $2.8 million for 1996, 1995 and 1994, respectively.
The Company reinsures, or retrocedes, portions of certain risks for which
it has accepted liability. The Company's policy is to retain up to $1.0 million
of liability on any one life for ordinary life insurance. The next $10.0 million
of liability in excess of $1.0 million is retroceded to a pool of ten
retrocessionaires. In certain limited circumstances the Company reinsures
policies where the underlying risk exceeds $11.0 million. In such cases, the
Company retrocedes any such risk in excess of $11.0 million on a facultative
basis.
Each retrocessionaire in the Company's current ordinary life pool reinsures
a percentage of each risk that is retroceded to the pool. Each of the domestic
participants in the pool is rated "A-" or better by A.M. Best. Although the
foreign retrocessionaires, which constitute 20% of the pool, are not rated by
A.M. Best, each of the foreign retrocessionaires provides the Company with an
irrevocable letter of credit drawn on a U.S. bank or a U.S. branch of a foreign
bank in the amount of the reserves held by such retrocessionaire for the benefit
of the Company. If a foreign retrocessionaire were to default on its payments,
the Company could collect such funds by exercising its rights under the
applicable letter of credit. To date, the Company has not experienced a material
default in connection with its retrocessional arrangements nor any material
difficulty in collecting claims recoverable from its retrocessionaires.
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<PAGE> 46
GROUP LIFE REINSURANCE
Group life reinsurance is the reinsurance of various types of group life
policies. These policies generally include employee-employer group term life
(representing the majority of such business), voluntary and supplemental term
life, association or affinity term life, group universal life and voluntary
group universal life. Group life reinsurance generally is written on an annual
basis resulting in the terms of such contracts being subject to renegotiation or
cancellation each year. The Company typically reinsures group life clients on an
experience rated basis, whereby the ceding company receives a refund of a
portion of the profits resulting from favorable claims experience with respect
to the underlying policies. Group life reinsurance policy revenues were $23.2
million, $24.4 million and $23.9 million in 1996, 1995 and 1994, respectively.
Experience rating refunds amounted to $3.1 million, $3.8 million and $2.4
million for 1996, 1995, and 1994, respectively.
The Company markets its group life reinsurance to a broad cross section of
client entities, which vary in size, corporate structure and geographic
location. No group life client accounted for more than 5% of the Company's
policy revenues in 1996.
The Company's group life retrocessionaire is rated "A" by A.M. Best and the
Company has not experienced any material difficulties in its recovery of group
life claims. The Company's retention limit for group life insurance business
generally may be in an amount up to $350,000, with amounts in excess thereof
being retroceded.
ADMINISTRATIVE REINSURANCE
In furtherance of REALIC's strategy of providing its clients with a
financial benefit through block reinsurance of existing insurance in force and
assisting those clients who wish to discontinue the administration of older
non-core blocks of business, the Company established its Administrative
Reinsurance line of business. By combining an administrative transfer with block
reinsurance of insurance in force, the Company's clients may benefit financially
in two ways: by realizing the embedded value of the in force and freeing target
surplus, and by reducing overhead and variable expenses associated with these
older blocks.
Administrative Reinsurance takes at least two forms: the reinsurance of
non-core existing insurance in force from life insurers, and the acquisition of
life insurance companies that lack critical mass to effectively market products
and efficiently administer blocks of insurance. In either case, the Company,
through REALIC, organizes the conversion of the client's block of business to
the systems of its third party administrator, Cybertek Corporation ("Cybertek"),
and ceases new marketing of the products reinsured. Before entering into
agreements for the acquisition of either blocks of business or insurance
companies, management of the Company conducts a review of each company's
underwriting standards and procedures and assesses each company's claims
history.
REALIC utilizes the services of an outside administrator, Cybertek, to
provide most of the administrative services needed for the primary business. The
administrative services provided by Cybertek are set forth in a seven-year
agreement between Cybertek and REALIC, and include premium processing, billing,
policyholder service and claims administration. The balance of REALIC's
administrative services and the supervision of Cybertek are performed by
employees of REALIC and Life Reassurance.
AUTOMOBILE CREDIT LIFE AND DISABILITY REINSURANCE
During 1996, the Company entered into the automobile credit life and
disability reinsurance line of business. In July 1996, the Company entered into
certain transactions with Resource Financial Corporation ("Resource"), which was
formerly Ryan Dealer Group and a subsidiary of Aon Corporation ("Aon"). Ryan
Dealer Group had over thirty years experience in marketing and issuing, through
its affiliates, credit life and disability insurance products in connection with
the sale of
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<PAGE> 47
automobiles. Ryan Dealer Group was purchased from Aon by its management
employees and renamed Resource. Resource also purchased from Aon a life
insurance carrier, American Combined Life Insurance Company, which was renamed
Resource Life Insurance Company ("Resource Life").
The Company's transactions with Resource included (i) the purchase of 5.9%
of the voting and 32.7% of the non-voting stock of Resource, (ii) the investment
of $15.0 million in the preferred stock of, and a $5.0 million loan to, an
intermediate holding company of Resource Life, and (iii) reinsurance
arrangements between Resource Life and Life Reassurance. The funds invested and
loaned to the intermediate holding company have been contributed to and are now
retained by Resource Life as capital and surplus.
Much of the business produced by Resource Life originates from automobile
dealerships that own reinsurance companies. These reinsurance companies are
referred to as Dealer Owned Reinsurance Companies (each, a "DRC"). Generally,
business sold at a dealership will be reinsured to that dealer's DRC on a
written basis for credit life insurance and on an earned basis for credit
disability insurance. Resource Life entered into reinsurance arrangements with
Life Reassurance under which a substantial majority of the credit life and
disability risks are reinsured to Life Reassurance which then retrocedes such
risks to the DRCs.
Life Reassurance also has entered into reinsurance agreements with
affiliates of Aon, and in connection with such reinsurance arrangements and the
arrangements with Resource Life, Life Reassurance agreed to pay contingent
consideration to a subsidiary of Aon based on premiums produced by Resource for
a period of five years subsequent to July 1, 1996.
GROUP ACCIDENT AND HEALTH AND SPECIAL RISK REINSURANCE
In 1997, the Company made a strategic decision to withdraw from the group
accident and health and special risk reinsurance business. This line of business
provided approximately 20% of revenues for the year ended December 31, 1997. The
decision to exit this line of business primarily was motivated by the need for
additional capital in its Traditional Life Reinsurance and Administrative
Reinsurance lines of business and the deterioration in accident and health
morbidity experience. The Company does not expect this line of business to
affect materially future results.
Group accident and health reinsurance consists of the reinsurance of
medical expense, disability and accident risks. Special risk reinsurance
consists principally of accidental death coverage and catastrophic excess of
loss coverage, as well as occupational accident coverage. In the substantial
majority of the Company's group accident and health reinsurance treaties, the
original client is a self insured corporate health plan. Reinsurance for such
self insured plans is secured in order to minimize the risk to the plan of
claims well in excess of those originally projected. The reinsurance is usually
in the form of specific and aggregate stop loss coverage. Specific stop loss
coverages provide for reimbursement of individual losses in excess of a
specified per person retention. Aggregate stop loss covers accumulations of
claims within the specified retention, once they exceed an agreed percentage
(usually 125%) of the total original estimated claims cost. The average
specified retention is generally at a level in excess of $25,000 to $100,000 per
person. Group accident and health and special risk reinsurance policy revenues
were $139.7 million, $112.4 million and $102.0 million in 1996, 1995 and 1994,
respectively.
The Company generally participates in group accident and health reinsurance
through reinsurance facilities, and in the case of special risk reinsurance,
through pool arrangements. Such reinsurance facilities typically are formed by
managing general underwriters to accept given types of risk. The managing
general underwriters then market their facilities and invite reinsurers to share
the risks. Usually, reinsurance facilities consist of several reinsurance
companies. Other functions performed by managing general underwriters typically
include underwriting of the reinsurance risk, adjustment and payment of claims,
marketing and accounting.
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<PAGE> 48
Reinsurance of group accident and health and special risk business
generally is written on an annual basis resulting in the terms of such contracts
being subject to renegotiation or cancellation each year. Many of the specific
and aggregate medical facilities have a profit commission feature which is based
on the profitability of the treaty.
A substantial portion of the group accident and health and special risk
business was written on an excess basis as measured by policy revenues.
At December 31, 1996, the Company reinsured risks under treaties with
approximately 150 ceding client entities with respect to group accident and
health and special risk business. In 1996, twenty-nine ceding client entities
each accounted for at least $1.0 million of group accident and health or special
risk policy revenues and represented, in the aggregate, approximately 89% of the
Company's group accident and health and special risk policy revenues. The
Company markets its group accident and health and special risk reinsurance to a
broad cross section of client entities, which vary in size, corporate structure
and geographic location. No group accident and health or special risk ceding
client entity accounted for more than 5% of the Company's policy revenues in
1996.
On group health reinsurance, the Company generally retains up to $300,000
for any one insured person per year. The Company's net liability in excess of
its retention up to $1.0 million is retroceded to a pool of reinsurers and the
next $1.0 million of liability is retroceded to a single retrocessionaire. For
one group health client, the Company has a retrocessional arrangement with a
single retrocessionaire. The Company has not experienced any material difficulty
in collecting claims recoverable from its group health retrocessionaires.
On special risk reinsurance, the Company generally retains up to $1.0
million on any one risk. Amounts in excess of $1.0 million are retroceded to a
syndicate of reinsurers in Europe. The Company has not experienced any
difficulty in collecting claims recoverable from its special risk
retrocessionaires.
UNDERWRITING
Senior management has developed underwriting guidelines, policies and
procedures with the objective of controlling the quality and pricing of business
written. The Company's underwriting process emphasizes close collaboration among
its underwriting, actuarial, administration and claims departments.
The Company determines whether to write reinsurance business by considering
many factors, including the type of risks to be covered, ceding company
retention and binding authority, product and pricing assumptions and the ceding
company's underwriting standards, financial strength and distribution systems.
The Company generally does not assume 100% of a risk and requires the ceding
company to retain at least 10% of every reinsured risk. The Company will assume
a substantial portion of the risk in connection with Administrative Reinsurance.
The Company regularly updates its underwriting policies, procedures and
standards to take into account changing industry conditions, market developments
and changes in medical technology. The Company endeavors to ensure that the
underwriting standards and procedures of its ceding client entities are
compatible with those of the Company. Toward this end, the Company conducts
periodic reviews of the ceding clients' underwriting and claims procedures. The
Company maintains its underwriting manual, which is distributed for use by its
ceding clients, to reflect current medical technology and the Company's
underwriting standards. In addition, with respect to a portion of the Company's
group reinsurance business, certain underwriting functions are performed on the
Company's behalf by managing general underwriters according to underwriting
guidelines reviewed by the Company.
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<PAGE> 49
MARKETING
The Company has developed its business on the basis of direct marketing
relationships established over many years through responsive service. The
Company's senior management is directly involved in all aspects of the Company's
marketing efforts, including the formulation, execution and evaluation of
marketing strategies, the identification of marketing opportunities and the
maintenance of relationships with senior executives at client companies. The
Company seeks to evaluate each client's specific reinsurance needs, tailor
reinsurance programs to meet those needs and be responsive in processing claims.
The Company believes this strategy will enable it to achieve its objective of
favorably competing on the basis of service as well as price.
In January 1996, the Company announced the creation of the Office of Life
Marketing. The Office of Life Marketing is responsible for direct marketing of
life reinsurance products and group reinsurance products. These group
reinsurance products include group life, major medical, and catastrophic excess
of loss business, all of which are marketed on a direct basis. The Office of
Life Marketing consists of executives having expertise in various disciplines
within the insurance industry. These disciplines include actuarial, legal,
marketing and underwriting. The Office of Life Marketing is designed to provide
excellent service to the Company's clients by working with clients to identify
and address their specific needs.
During 1996, substantially all policy revenues with respect to ordinary
life and group life reinsurance business were written directly while
approximately 11% of group accident and health and special risk reinsurance was
written directly. The remaining 89% of group accident and health and special
risk reinsurance was placed through reinsurance intermediaries, and of that
amount, 27% was placed by a single intermediary, D.W. Van Dyke and Company of
Connecticut, Inc. Intermediaries solicit, negotiate or place reinsurance
cessions or retrocessions on behalf of a ceding insurer, reinsurer or a
reinsurance facility. Intermediaries do not have the authority to bind the
Company with respect to reinsurance agreements, and the Company does not commit
in advance to accept any portion of the business that intermediaries submit.
CLAIMS ADMINISTRATION
The Company's claims department (i) reviews and verifies reinsurance
claims, (ii) obtains information necessary to evaluate claims, (iii) determines
the Company's liability with respect to claims and (iv) arranges for timely
claim payments. Claims are subjected to a thorough review process to ensure that
the risk was properly ceded, the claim complies with the contract provisions and
the ceding company is current in the payment of reinsurance policy premiums to
the Company. Ordinary life and group life claims generally are reported on an
individual basis by the ceding entity. The ceding entity will provide the
Company with proofs of loss, which the Company then reviews for compliance with
treaty terms.
Ordinary life claims under policies reinsured on a facultative basis and
underwritten within the five previous years and ordinary life claims under
policies reinsured under automatic treaties and underwritten within the two
previous years generally are reviewed by the underwriting department. The claims
department also investigates claims generally for evidence of misrepresentation
in the policy application and approval process. In addition to reviewing and
paying claims, the claims department monitors both specific claims and overall
claims handling procedures of ceding companies.
Group accident and health claims generally are reported to the Company by
the ceding entity on an aggregate basis. The ceding entity will provide the
Company with a listing of the claims paid by the ceding entity, which the
Company then reviews for compliance with treaty terms.
Cybertek provides claims administration for the Company's Administrative
Reinsurance. Cybertek reviews and processes all claims information and provides
for the payment of claims. The Company reviews and must approve prior to payment
all claims received by Cybertek which involve
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<PAGE> 50
a death benefit in excess of $100,000 or in which the insured died within two
years of policy issuance.
POLICY BENEFIT LIABILITIES
Policy benefit liabilities comprise the majority of the Company's financial
obligations. Policy benefit liabilities for other than annuities and interest
sensitive life insurance products reflected in the Company's consolidated
financial statements included herein are based upon the Company's best estimates
of mortality, persistency and investment income, with appropriate provision for
adverse deviation and the use of the net level premium method. The liabilities
for policy benefits established by the Company with respect to individual risks
or classes of business may be greater or less than those established by ceding
companies due to the use of different mortality and other assumptions. Policy
benefit liabilities for annuities and interest sensitive life insurance products
are reported at the accumulated fund balance of such contracts. Policy benefit
liabilities include both mortality and morbidity claims in the process of
settlement and claims that have been incurred but not yet reported. Actual
experience in a particular period may be worse than assumed experience and,
consequently, may adversely affect the Company's operating results for such
period. See Notes 2 and 6 of to the Company's consolidated financial statements
for certain additional information regarding reserve assumptions under generally
accepted accounting principles ("GAAP").
INVESTMENTS
All investments made by the Company are governed by the general
requirements and guidelines established and approved by the Boards of Directors
of the Company and the Subsidiaries and by qualitative and quantitative limits
prescribed by Connecticut, Illinois and Texas insurance laws and regulations.
The Company's investment policy is designed to maintain a high quality
portfolio, maximize current income, maintain a high degree of liquidity, and
attempt to match the cash flows of the portfolio to the required cash flows of
the Company's liabilities.
At December 31, 1996, the Company's invested assets had an aggregate fair
value of $1,833.2 million, of which 94% were fixed maturities with a weighted
average investment quality rating of "A". At December 31, 1996, the weighted
average duration of invested assets was 6.3 years. In the event the duration of
invested assets were to materially differ from the duration of liabilities and
if significant rapid increases or decreases in market interest rates were to
occur, the Company could be required to sell assets at a loss or incur
liabilities with respect to policies in excess of investment income. Such
consequences could have a material adverse effect on the Company's capital
resources and financial condition. Although no assurances as to future
performance can be given, the Company has not experienced any material
differences in cash flows relating to its assets and liabilities.
The Company's investment securities are managed by two professional
investment advisors, Conseco Capital Management, Inc. ("CCM") and Liberty
Capital Advisors, Inc. ("LCA"), each of which manages a segment of the
portfolio. Certain equity and short-term investments aggregating at December 31,
1996 approximately $44.4 million at fair value are managed directly by the
Company. CCM is the primary investment advisor for the Company, managing at
December 31, 1996 81% of its invested assets (approximately $1,480.0 million at
fair value as of December 31, 1996). LCA acts as an investment advisor for the
portion of the Company's invested assets relating to the reinsured universal
life insurance policies of an affiliate of LCA (approximately $244.0 million at
fair value as of December 31, 1996). The LCA-managed assets are held in separate
custody accounts and are managed to achieve a desired spread between investment
earnings and interest credited on the underlying universal life policies. The
agreements with CCM and LCA may be terminated by either party at the end of each
calendar year upon sixty days' notice. The performance of CCM and LCA and the
fees associated with the arrangements are periodically reviewed by the Boards of
Directors of the Company and the Subsidiaries.
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<PAGE> 51
The following table summarizes certain of the Company's investment results
for the years indicated:
INVESTMENT RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total invested assets(1)............................. $1,833,242 $1,504,175 $998,518
Investment income, net of related expenses........... $ 124,340 $ 98,616 $ 82,438
Effective yield rate(2).............................. 7.77% 8.16% 8.15%
Realized investment gains............................ $ 17,210 $ 3,702 $ 89
</TABLE>
- ---------------
(1) Fair value at end of the indicated year.
(2) The effective yield rate equals (i) net pre-tax investment income divided by
(ii) the average of total adjusted invested assets (fixed maturities at
amortized cost) at the end of each calendar quarter included in the
indicated period.
The Company's invested assets consist primarily of fixed maturities and
equity securities, with the majority being fixed maturities. The Company's fixed
maturities are invested primarily in U.S. government obligations, foreign
government obligations, public utilities obligations, corporate fixed
maturities, and mortgage-backed securities. Equity securities are primarily
nonredeemable preferred stock.
Mortgage-backed securities represented approximately 21% of total invested
assets as of December 31, 1996. Investors in these securities are compensated
primarily for reinvestment risk rather than credit quality risk. Investments in
mortgage-backed securities include collateralized mortgage obligations ("CMOs")
and mortgage-backed passthrough securities. Mortgage-backed securities generally
are collateralized by mortgages issued by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), all of which are agencies of
the U.S. government. Of these, only GNMA mortgages are backed by the full faith
and credit of the U.S. government. Credit risk generally is not a consideration
when investing in agency mortgage-backed securities. The Company's
mortgage-backed securities portfolio had a weighted average investment quality
rating of AAA at December 31, 1996.
At December 31, 1996 approximately 36% of the Company's mortgage-backed
investment portfolio consists of planned amortization class ("PAC") and target
amortization class ("TAC") instruments. These investments are designed to
amortize in a more predictable manner by shifting the primary risk of prepayment
of the underlying collateral to investors in other tranches ("support classes")
of the CMO.
In addition to the fixed maturities and equity securities, approximately 3%
of the Company's invested assets consisted of policy loans at December 31, 1996.
These policy loans present no credit risk because the amount of the loan cannot
exceed the obligation due the ceding company upon the death of the insured or
surrender of the underlying policy. The policy loan interest rates charged are
determined by the provisions of the treaties in force and the underlying
policies.
COMPETITION
The Company operates in a highly competitive environment. Reinsurers
compete based upon many factors, including financial strength, A.M. Best rating,
pricing and other terms and conditions of reinsurance agreements, reputation,
service and experience in the lines of business underwritten. The Company
believes that there are over 30 companies with significant competitive positions
within the ordinary life, group life, group accident and health and special risk
reinsurance markets within
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<PAGE> 52
the United States. The Company believes that within this market it is among the
five largest of those companies, based on reinsurance in force.
In connection with Administrative Reinsurance, the nature of the
competition faced by the Company depends on the company targeted for acquisition
or the block of business to be reinsured. Based on results achieved thus far,
the Company believes that it is competitively positioned to achieve its
objectives for growth in this area.
A.M. BEST RATING
Life Reassurance has been rated "A+" (Superior) by A.M. Best every year
since 1981. A.M. Best's ratings for insurance companies currently range from
"A++" to "F", and some companies are not rated. Publications of A.M. Best
indicate that "A++" and "A+" ratings are assigned to those companies which in
A.M. Best's opinion have achieved superior overall performance when compared to
the norms of the life insurance industry and generally have demonstrated a
strong ability to meet their policyholder and other contractual obligations.
Life Reassurance's A.M. Best "Financial Size Category" is Class VIII, which
encompasses companies with adjusted policyholders' surplus of $100.0 million to
$250.0 million.
REALIC is currently rated "A" (Excellent) by A.M. Best, the rating that was
given to REALIC prior to its acquisition by Life Reassurance. Publications of
A.M. Best indicate that "A" and "A-" ratings are assigned to those companies
which in A.M. Best's opinion have a strong ability to meet their obligations to
policyholders over a long period of time. During 1996, REALIC's A.M. Best
"Financial Size Category" was Class VI, which encompasses companies with
adjusted policyholders' surplus of $25.0 million to $50.0 million. At December
31, 1996, REALIC's adjusted policyholder surplus was approximately $39.0
million.
In evaluating a company's financial and operating performance, A.M. Best
reviews such company's profitability, leverage and liquidity as well as its book
of business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its policy reserves and
the experience and competency of its management. A.M. Best's ratings are based
upon factors of concern to policyholders, agents and intermediaries and are not
directed toward the protection of investors.
EMPLOYEES
As of December 31, 1996, the Company had 123 employees. None of these
employees is represented by a labor union. The Company believes that its
relationship with its employees is generally satisfactory.
REGULATION
The Company and the Subsidiaries are subject to the insurance laws and
regulations of Connecticut, Illinois and Texas, the domiciliary states of the
Subsidiaries, and the laws and regulations of the other states in which the
Subsidiaries are licensed to do business. At present, Life Reassurance is
licensed to conduct business or is an authorized reinsurer in all 50 states, the
District of Columbia and Puerto Rico, and REALIC is licensed to conduct business
in all such locations except for New Hampshire, New York, the District of
Columbia and Puerto Rico. The insurance laws and regulations, as well as the
level of supervisory authority that may be exercised by the various state
insurance departments vary by jurisdiction, but generally grant broad powers to
supervisory agencies or state regulators to examine and supervise insurance
companies and insurance holding companies with respect to every significant
aspect of the conduct of the insurance business. These laws and regulations
generally require insurance companies to meet certain solvency standards and
asset tests, to maintain minimum standards of business conduct and to file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership and financial condition. The Subsidiaries
generally are required to file annual
47
<PAGE> 53
and quarterly statutory financial statements in each jurisdiction in which they
are licensed. Additionally, the Subsidiaries are subject to periodic examination
by the insurance departments of the jurisdictions in which each is licensed,
authorized and accredited. The Connecticut Insurance Department and the Texas
Department of Insurance completed their most recent respective examinations of
Life Reassurance and TexasRe for the years ended December 31, 1987 through
December 31, 1992, and the Texas Department of Insurance is in the process of
completing its examination of TexasRe for years through December 31, 1995. The
Illinois Department of Insurance completed its most recent examination of REALIC
for years through December 31, 1991 and is in the process of completing an
examination of REALIC for subsequent years through December 31, 1995. The
results of each of the completed examinations contained no findings which would
have a material adverse effect on the operations of any of the Subsidiaries.
Although the rates and policy terms of primary insurance agreements are
regulated by state insurance departments, the rates, policy terms and conditions
of reinsurance agreements generally are not subject to regulation by any
regulatory authority.
RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS. The principal sources of cash
for the Company to make payments of principal, interest and dividends are
payments under two surplus notes issued by TexasRe to the Company in connection
with the purchase of Life Reassurance from General Reinsurance Corporation in
1988 (the "Surplus Debentures") and dividends paid by TexasRe. TexasRe's
principal sources of funds are dividends from Life Reassurance and distributions
by Life Reassurance under the Tax Allocation Agreement, a portion of which
distributions are used to pay TexasRe's income taxes. Under current Connecticut,
Illinois and Texas laws, any proposed payment of a dividend or distribution
which, together with dividends or distributions paid during the preceding twelve
months, exceeds the greater of (i) 10% of statutory capital and surplus as of
the preceding December 31 or (ii) statutory net gain from operations for the
preceding calendar year, is designated an "extraordinary dividend" and may not
be paid until either it has been approved, or a 30-day waiting period shall have
passed during which it has not been disapproved, by the Connecticut Insurance
Commissioner, the Director of Insurance of the State of Illinois (the "Illinois
Director of Insurance") or the Texas Insurance Commissioner, as the case may be.
In addition, Connecticut law provides that an insurance company may not pay
dividends in an amount exceeding its earned surplus without prior regulatory
approval. Life Reassurance has received approval from the Connecticut Department
of Insurance to define its earned surplus for this purpose to include amounts of
paid in surplus in excess of $125.0 million, and as of December 31, 1996, such
earned surplus was $43.9 million. Currently, no prior approval of the Texas
Department of Insurance is required to pay scheduled principal or interest on
the Surplus Debentures provided that, after giving effect to any such payment,
the statutory surplus of TexasRe exceeds $125.0 million. Life Reassurance paid
$14.9 million of dividends in 1996, although the maximum amount of dividends
Life Reassurance could have paid in 1996 without the prior approval of the
Connecticut Insurance Commissioner was $34.8 million. Life Reassurance paid the
maximum amount of dividends permitted without the prior approval of the
Connecticut Insurance Commissioner of $30.9 million and $13.5 million in 1995
and 1994, respectively. TexasRe had the capacity to pay dividends of $27.1
million, $28.2 million and $15.4 million in 1996, 1995 and 1994, respectively,
without the prior approval of the Texas Insurance Commissioner. TexasRe paid
dividends aggregating $12.1 million and $15.0 million in 1996 and 1995,
respectively. No dividends were paid by TexasRe in 1994. REALIC has not paid any
dividends subsequent to its acquisition by Life Reassurance in July 1995.
The Connecticut, Illinois and Texas insurance laws require that the
statutory surplus of Life Reassurance, REALIC and TexasRe, as the case may be,
following any dividend or distribution, be reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs. The Insurance
Commissioner of any such state may bring an action to enjoin or rescind the
payment of a dividend or distribution that would cause statutory surplus to be
unreasonable or inadequate under this standard.
In the event of a default on the Company's debt or the bankruptcy,
liquidation or other reorganization of the Company, the creditors and
stockholders of the Company will have no right to
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<PAGE> 54
proceed against the assets of the Life Reassurance, REALIC or TexasRe. If Life
Reassurance, REALIC or TexasRe were to be liquidated, such liquidation would be
conducted by the Connecticut, Illinois or Texas Insurance Commissioner, as the
case may be, as the receiver with respect to such insurance company's property
and business. Under the Connecticut, Illinois and Texas insurance laws, all
creditors of such insurance companies, including, without limitation, holders of
its reinsurance agreements and the various state guaranty associations, would be
entitled to payment in full from such assets before the Company, as a
stockholder, would be entitled to receive any distribution therefrom.
NAIC REGULATORY CHANGES. The NAIC and insurance regulators are in the
process of reexamining existing laws and regulations and their application to
insurance companies. In particular, this reexamination has focused on insurance
company investment and solvency issues and, in some instances, has resulted in
new interpretations of existing law, the development of new laws and the
implementation of nonstatutory guidelines. The NAIC has formed committees and
appointed advisory groups to study and formulate regulatory proposals on diverse
issues. As part of this review, the NAIC recently adopted the Valuation of Life
Insurance Policies Model Regulation (the "Model Regulation").
If adopted in its current form, the Model Regulation will have the greatest
impact on level term life insurance products with current premiums guaranteed
for more than five years. Companies with these products generally will have to
increase reserves above the current levels or limit the period of guaranteed
premiums to five years. The Model Regulation also will impact the reserve
requirements for other increasing premium products, deficiency reserves and
certain benefit guarantees in universal life products. The Model Regulation will
not impact the financial statements of the Company prepared in accordance with
GAAP; however, as a statutory accounting principle, the Model Regulation may
impact the statutory financial statements of the Subsidiaries.
CODIFICATION. In addition to the above regulatory changes being reexamined
and considered by the NAIC, the NAIC is in the process of codifying statutory
accounting principles. The purpose of such codification is to establish a
uniform set of accounting rules and regulations for use by insurance companies
in financial report preparation in connection with financial reporting to
regulatory authorities. The Company is unable to determine what impact, if any,
this codification will have on its Subsidiaries' statutory surplus requirements.
ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty laws in most
states in which the Company operates, insurers can be assessed for policyholder
losses incurred by insolvent insurance companies. At present, most insolvency or
guaranty laws provide for assessments based upon the amount of primary
insurance, rather than reinsurance, underwritten in a given jurisdiction.
Primary insurance written by REALIC is subject to such laws. REALIC incurred an
immaterial amount of guaranty fund assessments in 1996. To date, the Company has
paid only a de minimis amount of assessments with respect to insurer insolvency
proceedings.
INSURANCE HOLDING COMPANY REGULATIONS. The Company and the Subsidiaries
are subject to regulation under the insurance and insurance holding company
statutes of Connecticut, Illinois and Texas. The insurance holding company laws
and regulations vary from jurisdiction to jurisdiction, but generally require
insurance and reinsurance subsidiaries of insurance holding companies to
register with the applicable state regulatory authorities and to file with those
authorities certain reports describing, among other information, their capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations. The insurance holding company statutes also require
prior regulatory agency approval or, in certain circumstances, prior notice of
certain material intercompany transfers of assets as well as certain
transactions between insurance companies, their parent companies and affiliates.
Under the Connecticut, Illinois and Texas insurance laws, unless (i)
certain filings are made with the Connecticut Insurance Department, the Illinois
Department of Insurance or the Texas Department of Insurance, as the case may
be, (ii) certain requirements are met, including, in the case of Texas, a public
hearing and/or (iii) approval or exemption is granted by the applicable
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insurance commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as the
Company, which controls a Connecticut insurance company or an Illinois insurance
company or a Texas insurance company, or merge with such a holding company, if
as a result of such transaction such person would "control" the insurance
holding company. "Control" is presumed to exist in Connecticut, Illinois and
Texas if a person directly or indirectly owns or controls 10% or more of the
voting securities of another person.
FEDERAL REGULATION. Although the federal government generally does not
directly regulate the insurance or reinsurance industries, federal legislation,
financial services regulation and federal taxation can significantly affect the
insurance business. In recent years, increased scrutiny has been placed upon the
insurance regulatory framework and legislation has been introduced in Congress
which could result in the federal government assuming some role in the
regulation of the insurance industry.
It is not possible to predict the future impact of changing state and
federal regulation on the operations of the Subsidiaries or the Company, and
there can be no assurance that existing insurance related laws and regulations
will not become more restrictive in the future or that laws and regulations
enacted in the future will not be more restrictive.
TAX MATTERS
Under applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), a life insurance company is not permitted to file a
consolidated federal income tax return with a company that is not a life
insurance company until such life insurance company has been a member of the
"affiliated group" (as such term is defined for federal income tax purposes) for
five taxable years. REALIC filed a separate company income tax return for 1996.
Although TexasRe and Life Reassurance (together, the "Life Tax Group") as life
insurance companies, could and did file a consolidated federal income tax
return, prior to 1994 they could not file a consolidated federal income tax
return with the Company. As a result, to the extent the Company generated
taxable losses, such losses could not be used to offset the taxable income
reported on the consolidated federal income tax return of the Life Tax Group.
The Company began filing consolidated federal income tax returns with the Life
Tax Group commencing with its 1994 federal income tax return. Only losses
generated by the Company during consolidated years can be used to offset taxable
income of the Life Tax Group reported on the consolidated federal income tax
return and those losses can only be so used to a limited extent (generally, the
lesser of 35% of such losses or 35% of the taxable income of the Life Tax
Group).
Pursuant to the Tax Allocation Agreement, the members of the Life Tax Group
are required to pay to the Company an amount of tax measured by the total amount
that would have been due and payable by the Life Tax Group to the taxing
authorities had the Life Tax Group filed a life insurance company consolidated
federal income tax return. That amount is required to be paid even if the
Company is, due to its own tax status apart from the Life Tax Group, in a net
tax loss or nontaxable position. In the event that the Life Tax Group incurs tax
losses, credits or other benefits (including tax loss or credit carryforwards)
that reduce the tax liability of the consolidated group consisting of the Life
Tax Group and the Company, the Company is required to pay to the Life Tax Group
the amount of such reduction.
PROPERTIES
The Company's principal operations are conducted from approximately 51,000
square feet of leased office space located at 969 High Ridge Road, Stamford,
Connecticut 06905. The lease with respect to such space expires on September 30,
2004. The rental expense paid by the Company under the lease during 1996 was $.9
million.
LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation or
arbitration.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the current directors and executive officers of
the Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------------- --- -------------------------------------------------
<S> <C> <C>
Rodney A. Hawes, Jr.......... 60 Chairman of the Board, Chief Executive Officer,
Office of the Chairman and Director
Douglas M. Schair............ 52 Vice Chairman of the Board, Chief Investment
Officer, Office of the Chairman and Director
Jacques E. Dubois............ 48 President, Chief Operating Officer, Office of the
Chairman and Director
Chris C. Stroup.............. 37 Executive Vice President, Chief Financial Officer
and Director
Samuel V. Filoromo........... 53 Vice President-Operations and Director
Carolyn K. McCandless........ 52 Director
K. Fred Skousen.............. 55 Director
T. Bowring Woodbury, II...... 60 Director
W. Weldon Wilson............. 37 Vice President, General Counsel and Secretary
</TABLE>
Mr. Hawes has served as Chairman of the Board and Chief Executive Officer
of the Company since November 1988 and in the Office of the Chairman since May
1992. Mr. Hawes also has served as Chairman of the Executive Committees of Life
Reassurance since 1988 and REALIC since 1995, and Chairman of the Boards of Life
Reassurance since July 1993, REALIC since August 1995 and of AML since October
1997. In addition, Mr. Hawes is associated with Insurance Investment Associates
("IIA"), which provides investment banking services to the insurance industry,
which he founded in 1972.
Mr. Schair has served as Vice Chairman of the Board of the Company since
November 1988 and Chief Investment Officer and in the Office of the Chairman
since May 1992. Mr. Schair also has served as Vice Chairman of the Board and
Chief Investment Officer of Life Reassurance since July 1993, of REALIC since
August 1995 and of AML since October 1997. In addition, Mr. Schair has been
associated with IIA since 1975.
Mr. Dubois has served as President and Director of the Company since
November 1988 and Chief Operating Officer and in the Office of the Chairman
since May 1992. Mr. Dubois also serves as President and Chief Executive Officer
of Life Reassurance and as Chief Executive Officer of REALIC and of AML. In
addition, Mr. Dubois has been associated with IIA since 1979.
Mr. Stroup has served as Executive Vice President and Chief Financial
Officer and as a Director of the Company since June 1996. Mr. Stroup also has
served as Executive Vice President and Chief Financial Officer of Life
Reassurance and Vice President and Chief Financial Officer of REALIC since
August 1996 and of AML since October 1997. From 1983 to 1996, Mr. Stroup was
associated with the firm of Ernst & Young LLP, where he served as a partner from
1993, providing accounting and consulting services to the insurance industry.
Mr. Filoromo has served as Vice President-Operations of the Company since
June 1996 and served as Vice President and Chief Financial Officer of the
Company from May 1992 to June 1996 and as a Director of the Company since May
1992. Mr. Filoromo has served as Executive Vice President-Operations of Life
Reassurance since August 1996, and as its Executive Vice President and Chief
Financial Officer from May 1992 to August 1996. He also has served as Vice
President-Operations of REALIC since August 1996 and served as its Chief
Financial Officer from August 1995 to August 1996. From January 1992 to May
1992, Mr. Filoromo was employed on a full-time basis as
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<PAGE> 57
a consultant for the Company. From May 1991 to January 1992, Mr. Filoromo was an
independent consultant. From November 1990 to May 1991, Mr. Filoromo served as a
Senior Vice President of Conseco, Inc. From 1986 to February 1990, Mr. Filoromo
served as Vice President-Finance and Controller of Sun America Corporation.
Ms. McCandless has served as a Director of the Company since November 1992.
Since April 1990, Ms. McCandless has served as Vice President of Human Resources
and Administration for Time Warner Inc. From 1985 to 1990, Ms. McCandless was
Vice President and Director of Employee Benefits for Time Inc.
Dr. Skousen has served as a Director of the Company since November 1992.
Since 1989, Dr. Skousen has been the Dean of the Marriott School of Management
at Brigham Young University, Provo, Utah. From 1983 to 1989, Dr. Skousen held
the Peat Marwick Mitchell Professorship and from 1974 to 1983 served as Director
of the School of Accountancy at Brigham Young University. Dr. Skousen is a
certified public accountant. Dr. Skousen also serves on the board of Geneva
Steel Co.
Mr. Woodbury has served as a Director of the Company since November 1992.
Mr. Woodbury currently serves as a President of the Tacoma, Washington Mission
of The Church of Jesus Christ of Latter-day Saints. From June 1989 to April
1995, Mr. Woodbury served as Senior Vice President and General Counsel of
Consolidated Edison, where he also served as a member of the corporate policy
committee, and from May 1995 through June 1996 he served as a consultant to
Consolidated Edison. From 1987 to 1989, Mr. Woodbury served as Senior Vice
President, General Counsel and Corporate Secretary of Commercial Union Insurance
Company. From 1986 to 1987, Mr. Woodbury served as Executive Vice President,
General Counsel and Corporate Secretary of The Home Insurance Company.
Mr. Wilson has served as Vice President, General Counsel and Secretary of
the Company since May 1992. Mr. Wilson also has served as Executive Vice
President, General Counsel and Secretary of Life Reassurance since June 1995, as
its Senior Vice President, General Counsel and Secretary since January 1992 and
as its Vice President, General Counsel and Secretary since July 1991. Mr. Wilson
also has served as Vice President, General Counsel and Secretary of REALIC since
August 1995 and of AML since October 1997. Prior to joining Life Reassurance,
from May 1989 to June 1991, Mr. Wilson was associated with the law firm of
Johnson & Gibbs in Dallas, Texas. From September 1986 to May 1989, Mr. Wilson
was associated with the law firm of Moore & Peterson in Dallas, Texas.
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DESCRIPTION OF THE UNITS
The summaries of certain provisions of documents described below are not
necessarily complete, and in each instance reference is hereby made to the
copies of such documents (including the definitions therein of certain terms)
which are on file with the Commission. Wherever particular sections of, or terms
defined in, such documents are referred to herein, such sections or defined
terms are incorporated by reference herein. Capitalized terms not defined herein
have the meanings assigned to such terms in the Principal Agreements (as defined
herein).
GENERAL
Each Unit will have a Stated Amount of $ (equal to the last
reported per share sale price of the Common Stock on the NYSE on the date of
this Prospectus). Each Unit will initially consist of (a) a Purchase Contract
under which (i) the holder will purchase from the Company on the Stock Purchase
Date of , 2001, for cash in an amount equal to the
Stated Amount, between of a share and one share of Common Stock of the
Company (depending on the Applicable Market Value of the Common Stock on the
Stock Purchase Date, as described below), subject to adjustment in certain
circumstances, and (ii) Contract Fees will be payable at the Contract Fee Rate
of % of the Stated Amount per annum as described below (see "-- Description
of the Purchase Contracts"), and (b) QUIPS having a QUIPS Liquidation Amount
equal to the Stated Amount, a QUIPS Distribution Rate of % per annum and a
QUIPS and Debenture Maturity Date of , 2003 (see
"-- Description of the QUIPS"), subject to a Call Option granted by the holder
of the Unit to the Call Option Holder which (when aggregated with the Call
Options underlying all other Units) will entitle the Call Option Holder to
acquire the QUIPS underlying the Units (or the Junior Subordinated Debentures
substituted therefor), on or before the Call Option Expiration Date of
, 2001 (i.e., 90 days before the Stock Purchase Date),
in exchange for the Aggregate Consideration Deliverable on Exercise of the Call
Options (see "-- Description of the Call Options"). For so long as a Purchase
Contract remains in effect, such Purchase Contract and the QUIPS or other
Pledged Securities securing it (and, until the Call Option relating to such
Pledged Securities is exercised or expires, the obligations of the holder to the
Call Option Holder thereunder) will not be separable and may be transferred only
as an integrated Unit.
For the period from the date of issuance of the Units to the Stock Purchase
Date, each holder of a Unit will be entitled to receive cash payments of %
of the Stated Amount per annum, payable in arrears on the Quarterly Payment
Dates of , , and of each year
(unless deferred as described herein). Such payments will consist of payments on
the QUIPS or other Pledged Securities plus Contract Fees payable by the Company
or net of Contract Fees payable by the holders, as the case may be. See
"-- Description of the QUIPS -- Distributions", "-- Description of the Call
Options" and "-- Description of the Purchase Contracts -- Contract Fees". If a
holder of a Unit does not provide cash to settle the underlying Purchase
Contract in the manner described herein, cash proceeds from the exercise of the
Junior Subordinated Debenture Put Option or from other Pledged Securities
underlying such Unit will be applied on the Stock Purchase Date to the purchase
of Common Stock pursuant to such Purchase Contract.
The QUIPS underlying a Unit will constitute Pledged Securities that will be
pledged to the Collateral Agent to secure the holder's obligations to the
Company and the Call Option Holder under the Purchase Contract and Call Option
underlying such Unit. If Treasury Securities are exchanged for Pledged
Securities upon exercise of the Call Options or Junior Subordinated Debentures
are distributed in respect of Pledged Securities upon dissolution of the Trust,
the Treasury Securities so exchanged or the Junior Subordinated Debentures so
distributed will automatically be substituted as Pledged Securities in place of
the securities that theretofore had been Pledged Securities. The holder will
also have the right to substitute Treasury Securities as Pledged Securities in
place of the QUIPS or Junior Subordinated Debentures that theretofore had been
Pledged Securities and obtain
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<PAGE> 59
the release of such QUIPS or Junior Subordinated Debentures from the pledge
arrangement as described herein.
Prior to the earlier of the exercise of the Call Options or the Call Option
Expiration Date, such right to substitute Treasury Securities for QUIPS or
Junior Subordinated Debentures as Pledged Securities may not be exercised
without the consent of the Call Option Holder. The Call Option Holder is under
no obligation to grant such consent, and there can be no assurance that such
consent will be granted if a holder desires to exercise this substitution right.
The obligations of the holders of Units under the Purchase Contracts, if
not paid in cash by such holders, will be funded out of payments made in respect
of the Pledged Securities.
Each holder of Units, by acceptance thereof, will, under the terms of the
Principal Agreements and the Purchase Contracts and Call Options underlying such
Units, be deemed to have (a) irrevocably agreed to be bound by the terms of the
Principal Agreements and such Purchase Contracts and Call Options for so long as
such holder remains a holder of such Units, and (b) duly appointed the Unit
Agent as such holder's agent and attorney-in-fact to enter into and perform such
Purchase Contracts and Call Options on behalf of and in the name of such holder.
Subject to applicable law (including, without limitation, United States
Federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Units by tender, in the open market or by
private agreement.
FORMATION OF THE UNITS
At the closing of the offering made hereby, the Underwriters will (a) enter
into Purchase Contracts with the Company and (b) purchase QUIPS from the Trust
for cash. The Underwriters will fund that cash in part by the sale of the Units
offered hereby to the initial investors thereof and in part by the sale of Call
Options (on behalf of such investors) to the Call Option Holder. The QUIPS will
then be pledged to the Collateral Agent to secure the obligations owed to the
Company under the Purchase Contracts and the obligations owed to the Call Option
Holder under the Call Options. The Trust will use that cash to purchase Junior
Subordinated Debentures from the Company. The rights to purchase Common Stock
under a Purchase Contract, together with the QUIPS or other Pledged Securities
pledged to secure the obligations referred to in (a) and (b) below, subject to
(a) the obligations owed to the Company under such Purchase Contract, (b) the
obligations owed to the Call Option Holder under the Call Option relating to
such QUIPS or other Pledged Securities and (c) the pledge arrangements securing
the foregoing obligations, are collectively referred to herein as a "Unit".
The Company will enter into (a) an agreement (the "Master Unit Agreement")
with , as unit agent (together with any successor thereto in such
capacity, the "Unit Agent"), governing the appointment of the Unit Agent as the
agent and attorney-in-fact for the holders of the Units, the Purchase Contracts,
the transfer, exchange or replacement of certificates representing the Units and
certain other matters relating to the Units and (b) an agreement (the "Pledge
Agreement") among the Company, the Collateral Agent and the Call Option Holder
creating a pledge and security interest for the benefit of the Company to secure
the obligations of holders of Units under the Purchase Contracts and a pledge
and security interest for the benefit of the Call Option Holder to secure the
obligations of the holders of Units under the Call Options. In addition the Unit
Agent will enter into an agreement (the "Call Option Agreement") with the Call
Option Holder governing the Call Options. The Master Unit Agreement, the Pledge
Agreement and the Call Option Agreement are collectively referred to herein as
the "Principal Agreements".
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
The Purchase Contracts will be governed by the Master Unit Agreement.
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<PAGE> 60
Each Purchase Contract underlying a Unit (unless earlier terminated) will
obligate the holder of such Unit to purchase, and the Company to sell, on the
Stock Purchase Date, for cash in an amount equal to the Stated Amount, a number
of newly issued shares of Common Stock equal to the Settlement Rate. The
Settlement Rate will be calculated as follows (subject to adjustment under the
circumstances described below under "-- Anti-Dilution Adjustments"):
(a) if the Applicable Market Value is greater than or equal to the
Threshold Appreciation Price of $ (i.e., approximately %
higher than the Stated Amount), the Settlement Rate will be ;
(b) if the Applicable Market Value is less than the Threshold
Appreciation Price but greater than the Stated Amount, the Settlement Rate
will equal the Stated Amount divided by the Applicable Market Value (i.e.,
the Settlement Rate will be calculated so that the Applicable Market Value
of the Common Stock purchasable under each Purchase Contract would equal
the Stated Amount payable therefor); and
(c) if the Applicable Market Value is less than or equal to the Stated
Amount, the Settlement Rate will be one.
"Applicable Market Value" means the average of the Closing Prices per share
of Common Stock on each of the twenty consecutive Trading Days ending on the
last Trading Day immediately preceding the Stock Purchase Date. "Closing Price"
of the Common Stock on any date of determination means the closing sale price
(or, if no closing price is reported, the last reported sale price) of the
Common Stock on the NYSE on such date, or if the Common Stock is not listed for
trading on the NYSE on any such date, as reported in the composite transactions
for the principal United States securities exchange on which the Common Stock is
so listed, or if the Common Stock is not so listed on a United States national
or regional securities exchange, as reported by The Nasdaq Stock Market, or if
the Common Stock is not so reported, the last quoted bid price of the Common
Stock in the over-the-counter market as reported by the National Quotation
Bureau or similar organization, or if such bid price is not available, the
market value of the Common Stock on such date as determined by a nationally
recognized investment banking firm retained for this purpose by the Company. A
"Trading Day" means a day on which the Common Stock (a) is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (b) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of the Common
Stock.
No fractional shares of Common Stock will be issued by the Company pursuant
to the Purchase Contracts. In lieu of a fraction of a share otherwise issuable
in respect of Purchase Contracts being settled by a holder of Units, the holder
will be entitled to receive an amount of cash equal to such fraction times the
Applicable Market Value.
Prior to the Stock Purchase Date, the Common Stock purchasable on
settlement of Purchase Contracts will not be deemed to be outstanding for any
purpose and no holder of Units will have any voting rights, rights to dividends
or other distributions or other rights or privileges of a stockholder of the
Company by virtue of holding such Units.
SETTLEMENT
In order to settle the Purchase Contracts underlying any Units, the holder
of such Units shall, by no later than 10:00 a.m., New York City time, on the
Stock Purchase Date, deliver payment (in the form of a certified or cashier's
check payable to the order of the Company in immediately available funds), at
the offices of the Unit Agent, of an amount equal to the aggregate Stated Amount
of such Units (plus, if there are unpaid Contract Fees accrued on such Purchase
Contracts and payable by the holder on the Stock Purchase Date and the cash
received by the Collateral Agent on such date in respect of the Pledged
Securities securing such Purchase Contracts is less than the amount of such
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unpaid Contract Fees, an amount sufficient to cover such short-fall). The Common
Stock purchased on settlement of such Purchase Contracts will then be issued and
delivered to such holder or such holder's designee and the Pledged Securities
securing such Purchase Contracts (or, in the case of Treasury Securities, the
proceeds from the payment of such Treasury Securities at maturity, net of any
unpaid Contract Fees payable by the holder accrued thereon to the Stock Purchase
Date) will then be released from the pledge under the Pledge Agreement and
delivered to such holder or such holder's designee, upon presentation and
surrender of the certificate evidencing such Units and payment by the holder of
any transfer or similar taxes payable in connection with the issuance of Common
Stock or the transfer of Pledged Securities to any person other than such
holder.
On the Stock Purchase Date, if a holder of Units has not delivered cash to
settle the underlying Purchase Contracts in the manner described above and no
event described under "-- Termination" below has occurred, then (a) the Unit
Agent will notify the Collateral Agent and (i) if QUIPS underlie such Units, the
Collateral Agent, on behalf of such holder, will exercise such holder's right to
require the Trust to distribute Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate QUIPS Liquidation Amount of
such QUIPS, in exchange for such QUIPS, and, upon receiving such Junior
Subordinated Debentures, will thereupon, as Put Agent, exercise the Junior
Subordinated Debenture Put Option with respect thereto (see "-- Description of
the QUIPS -- Right to Exercise Junior Subordinated Debenture Put Options" and
"-- Description of the Junior Subordinated Debentures -- Junior Subordinated
Debenture Put Options") and (ii) if Junior Subordinated Debentures underlie such
Units, the Collateral Agent, on behalf of such holder, will, as Put Agent,
exercise the Junior Subordinated Debenture Put Option with respect thereto (see
"-- Description of the Junior Subordinated Debentures -- Junior Subordinated
Debenture Put Options"), (b) a portion of the proceeds from the exercise of such
Junior Subordinated Debenture Put Option (or, if Treasury Securities underlie
such Units because the Call Option Holder has exercised its Call Option or the
holder has exercised its right to substitute Treasury Securities for the QUIPS
or Junior Subordinated Debentures that previously had been Pledged Securities, a
portion of the proceeds from the payment of such Treasury Securities at
maturity) equal to the aggregate Stated Amount of such Units will be applied to
satisfy in full such holder's obligation to purchase Common Stock under such
Purchase Contracts and to pay any unpaid Contract Fees payable by such holder
accrued thereon to the Stock Purchase Date and (c) the remainder of such
proceeds, if any, will be paid to such holder; provided, however, that the
holder's obligation to satisfy the Purchase Contract may be offset by any
amounts due and owing by the Company to such holder. Such Common Stock will then
be issued and delivered to such holder or such holder's designee, upon
presentation and surrender of the certificate evidencing such Units and payment
by the holder of any transfer or similar taxes payable in connection with the
issuance of Common Stock to any person other than such holder.
CONTRACT FEES
The holders of Units may be required to pay Contract Fees to the Company,
or the Company may be required to pay Contract Fees to the holders of Units, as
specified in the final Prospectus for the offering made hereby.
Any obligation of the holders of Units to pay Contract Fees to the Company
will be funded out of payments made in respect of the Pledged Securities. If
payments made in respect of the Pledged Securities are insufficient to cover the
obligation of the holders of the Units to pay Contract Fees, such obligation
will be deferred until the earlier of the date sufficient cash is available and
the Stock Purchase Date. In the event that holders of Units are required to pay
Contract Fees to the Company, it is unlikely such holders will be entitled to a
current deduction for such payments. As a result, although the amount of cash
distributions made to holders will be reduced by the amount of Contract Fees
payable to the Company, holders will nevertheless recognize income each quarter
equal to the full amount of interest received or accrued with respect to the
QUIPS underlying the Units held by such holder. See "Certain Federal Income Tax
Consequences -- Contract Fees".
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Any obligation of the Company to pay Contract Fees to the holders of Units
will be subordinated and junior in right of payment to the Company's obligations
under its Senior Indebtedness, in a manner substantially similar to the manner
in which the Junior Subordinated Debentures are subordinated as described under
"-- Description of the Junior Subordinated Debentures" below. So long as no
default in the Company's obligations under the Principal Agreements has occurred
and is continuing, the Company will have the right to defer the payment of
Contract Fees at any time or from time to time for a period not extending beyond
the Stock Purchase Date; provided, however, that in order to exercise such
right, the Company must give the Unit Agent notice at least five Business Days
prior to the earlier of (a) the date such payment would otherwise have been
payable, (b) the date the Company is required to give notice to any securities
exchange or to holders of Units of the record date or the date such payment is
payable and (c) such record date. During any such deferral period, the Company
may not take any of the actions that it would be prohibited from taking during
an Extension Period as described under "-- Description of the Junior
Subordinated Debentures -- Option To Extend Interest Payment Date" below.
Contract Fees will be payable at the Contract Fee Rate set forth under
"-- General" above. Any deferred Contract Fees will bear additional Contract
Fees at the Contract Fee Rate (compounding on each succeeding Quarterly Payment
Date) until paid. Contract Fees payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. Contract Fees will accrue from
and including the date of issuance of the Units to but excluding the Stock
Purchase Date and will be payable in arrears on the Quarterly Payment Dates
(unless deferred as described above). If the Purchase Contracts are terminated,
the right of holders of Units to receive Contract Fees or the obligation of
holders of Units to pay Contract Fees (including any deferred Contract Fees)
will also terminate.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment upon the occurrence of certain events, including: (a) the payment of
dividends (and other distributions) of Common Stock on Common Stock; (b) the
issuance to all holders of Common Stock of rights, warrants or options entitling
them, for a period of up to 45 days, to subscribe for or purchase Common Stock
at less than the Current Market Price (as defined) thereof; (c) subdivisions and
combinations of Common Stock; (d) distributions to all holders of Common Stock
of evidences of indebtedness of the Company, securities, cash or other assets
(excluding any dividend or distribution covered by clause (a) or (b) above and
any dividend or distribution paid exclusively in cash); (e) distributions
consisting exclusively of cash to all holders of Common Stock in an aggregate
amount that, together with (i) other all-cash distributions made within the
preceding 12 months and (ii) any cash and the fair market value, as of the
expiration of the tender or exchange offer referred to below, of consideration
payable in respect of any tender or exchange offer by the Company or a
subsidiary for the Common Stock concluded within the preceding 12 months,
exceeds 12.5% of the Company's aggregate market capitalization (such aggregate
market capitalization being the product of the Current Market Price of the
Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the date of such distribution; and (f) the successful completion
of a tender or exchange offer made by the Company or any subsidiary for the
Common Stock which involves an aggregate consideration that, together with (i)
any cash and the fair market value of other consideration payable in respect of
any tender or exchange offer by the Company or a subsidiary for the Common Stock
concluded within the preceding 12 months and (ii) the aggregate amount of any
all-cash distributions to all holders of the Company's Common Stock made within
the preceding 12 months, exceeds 12.5% of the Company's aggregate market
capitalization on the date of expiration of such tender or exchange offer.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or property, each
Purchase Contract then outstanding would, without the consent of
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the holders of Units, become a contract to purchase only the kind and amount of
securities, cash and other property receivable upon consummation of the
transaction by a holder of the number of shares of Common Stock which would have
been received by the holder of the related Unit immediately prior to such
transaction if such holder had then settled such Purchase Contract.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States Federal income tax purposes (i.e., distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe to capital stock) and, pursuant to the Settlement Rate
adjustment provisions of the Master Unit Agreement, the Settlement Rate is
increased, such increase may be deemed to be the receipt of taxable income to
holders of Units. See "Certain Federal Income Tax Consequences -- Adjustment of
Settlement Rate".
In addition, the Company may make such increases in the Settlement Rate as
the Board of Directors of the Company deems advisable to avoid or diminish any
income tax to holders of shares of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate; provided, however, that any adjustments which by
reason of the foregoing are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
The Company will be required, within ten Business Days following the
occurrence of an event that requires or permits an adjustment in the Settlement
Rate, to provide written notice to the Unit Agent of the occurrence of such
event and a statement in reasonable detail setting forth the method by which the
adjustment to the Settlement Rate was determined and setting forth the revised
Settlement Rate.
TERMINATION
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the Units thereunder (including the right to receive and the
obligation to pay Contract Fees or deferred Contract Fees thereunder and the
right and obligation of the holders to purchase and the Company to sell Common
Stock thereunder), will automatically terminate upon the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to the Company.
Upon such termination, the Call Options will terminate and the Pledged
Securities will be distributed in the manner described under "-- Pledged
Securities and Pledge Agreement -- Termination of Purchase Contracts".
DESCRIPTION OF THE CALL OPTIONS
At the closing of the Offering made hereby, the Underwriters will sell the
Call Options to the Call Option Holder at a price equal to $ per Call
Option. The Call Options will be governed by the Call Option Agreement.
Each Call Option underlying a Unit (unless earlier terminated), when
aggregated with the Call Options underlying all other Units, will entitle the
Call Option Holder to acquire the QUIPS underlying the Units (or the Junior
Subordinated Debentures substituted therefor), on or before the Call Option
Expiration Date, in exchange for the Aggregate Consideration Deliverable on
Exercise of the Call Options. The Aggregate Consideration Deliverable on
Exercise of the Call Options will be comprised of:
(a) Treasury Securities that will generate, on each Quarterly Payment
Date falling after the Call Settlement Date and on or before the Stock
Purchase Date, an amount of cash equal to the
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aggregate QUIPS Liquidation Amount of the QUIPS constituting Pledged
Securities times the QUIPS Distribution Rate divided by four;
(b) Treasury Securities that will generate, on the Stock Purchase
Date, an amount of cash equal to the aggregate QUIPS Liquidation Amount of
the QUIPS constituting Pledged Securities; and
(c) if the Company is, at the Call Settlement Date, deferring interest
payments on the Junior Subordinated Debentures (see "-- Description of the
Junior Subordinated Debentures -- Option to Extend Interest Payment Date"),
an amount in cash equal to (i) any deferred interest payments on the Junior
Subordinated Debentures related to the Pledged Securities accrued to the
Call Settlement Date, if the Call Settlement Date is a Quarterly Payment
Date, and (ii) any deferred interest payments accrued to the Quarterly
Payment Date immediately preceding the Call Settlement Date plus interest
thereon at the QUIPS Distribution Rate for the period from and including
such Quarterly Payment Date to but excluding such Call Settlement Date, if
the Call Settlement Date is not a Quarterly Payment Date.
The Call Option Holder may exercise all of its Call Options (but not less
than all) by (a) delivering to the Unit Agent and the Collateral Agent, at least
two Business Days prior to the Call Settlement Date, a notice stating that the
Call Option Holder is exercising its Call Options and specifying the Call
Settlement Date therefor (which may not be after the Call Option Expiration
Date) and (b) delivering to the Collateral Agent, by Noon, New York City time,
on the Call Settlement Date, the Aggregate Consideration Deliverable on Exercise
of the Call Options. Pursuant to the Pledge Agreement, upon receipt by the
Collateral Agent of the Treasury Securities included in the Aggregate
Consideration Deliverable on Exercise of the Call Options, the Collateral Agent
will transfer the QUIPS (or Junior Subordinated Debentures) to the Call Option
Holder or its designee free and clear of the pledge and security interest
created by the Pledge Agreement and the Treasury Securities shall automatically
be substituted for the QUIPS (or Junior Subordinated Debentures) as Pledged
Securities, whereupon the Call Option Holder shall cease to have a security
interest in the Pledged Securities.
If the Call Options are exercised, the Unit Agent shall, not later than
three Business Days following the Call Settlement Date, mail notice of such
exercise to the holders of the Units.
The Call Options, and the rights and obligations of the Call Option Holder
and of the holders of the Units thereunder, will automatically terminate upon
the occurrence of certain events of bankruptcy, insolvency or reorganization
with respect to the Company. See "-- Description of the Purchase
Contracts -- Termination" and "-- Pledged Securities and Pledge
Agreement -- Termination of Purchase Contracts".
PLEDGED SECURITIES AND PLEDGE AGREEMENT
GENERAL
Pursuant to the Pledge Agreement, the Pledged Securities will be pledged to
the Collateral Agent, for the benefit of the Company and the Call Option Holder,
to secure (a) the obligations of holders of Units to purchase Common Stock under
the Purchase Contracts, (b) any obligations of the holders of Units to pay
Contract Fees to the Company and (c) the obligations of holders of Units to
deliver the underlying QUIPS (or Junior Subordinated Debentures) to the Call
Option Holder if the Call Options are exercised. The Pledged Securities will
initially consist of the QUIPS. If Treasury Securities are exchanged for Pledged
Securities upon exercise of the Call Options or Junior Subordinated Debentures
are distributed in respect of Pledged Securities upon dissolution of the Trust,
the Treasury Securities so exchanged or the Junior Subordinated Debentures so
distributed will automatically be substituted as Pledged Securities in place of
the securities that theretofore had been Pledged Securities and the securities
that theretofore had been Pledged Securities will automatically be released from
the pledge and security interest created by the Pledge Agreement.
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The rights of the holders of the Units to the underlying Pledged Securities
will be subject to the pledge and security interest created by the Pledge
Agreement; except as described below under "-- Substitution of Pledged
Securities", no holder of Units will be permitted to withdraw the Pledged
Securities underlying such Units from the pledge arrangement except upon the
settlement or termination of the Purchase Contracts. Subject to such pledge and
security interest, however, each holder of Units will have full beneficial
ownership of the underlying Pledged Securities and will be entitled (through the
Collateral Agent) to all of the rights of such Pledged Securities (including
payment, voting, redemption and liquidation rights). The Company will have no
rights with respect to Pledged Securities other than its security interest
therein.
SUBSTITUTION OF PLEDGED SECURITIES
A holder of Units may obtain the release from the pledge arrangement of the
QUIPS or Junior Subordinated Debentures underlying a Unit or Units that
theretofore had been the Pledged Securities underlying such Units upon
substituting therefor Treasury Securities as Pledged Securities. To exercise
this right to obtain direct ownership of such QUIPS or Junior Subordinated
Debentures free and clear of the pledge arrangement through substitution of
Pledged Securities, a holder must present and surrender to the Collateral Agent
the certificate evidencing such Units and instructions requesting such release
and substitution of Pledged Securities together with: (a)(i) Treasury Securities
that will generate on the Stock Purchase Date an amount of cash equal to the
Stated Amount of such Units and (ii) if Contract Fees are payable by the holders
of the Units to the Company, Treasury Securities that will generate on each
Quarterly Payment Date falling after the date of request for such release and
substitution to and including the Stock Purchase Date an amount of cash equal to
the aggregate Stated Amount of such Units times the Contract Fee Rate divided by
four; (b) if there are any deferred Contract Fees payable by the holder to the
Company at the date of request for such release and substitution, an amount in
cash equal to (i) the deferred Contract Fees accrued to the date of such
request, if such date is a Quarterly Payment Date, and (ii) deferred Contract
Fees accrued to the Quarterly Payment Date immediately preceding such date plus
interest thereon at a rate of % per annum for the period from and including
such Quarterly Payment Date to but excluding the date of such request, if such
date is not a Quarterly Payment Date; and (c) if the Call Options have not been
exercised and such release and substitution is requested prior to the Call
Option Expiration Date, an instrument from the Call Option Holder either
cancelling the Call Options relating to such Pledged Securities or releasing the
security interest of the Call Option Holder in such Pledged Securities.
Upon receipt by the Collateral Agent of the foregoing, the Collateral Agent
will substitute the Treasury Securities delivered by the holder as the Pledged
Securities underlying the affected Units and transfer to the holder the QUIPS or
Junior Subordinated Debentures underlying such Units free and clear of the
Company's and the Call Option Holder's security interests therein together with
a new certificate evidencing the Purchase Contracts underlying such Units.
As indicated above, prior to the earlier of the exercise of the Call
Options and the Call Option Expiration Date, such right to substitute Treasury
Securities for QUIPS or Junior Subordinated Debentures as Pledged Securities may
not be exercised without the consent of the Call Option Holder. The Call Option
Holder is under no obligation to grant such consent, and there can be no
assurance that such consent will be granted if a holder desires to exercise this
substitution right.
QUARTERLY PAYMENTS ON PLEDGED SECURITIES
The Collateral Agent will, upon receipt of any quarterly distributions or
payments of interest on the Pledged Securities, (a) pay to the Company an amount
therefrom equal to the aggregate Contract Fees (if any) then due from the
holders of the Units to the Company and (b) pay the remainder to the Unit Agent,
which will in turn distribute that amount, together with the Contract Fees (if
any) then due from the Company to the holders of Units, to the persons in whose
names the Units are registered at the close of business on the Record Date for
such payment. As long as
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the Purchase Contracts remain in book-entry only form, the Record Date for any
payment will be one Business Day prior to such payment date.
SETTLEMENT OF PURCHASE CONTRACTS
On the Stock Purchase Date, the Pledged Securities (or, in the case of
Treasury Securities, the proceeds from the payment of such Treasury Securities
at maturity) will be released from the pledge and security interest created by
the Pledge Agreement and distributed or delivered as specified under
"-- Description of the Purchase Contracts -- Settlement".
TERMINATION OF PURCHASE CONTRACTS
Upon termination of the Purchase Contacts (see "-- Description of the
Purchase Contracts -- Termination"), the Collateral Agent will release the
Pledged Securities underlying the Units to the Unit Agent for distribution to
the holders of such Units, upon presentation and surrender of the certificates
evidencing such Units. If upon such termination any holder would otherwise be
entitled to receive a principal amount of Treasury Securities of any series that
is not an integral multiple of $1,000, the Unit Agent will distribute to such
holder Treasury Securities of such series in a principal amount equal to the
next lower integral multiple of $1,000, will sell the Treasury Securities of
such series not otherwise distributed to such holder (together with the Treasury
Securities of such series not otherwise distributed to other holders) and will
distribute to all such holders (in accordance with their respective interests
therein) the proceeds therefrom.
BOOK ENTRY-SYSTEM
The Depository Trust Company (the "Depositary") will act as securities
depositary for the Units. The Units will be issued only as fully-registered
securities registered in the name of Cede & Co. or another nominee of the
Depositary. Fully-registered global security certificates ("Global Security
Certificates"), representing the total aggregate number of Units, will be
issued, will be deposited with the Depositary and will bear a legend regarding
the restrictions on exchanges and registration of transfer thereof referred to
below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Units so long as
such Units are represented by Global Security Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depositary holds
securities that its participants ("Participants") deposit with the Depositary.
The Depositary also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations ("Direct Participants").
The Depositary is owned by a number of its Direct Participants and by the NYSE,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the Depositary system is also available to others, such
as securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a Direct Participant either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Participants are
on file with the Commission.
No Units represented by Global Security Certificates may be exchanged in
whole or in part for Units registered, and no transfer of Global Security
Certificates in whole or in part may be
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registered, in the name of any person other than the Depositary or a nominee of
the Depositary unless the Depositary has notified the Company that it is
unwilling or unable to continue as depositary for such Global Security
Certificates or has ceased to be qualified to act as such as required by the
Master Unit Agreement or there shall have occurred and be continuing a default
by the Company in respect of its obligations under one or more Principal
Agreements. All Units represented by Global Security Certificates or any portion
thereof will be registered in such names as the Depositary may direct.
As long as the Depositary or its nominee is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the Global Security
Certificates and all Units represented thereby for all purposes under the Units,
Purchase Contracts, Call Options and Principal Agreements. Except in the limited
circumstances referred to above, owners of beneficial interests in Global
Security Certificates will not be entitled to have such Global Security
Certificates or the Units represented thereby registered in their names, will
not receive or be entitled to receive physical delivery of certificates in
exchange therefor and will not be considered to be owners or holders of such
Global Security Certificates or any Units represented thereby for any purpose
under the Units, Purchase Contracts, Call Options and Principal Agreements. All
payments on the Units represented by the Global Security Certificates and all
deliveries of Pledged Securities or Common Stock to the holders thereof will be
made to the Depositary or its nominee, as the case may be, as the holder
thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with the Depositary. Ownership of beneficial
interests in Global Security Certificates will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to Participants'
interests) or any such Participant (with respect to interests of persons held by
such Participants on their behalf). Procedures for settlement of Purchase
Contracts on the Stock Purchase Date will be governed by arrangements among the
Depositary, Participants and persons that may hold beneficial interests through
Participants designed to permit such settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchanges and other matters
relating to beneficial interests in Global Security Certificates may be subject
to various policies and procedures adopted by the Depositary from time to time.
The Depositary has advised the Company that it will take any action permitted to
be taken by a holder of Units only at the direction of one or more Participants
to whose account with the Depositary interests in the Global Security
Certificates are credited and only in respect of such number of Units as to
which such Participant or Participants has or have given such direction. None of
the Company, the Trust, the Unit Agent or any agent of the Company, the Trust or
the Unit Agent will have any responsibility or liability for any aspect of the
Depositary's or any Participant's records relating to, or for payments made on
account of, beneficial interests in Global Security Certificates, or for
maintaining, supervising or reviewing any of the Depositary's records or any
Participant's records relating to such beneficial ownership interests.
The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that the Company and the Trust
believe to be reliable, but neither the Company nor the Trust takes
responsibility for the accuracy thereof.
CERTAIN PROVISIONS OF THE PRINCIPAL AGREEMENTS
GENERAL
Distributions on the Units will be payable, Purchase Contracts (and
documents related thereto) will be settled and transfers of the Units will be
registrable at the office of the Unit Agent in the Borough of Manhattan, The
City of New York. In addition, in the event that the Units do not remain in
book-entry form, payment of distributions on the Units may be made, at the
option of the Company, by check mailed to the address of the persons entitled
thereto as shown on the Unit Register.
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In the event that any Quarterly Payment Date, the date of exercise of the
Call Options, the Stock Purchase Date or any Put Date is not a Business Day,
then payment of the Contract Fees payable on any such Quarterly Payment Date or
settlement of the Call Options, the Purchase Contract or the Put Options, as the
case may be, 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 is in the next succeeding calendar year, such payment
or settlement will be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such payment date. A "Business
Day" shall mean any day other than Saturday, Sunday or any other day on which
banking institutions in The City of New York are authorized or obligated by law
or executive order to be closed.
If a holder of Units fails to present and surrender the certificate
evidencing such Units to the Unit Agent on the Stock Purchase Date, the shares
of Common Stock issuable in settlement of the related Purchase Contracts will be
registered in the name of the Unit Agent and, together with any distributions
thereon, shall be held by the Unit Agent as agent for the benefit of such
holder, until such certificate is presented and surrendered or the holder
provides satisfactory evidence that such certificate has been destroyed, lost or
stolen, together with any indemnity that may be required by the Unit Agent and
the Company.
If the Purchase Contracts have terminated prior to the Stock Purchase Date,
the related Pledged Securities have been transferred to the Unit Agent for
distribution to the holders entitled thereto and a holder of Units fails to
present and surrender the certificate evidencing such Units to the Unit Agent,
the Pledged Securities otherwise deliverable to such holder and payments thereon
shall be held by the Unit Agent as agent for the benefit of such holder, until
such certificate is presented and surrendered or the holder provides the
evidence and indemnity described above.
The Unit Agent will have no obligation to invest or to pay interest on any
amounts held by the Unit Agent pending distribution.
No service charge will be made for any registration of transfer or exchange
of the Units, except for any tax or other governmental charge that may be
imposed in connection therewith.
MODIFICATION
The Principal Agreements will contain provisions permitting the parties
thereto, with the consent of the holders of not less than a majority of the
Units at the time outstanding, to modify the terms of the Principal Agreements,
the Purchase Contracts and the Call Options, except that no such modification
may, without the consent of the holder of each outstanding Unit affected
thereby, (a) change any payment date, (b) change the amount or type of Pledged
Securities required to be pledged to secure obligations under the Units, impair
the right of the holder of any Units to receive distributions on the Pledged
Securities underlying such Units or otherwise adversely affect the holder's
rights in or to such Pledged Securities, (c) change the place or currency of
payment for any Contract Fees or other amounts payable in respect of the Units,
increase any Contract Fees or other amounts payable by holders in respect of
Units or decrease any Contract Fees or other amounts receivable by holders in
respect of Units, (d) impair the right to institute suit for the enforcement of
any Purchase Contract, (e) reduce the amount of Common Stock purchasable under
any Purchase Contract, increase the price to purchase Common Stock on settlement
of any Purchase Contract, change the Stock Purchase Date or otherwise adversely
affect the holder's rights under any Purchase Contract, (f) reduce the amount
payable on exercise of any Call Option, extend the Call Option Expiration Date
or otherwise adversely affect the holder's rights under any Call Option or (g)
reduce the above-stated percentage of outstanding Units the consent of whose
holders is required for the modification or amendment of the provisions of the
Principal Agreements, the Purchase Contracts or the Call Options.
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CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will covenant in the Master Unit Agreement that it will not
merge or consolidate with any other entity or sell, assign, transfer, lease or
convey all or substantially all of its properties and assets to any person, firm
or corporation unless the Company is the continuing corporation or the successor
corporation is a corporation organized under the laws of the United States of
America or a state thereof and such corporation expressly assumes the
obligations of the Company under the Principal Agreements and the Purchase
Contracts, and the Company or such successor corporation is not, immediately
after such merger, consolidation, sale, assignment, transfer, lease or
conveyance, in default in the performance of any of its obligations thereunder.
TITLE
The Company, the Unit Agent, the Collateral Agent and the Call Option
Holder may treat the registered holder of any Units as the absolute owner
thereof for the purpose of making payment and settling the related Purchase
Contracts or Call Options and for all other purposes.
REPLACEMENT OF UNITS CERTIFICATES
In the event that physical certificates have been issued, any mutilated
certificate evidencing Units will be replaced by the Company at the expense of
the holder upon surrender of such certificate to the Unit Agent. Certificates
that become destroyed, lost or stolen will be replaced by the Company at the
expense of the holder upon delivery to the Company and the Unit Agent of
evidence of the destruction, loss or theft thereof satisfactory to the Company
and the Unit Agent. In the case of a destroyed, lost or stolen certificate, an
indemnity satisfactory to the Unit Agent and the Company may be required at the
expense of the holder of the Units evidenced by such certificate before a
replacement will be issued.
Notwithstanding the foregoing, the Company will not be obligated to issue
any Units on or after the Stock Purchase Date or after the Purchase Contracts
have terminated. In lieu of the delivery of a replacement certificate following
the Stock Purchase Date, the Unit Agent, upon delivery of the evidence and
indemnity described above, will deliver the Common Stock issuable pursuant to
the Purchase Contracts included in the Units evidenced by such certificate, or,
if the Purchase Contracts have terminated prior to the Stock Purchase Date,
transfer the Pledged Securities related to the Units evidenced by such
certificate.
GOVERNING LAW
The Principal Agreements, the Purchase Contracts and the Call Options will
be governed by, and construed in accordance with, the laws of the State of New
York.
INFORMATION CONCERNING THE UNIT AGENT
will initially act as Unit Agent. The Unit Agent will act as
the agent for the holders of Units from time to time. The Master Unit Agreement
will not obligate the Unit Agent to exercise any discretionary actions in
connection with a default under the terms of the Principal Agreements, the
Purchase Contracts, the Call Options or the Pledged Securities.
The Master Unit Agreement will contain provisions limiting the liability of
the Unit Agent. The Master Unit Agreement will contain provisions under which
the Unit Agent may resign or be replaced. Such resignation or replacement would
be effective upon the appointment of a successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
will initially act as Collateral Agent. The Collateral Agent
will act solely as the agent of the Company or the Call Option Holder and will
not assume any obligation or relationship of
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agency or trust for or with any of the holders of the Units except for the
obligations owed by a pledgee of property to the owner thereof under the Pledge
Agreement and applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
DESCRIPTION OF THE QUIPS
GENERAL
The QUIPS will be issued by the Trust, a statutory business trust created
under Delaware law pursuant to the Declaration. The Trust's affairs are
conducted by the Issuer Trustees, which are currently The Bank of New York, as
the Property Trustee, and The Bank of New York (Delaware), as the Delaware
Trustee, and the three Administrators, who are employees of the Company. The
Trust exists for the exclusive purposes of (a) issuing and selling the Trust
Securities consisting of the QUIPS and the Common Trust Securities, (b) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures issued by the Company and (c) engaging in only those
other activities necessary, advisable or incidental thereto. Accordingly, the
Junior Subordinated Debentures will be the sole assets of the Trust, and
payments under the Junior Subordinated Debentures will be the sole revenue of
the Trust. All of the Common Trust Securities will be owned by the Company.
The QUIPS will represent preferred undivided beneficial interests in the
assets of the Trust and the holders thereof will be entitled to a preference
over the Common Trust Securities in certain circumstances with respect to
distributions and amounts payable on redemption of the Trust Securities or
liquidation of the Trust. See "-- Subordination of Common Trust Securities"
below. The QUIPS will be issued pursuant to, and be governed by, the
Declaration. The Declaration will be qualified under the Trust Indenture Act.
Each QUIPS will have a QUIPS Liquidation Amount that is equal to the Stated
Amount. The QUIPS will rank pari passu, and payments will be made thereon pro
rata, with the Common Trust Securities except as described under
"-- Subordination of Common Trust Securities" below. Legal title to the Junior
Subordinated Debentures will be held by the Property Trustee in trust for the
benefit of the holders of the QUIPS and the Common Trust Securities.
The QUIPS will be subject to mandatory redemption on the QUIPS and
Debenture Maturity Date of , 2003, at a redemption price equal to
the aggregate QUIPS Liquidation Amount thereof plus unpaid distributions thereon
accrued to but excluding such date, out of the proceeds of the repayment of the
Junior Subordinated Debentures at maturity. The Junior Subordinated Debentures
are not redeemable at the option of the Company prior to the QUIPS and Debenture
Maturity Date.
DISTRIBUTIONS
Distributions on the QUIPS will be cumulative, will accumulate from the
first date of issuance of the QUIPS and will be payable quarterly in arrears on
the Quarterly Payment Dates, at the QUIPS Distribution Rate of % per annum
of the QUIPS Liquidation Amount, to the holders of the QUIPS on the relevant
record dates. Unless the QUIPS are not Pledged Securities and are issued in
certificated form, the record date for any payment of Distributions will be one
Business Day prior to such payment date. The amount of Distributions payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which Distributions are payable on the
QUIPS is not a Business Day, payment of the Distributions payable on such date
will be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay), except that if such
Business Day is in the next succeeding calendar year, such payment will be made
on the immediately preceding Business Day, in each case
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with the same force and effect as if made on the date such payment was
originally payable (each date on which Distributions are payable in accordance
with the foregoing, a "Distribution Date").
So long as no Debenture Event of Default shall have occurred and be
continuing, the Company will have the right under the Indenture to elect to
defer the payment of interest on the Junior Subordinated Debentures at any time
and from time to time for a period not extending beyond the QUIPS and Debenture
Maturity Date (each such period of deferral, an "Extension Period"). See
"-- Description of the Junior Subordinated Debentures -- Option to Extend
Interest Payment Date" and "Certain Federal Income Tax Consequences -- Interest
Received on the QUIPS". Upon any such election, quarterly Distributions on the
QUIPS will be deferred by the Trust during such Extension Period. Distributions
to which holders of the QUIPS are entitled during any such Extension Period will
accumulate additional Distributions thereon at the QUIPS Distribution Rate,
compounded on each succeeding Distribution Date. The term "Distributions", as
used in this Description of the QUIPS, shall include any such additional
Distributions and any Additional Sums (as defined herein) paid on the Junior
Subordinated Debentures.
During any Extension Period, the Company may not take any of the prohibited
actions described under "-- Description of the Junior Subordinated
Debentures -- Certain Covenants of the Company".
Although the Company may in the future exercise its option to defer
payments of interest on the Junior Subordinated Debentures, the Company has no
such current intention.
The revenue of the Trust available for distribution to holders of the QUIPS
will be limited to payments under the Junior Subordinated Debentures. If the
Company does not make interest payments on the Junior Subordinated Debentures,
the Property Trustee will not have funds available to pay Distributions on the
QUIPS. The payment of Distributions (if and to the extent the Trust has funds on
hand legally available for the payment of such Distributions) will be guaranteed
by the Company on a limited basis as set forth herein under "-- Description of
the Guarantee".
MANDATORY REDEMPTION
Upon the repayment of the Junior Subordinated Debentures, the proceeds from
such repayment shall be applied by the Property Trustee to redeem a Like Amount
(as defined herein) of the Trust Securities, at a redemption price (the "Final
Redemption Price") which shall be equal to the principal of and accrued and
unpaid interest on the Junior Subordinated Debentures.
"Like Amount" means (i) with respect to the redemption of the Trust
Securities, Trust Securities having an aggregate liquidation amount equal to the
principal amount of Junior Subordinated Debentures to be paid in accordance with
their terms and (ii) with respect to a distribution of Junior Subordinated
Debentures upon the liquidation of the Trust, Junior Subordinated Debentures
having a principal amount equal to the aggregate liquidation amount of the Trust
Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
RIGHT TO EXERCISE JUNIOR SUBORDINATED DEBENTURE PUT OPTIONS
Each holder of QUIPS will have the right to require the Trust to distribute
Junior Subordinated Debentures having an aggregate principal amount equal to the
aggregate QUIPS Liquidation Amount of such QUIPS to the Put Agent, on the Stock
Purchase Date or on the date which is three months after the Stock Purchase Date
(the "Final Put Date" and, together with the Stock Purchase Date, the "Put
Dates"), in exchange for such QUIPS, in connection with the concurrent exercise
by the Put Agent on behalf of each such holder of the Junior Subordinated
Debenture Put Option related thereto.
A holder of QUIPS may exercise the right referred to above by presenting
and surrendering the certificate evidencing such QUIPS, at the offices of the
Property Trustee, with the form of "Notice to Require Exercise of Junior
Subordinated Debenture Put Option" on the reverse side of the
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certificate completed and executed as indicated, by 10:00 a.m., New York City
time, on the applicable Put Date. If such right is properly exercised, the
applicable Junior Subordinated Debentures will be distributed to an agent for
the holder appointed by the Company for such purpose (the "Put Agent", who
shall, if the right is exercised on the Stock Purchase Date, be the Collateral
Agent), and the Put Agent will then exercise the Junior Subordinated Debenture
Put Option related thereto on behalf of the holder.
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust.
The Trust shall automatically dissolve upon the first to occur of: (a)
certain events of bankruptcy, dissolution or liquidation of the Company or the
Trust; (b) the distribution of a Like Amount of the Junior Subordinated
Debentures to the holders of the Trust Securities, if the Company, as Sponsor,
has given written direction to the Property Trustee to dissolve the Trust (which
direction is optional and wholly within the discretion of the Company, as
Sponsor); (c) redemption of all of the Trust Securities as described under
"-- Mandatory Redemption"; (d) expiration of the term of the Trust; and (e) the
entry of an order for the dissolution of the Trust by a court of competent
jurisdiction.
If a dissolution occurs as described in clauses (a), (b), (d) or (e) of the
preceding paragraph, the Trust shall be liquidated by the Administrators as
expeditiously as practicable by distributing, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, to the holders of the
Trust Securities a Like Amount of the Junior Subordinated Debentures (such
amount being the "Liquidation Distribution"). If the Liquidation Distribution
can be paid only in part because the Trust has insufficient assets on hand
legally available to pay in full the aggregate Liquidation Distribution, then
the amounts payable directly by the Trust on the QUIPS and the Common Trust
Securities shall be paid on a pro rata basis, except that if a Debenture Event
of Default has occurred and is continuing, the QUIPS shall have a priority over
the Common Trust Securities. See "-- Subordination of Common Trust Securities"
below.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities, (a) the Trust
Securities will no longer be deemed to be outstanding, (b) each registered
global certificate, if any, representing Trust Securities and held by the
Depositary or its nominee will receive a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution and (c) any certificates representing Trust Securities
not held by the Depositary or its nominee will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of such Trust Securities, and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on such
Trust Securities until such certificates are presented to the Administrators or
their agent for cancellation, whereupon the Company will issue to such holder,
and the Debenture Trustee will authenticate, a certificate representing such
Junior Subordinated Debentures.
REDEMPTION PROCEDURES
The QUIPS shall be redeemed at the Final Redemption Price with the proceeds
from the contemporaneous repayment of the Junior Subordinated Debentures. The
redemption of QUIPS shall be made and the Final Redemption Price shall be
payable on the QUIPS and Debenture Maturity Date only to the extent that the
Trust has funds legally available for the payment of such applicable Redemption
Price.
If the Trust gives a notice of redemption in respect of the QUIPS, then, by
12:00 noon, New York City time, on the QUIPS and Debenture Maturity Date, to the
extent funds are legally available, with
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respect to the QUIPS held by the Depositary or its nominees, the Property
Trustee will pay or cause the Paying Agent to pay the Final Redemption Price to
the Depositary. With respect to the QUIPS held in certificated form, the
Property Trustee, to the extent funds are legally available, will give
irrevocable instructions and authority to the Paying Agent and will irrevocably
deposit with the Paying Agent for the QUIPS funds sufficient to pay or cause the
Paying Agent to pay the Final Redemption Price to the holders thereof upon
surrender of their certificates evidencing the QUIPS. See "-- Payment and Paying
Agency" below. If notice of redemption shall have been given and funds deposited
with the Property Trustee to pay the Final Redemption Price, then all rights of
the holders of the QUIPS will cease, except the right of the holders of QUIPS to
receive the Final Redemption Price, but without interest on the Final Redemption
Price, and the QUIPS will cease to be outstanding. In the event that the QUIPS
and Debenture Maturity Date is not a Business Day, then the Final Redemption
Price payable on such date will be paid on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay). In the event that payment of the Final Redemption Price is improperly
withheld or refused and not paid either by the Trust or by the Company pursuant
to the Guarantee as described under "-- Description of the Guarantee",
Distributions on the QUIPS will accumulate on the Final Redemption Price at the
QUIPS Distribution Rate from the QUIPS and Debenture Maturity Date to the date
the Final Redemption Price is actually paid.
SUBORDINATION OF COMMON TRUST SECURITIES
Payment of Distributions on, and the Final Redemption Price of, the QUIPS
and the Common Trust Securities, as applicable, shall be made pro rata based on
the liquidation amount of the QUIPS and Common Trust Securities; provided,
however, that if on any Distribution Date or QUIPS and Debenture Maturity Date a
Debenture Event of Default (solely as the result of an event described in
clauses (a), (b) or (c) thereto) shall have occurred and be continuing, no
payment of any Distribution on, or Final Redemption Price of, any of the Common
Trust Securities, and no other payment on account of the redemption, liquidation
or other acquisition of the Common Trust Securities, shall be made unless
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding QUIPS for all Distribution periods terminating on or prior
thereto or, in the case of the QUIPS and Debenture Maturity Date, the full
amount of the Final Redemption Price therefor, 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 Final Redemption Price
of, the QUIPS then due and payable.
In the case of any Event of Default, the Company as holder of the Common
Trust Securities will be deemed to have waived any right to act with respect to
such Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the QUIPS, and only the holders of the QUIPS will
have the right to direct the Property Trustee to act on their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default (see "-- Description of the
Junior Subordinated Debentures -- Debenture Events of Default") constitutes an
"Event of Default" under the Declaration; provided that pursuant to the
Declaration, the holder of the Common Trust Securities will be deemed to have
waived any Event of Default with respect to such Common Trust Securities until
all Events of Default with respect to the QUIPS have been cured, waived or
otherwise eliminated. Until such Events of Default have been so cured, waived or
otherwise eliminated, the Property Trustee will be deemed to be acting solely on
behalf of the holders of the QUIPS and only the holders of such QUIPS will have
the right to direct the Property Trustee with respect to certain matters under
the Declaration, and therefore the Indenture. The holders of a majority in QUIPS
Liquidation Amount of the QUIPS will have the right to direct the time, method
and place of
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conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Declaration, including the right to direct the Property Trustee to
exercise the remedies available to it as holder of the Junior Subordinated
Debentures. If the Property Trustee fails to enforce its rights under the Junior
Subordinated Debentures after the holders of a majority in QUIPS Liquidation
Amount of QUIPS have so directed the Property Trustee, a holder of record of
such QUIPS may, to the fullest extent permitted by law, institute a legal
proceeding against the Company to enforce the Property Trustee's rights under
the Junior Subordinated Debentures without first instituting any legal
proceeding against the Property Trustee or any other person or entity.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing, and such event is attributable to the failure of the Company to pay
interest or principal on the Junior Subordinated Debentures on the respective
dates such interest or principal is payable (after giving effect to any
Extension Period), then a holder of record of QUIPS (or, for so long as QUIPS
underlie Units, a holder of record of Units) may institute a Direct Action
against the Company for payment to such holder of the portion of such principal
or interest attributable to Junior Subordinated Debentures having a principal
amount equal to the aggregate QUIPS Liquidation Amount of the QUIPS held by such
holder (or underlying such holder's Units). In connection with such Direct
Action, the Company will be subrogated to the rights of such holder of QUIPS or
Units under the Declaration to the extent of any payment made by the Company to
such holder of QUIPS or Units in such Direct Action; provided, however, that no
such subrogation right may be exercised so long as an Event of Default has
occurred and is continuing. The holders of QUIPS will not be able to exercise
directly any other remedy available to the holders of the Junior Subordinated
Debentures.
Upon occurrence of an Event of Default, the Property Trustee, so long as it
is the sole holder of Junior Subordinated Debentures, will have the right under
the Indenture to declare the principal of (or premium, if any) and interest on
the Junior Subordinated Debentures to be immediately due and payable.
Within ten 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 the QUIPS, the Administrators
and the Company, as Sponsor, unless such Event of Default shall have been cured
or waived. The Company, as Sponsor, 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 the conditions and covenants applicable to them under the
Declaration.
If a Debenture Event of Default has occurred and is continuing, the QUIPS
shall have a preference over the Common Trust Securities as described under
"-- Liquidation of the Trust and Distribution of Junior Subordinated Debentures"
and "-- Subordination of Common Trust Securities".
REMOVAL OF ISSUER TRUSTEES AND ADMINISTRATORS
Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee may be removed at any time by the holder of the Common Trust
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time by the
holders of a majority in QUIPS Liquidation Amount of the outstanding QUIPS. In
no event will the holders of the QUIPS 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 Trust Securities. 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 Declaration.
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MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee or the Delaware Trustee that is
not a natural person may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which such Issuer Trustee shall be a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Issuer Trustee, shall be the successor of such Issuer Trustee under the
Declaration, provided such Person shall be otherwise qualified and eligible.
MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE
TRUST
The Trust may not merge or convert with or into, consolidate, amalgamate,
or be replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any company or other Person, except
as described below or as otherwise described under "-- Liquidation of the Trust
and Distribution of Junior Subordinated Debentures". The Trust may, at the
request of the Company, as Sponsor and holder of the Common Trust Securities,
but without the consent of the holders of the QUIPS, merge or convert with or
into, consolidate, amalgamate, or be replaced by or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety to a
trust organized as such under the laws of any State; provided, that (a) such
successor entity either (i) expressly assumes all of the obligations of the
Trust with respect to the QUIPS or (ii) substitutes for the QUIPS other
securities having substantially the same terms as the QUIPS (the "Successor
Securities") so long as the Successor Securities rank the same as the QUIPS rank
in priority with respect to distributions and payments upon liquidation,
redemption and otherwise, (b) the Company expressly appoints a trustee of such
successor entity possessing the same powers and duties as the Property Trustee
with respect to the Junior Subordinated Debentures, (c) the Successor Securities
are listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which the
QUIPS are then listed or quoted, if any, (d) such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the QUIPS (including any Successor Securities) or Units to be downgraded
by any nationally recognized statistical rating organization, if then so rated,
(e) such merger, conversion, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the QUIPS (including any Successor Securities)
in any material respect, (f) such successor entity has a purpose substantially
identical to that of the Trust, (g) prior to such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Company has received an opinion from independent counsel to the Trust
experienced in such matters to the effect that (i) such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
QUIPS (including any Successor Securities) in any material respect, (ii)
following such merger, conversion, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the Trust 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 (iii) following such
merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease, the Trust or the successor entity will continue to be
classified as a grantor trust for United States Federal income tax purposes and
(h) the Company or any permitted successor or assignee owns all of the common
trust 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 Trust shall not, except
with the consent of holders of 100% in liquidation amount of the Trust
Securities, consolidate, amalgamate, merge or convert with or into, or be
replaced by or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any other entity or permit any other
entity to consolidate, amalgamate, merge or convert with or into, or replace it
if such consolidation, amalgamation, merger, conversion, replacement,
conveyance, transfer or lease would cause the Trust or the successor entity to
be
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classified as an association taxable as a corporation or as other than a grantor
trust for United States Federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
Except as provided below and under "-- Mergers, Conversions,
Consolidations, Amalgamations or Replacements of the Trust" above and
"-- Description of the Guarantee -- Amendments and Assignment" and as otherwise
required by law and the Declaration, the holders of the QUIPS will have no
voting rights.
The Declaration may be amended from time to time by the Company and the
Property Trustee, without the consent of the holders of the QUIPS, (a) to cure
any ambiguity, correct or supplement any provisions in the Declaration that may
be inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Declaration, which shall not
be inconsistent with the other provisions of the Declaration, or (b) to modify,
eliminate or add to any provisions of the Declaration to such extent as shall be
necessary to ensure that the Trust will be classified for United States Federal
income tax purposes as a grantor trust or as other than an association taxable
as a corporation at all times that any Trust Securities are outstanding or to
ensure that the Trust will not be required to register as an "investment
company" under the Investment Company Act; provided, however, that in each case,
such action shall not adversely affect in any material respect the interests of
the holders of the Trust Securities. Any amendments of the Declaration pursuant
to the foregoing shall become effective when notice thereof is given to the
holders of the Trust Securities. The Declaration may be amended by the Issuer
Trustees and the Company (a) with the consent of holders of QUIPS (or Units)
representing a majority (based upon QUIPS Liquidation Amount) of the outstanding
QUIPS and (b) upon receipt by the Issuer Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Issuer Trustees in accordance with such amendment will not cause the Trust to be
classified as an association taxable as a corporation or affect the Trust's
status as a grantor trust for United States Federal income tax purposes or the
Trust'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 Declaration may not be amended to (i) change the amount or
timing of any Distribution or other payment on the Trust Securities (including
payment of the Applicable Put Price) or otherwise adversely affect the amount of
any Distribution or other payment (including payment of the Applicable Put
Price) 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.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (a) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (b) waive certain past defaults under the
Indenture, (c) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures or (d) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
QUIPS (or Units) representing a majority in QUIPS Liquidation Amount of all
outstanding QUIPS; provided, however, that where a consent under the 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 approval of each holder of the QUIPS (or Units). The Issuer Trustees
shall not revoke any action previously authorized or approved by a vote of the
holders of the QUIPS (or Units) except by subsequent vote of such holders. The
Property Trustee shall notify each holder of Trust Securities (or Units) of any
notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of such holders, prior to taking
any of the foregoing actions, the Issuer Trustees shall obtain an opinion of
counsel
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experienced in such matters to the effect that the Trust will not be classified
as an association taxable as a corporation for United States Federal income tax
purposes or as other than a grantor trust for United States income tax purposes
on account of such action.
Any required approval of holders of QUIPS (or Units) may be given at a
meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of QUIPS (or Units) 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 QUIPS (or Units) in the manner set forth in the Declaration.
No vote or consent of the holders of QUIPS (or Units) will be required for
the Trust to redeem and cancel the QUIPS in accordance with the Declaration.
Notwithstanding that holders of the QUIPS (or Units) are entitled to vote
or consent under any of the circumstances described above, any of the QUIPS (or
Units) that are owned by the Company or any affiliate of the Company shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
FORM AND BOOK-ENTRY PROCEDURES
As long as the QUIPS constitute Pledged Securities, the QUIPS will be
represented by a single certificate and held for the benefit of the holders of
the Units. If the QUIPS cease to constitute Pledged Securities, the QUIPS may be
represented by one or more QUIPS in registered, global form registered in the
name of the Depositary or its nominee. The depositary arrangements for the QUIPS
are expected to be substantially similar to those in effect for the Units. For a
description of the Depositary and the terms of the depositary arrangements, see
"-- Book Entry System".
PAYMENT AND PAYING AGENCY
If the QUIPS cease to constitute Pledged Securities, payments in respect of
the QUIPS held in global form shall be made to the Depositary, which shall
credit the relevant accounts at the Depositary on the applicable Distribution
Dates or in respect of the QUIPS that are not held by the Depositary, such
payments shall be made by 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 Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee 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 acceptable to the Administrators and the
Company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
QUIPS.
Registration of transfers of the QUIPS will be effected without charge by
or on behalf of the Trust but upon payment of any tax or other governmental
charges that may be imposed in connection with any transfer or exchange. The
Trust will not be required to register or cause to be registered the transfer of
any QUIPS after they have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
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 Declaration 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 affairs. Subject to this provision, the Property Trustee
is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of
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any holder of Trust Securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby. The Property
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if repayment or
adequate indemnity is not reasonably assured to the Property Trustee.
MISCELLANEOUS
The Administrators are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust 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 or as other than a
grantor trust 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 Company
and the Administrators are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the Trust or the Declaration, that
the Company and the Administrators 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 Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
GENERAL
The Junior Subordinated Debentures are to be issued under the Indenture.
The Bank of New York will initially act as Debenture Trustee under the
Indenture. The Indenture will be qualified under the Trust Indenture Act.
The Junior Subordinated Debentures will mature on the QUIPS and Debenture
Maturity Date of , 2003. The Junior Subordinated Debentures will not
be redeemable at the option of the Company prior to the QUIPS and Debenture
Maturity Date.
The Junior Subordinated Debentures will bear interest from their first date
of issuance at a rate that is equal to the QUIPS Distribution Rate payable
quarterly in arrears on the Quarterly Payment Dates (each, an "Interest Payment
Date"), to the holders of the Junior Subordinated Debenture on the relevant
record dates, which, unless the Junior Subordinated Debentures are distributed
upon liquidation of the Trust and are issued in certificated form, will be one
Business Day prior to the relevant Interest Payment Date. Until the liquidation,
if any, of the Trust, each Junior Subordinated Debenture will be held in the
name of the Property Trustee in trust for the benefit of the holders of the
Trust Securities. The amount of interest payable for any period will be computed
on the basis of a 360-day year of twelve 30-day months. In the event that any
date on which interest is payable on the 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), except that if such Business Day is
in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on the date such payment was originally payable. The term "interest",
as used in this Description of the Junior Subordinated Debentures, shall include
any Additional Sums (as defined herein) payable on the Junior Subordinated
Debentures.
The Junior Subordinated Debentures will be unsecured and subordinate and
rank junior in right of payment to the extent and in the manner set forth in the
Indenture to all Senior Indebtedness of the Company. See "Risk
Factors -- Holding Company Structure; Reliance on Dividends from Insurance
Subsidiaries" above and "-- Subordination" below.
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OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is continuing,
the Company will have the right under the Indenture at any time during the term
of the Junior Subordinated Debentures to defer the payment of interest at any
time or from time to time for a period not extending beyond the QUIPS and
Debenture Maturity Date. At the end of an Extension Period, the Company must pay
all interest then accrued and unpaid (together with interest thereon accrued at
the same rate borne by the Junior Subordinated Debentures, compounded on each
succeeding Interest Payment Date). During an Extension Period, interest will
continue to accrue and, if the Junior Subordinated Debentures have been
distributed to holders of the Trust Securities, holders of Junior Subordinated
Debentures (or holders of the Trust Securities while Trust Securities are
outstanding) will be required to accrue interest income for United States
Federal income tax purposes prior to the receipt of cash attributable to such
income. See "Certain Federal Income Tax Consequences -- Interest Received on the
QUIPS".
During any such Extension Period, the Company may not take any of the
prohibited actions described under "-- Certain Covenants of the Company".
Prior to the expiration of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to extend beyond the QUIPS and Debenture Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, 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 Property Trustee, the Administrators and the Debenture
Trustee written notice of its election of any Extension Period (or an extension
thereof) at least five Business Days prior to the earlier of (a) the date the
Distributions on the Trust Securities would have been payable except for the
election to begin or extend such Extension Period, (b) the date the
Administrators are required to give notice to any securities exchange or to
holders of QUIPS of the record date or the date such Distributions are payable
and (c) such record date. The Debenture Trustee shall give notice of the
Company's election to begin or extend a new Extension Period to the holders of
the QUIPS. There is no limitation on the number of times that the Company may
elect to begin an Extension Period.
ADDITIONAL SUMS
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures the Additional Sums.
"Additional Sums" means such additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding QUIPS and Common Trust Securities shall not be reduced as a result
of any additional taxes, duties or other governmental charges to which the Trust
has become subject as a result of a Tax Event.
A "Tax Event" means the receipt by the Company and the Trust of an opinion
of a nationally recognized tax 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 (a) amendment or change
is effective or (b) such pronouncement or decision is announced, on or after the
date of original issuance of the Junior Subordinated Debentures, there is more
than an insubstantial risk that (i) the Trust 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 or
(ii) the Trust 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.
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In lieu of paying Additional Sums on the Junior Subordinated Debentures the
Company may dissolve the Trust and cause the Junior Subordinated Debentures to
be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "-- Description of the QUIPS -- Liquidation of the Trust and
Distribution of Junior Subordinated Debentures".
JUNIOR SUBORDINATED DEBENTURE PUT OPTIONS
Each holder of Junior Subordinated Debentures will have the right (a
"Junior Subordinated Debenture Put Option") to require the Company to repurchase
such Junior Subordinated Debentures, in whole or in part, on either Put Date,
for a purchase price equal to the Applicable Put Price for such Junior
Subordinated Debentures. The Trust will covenant in the Declaration that it will
not exercise any Junior Subordinated Debenture Put Option (although it may
distribute Junior Subordinated Debentures to a Put Agent in connection with the
exercise by a holder of QUIPS or the Put Agent on behalf of such holder of such
holder's right to require the Trust to do so, as contemplated under
"-- Description of the QUIPS -- Right to Exercise Junior Subordinated Debenture
Put Options" above).
Each holder of Junior Subordinated Debentures or the Put Agent on behalf of
such holder may exercise the Junior Subordinated Debenture Put Option related to
such securities by presenting and surrendering the certificate evidencing such
securities, at the offices of the Debenture Trustee, with the form of "Notice of
Exercise of Put Right" on the reverse side of the certificate completed and
executed as indicated, by 10:00 a.m., New York City time, on the applicable Put
Date.
"Applicable Put Price" for any Junior Subordinated Debentures will be:
(a) if the Put Date is the Stock Purchase Date, the aggregate
principal amount of such Junior Subordinated Debentures plus unpaid
interest accrued thereon to but not including the Put Date; or
(b) if the Put Date is the Final Put Date, (i) the Effective Call
Option Price for such Junior Subordinated Debentures plus simple interest
thereon for the period from and including the Call Option Expiration Date
to but excluding the Put Date at a rate per annum equal to the LIBOR Rate
(as defined) for such period prevailing on the Call Option Expiration Date
plus basis points, minus (ii) the aggregate amount of interest paid on
such Junior Subordinated Debentures after the Call Option Expiration Date
and on or before the Final Put Date plus simple interest on each such
interest payment for the period from and including the date of receipt of
such payment to but excluding the Put Date at a rate per annum equal to the
LIBOR Rate for such period prevailing on such date of receipt.
For purposes of the foregoing:
"Effective Call Option Price" for any Junior Subordinated Debentures means
(a) the aggregate principal amount of such Junior Subordinated Debentures plus
90 days of simple interest thereon at the QUIPS Distribution Rate, all
discounted to present value at the Call Option Expiration Date at a discount
rate equal to the 3-Month Treasury Rate prevailing on the Call Option Expiration
Date (i.e., divided by one plus such 3-Month Treasury Rate (expressed as a
decimal between 0 and 1)) plus (b) the aggregate amount of deferred interest
payments on such Junior Subordinated Debentures accrued to but not including the
Call Option Expiration Date.
CERTAIN COVENANTS OF THE COMPANY
The Company will covenant that it will not (a) 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, (b) 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 with or junior in right of
payment to the Junior Subordinated Debentures or (c) make any guarantee payments
with respect to any guarantee by the Company of any securities of any subsidiary
of the Company if such
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guarantee ranks pari passu or junior in right of payment to the Junior
Subordinated Debentures (other than, in the case of clauses (a), (b) and (c),
(i) dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, common stock of the Company, (ii) any
declaration of a dividend in connection with the implementation of a
stockholder's 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,
(iii) payments under the Guarantee, (iv) as a result of a reclassification of
the Company's capital stock solely into shares of one or more classes or series
of the Company's capital stock or the exchange or conversion of one class or
series of the Company's capital stock for another class or series of the
Company's capital stock, (v) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged and (vi)
purchases of common stock in connection with the satisfaction by the Company of
its obligations under any of the Company's benefit plans for its and its
subsidiaries' directors, officers or employees or any of the Company's dividend
reinvestment plans) if at such time (x) a Debenture Event of Default shall have
occurred and be continuing, (y) the Company shall be in default with respect to
its payment of any obligations under the Guarantee or (z) the Company shall have
given notice of its election of an Extension Period, or any extension thereof,
as provided in the Indenture and shall not have rescinded such notice, and such
Extension Period, or any extension thereof, shall have commenced and not yet
terminated.
The Company will also covenant (a) to maintain 100 percent ownership of the
Common Trust Securities; provided, however, that any permitted successor of the
Company under the Indenture may succeed to the Company's ownership of the Common
Trust Securities, (b) to use its reasonable efforts to cause the Trust (i) to
remain a statutory business trust, except in connection with the distribution of
Junior Subordinated Debentures to the holders of Trust Securities in liquidation
of the Trust, the redemption of all of the Trust Securities of the Trust, or
certain mergers, consolidations or amalgamations, each as permitted by the
Declaration of the Trust and (ii) to continue not to be classified as an
association taxable as a corporation or a partnership for United States Federal
income tax purposes and (c) to use its reasonable efforts to cause each holder
of Trust Securities (or, for so long as Trust Securities constitute Pledged
Securities, Units) to be treated as owning an undivided beneficial interest in
the Junior Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture 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):
(a) 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
(b) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, by declaration of acceleration of maturity or
otherwise; or
(c) failure to pay the Applicable Put Price when due upon exercise of
a Junior Subordinated Debenture Put Option; or
(d) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of Junior Subordinated Debentures;
or
(e) certain events of bankruptcy, insolvency or reorganization of the
Company.
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Prior to any declaration accelerating the maturity of the Junior
Subordinated Debentures, the holders of a majority in aggregate outstanding
principal amount of the 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. The Debenture Trustee or the holders of not less than
25% in aggregate outstanding principal amount of the Junior Subordinated
Debentures may declare the principal due and payable immediately upon a
Debenture Event of Default. The holders of a majority in aggregate outstanding
principal amount of the Junior Subordinated Debentures may annul such
declaration and waive the default if the default (other than the nonpayment of
the principal of the Junior Subordinated Debentures which has become due solely
by such acceleration) 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.
The holder or holders of a majority in aggregate outstanding principal
amount of the Junior Subordinated Debentures (which, prior to any liquidation or
dissolution of the Trust, will be the Property Trustee) 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, premium, if any, interest
or Applicable Put Price in respect of Junior Subordinated Debentures (unless
such default has been cured and a sum sufficient to pay all matured installments
of interest and premium, if any, and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee), or a default in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each outstanding Junior
Subordinated Debenture.
The Indenture requires the annual filing by the Company with the Debenture
Trustee of a certificate as to the absence of certain defaults under the
Indenture.
The Indenture provides that the Debenture Trustee may withhold notice of a
Debenture Event of Default from the holders of the Junior Subordinated
Debentures (except a Debenture Event of Default in payment of principal,
premium, if any, interest or Applicable Put Price in respect of Junior
Subordinated Debentures) if the Debenture Trustee considers it in the interest
of such holders to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF QUIPS
If a Debenture Event of Default shall have occurred and be continuing and
shall be attributable to the failure of the Company to pay interest or premium,
if any, on or principal of the Junior Subordinated Debentures on the due date
(after giving effect to any Extension Period), a holder of record of QUIPS (or,
for so long as QUIPS underlie Units, a holder of record of Units) may institute
a Direct Action. See "-- Description of the QUIPS -- Events of Default; Notice".
The Company may not amend the Indenture to remove the foregoing right to bring a
Direct Action without the prior written consent of the holders of all of the
QUIPS (or, for so long as QUIPS underlie Units, the holders of all the Units).
The holders of the QUIPS will 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.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets as
an entirety or substantially as an entirety to any Person, and no Person shall
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to the
Company, unless: (i) in case the Company consolidates with or merges into
another Person or conveys or transfers its properties and assets substantially
as an entirety to any Person, the successor Person is organized under the laws
of the United States or any State or the District of Columbia, and such
successor Person expressly assumes the Company's obligations on the Junior
Subordinated Debentures; (ii) immediately after giving effect thereto, no
Debenture Event of
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Default, and no event which, after notice or lapse of time or both, would become
a Debenture Event of Default, shall have occurred and be continuing; and (iii)
certain other conditions as prescribed in the Indenture are met.
The general provisions of the 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.
MODIFICATION OF THE INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of Junior Subordinated Debentures, amend, waive or
supplement the 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 Junior
Subordinated Debentures). The Indenture contains provisions permitting the
Company and the Debenture Trustee, with the consent of the holders of a majority
in principal amount of the Junior Subordinated Debentures, to modify the
Indenture in a manner affecting the rights of the holders of Junior Subordinated
Debentures; provided that no such modification may, without the consent of the
holders of each outstanding Junior Subordinated Debenture so affected, (a)
change the QUIPS and Debenture Maturity Date, or reduce the principal amount of
the Junior Subordinated Debentures or reduce the rate or extend the time of
payment of interest thereon, (b) change any of the terms or conditions of the
Junior Subordinated Debenture Put Options or the Applicable Put Price, or (c)
reduce the percentage of principal amount of Junior Subordinated Debentures the
holders of which are required to consent to any such modification of the
Indenture.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (a) have become due and payable or (b) will become due and payable
at maturity within one year and the Company deposits or causes to be deposited
with the Debenture Trustee 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 interest to the QUIPS and Debenture Maturity
Date, then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and to
provide the officers' certificates and opinions of counsel described therein),
and the Company will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
The obligations of the Company under the Junior Subordinated Debentures
will be unsecured and subordinate and rank junior in right of payment to all
present and future Senior Indebtedness to the extent provided in the Indenture.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of all Senior Indebtedness before
the holders of Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect thereof.
No payments on account of principal of, premium, if any, or interest on the
Junior Subordinated Debentures (including payments on exercise of Junior
Subordinated Debenture Put Options) may be made if there shall have occurred and
be continuing a default in any payment with respect to Senior Indebtedness, or
an event of default with respect to any Senior Indebtedness resulting in the
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acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of all
amounts due in respect of such Senior Indebtedness before the holders of Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the Junior Subordinated Debentures.
Notwithstanding the foregoing, amounts that would be due and payable by the
Company to holders of Units or Pledged Securities in the absence of the
foregoing subordination provisions may be applied by such holders to offset
their obligations under their respective Purchase Contracts.
"Senior Indebtedness" shall mean, with respect to the Company, (a) the
principal, premium, if any, and interest in respect of (i) indebtedness of the
Company for money borrowed and (ii) indebtedness evidenced by securities,
debentures, notes, bonds or other similar instruments issued by the Company,
including, without limitation, any current or future indebtedness under any
indenture (other than the Indenture) to which the Company is party, (b) all
capital lease obligations of the Company, (c) all obligations of the Company
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of the Company and all obligations of the Company under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business), (d) all obligations of the Company for the
reimbursement on any letter of credit, any banker's acceptance, any security
purchase facility, any repurchase agreement or similar arrangement, any interest
rate swap, any other hedging arrangement, any obligation under options or any
similar credit or other transaction, (e) all obligations of the type referred to
in clauses (a) through (d) above of other persons for the payment of which the
Company is responsible or liable as obligor, guarantor or otherwise and (f) all
obligations of the type referred to in clauses (a) through (e) above of other
persons secured by any lien on any property or asset of the Company (whether or
not such obligation is assumed by the Company), except for (x) any indebtedness
between or among the Company or any affiliate of the Company, (y) any other debt
securities issued pursuant to the Indenture and guarantees in respect of those
debt securities and (z) any indebtedness that is by its terms subordinated to or
pari passu with the Junior Subordinated Debentures, including any junior
subordinated debt securities issued in the future with subordination terms
substantially similar to the Junior Subordinated Debentures. Senior Indebtedness
shall continue to be Senior Indebtedness and be entitled to the benefits of the
subordination provisions irrespective of any amendment, modification or waiver
of any term of such Senior Indebtedness.
Because the Company is a holding company, the Junior Subordinated
Debentures are effectively subordinated to all existing and future liabilities
of the Company's subsidiaries, except to the extent the Company is a creditor of
the subsidiary recognized as such. See "Risk Factors -- Holding Company
Structure; Reliance on Dividends from Insurance Subsidiaries".
The Indenture places no limitation on the amount of Senior Indebtedness
that may be incurred by the Company. The Company expects from time to time to
incur indebtedness constituting Senior Indebtedness.
FORM AND BOOK-ENTRY PROCEDURES
If the Junior Subordinated Debentures are distributed to the holders of the
Trust Securities and do not constitute Pledged Securities with respect to the
Units, the Junior Subordinated Debentures may be represented by one or more
global certificates registered in the name of the Depositary or its nominee. The
depositary arrangements for such Junior Subordinated Debentures are expected to
be substantially similar to those in effect for the Units. For a description of
the Depositary and the terms of the depositary arrangements, see "-- Book-Entry
System".
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PAYMENT AND PAYING AGENTS
Payment of principal of and premium, if any, and any interest on Junior
Subordinated Debentures will be made at the office of the Debenture Trustee in
The City of New York or at the office of such paying agent or paying agents as
the Company may designate from time to time, except that at the option of the
Company payment of any interest may be made (i) by check mailed to the address
of the Person entitled thereto as such address shall appear in the register for
Junior Subordinated Debentures or (ii) by transfer to an account maintained by
the Person entitled thereto as specified in such register, provided that proper
transfer instructions have been received by the relevant Record Date. Payment of
any interest on any Junior Subordinated Debenture will be made to the Person in
whose name such Junior Subordinated Debenture is registered at the close of
business on the Record Date for such interest, except in the case of defaulted
interest. The Company may at any time designate additional paying agents or
rescind the designation of any paying agent; however the Company will at all
times be required to maintain a paying agent in each place of payment for the
Junior Subordinated Debentures.
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 (or the
Applicable Put Price therefor) and remaining unclaimed for two years after such
principal and premium, if any, or interest (or Applicable Put Price) has become
due and payable shall, at the request of the Company, be repaid to the Company
and the holder of such Junior Subordinated Debenture shall thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
GOVERNING LAW
The 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
Subject to such provisions, the Debenture Trustee is under no obligation to
exercise any of the powers vested in it by the Indenture at the request of any
holder of Junior Subordinated Debentures, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
DESCRIPTION OF THE GUARANTEE
GENERAL
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the QUIPS for the benefit of the holders from
time to time of the QUIPS. The Bank of New York will initially act as Guarantee
Trustee under the Guarantee. The Guarantee will be qualified under the Trust
Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the QUIPS.
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 herein) to the holders of the QUIPS, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
QUIPS, to the extent not paid by or on behalf of the Trust (the "Guarantee
Payments"), will be subject to the Guarantee: (a) any accumulated and unpaid
Distributions required to be paid on QUIPS, to the extent the Trust has funds on
hand legally available therefor and (b) the Final Redemption Price with respect
to the QUIPS, to the extent that the Trust has funds on hand legally
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available therefor. 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 QUIPS or by causing the Trust to pay such amounts to such
holders.
The Guarantee will be unsecured and subordinate and rank junior in right of
payment to the extent and in the manner provided therein to all Senior
Indebtedness. See "Risk Factors -- Holding Company Structure; Reliance on
Dividends from Insurance Subsidiaries" above and "-- Status" below.
The Guarantee, when taken together with the Company's obligations under the
Declaration, the Junior Subordinated Debentures and the Indenture, including its
obligations to pay costs, expenses, debt and liabilities of the Trust (other
than with respect to the Trust Securities), will provide in the aggregate, a
full, irrevocable and unconditional guarantee of all of the Trust's obligations
of payments due under the QUIPS. See "-- Relationship Among the QUIPS, the
Junior Subordinated Debentures and the Guarantee".
The Company also has agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to Common Trust Securities
issued by the Trust to the same extent as the Guarantee, except that upon an
Event of Default under the Declaration, holders of QUIPS shall have priority
over holder of Common Trust Securities with respect to Distributions and
payments on liquidation, redemption or otherwise.
STATUS
The Guarantee will be unsecured and subordinate and rank junior in right of
payment to all Senior Indebtedness to the extent and in the manner provided
therein, which is similar to extent and manner of subordination of the Junior
Subordinated Debentures as described under "-- Description of the Junior
Subordinated Debentures -- Subordination" above.
Because the Company is a holding company, the Guarantee is effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, except to the extent the Company is a creditor of the subsidiary
recognized as such. See "Risk Factors -- Holding Company Structure; Reliance on
Dividends from Insurance Subsidiaries".
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 Company 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 QUIPS. The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution to the holders of the QUIPS of the Junior
Subordinated Debentures. The Guarantee does not place a limitation on the amount
of Senior Indebtedness that may be incurred by the Company. The Company expects
from time to time to incur indebtedness constituting Senior Indebtedness.
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 a majority in QUIPS Liquidation Amount of the QUIPS will have the
right to (a) waive any past event of default under the Guarantee and its
consequences, whereby such event of default shall cease to exist and any event
of default under the Guarantee arising therefrom shall be deemed to have been
cured for every purpose of the Guarantee and (b) 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.
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Any holder of the QUIPS may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity.
The Company, as guarantor, will be 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.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any QUIPS
remain outstanding, if there shall have occurred any event that is or would
constitute an event of default under the Guarantee, that is continuing, or the
Declaration, then the Company will not take any of the prohibited actions
described under "-- Description of the Junior Subordinated Debentures -- Certain
Covenants of the Company".
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the QUIPS (in which case no approval will be required),
the Guarantee may not be amended without the prior approval of the holders of a
majority in QUIPS Liquidation Amount of such outstanding QUIPS. The manner of
obtaining any such approval will be as set forth under "-- Description of the
QUIPS -- Voting Rights; Amendment of the Declaration". All guarantees and
agreements contained in the Guarantee Agreement shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall inure
to the benefit of the holders of the QUIPS then outstanding.
TERMINATION
The Guarantee will terminate and be of no further force and effect upon
full payment of the Final Redemption Price of the QUIPS, upon full payment of
the amounts payable upon liquidation of the Trust or upon distribution of the
Junior Subordinated Debentures to the holders of the QUIPS. The Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the QUIPS must restore payment of any sums paid under the
QUIPS or the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee may be appointed or removed by the Guarantor without
cause at any time, except during an event of default under the Guarantee. The
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Guarantee at the request of any holder of QUIPS, unless offered
reasonable indemnity against the costs, expenses and liabilities which might be
incurred thereby. The Guarantee Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if it reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
The Company or its affiliates maintain certain business relationships with
the Guarantee Trustee and its affiliates in the ordinary course of business.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
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RELATIONSHIP AMONG THE QUIPS, THE JUNIOR SUBORDINATED DEBENTURES AND THE
GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the QUIPS (to the extent
the Trust has funds on hand legally available for the payment of such
Distributions) will be irrevocably guaranteed by the Company as and to the
extent set forth under "Description of the Guarantee". If and to the extent that
the Company does not make the required payments on the Junior Subordinated
Debentures, the Trust will not have sufficient funds to make the related
payments, including Distributions, on the QUIPS. The Guarantee will not cover
any such payment unless and until the Trust has sufficient funds for the payment
therefor. The Guarantee, when taken together with the Company's obligations
under the Junior Subordinated Debentures, the Indenture and the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of the
Trust (other than with respect to the Trust Securities), will provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
Distributions and other amounts due on the QUIPS. The obligations of the Company
under the Guarantee will be unsecured and subordinate and rank junior in right
of payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the QUIPS, primarily because: (a) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the aggregate liquidation amount of the QUIPS and Common Trust Securities;
(b) the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the QUIPS Distribution Rate and Distribution
and other payment dates for the Trust Securities; (c) the Company shall pay for
all and any costs, expenses and liabilities of the Trust except the Trust's
obligations to holders of Trust Securities under such Trust Securities; and (d)
the Declaration will provide that the Trust is not authorized to engage in any
activity that is not consistent with the limited purposes thereof.
ENFORCEMENT OF RIGHTS OF HOLDERS OF QUIPS
If the Company fails to make interest or other payments on the Junior
Subordinated Debentures when due (after giving effect to any Extension Period),
the Declaration provides a mechanism whereby the holders of the QUIPS (or, for
so long as QUIPS underlie Units, the holders of the Units) may direct the
Property Trustee to enforce its rights under the Junior Subordinated Debentures.
If the Property Trustee fails to enforce its rights under the Junior
Subordinated Debentures after a majority in liquidation amount of QUIPS have so
directed the Property Trustee, a holder of record of the QUIPS (or, for so long
as QUIPS underlie Units, a holder of record of Units) may, to the fullest extent
permitted by law, institute a legal proceeding against the Company to enforce
the Property Trustee's rights under the Junior Subordinated Debentures without
first instituting any legal proceedings against the Property Trustee or any
other person or entity. Notwithstanding the foregoing, if an Event of Default
has occurred and is continuing and such event is attributable to the failure of
the Company to pay principal or interest on the Junior Subordinated Debentures
on the respective dates such principal or interest is payable, after giving
effect to any Extension Period, then a holder of record of QUIPS (or, for so
long as QUIPS underlie Units, a holder of record of Units) may institute a
Direct Action for payment to such holder of the portion of such principal or
interest attributable to Junior Subordinated Debentures having a principal
amount equal to the aggregate QUIPS Liquidation Amount of the QUIPS held by such
holder (or underlying such holder's Units). In connection with such Direct
Action, the Company will be subrogated to the rights of such holder of QUIPS
under the Declaration to the extent of any payment made by the Company to such
holder of QUIPS in such Direct Action; provided, however, that no such
subrogation right may be exercised so long as a Declaration Event of Default has
occurred and is continuing.
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In addition, a holder of QUIPS 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 Trust or any
other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Declaration. However, in the
event of payment defaults under, or acceleration of, Senior Indebtedness, the
subordination provisions of the Indenture will 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 or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Declaration.
LIMITED PURPOSE OF THE TRUST
The QUIPS will represent preferred undivided beneficial interests in the
assets of the Trust, and the Trust exists for the sole purpose of issuing and
selling the Trust Securities, using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debentures and engaging in only
those other activities necessary, advisable or incidental thereto.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary liquidation or bankruptcy of the Company,
the Property Trustee, as holder of the Junior Subordinated Debentures, would be
a subordinated creditor of the Company, subordinated in right of payment to all
Senior Indebtedness as set forth in the Indenture, but entitled to receive
payment in full of principal (and premium, if any) and interest, before any
stockholders of the Company receive payments or distributions. Since the Company
will be the guarantor under the Guarantee and will agree to pay for all costs,
expenses and liabilities of the Trust (other than the Trust's obligations to the
holders of its Trust Securities), the positions of a holder of QUIPS 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 CONSEQUENCES
The following summary of the principal U.S. federal income tax consequences
of the purchase, ownership and disposition of Units, QUIPS and Common Stock is
based on the views of Sullivan & Cromwell, special tax counsel to the Company.
No statutory, judicial or administrative authority directly addresses the tax
treatment of Units or instruments similar to Units for U.S. Federal income tax
purposes. As a result, no assurance can be given that the IRS will agree with
the tax consequences described herein or that these consequences will not be
successfully challenged. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR
TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF AN INVESTMENT IN THE UNITS.
The summary deals only with Units, QUIPS, and Common Stock held as capital
assets by purchasers who purchase in conjunction with the initial offering at
the issue price and who or which are (i) citizens or residents of the United
States, (ii) corporations or partnerships created or organized in or under the
laws of the United States or any state thereof or the District of Columbia,
(iii) estates the income of which is subject to United States federal income
taxation without regard to source, or (iv) trusts if a court within the United
States is able to exercise primary supervision over the administration of such
trust and one or more United States persons have the authority to control all
substantial decisions of such trust. It does not address consequences to special
classes of holders, including dealers in securities or currencies, financial
institutions, insurance companies, tax-exempt entities, taxpayers subject to the
alternative minimum tax, non-United States persons or taxpayers holding the
Purchase Contracts, QUIPS or Common Stock as part of a "straddle" or a hedging
or conversion transaction or other integrated investment. Moreover, the effect
of any applicable estate and gift tax laws or state, local or foreign tax laws
is not discussed. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX
ADVISORS CONCERNING THE TAX CONSEQUENCES OF AN INVESTMENT IN THE UNITS,
INCLUDING THE APPLICATION OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations issued thereunder, published rulings and
court decisions, each as currently in effect and all of which are subject to
change. Any 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 holder of Units, QUIPS or Common Stock.
This discussion assumes that, in connection with the formation of the
Units, the Underwriters will be acting on behalf of the holders and will (a)
sell the Call Options to the Call Option Holder and apply the proceeds from such
sale (the "Call Premium") together with the amount paid directly by the holders
to the Underwriters (the "Purchase Price") to the purchase of the QUIPS and (b)
enter into the Purchase Contracts with the Company and that holders will assume
the rights and obligations arising from these actions undertaken on their
behalf.
CLASSIFICATION OF THE TRUST
The Trust will, for U.S. Federal income tax purposes, not be classified as
an association taxable as a corporation. As a result, each holder of QUIPS will
be required to include in gross income the items of income realized with respect
to the holder's allocable share of those Junior Subordinated Debentures.
TREATMENT OF THE CALL PREMIUM
A holder will not be subject to tax in respect of the receipt of the Call
Premium at the time the Call Premium is received. Rather, the amount of the Call
Premium will be included in the amount realized by a holder when the Call Option
is exercised (see "-- Exercise of the Call Option and Ownership of Treasury
Securities" below) or the Units are sold (see "-- Sale or Disposition of Units"
below). If the Call Option expires unexercised, the amount of the Call Premium
will be
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<PAGE> 91
taxable to the holder as short-term capital gain. Such short-term capital gain
may, subject to certain limitations, be offset, however, by long-term capital
loss recognized on maturity of the QUIPS (see "-- Sale or Retirement of QUIPS"
below), or effectively offset by prior amortization of premium on the QUIPS.
(See "-- Tax Basis of QUIPS" below).
TAX BASIS OF QUIPS
The amount paid by a holder for a Unit, which, for U.S. federal income tax
purposes, will equal the sum of the Purchase Price plus the amount of the Call
Premium received by such holder and paid to the Company in partial payment of
the Units, will be allocated between the QUIPS and the Purchase Contract
included in such Unit in proportion to their respective fair market values at
the time of purchase. Such allocation will establish each holder's initial tax
basis in the QUIPS and the Purchase Contracts. Consistent with the
documentation, and reasonably consistent with the facts and circumstances, the
Company intends to take the position that, at the time of issuance of the Units,
the fair market value of the Purchase Contracts equals zero, and the entire
amount paid for the Units, including the Call Premium, is allocable to the
QUIPS. The Company's position will be binding upon each holder unless the holder
explicitly discloses a contrary position on a statement attached to the holder's
timely filed U.S. federal income tax return for the taxable year in which the
Units are acquired by such holder.
Assuming the above allocation, the holder's basis in the QUIPS (and in the
undivided beneficial interest in the Junior Subordinated Debentures represented
by the QUIPS) will exceed the amount payable at maturity with respect to the
QUIPS by the amount of the Call Premium. In general, this excess amount will be
"bond premium", which, at the election of the holder, may be "amortized" over
the life of the QUIPS. Because of the existence of the Call Options and the
Junior Subordinated Debentures Put Options, however, there may be some
uncertainty regarding the exact amount of bond premium and the period over which
such premium may be amortized. As a result, holders who wish to make an election
to amortize bond premium should consult their tax advisors.
A holder who makes an election to amortize bond premium will reduce the
amount of interest included in income each year with respect to the QUIPS by the
amount of amortizable bond premium allocable to such year under currently
applicable Treasury regulations, and the holder's basis in the QUIPS will be
reduced by the same amount. As a result of such reduction in basis, such a
holder may recognize a corresponding amount of capital gain, if and when the
Call Option is exercised, equal to the excess of the amount realized from the
sale of the QUIPS over the basis of the QUIPS. See "-- Exercise of the Call
Option and Ownership of Treasury Securities", below. Holders should consult a
tax advisor before making an election to amortize bond premium, as the election
will generally apply to other debt instruments acquired at a premium by a
holder.
INTEREST RECEIVED ON QUIPS
Under applicable Treasury regulations, stated interest on a debt instrument
is generally not "qualified stated interest" and, therefore, will give rise to
OID unless such interest is unconditionally payable in cash or in property
(other than debt instruments of the issuer) at least annually at a single fixed
rate. Interest is considered to be unconditionally payable only if reasonable
legal remedies exist to compel timely payment or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment or
non-payment "remote".
The Company has the right, at any time and from time to time during the
term of the Junior Subordinated Debentures, to defer payments of interest by
extending the interest payment period, provided that no Extension Period may
extend beyond the QUIPS and Debenture Maturity Date. During any Extension
Period, the Company may not take any of the prohibited actions set forth under
"Description of the Units -- Description of the Junior Subordinated
Debentures -- Certain Covenants of the Company". The Company currently believes
that the adverse impact that the imposition of such restrictions would have on
the Company and on the value of its equity securities
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<PAGE> 92
makes the likelihood of its exercising its right to defer payments of interest
on the Junior Subordinated Debentures remote. Based on the foregoing, the
Company believes that the Junior Subordinated Debentures should not be
considered to have been issued with OID, and, accordingly, a holder should
include in gross income such holder's allocable share of interest on the Junior
Subordinated Debentures as it is paid or accrued, in accordance with the
holder's normal method of tax accounting.
If the Company were to exercise its right to defer payments of interest on
the Junior Subordinated Debentures, the Junior Subordinated Debentures would be
treated, solely for purposes of the OID rules, as being re-issued at such time
with OID and the Junior Subordinated Debentures would be considered to have OID
at all times thereafter. Under these rules, a holder of QUIPS would be required
to include OID in income as ordinary income, on a current basis, over the period
that the QUIPS were held, even though the Company would not make any actual cash
payments during the Extension Period. The amount of OID includible in the
taxable income of a holder of QUIPS would be determined on the basis of a
constant yield method over the remaining term of the instruments, and the actual
payment of stated interest on the Junior Subordinated Debentures would not be
separately reported as taxable income. Any OID included in income would increase
such holder's tax basis in the QUIPS, and actual payments would reduce such tax
basis.
Because income with respect to the QUIPS will constitute interest for U.S.
Federal income tax purposes, corporate holders of Units will not be entitled to
a dividends-received deduction in respect of such income.
CONTRACT FEES
The holders of Units may be required to pay Contract Fees to the Company,
or the Company may be required to pay Contract Fees to the holders of the Units,
as specified in the final Prospectus for the offering made hereby.
There is no authority for the treatment of the Contract Fees under current
law. In the event that the Company is required to pay Contract Fees to holders,
the Company intends to file information returns on the basis that the Contract
Fees are ordinary income to holders for the taxable year of receipt. Because any
Contract Fees received by a holder will not constitute dividends for U.S.
federal income tax purposes, corporate holders will not be entitled to a
dividends-received deduction as a result of receiving such fees. Holders should
consult their own tax advisors concerning the treatment of the Contract Fees,
including the possibility that the Contract Fees may not be treated as current
income to holders, but would instead reduce a holder's basis in the Common Stock
received upon exercise of the Purchase Contracts, by analogy to the treatment of
rebates. In the event the Company is required to pay Contract Fees to holders,
the Company does not intend to deduct the Contract Fees, because it views them
as a cost of issuing the Common Stock. Contract Fees received by a regulated
investment company should be treated as income derived with respect to the
company's business of investing in stock and securities.
In the event that holders are required to pay Contract Fees to the Company,
it is unlikely that holders will be entitled to a current deduction in respect
of such payments. As a result, although the amount of cash distributions made to
holders in respect of the QUIPS will be reduced by the amount of Contract Fees
payable to the Company, holders will nevertheless recognize ordinary income each
quarter equal to the full amount of interest received or accrued with respect to
the QUIPS held by such holder, without a corresponding deduction for payment of
the Contract Fees. Payment of the Contract Fees by holders will, however,
effectively increase the basis of the Common Stock received under the Purchase
Contract. See "-- Purchase of Common Stock under the Purchase Contract" below.
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RECEIPT OF JUNIOR SUBORDINATED DEBENTURES UPON LIQUIDATION OF THE TRUST
If the Company exercises its right to liquidate the Trust and cause the
Junior Subordinated Debentures to be distributed, on a pro rata basis, to
holders of QUIPS (or to the Collateral Agent on behalf of such holders), such
distribution, under current law, would not be taxable to such holders and each
holder's aggregate tax basis in the Junior Subordinated Debentures would be
equal to such holder's aggregate tax basis in the QUIPS. A holder's holding
period for the Junior Subordinated Debentures would include the period during
which the QUIPS were held by such holder.
EXERCISE OF THE CALL OPTION AND OWNERSHIP OF TREASURY SECURITIES
Exercise of the Call Option will be a taxable event to holders of the
Units. As a result, holders will recognize gain or loss equal to the difference
between the amount realized from the exercise of the Call Option (less any
amount attributable to accrued but unpaid interest) and the adjusted tax basis
of the QUIPS. The amount realized from the exercise of the Call Option will
equal the aggregate of the Call Premium and the fair market value of the
Treasury Securities received.
Assuming, however, that (a) the entire purchase price of a Unit is properly
allocated to the QUIPS (see "-- Tax Basis of QUIPS" above), (b) the Purchase
Price is equal to both the principal amount of the QUIPS and the principal
amount of the Treasury Securities, and (c) the holder has not elected to
amortize bond premium with respect to the QUIPS (see "-- Tax Basis of QUIPS"
above), the holder generally will not recognize any significant gain or loss as
a result of the exercise of the Call Option, because the amount realized upon
exercise of the Call Option (which will include the Call Premium) will be
approximately equal to the holder's basis in the QUIPS (which will likewise
include the Call Premium). See "-- Tax Basis of QUIPS" above. Any net gain or
loss attributable to the difference between the fair market value of the
Treasury Securities and the principal amount of the QUIPS should in any event be
effectively offset by net gain or loss recognized upon maturity of the Treasury
Securities, as discussed immediately below.
Any amount paid upon exercise of the call attributable to accrued but
unpaid interest with respect to the QUIPS will be taxable as interest income.
A holder who has made an election to amortize bond premium with respect to
the QUIPS will generally recognize gain upon sale of the QUIPS pursuant to
exercise of the Call Option in an amount equal to the excess of the amount
realized by the holder from the sale of the QUIPS over the holder's adjusted tax
basis in the QUIPS at such time. Except to the extent attributable to accrued
but unpaid interest, any such gain will be capital gain, and will be long-term
capital gain if the holder has held the QUIPS for more than one year.
A holder's basis in the Treasury Securities received as a result of the
exercise of the Call Option will be equal to the fair market value of such
Treasury Securities, determined as of the Call Settlement Date. Except to the
extent the Treasury Securities are "stripped" U.S. Treasury securities
("Stripped Treasury Securities"), the treatment of which is discussed in the
immediately succeeding paragraph, (a) interest with respect to a holder's
portion of the Treasury Securities will be taxable as ordinary income to such
holder as it is received or accrued, in accordance with such holder's normal
method of accounting for United States federal income tax purposes, and (b) any
gain realized by a holder at maturity of the Treasury Securities will generally
be treated as capital gain, unless the Treasury Securities are considered to
have more than a "de minimis" amount of market discount.
A holder will be required to treat a Stripped Treasury Security received by
such holder as a bond that was originally issued on the date received by such
holder. Stripped Treasury Securities (other than Stripped Treasury Securities
with a remaining term of one year or less) will be considered to have original
issue discount (OID) in an amount equal to the difference between the amount
payable on such security and the holder's initial basis in such security
(determined as described in the immediately preceding paragraph). As a result, a
holder who receives a Stripped Treasury
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Security (other than a Stripped Treasury Security with a remaining term of one
year or less) will be required to include OID in income as ordinary income over
the remaining term of such security and will increase its basis in the Stripped
Treasury Security by the amount of OID included in income with respect to such
security.
Stripped Treasury Securities with a remaining term of one year or less
("Short-term Stripped Treasury Securities") generally should be considered to
have "acquisition discount" in an amount equal to the difference between the
principal amount of the Short-term Stripped Treasury Security and the taxpayer's
basis in the Short-term Stripped Treasury Security. A holder (other than a
holder on the accrual method of accounting or a holder who elects to accrue such
acquisition discount into income over the remaining term of the Short-term
Stripped Treasury Security) generally will recognize ordinary income upon
maturity of the Short-term Stripped Treasury Security equal to the amount of
such acquisition discount.
SALE OR DISPOSITION OF UNITS
A holder will generally recognize gain or loss upon the sale or other
disposition of Units. Such gain or loss will be separately calculated with
respect to the QUIPS, Junior Subordinated Debentures, or Treasury Securities, as
the case may be, and the related Purchase Contract comprising such Units by
allocating the sum of any cash and the fair market value of any property
received between the two components in proportion to their respective fair
market values. The amount considered to be received by a holder with respect to
the sale of the QUIPS or Junior Subordinated Debentures will include the value
of the assumption of the holder's obligations under the Call Option, which, in
the absence of any means of independent valuation, will likely be deemed to
equal the amount of the Call Premium previously received by such holder. See
"-- Treatment of the Call Premium" above.
The amount of gain or loss with respect to each component will equal the
difference between the consideration so allocated to each component (reduced, in
the case of the QUIPS, Junior Subordinated Debentures or Treasury Securities, by
any amount attributable to accrued but unpaid interest, which will be taxable as
ordinary income) and the holder's adjusted tax basis in the respective
components. Any such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if the holder held the respective components for
more than one year at the time of such sale or disposition.
In general, application of the principles set out above should effectively
cause holders to recognize gain or loss upon a sale or disposition of Units
prior to the exercise or expiration of the Call Option in an amount equal to the
difference between (a) the amount received from the sale of the Units and (b)
the Purchase Price, increased by the amount of any Contract Fees paid to the
Company and any accrued but unpaid OID on the QUIPS and decreased by (i) the
amount of any Contract Fees received by the holder and not yet included in
income and (ii) the amount of any amortization of bond premium.
SALE OR RETIREMENT OF QUIPS
If the Call Option is not exercised by the Call Option Holder, a holder
will recognize gain or loss on the sale or retirement of the QUIPS (including a
sale pursuant to the exercise of a Junior Subordinated Debentures Put Option) in
an amount equal to the difference between the amount realized on the sale or
retirement of the QUIPS (less any amount attributable to accrued but unpaid
interest, which will be taxable as ordinary income) and the holder's adjusted
tax basis in the QUIPS at such time. Any gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the holder has held the QUIPS
for more than one year.
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PURCHASE OF COMMON STOCK UNDER THE PURCHASE CONTRACT
Assuming that the initial basis of the Purchase Contract will be zero (see
"-- Tax Basis in QUIPS" above), the tax basis of the Common Stock acquired under
a Purchase Contract will equal the amount of cash paid to purchase such Common
Stock (including cash applied by the Collateral Agent upon maturity of the
Treasury Securities), increased by the amount of any Contract Fees paid by the
holder (as discussed above under "-- Contract Fees") and decreased by (a) the
amount of any Contract Fees received by the holder and not previously included
in income and (b) the amount of any cash received in lieu of fractional shares
of Common Stock. A holder will recognize capital gain or loss upon receipt of
cash in lieu of fractional shares of Common Stock equal to the difference
between the amount of cash received and the holder's basis in such fractional
shares. A holder's holding period in the Common Stock purchased pursuant to the
Purchase Contract will begin on the day after the purchase of such Common Stock.
OWNERSHIP OF COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
Assuming that the Company has current or accumulated earnings and profits
at least equal to the amount of the dividends, a holder will include a dividend
on the Common Stock in income when paid, and the dividend will be eligible for
the dividends received deduction if received by an otherwise qualifying
corporate holder which meets the holding period and other requirements for the
dividends received deduction.
Upon the sale, exchange or other disposition of Common Stock, the holder
will recognize gain or loss equal to the difference between the holder's tax
basis in the Common Stock and the amount realized on the disposition. The gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the holder has held the stock for more than one year at the time of
disposition.
ADJUSTMENT OF SETTLEMENT RATE
Holders of Units might be treated as receiving a constructive distribution
from the Company if (i) the Settlement Rate is adjusted and as a result of such
adjustment, the proportionate interest of holders of Securities in the assets or
earnings and profits of the Company is increased, and (ii) the adjustment is not
made pursuant to a reasonable antidilution formula. An adjustment in the
Settlement Rate would not be considered made pursuant to such a formula if the
adjustment were made to compensate for certain taxable distributions with
respect to Common Stock. Thus, under certain circumstances, an increase in the
Settlement Rate is likely to be taxable to holder of Units as a dividend to the
extent of the current or accumulated earnings and profits of the Company.
Holders of Units would be required to include their allocable share of such
constructive dividends in gross income but would not receive any cash related
thereto.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, (a) the
Company has agreed to enter into the Purchase Contracts with each of the
Underwriters named below (the "Underwriters") underlying the respective number
of Units set forth opposite its name below, (b) the Company and the Trust have
agreed to sell to each of the Underwriters the QUIPS underlying the respective
number of Units set forth opposite its name below, and (c) each of such
Underwriters has severally agreed to enter into such Purchase Contracts with the
Company, purchase such QUIPS from the Company and the Trust, pledge under the
Pledge Agreement such QUIPS and sell (on behalf of the initial investors in the
Units) to the Call Option Holder the Call Options with respect to such Units:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF UNITS
------------------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co. ....................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................
Donaldson, Lufkin & Jenrette Securities Corporation......................
---------
Total.......................................................... 1,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to enter into Purchase Contracts, purchase and pledge
QUIPS and sell Call Options with respect to all of the Units offered hereby, if
any Purchase Contracts are entered into, QUIPS are taken and Call Options sold.
The Underwriters propose to offer the Units in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $ per Unit. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per Unit to certain
brokers and dealers. After the Units are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company and the Trust have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to enter into Purchase
Contracts and purchase QUIPS underlying up to an aggregate of 225,000 additional
Units solely to cover over-allotments, if any. If Purchase Contracts underlying
any such additional Units are entered into and QUIPS are purchased, the
Underwriters would pledge under the Pledge Agreement such QUIPS and would sell
to the Call Option Holder the Call Options underlying such Units. If the
Underwriters exercise their over-allotment option, each of the Underwriters has
severally agreed, subject to certain conditions, to effect the foregoing
transactions with respect to approximately the same percentage of such Units
that the respective number of Units set forth opposite its name in the foregoing
table bears to the 1,500,000 Units offered hereby.
The Company has agreed, subject to certain exceptions, that during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, it will not
offer, sell, contract to sell or otherwise dispose of any Common Stock (other
than pursuant to employee stock option or purchase plans existing, or on the
conversion or exchange of convertible or exchangeable securities or the exercise
of warrants outstanding, on the date of this Prospectus) or any securities of
the Company which are substantially similar to the Common Stock, or which are
convertible into or exchangeable for, or otherwise represent the right to
receive, Common Stock or any such other securities, without the prior written
consent of the Underwriters, except for shares of Common Stock offered in
connection with the Offering and the Common Stock Offering and for shares of
Common Stock or such other securities issued as consideration in future
acquisitions as long as either the entity to which the Company is issuing
consideration for such acquisitions or, in the case of consideration being paid
to shareholders of the acquired entity, all of the executive officers,
directors, other affiliates and shareholders owning 5% or more of the equity of
the entity being acquired have agreed in writing to such 180-day restriction.
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<PAGE> 97
The Units will be a new issue of securities with no established trading
market. Application will be made to list the Units on the NYSE. The Underwriters
have advised the Company that they intend to make a market in the Units, but
they are not obligated to do so and may discontinue market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Units.
In connection with the Offering, the Underwriters may purchase and sell the
Units or Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Units or Common
Stock, as applicable; and short positions created by the Underwriters involve
the sale by the Underwriters of a greater number of Units than they are required
to purchase from the Company and the Trust in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to
broker-dealers in respect of the Units sold in the Offering may be reclaimed by
the Underwriters if such Units are repurchased by the Underwriters in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Units or the Common Stock, which may
be higher than the price that might otherwise prevail in the open market, and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
The Company and the Trust have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
VALIDITY OF THE SECURITIES
The validity of the Units, the QUIPS, the Purchase Contracts, the Common
Stock issuable upon settlement thereof, the Junior Subordinated Debentures and
the Guarantee being offered hereby will be passed upon for the Company and the
Trust by Weil, Gotshal & Manges LLP, New York, New York. The validity of the
Purchase Contracts, the Common Stock issuable upon settlement thereof, the
Junior Subordinated Debentures and the Guarantee being offered hereby will be
passed upon for the Underwriters by Sullivan & Cromwell, New York, New York.
Certain matters relating to United States Federal income tax considerations will
be passed upon for the Company by Sullivan & Cromwell, special tax counsel to
the Company.
EXPERTS
The consolidated financial statements and schedule of the Company appearing
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements and schedule are incorporated by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods ended March 31, 1997 and March 31, 1996,
the three-month and six-month periods ended June 30, 1997 and June 30, 1996 and
the three-month and nine-month periods ended September 30, 1997 and September
30, 1996, incorporated by reference in this Prospectus, Ernst & Young LLP have
reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
reports, included in the Company's Quarterly Report on Form 10-Q for the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, and
incorporated herein by reference, state that they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted
considering the limited nature of the review procedures applied. The independent
auditors are not subject to the liability provisions of Section 11 of the
Securities Act for their report on the unaudited interim financial information
because that report is not a "report" or a "part" of the Registration Statement
prepared or certified by the auditors within the meanings of Sections 7 and 11
of the Securities Act.
92
<PAGE> 98
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Sums....................................................................... 74
Administrators........................................................................ 18
Aggregate Consideration Payable on Exercise of the Call Options....................... 6
Applicable Market Value............................................................... 5
Applicable Put Price.................................................................. 75
Business Day.......................................................................... 63
Call Option........................................................................... 5
Call Option Agreement................................................................. 54
Call Option Expiration Date........................................................... 6
Call Option Holder.................................................................... 5
Call Premium.......................................................................... 85
Closing Price......................................................................... 55
Collateral Agent...................................................................... 6
Common Stock.......................................................................... i
Common Stock Offering................................................................. 10
Common Trust Securities............................................................... 8
Contract Fee Rate..................................................................... 5
Contract Fees......................................................................... 5
Debenture Event of Default............................................................ 76
Debenture Trustee..................................................................... 9
Declaration........................................................................... 4
Delaware Trustee...................................................................... 18
Depositary............................................................................ 61
Direct Action......................................................................... 16
Direct Participants................................................................... 61
Distribution Date..................................................................... 66
Distributions......................................................................... 66
Effective Call Option Price........................................................... 75
Extension Period...................................................................... 66
Final Put Date........................................................................ 66
Final Redemption Price................................................................ 66
Global Security Certificates.......................................................... 61
Guarantee............................................................................. 9
Guarantee Payments.................................................................... 80
Guarantee Trustee..................................................................... 9
Indenture............................................................................. 9
Indirect Participants................................................................. 61
Interest Payment Date................................................................. 73
Issuer Trustees....................................................................... 4
IRS................................................................................... 15
Junior Subordinated Debenture......................................................... 8
Junior Subordinated Debenture Put Option.............................................. 75
Like Amount........................................................................... 66
Liquidation Distribution.............................................................. 67
Master Unit Agreement................................................................. 54
OID................................................................................... 15
</TABLE>
93
<PAGE> 99
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Participants.......................................................................... 61
Paying Agent.......................................................................... 72
Pledge Agreement...................................................................... 54
Pledged Securities.................................................................... 6
Principal Agreements.................................................................. 54
Property Account...................................................................... 19
Property Trustee...................................................................... 18
Purchase Contract..................................................................... 5
Purchase Price........................................................................ 85
Put Agent............................................................................. 67
Put Dates............................................................................. 66
Quarterly Payment Dates............................................................... 4
QUIPS................................................................................. 5
QUIPS and Debenture Maturity Date..................................................... 8
QUIPS Distribution Rate............................................................... 8
QUIPS Liquidation Amount.............................................................. 8
Senior Indebtedness................................................................... 79
Settlement Rate....................................................................... 4
Short-term Stripped Treasury Securities............................................... 89
Sponsor............................................................................... 4
Stated Amount......................................................................... 4
Stock Purchase Date................................................................... 4
Stripped Treasury Securities.......................................................... 88
Successor Securities.................................................................. 70
Surplus Debentures.................................................................... 48
Tax Allocation Agreement.............................................................. 13
Tax Event............................................................................. 74
Threshold Appreciation Price.......................................................... 5
Trading Day........................................................................... 55
Treasury Securities................................................................... 6
Trust................................................................................. 4
Trust Indenture Act................................................................... 4
Trust Securities...................................................................... 8
Underwriters.......................................................................... 7
Unit Agent............................................................................ 54
Unit.................................................................................. 7
</TABLE>
94
<PAGE> 100
=======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE TRUST SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-looking Statements............. i
Available Information.................. ii
Incorporation of Certain Documents by
Reference............................ iii
Prospectus Summary..................... 1
Risk Factors........................... 13
The Trust.............................. 18
Use of Proceeds........................ 19
Ratio of Earnings to Fixed Charges..... 19
Price Range of Common Stock and
Dividends............................ 20
Capitalization......................... 21
Accounting Treatment................... 22
Selected Consolidated Financial Data... 23
Recent Developments.................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 28
Business............................... 37
Management............................. 51
Description of the Units............... 53
Certain Federal Income Tax
Consequences......................... 85
Underwriting........................... 91
Validity of the Securities............. 92
Experts................................ 92
Index of Defined Terms................. 93
</TABLE>
=======================================================
=======================================================
1,500,000 UNITS
LIFE RE CORPORATION
LIFE RE CAPITAL TRUST II
% ADJUSTABLE CONVERSION-RATE
EQUITY SECURITY UNITS
------------------------
[LIFE RE CORPORATION LOGO]
------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
=======================================================
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the offering of the Common Stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee
and the New York Stock Exchange listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $67,681
New York Stock Exchange listing fee....................................... *
Legal fees and expenses................................................... *
Accounting fees and expenses.............................................. *
Printing and engraving expenses........................................... *
Rating agencies' fees..................................................... *
Miscellaneous............................................................. *
-------
Total................................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Life Re Corporation is a Delaware corporation. Reference is made to Section
145 of the Delaware General Corporation Law ("DGCL"), which provides that a
corporation may indemnify any person, including an officer or director, who is,
or is threatened to be made, party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation or is or was serving at the request of such
corporation as an officer, director, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise. The indemnity may
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding provided such officer, director, employee, or
agent acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the corporation's best interest and, with respect to criminal
proceedings, had no reasonable cause to believe that his or her conduct was
unlawful. Section 145 of the DGCL provides further that a Delaware corporation
may indemnify officers, directors, employees, or agents of the corporation in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer,
director, employee, or agent is adjudged to be liable to the corporation. Where
an officer, director, employee, or agent is successful on the merits or
otherwise in the defense of any action referred to above or any claim therein,
the corporation must indemnify him or her against the expenses that such person
actually and reasonably incurred.
Article Ten of the Company's Restated Certificate of Incorporation provides
that directors shall not be personally liable for monetary damages to the
Company or its stockholders for breach of fiduciary duty as directors, except to
the extent not permitted under the DGCL. Article Ten further stipulates that if
the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liabilities of directors, then (without further actions by
the stockholders of the Company) the liability of the directors of the Company
shall be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended from time to time. Article VIII of the By-laws of the Company
provides for the indemnification of any person (i) who is a party to or is
threatened to be made a party to or otherwise involved in any proceeding (other
than a proceeding by or in the right
II-1
<PAGE> 102
of the Company to procure a judgement for the Company), by reason of the fact
that such person is or was a director or officer of the Company, provided that
such person acted in good faith and in a manner that he reasonably believed to
be or not opposed to the best interests of the Company and, in the case of a
criminal proceeding, also had no cause to believe that his conduct was unlawful
or (ii) who is a party to or is threatened to be made a party to or otherwise
involved in any proceeding by or in the right of the Company to procure a
judgement in favor of the Company, by reason of the fact that such person is or
was a director or officer of the Company, if such person acted in good faith and
in a manner that he reasonably believed to be in the best interests of the
Company; provided, however, that no indemnification for expenses shall be made
in respect to any claim, issue or matter pursuant to clause (ii) which such
person shall have been adjudged to be liable to the Company unless the Delaware
Court of Chancery or any court in which such proceeding was brought or appealed
shall determine upon application that, despite the adjudication of liability but
in view of the circumstances of the case, such person is fairly and reasonably
entitled to indemnification for expenses as such court shall deem proper. Such
indemnity shall be to the fullest extent required or permitted under the laws of
the State of Delaware.
In addition, the Company has entered into certain employment and severance
agreements with certain members of its senior management which include
provisions for the indemnification by the Company of each of them to the full
extent permitted by the DGCL. In that connection, the Company also agreed to
maintain director and officer liability insurance policies (the "Insurance")
covering such management employees. Such Insurance also covers those directors
of the Company who are not also employees of the Company.
The Declaration of Trust for Life Re Capital Trust II (the "Trust")
provides that no Issuer Trustee or any of its Affiliates, or any officer,
director, shareholder, member, partner, employee, representative, custodian,
nominee or agent of any Issuer Trustee (each an "Fiduciary Indemnified Person"),
and no Administrator, Affiliate of any Administrator, or any officer, director,
shareholder, member, partner, employee, representative or agent of any Regular
Trustee or any Affiliate thereof, or any employee or agent of the Trust or any
of its Affiliates (each a "Company Indemnified Person") shall be liable,
responsible or accountable in damages or otherwise to the Trust or any officer,
director, shareholder, partner, member, representative, employee or agent of the
Trust or its Affiliates or to any holder of preferred securities for any loss,
damage or claim incurred by reason of any act or omission performed or omitted
by such Fiduciary Indemnified Person or Company Indemnified Person in good faith
on behalf of the Trust and in a manner such Fiduciary Indemnified Person or
Company Indemnified Person reasonably believed to be within the scope of the
authority conferred on such Fiduciary Indemnified Person or Company Indemnified
Person by such Declaration or by law, except that a Fiduciary Indemnified Person
or Company Indemnified Person shall be liable for any such loss, damage or claim
incurred by reason of such Fiduciary Indemnified Person's or Company Indemnified
Person's gross negligence or willful misconduct with respect to such acts or
omissions.
The Declaration of Trust for the Trust also provides that to the full
extent permitted by law, the Company shall indemnify any Company Indemnified
Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of any such Trust) by reason of the fact that he is or was a Company
Indemnified Person against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Trust, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful. The Declaration of Trust also provides that to the full extent
permitted by law, the Company shall indemnify any Company Indemnified Person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of any such trust to procure a
judgment in its favor by reason of the fact that such
II-2
<PAGE> 103
person is or was a Company Indemnified Person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of any such trust and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such Company Indemnified Person shall have been adjudged to be liable to
any such trust unless and only to the extent that the Court of Chancery of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court of Chancery or such other court
shall deem proper. The Declaration of Trust further provides that expenses
(including attorneys' fees) incurred by a Company Indemnified Person in
defending a civil, criminal, administrative or investigative action, suit or
proceeding referred to in the immediately preceding two sentences shall be paid
by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Company
Indemnified Person to repay such amount if it shall ultimately be determined
that such person is not entitled to be indemnified by the Company as authorized
in any such Declaration.
The Declaration of Trust also provides that the Company shall indemnify
each Fiduciary Indemnified Person against any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the trust or trusts under
any such Trust, including the costs and expenses (including reasonable legal
fees and expenses) of defending itself against or investigating any claim or
liability in connection with the exercise or performance of any of its powers or
duties thereunder.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement with respect to the Units.**
4.1 Restated Articles of Incorporation of Life Re Corporation, dated November 13,
1997.*
4.2 By-laws of Life Re Corporation, dated August 5, 1992.*
4.3 Certificate of Trust of Life Re Capital Trust II.
4.4 Declaration of Trust of Life Re Capital Trust II.
4.5 Form of Amended and Restated Declaration of Trust of Life Re Capital Trust II.**
4.6 Form of Quarterly Income Preferred Security of Life Re Capital Trust II.**
4.7 Form of Indenture between Life Re Corporation and The Bank of New York, as Trustee,
pursuant to which the Junior Subordinated Debentures are to be issued.**
4.8 Form of Junior Subordinated Debenture.**
4.9 Form of Guarantee Agreement with respect to the QUIPS.**
4.10 Specimen Common Stock Certificate of Life Re Corporation.***
4.11 Form of Supplemental Indenture to Indenture to be used in connection with issuance
of Junior Subordinated Debentures related to the Units.**
4.12 Form of Master Unit Agreement.**
4.13 Form of Pledge Agreement.**
5.1 Opinion of Weil, Gotshal & Manges LLP.**
8.1 Tax opinion of Sullivan & Cromwell.**
12.1 Computation of Ratios of Earnings to Fixed Charges.
15.1 Letter re unaudited interim financial information.****
23.1 Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.****
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1 hereto).
25.1 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.**
</TABLE>
II-3
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------
<C> <S>
25.2 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York (Delaware), as Delaware Trustee under the
Declaration of Trust of Life Re Capital Trust II.**
25.3 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Property Trustee under the Declaration of
Trust of Life Re Capital Trust II.**
</TABLE>
- ---------------
* Incorporated herein by reference to Exhibits 3.1 and 3.2 to the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997 of
Life Re Corporation (File No. 1-1134).
** To be filed by amendment.
*** Incorporated herein by reference to Exhibit 4.1 of the Company's
Registration Statement as Form S-1 (File No. 33-50556).
**** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the provisions under Item 15 above, or otherwise,
each of the Registrants has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrants will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrants hereby undertake that (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as of the time
it was declared effective; and (2) for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on February 18, 1998.
LIFE RE CORPORATION
By: /s/ RODNEY A. HAWES, JR.
------------------------------------
Name: Rodney A. Hawes, Jr.
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ RODNEY A. HAWES, JR. Chairman of the Board, Chief February 18, 1998
- ------------------------------------------ Executive Officer, Office of
Rodney A Hawes, Jr. the Chairman and Director
(principal executive
officer)
/s/ DOUGLAS M. SCHAIR Vice Chairman of the Board, February 18, 1998
- ------------------------------------------ Chief Investment Officer,
Douglas M. Schair Office of the Chairman and
Director
/s/ JACQUES E. DUBOIS President, Chief Operating February 18, 1998
- ------------------------------------------ Officer, Office of the
Jacques E. Dubois Chairman and Director
/s/ CHRIS C. STROUP Executive Vice President, February 18, 1998
- ------------------------------------------ Chief Financial Officer and
Chris C. Stroup Director (principal
accounting officer and
principal financial officer)
/s/ SAMUEL V. FILOROMO Vice President -- Operations February 18, 1998
- ------------------------------------------ and Director
Samuel V. Filoromo
/s/ CAROLYN K. MCCANDLESS Director February 18, 1998
- ------------------------------------------
Carolyn K. McCandless
/s/ K. FRED SKOUSEN Director February 18, 1998
- ------------------------------------------
K. Fred Skousen
/s/ T. BOWRING WOODBURY, II Director February 18, 1998
- ------------------------------------------
T. Bowring Woodbury, II
</TABLE>
II-5
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Life Re Capital
Trust II certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on February 18, 1998.
LIFE RE CORPORATION,
as Depositor
By: /s/ W. WELDON WILSON
------------------------------------
Name: W. Weldon Wilson
Title: Vice President, General Counsel
and
Secretary
II-6
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
1.1 Form of Underwriting Agreement with respect to the Units.**
4.1 Restated Articles of Incorporation of Life Re Corporation, dated November 13, 1997.*
4.2 By-laws of Life Re Corporation, dated August 5, 1992.*
4.3 Certificate of Trust of Life Re Capital Trust II.
4.4 Declaration of Trust of Life Re Capital Trust II.
4.5 Form of Amended and Restated Declaration of Trust of Life Re Capital Trust II.**
4.6 Form of Quarterly Income Preferred Security of Life Re Capital Trust II.**
4.7 Form of Indenture between Life Re Corporation and The Bank of New York, as Trustee,
pursuant to which the Junior Subordinated Debentures are to be issued.**
4.8 Form of Junior Subordinated Debenture.**
4.9 Form of Guarantee Agreement with respect to the QUIPS.**
4.10 Specimen Common Stock Certificate of Life Re Corporation.***
4.11 Form of Supplemental Indenture to Indenture to be used in connection with issuance of
Junior Subordinated Debentures related to the Units.**
4.12 Form of Master Unit Agreement.**
4.13 Form of Pledge Agreement.**
5.1 Opinion of Weil, Gotshal & Manges LLP.**
8.1 Opinion of Sullivan & Cromwell.**
12.1 Computation of Ratios of Earnings to Fixed Charges.
15.1 Letter re unaudited interim financial information.****
23.1 Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.****
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1 hereto).
25.1 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.**
25.2 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York (Delaware), as Delaware Trustee under the
Declaration of Trust of Life Re Capital Trust II.**
25.3 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Property Trustee under the Declaration of Trust
of Life Re Capital Trust II.**
</TABLE>
- ---------------
* Incorporated herein by reference to exhibits 3.1 and 3.2 to the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1997 of
Life Re Corporation (File No. 1-1134).
** To be filed by amendment.
*** Incorporated herein by reference to Exhibit 4.1 of the Company's
Registration Statement as Form S-1 (File No. 33-50556).
**** Previously filed.
<PAGE> 1
Exhibit 4.3
CERTIFICATE OF TRUST
OF
LIFE RE CAPITAL TRUST II
This CERTIFICATE OF TRUST OF LIFE RE CAPTAL TRUST II (the
"Trust"), dated as of February 10, 1998, is being duly executed and filed by
the undersigned, as trustees, to form a business trust under the Delaware
Business Trust Act (12 Del. C. Section 3801, et seq.).
1. Name. The name of the business trust formed hereby is Life Re
Capital Trust II.
2. Delaware Trustee. The name and business address of the trustee of
the Trust with a principal place of business in the State of Delaware are The
Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware
19711.
3. Effective Date. This Certificate of Trust shall be effective upon
filing.
IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust,
have executed this Certificate of Trust as of the date first-above written.
BANK OF NEW YORK
(DELAWARE),
not in its individual
capacity but solely as Delaware
Trustee of the Trust
By: /s/ Walter N. Gitlin
-------------------------------
Name: WALTER N. GITLIN
Title: Authorized Signatory
/s/ W. Weldon Wilson
-----------------------------------
W. WELDON WILSON,
not in his individual capacity
but solely as trustee of the Trust
<PAGE> 1
Exhibit 4.4
DECLARATION OF TRUST
OF
LIFE RE CAPITAL TRUST II
THIS DECLARATION OF TRUST, dated as of February 10, 1998 (this
"Declaration of Trust"), by and among Life Re Corporation, a Delaware
corporation, as depositor (the "Depositor"), and The Bank of New York
(Delaware), as trustee (the "Delaware Trustee"), and The Bank of New York, as
trustee (the "Property Trustee") and W. Weldon Wilson, as trustee (the
"Administrative Trustee")(the Delaware Trustee, the Property Trustee and the
Administrative Trustee being hereinafter jointly referred to as the "Trustees").
The Depositor and the Trustees hereby agree as follows:
1. The trust created hereby shall be known as Life Re Capital Trust II
(the "Trust"), in which name the Trustees or the Depositor, to the extent
provided herein, may conduct the business of the Trust, make and execute
contracts and sue and be sued.
2. The Depositor hereby assigns, transfers, conveys and sets over to
the Trust the sum of $10. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del.C. Section 3801 et seq. (the "Business Trust Act"),
and that this document constitutes the governing instrument of the Trust. The
Trustees are hereby authorized and directed to execute and file a certificate of
trust with the Secretary of State of the State of Delaware in accordance with
the provisions of the Business Trust Act in such form as the Trustees may
approve.
3. The Depositor and the Trustees will enter into an amended and
restated Declaration of Trust, satisfactory to each such party and substantially
in the form to be included as an exhibit to the Registration Statement (the
"1933 Act Registration Statement") referred to below, or in such other form as
the parties thereto may approve, to provide for the contemplated operation of
the Trust created hereby and the issuance of the preferred securities and common
securities to be referred to therein. Prior to the execution and delivery of
such amended and restated Declaration of Trust, the Trustees shall not have any
duty or obligation hereunder or with respect to the trust estate, except as
otherwise required by applicable law or as may be necessary to obtain prior to
such execution and delivery any license, consents or approvals required by
applicable law or otherwise. Notwithstanding the foregoing, the Trustees may
take all actions deemed proper as are necessary to effect the transaction
contemplated herein.
<PAGE> 2
4. The Depositor, as depositor of the Trust, is hereby authorized (i)
to file with the Securities and Exchange Commission (the "Commission") and to
execute, in the case of the 1933 Act Registration Statement and 1934 Act
Registration Statement (as herein defined), on behalf of the Trust, (a) the 1933
Act Registration Statement, including pre-effective or post-effective amendments
to such Registration Statement and any and all amendments to Registration
Statements filed pursuant to Rule 462(b) promulgated under the Securities Act of
1933, as amended (the "1933 Act"), relating to the registration under the 1933
Act, of the preferred or common securities of the Trust and certain other
securities of the Trust, (b) any preliminary prospectus or prospectus or
supplement thereto relating to the preferred or common securities required to be
filed pursuant to the 1933 Act, and (c) a Registration Statement on Form 8-A or
other appropriate form (the "1934 Act Registration Statement") (including all
pre-effective and post-effective amendments thereto) relating to the
registration of the preferred or common securities of the Trust under the
Securities Exchange Act of 1934, as amended; (ii) to file with the New York
Stock Exchange or other exchange, and execute on behalf of the Trust, a listing
application and all other applications, statements, certificates, agreements and
other instruments as shall be necessary or desirable to cause the preferred or
common securities to be listed on the New York Stock Exchange or such other
exchange; (iii) to file and execute on behalf of the Trust such applications,
reports, surety bonds, irrevocable consents, appointments of attorney for
service of process and other papers and documents as the Depositor, on behalf of
the Trust, may deem necessary or desirable to register the preferred or common
securities under the securities or "Blue Sky" laws of any applicable
jurisdiction; (iv) to execute, deliver and perform on behalf of the Trust such
underwriting or purchase agreements with one or more underwriters, purchasers or
agents relating to the offering of the preferred or common securities as the
Depositor, on behalf of the Trust, may deem necessary or desirable; and (v) to
execute on behalf of the Trust any and all documents, papers and instruments as
may be desirable in connection with any of the foregoing. If any filing referred
to in clauses (i), (ii) and (iii) above is required by law or by the rules and
regulations of the Commission of the New York Stock Exchange or other exchange,
or state securities or "Blue Sky" laws or any applicable governmental agency,
self-regulatory organization or other person or organization to be executed on
behalf of the Trust by a Trustee, the Depositor and any Trustee of the Trust
appointed pursuant to Section 6 hereof, in its capacity as Trustee of the Trust,
are hereby authorized and directed to join in any such filing and to execute on
behalf of the Trust any and all of the foregoing. In connection with all of the
foregoing, the Trustees, solely in their capacities as trustees of the Trust,
and the Depositor hereby constitute and appoint W. Weldon Wilson as his, her or
its, as the case may be, true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution for the Depositor or in the Depositor's
name, place and stead, in any and all capacities, to sign any and all amendments
(including all pre-effective and post-effective amendments) to the 1933
2
<PAGE> 3
Act Registration Statement and the 1934 Act Registration Statement and to file
the same, with all exhibits thereto, and any other documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as the Depositor might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
respective substitute or substitutes, shall do or cause to be done by virtue
hereof.
5. This Declaration of Trust may be executed in one or more
counterparts.
6. The Trustees shall initially be the only trustees of the Trust.
Thereafter, the Depositor may increase or decrease (but not below one) the
number of trustees of the Trust by executing a written instrument fixing such
number, provided, however, that so long as it is required by the Business Trust
Act, one Trustee of the Trust shall be either a natural person who is a resident
of the State of Delaware or an entity other than a natural person that has its
principal place of business in the State of Delaware and that, in either case,
otherwise meets the requirements of applicable Delaware law. Subject to the
foregoing, the Depositor is entitled to appoint or remove without cause any
Trustee of the Trust at any time. The Trustees may resign upon thirty days'
prior notice to the Depositor.
7. This Declaration of Trust shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws principles).
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Declaration of
Trust to be duly executed as of the day and year first above written.
LIFE RE CORPORATION, as Depositor
By: /s/ W. Weldon Wilson
------------------------------------
Name: W. Weldon Wilson
Title: Vice President
THE BANK OF NEW YORK
(DELAWARE), not in its individual
capacity but solely as Delaware Trustee
By: /s/ Walter N. Gitlin
------------------------------------
Name: Walter N. Gitlin
Title: Authorized Signatory
THE BANK OF NEW YORK,
not in its individual capacity
but solely as Property Trustee
By: /s/ Mary La Gumina
------------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
/s/ W. Weldon Wilson
------------------------------------
W. WELDON WILSON,
not in his individual capacity but
solely as Trustee
4
<PAGE> 1
EXHIBIT 12.1
LIFE RE CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Income before federal income taxes and
extraordinary charge................. $ 53.8 $76.1 $54.8 $52.8 $60.6 $68.6
===== ===== ===== ===== ===== =====
Fixed charges:
Interest expense..................... 6.0 8.4 10.7 9.1 9.9 18.9
Distributions on capital
securities........................ 2.8 -- -- -- -- --
Dividends on preferred stock of Texas
Re (pre-tax)...................... -- -- -- -- -- 1.9
Interest portion of operating
leases............................ .3 .3 .3 .3 .3 .3
----- ----- ----- ----- ----- -----
Subtotal............................. 9.1 8.7 11.0 9.4 10.2 21.1
Interest on annuities and financial
products.......................... 28.6 34.6 21.2 15.0 15.1 15.0
----- ----- ----- ----- ----- -----
$ 37.7 $43.3 $32.2 $24.4 $25.3 $36.1
===== ===== ===== ===== ===== =====
Ratio of Earnings to Fixed Charges:
Excluding interest on annuities and
financial products(1)............. 7.0x 9.8x 6.0x 6.6x 6.9x 4.2x
Including interest on annuities and
financial products(2)............. 2.4x 2.8x 2.7x 3.2x 3.4x 2.8x
</TABLE>
- ---------------
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes and extraordinary charge (1995 and 1992), plus fixed
charges. Fixed charges consist of interest expense on debt, distributions on
capital securities, dividends on preferred stock of TexasRe (1992) and the
portion of operating leases that are representative of the interest factor.
(2) Same as the ratio of earnings to fixed charges, excluding interest on
annuities and financial products, except fixed charges and earnings include
interest on annuities and financial products.
