-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, XEKxyb2mTern3zbDOe858WbM+IIJi+U3zQl7hU0toLyew8Cvdk5IifaZsh40zC+6 RFuPYRChsvWuXQ6bQn2weA== 0000950134-94-001296.txt : 19941122 0000950134-94-001296.hdr.sgml : 19941122 ACCESSION NUMBER: 0000950134-94-001296 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941110 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMPANIES FINANCIAL CORP CENTRAL INDEX KEY: 0000217416 STANDARD INDUSTRIAL CLASSIFICATION: 6162 IRS NUMBER: 710430414 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17459 FILM NUMBER: 94558876 BUSINESS ADDRESS: STREET 1: 4041 ESSEN LN STREET 2: P O BOX 1591 CITY: BATON ROUGE STATE: LA ZIP: 70809 BUSINESS PHONE: 5049246007 10-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from ................ to ................ Commission file number 1-7067 UNITED COMPANIES FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Louisiana 71-0430414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4041 Essen Lane 70809 Baton Rouge, Louisiana (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code (504) 924-6007 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of $2.00 par value common stock issued and outstanding as of November 8, 1994 was 12,445,978, excluding 526,672 treasury shares. ================================================================================ 2 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1994
PAGE PART I - FINANCIAL INFORMATION Financial Statements: Consolidated Balance Sheets September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Income Three months and nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows Nine months ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5-9 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-25 Review by Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Independent Accountants' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, 1994 December 31, (Unaudited) 1993 ----------- ------------ Assets ------ Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 79,749 $ 45,530 Temporary investments - reserve accounts . . . . . . . . . . . . . . . . 68,696 27,672 Bonds and stocks - net Trading (amortized cost at September 30, 1994, $462) . . . . . . . 481 - Available-for-sale (amortized cost at September 30, 1994, $995,651) 942,517 - Held-to-maturity (fair value - $61,670 at September 30, 1994 and $910,816 at December 31, 1993) . . . . . . . . . . . 64,478 879,301 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,467 26,698 ---------- ---------- Bonds and stocks - net . . . . . . . . . . . . . . . . . . . . . 1,032,943 905,999 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418,040 542,633 Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . (18,362) (21,017) Unearned loan charges . . . . . . . . . . . . . . . . . . . . . . (1,292) (1,982) ---------- ---------- Loans - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 398,386 519,634 Capitalized excess servicing income . . . . . . . . . . . . . . . . . . . 165,749 113,192 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . 89,077 83,495 Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,309 36,558 Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 34,473 30,266 Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,955 28,988 Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,529 19,633 Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . 9,668 - Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,887 6,577 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . $1,973,421 $1,817,544 ========== ========== Liabilities and Stockholders' Equity ------------------------------------ Annuity reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,396,310 $1,294,983 Notes payable: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,120 500 Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000 155,000 Policy benefit reserves . . . . . . . . . . . . . . . . . . . . . . . . . 120,608 125,340 Allowance for loss on loans serviced . . . . . . . . . . . . . . . . . . 24,171 12,938 Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . . 5,577 10,260 Repurchase agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,622 30,000 Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . - 5,468 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,065 29,687 ---------- ---------- Total liabilities . . . . . . . . . . . . . . . . . . . . . 1,809,473 1,664,176 ---------- ---------- Stockholders' equity: Common stock, $2 par value; Authorized - 100,000,000 shares; Issued - 12,972,076 and 12,684,858 shares . . . . . . . . . . 25,944 25,370 Additional paid-in capital . . . . . . . . . . . . . . . . . . . 81,450 76,312 Net unrealized loss on securities . . . . . . . . . . . . . . . . (34,537) - Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 99,879 59,988 Treasury stock and ESOP debt . . . . . . . . . . . . . . . . . . . (8,788) (8,302) ---------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . 163,948 153,368 ---------- ---------- Total liabilities and stockholders' equity . . . . . . . . $1,973,421 $1,817,544 ========== ==========
See notes to consolidated financial statements. 2 4 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1994 1993 1994 1993 -------- -------- --------- -------- Revenues: Interest, charges and fees on loans . . . . . . . . . . $ 31,387 $ 24,902 $ 88,493 $ 69,437 Loan sale gains . . . . . . . . . . . . . . . . . . . . 22,204 15,455 65,550 38,300 Investment income . . . . . . . . . . . . . . . . . . . 22,025 19,030 61,216 56,052 Net insurance premiums . . . . . . . . . . . . . . . . 15,028 10,137 40,180 28,830 Loan servicing income . . . . . . . . . . . . . . . . . 3,745 2,656 11,429 8,309 Investment gains . . . . . . . . . . . . . . . . . . . 230 288 329 356 -------- -------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . 94,619 72,468 267,197 201,284 -------- -------- --------- -------- Expenses: Interest on annuity policies . . . . . . . . . . . . . 18,261 19,162 54,115 57,353 Personnel . . . . . . . . . . . . . . . . . . . . . . . 15,076 10,301 43,261 29,901 Insurance commissions . . . . . . . . . . . . . . . . . 13,545 8,637 37,249 23,010 Insurance benefits . . . . . . . . . . . . . . . . . . 3,694 4,380 10,635 14,223 Loan loss provision . . . . . . . . . . . . . . . . . . 3,400 4,284 9,711 12,109 Interest . . . . . . . . . . . . . . . . . . . . . . . 3,973 2,272 9,672 7,701 Other operating . . . . . . . . . . . . . . . . . . . . 13,183 8,416 35,484 31,395 -------- -------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . 71,132 57,452 200,127 175,692 -------- -------- --------- -------- Income from continuing operations before income taxes . . 23,487 15,016 67,070 25,592 Provision for income taxes (benefit): Current . . . . . . . . . . . . . . . . . . . . . . . . 2,346 6,213 19,947 11,432 Deferred . . . . . . . . . . . . . . . . . . . . . . . 5,888 (1,024) 3,461 (2,613) -------- -------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . 8,234 5,189 23,408 8,819 -------- -------- --------- -------- Income from continuing operations . . . . . . . . . . . . 15,253 9,827 43,662 16,773 Loss from discontinued operations: Loss from discontinued operations net of applicable income tax benefit of $782 . . . . . . . . . . . . . - - - (1,519) Loss on disposal of discontinued operations, including estimated operating losses during phaseout (net of applicable income tax benefit of $8,326) . . . . . - - - (16,066) -------- -------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . - - - (17,585) -------- -------- --------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 15,253 $ 9,827 $ 43,662 $ (812) ======== ======== ========= ======== Per share data: Primary: Income from continuing operations . . . . . . . . . . . $ 1.18 $ .97 $ 3.36 $ 1.75 Loss from discontinued operations . . . . . . . . . . . - - - (1.87) -------- -------- --------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . $ 1.18 $ .97 $ 3.36 $ ( .12) ======== ======== ========= ======== Fully diluted: Income from continuing operations . . . . . . . . . . . $ 1.18 $ .84 $ 3.36 $ 1.63 Loss from discontinued operations . . . . . . . . . . . - - - (1.71) -------- -------- --------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . $ 1.18 $ .84 $ 3.36 $ ( .08) ======== ======== ========= ========
See notes to consolidated financial statements. 3 5 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30 1994 1993 -------- -------- Cash flows from continuing operating activities: Income from continuing operations . . . . . . . . . . . . . . . . $ 43,662 $ 16,773 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Increase in deferred policy acquisition costs . . . . . . . . (5,581) (3,387) Decrease in due from reinsurers . . . . . . . . . . . . . . . 1,249 730 Decrease in policy loans . . . . . . . . . . . . . . . . . . . 104 936 Increase in accrued interest receivable . . . . . . .. . . . . (4,206) (1,843) Increase in other assets . . . . . . . . . . . . . . . . . . . (3,149) (1,528) Decrease in policy benefit reserves . . . . . . . . . . . . . (3,380) (1,276) Interest on annuity policies . . . . . . . . . . . . . . . . . 54,115 57,353 Decrease in unearned premium reserves . . . . . . . . . . . . (4,683) (4,874) Deferred income taxes . . . . . . . . . . . . . . . . . . . . 3,461 (2,613) Increase (decrease) in other liabilities . . . . . . . . . . . (1,759) 16,566 Loan loss provision . . . . . . . . . . . . . . . . . . . . . 9,711 12,109 Amortization and depreciation . . . . . . . . . . . . . . . . 2,216 2,731 Loan sale gains . . . . . . . . . . . . . . . . . . . . . . . (65,550) (38,300) Amortization of prior loan sale gains . . . . . . . . . . . . 27,962 13,413 Investment gains . . . . . . . . . . . . . . . . . . . . . . . (329) (356) --------- --------- Net cash provided by continuing operating activities . . . 53,843 66,434 --------- --------- Cash flows from discontinued operating activities . . . . . . . . . . . . - (320) --------- --------- Cash flows from investing activities: Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . 724,098 298,152 Principal collected on loans . . . . . . . . . . . . . . . . . . 73,668 80,825 Loan originations and acquisitions . . . . . . . . . . . . . . . . (689,964) (385,922) Increase in reserve accounts . . . . . . . . . . . . . . . . . . . (41,024) (13,411) Proceeds from sales of investments . . . . . . . . . . . . . . . . 9,202 15,762 Proceeds from maturities of investments . . . . . . . . . . . . . 62,127 75,458 Purchases of investments . . . . . . . . . . . . . . . . . . . . . (251,081) (224,770) Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (3,165) (461) --------- --------- Net cash used by investing activities . . . . . . . . . . (116,139) (154,367) --------- --------- Cash flows from financing activities: Increase (decrease) in revolving credit debt . . . . . . . . . . 30,000 (20,000) Increase in debt with maturities of three months or less . . . . . 10,650 600 Payments on long-term debt . . . . . . . . . . . . . . . . . . . . - (15,750) Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . 970 - Decrease in repurchase agreements . . . . . . . . . . . . . . . . (9,378) Deposits received from annuities and interest sensitive products . 186,972 164,178 Payments on annuities and interest sensitive products . . . . . . (141,113) (91,501) Increase in managed cash overdraft . . . . . . . . . . . . . . . . 17,101 Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . (3,771) (2,563) Proceeds from issuance of stock . . . . . . . . . . . . . . . . . 4,545 18,881 Proceeds from exercise of stock options . . . . . . . . . . . . . 539 283 --------- --------- Net cash provided by investing activities . . . . . . . . 96,515 54,128 --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 34,219 (34,125) Cash and cash equivalents at beginning of period . . . . . . . . . . . . 45,530 54,707 --------- --------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 79,749 $ 20,582 ========= =========
See notes to consolidated financial statements. 4 6 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal accruals, necessary to present fairly the financial position, the results of operations and the cash flows for the interim periods presented. These notes reflect only the major changes from those disclosures contained in the Company's Annual Report, as amended, to the United States Securities and Exchange Commission (Form 10-K) for the year ended December 31, 1993. The consolidated results of operations for the nine months ended September 30, 1994 and 1993 are not necessarily indicative of the results to be expected for the full year. Certain 1993 amounts have been reclassified to conform with the current year presentations. Such reclassifications had no effect on net income. 2. DISCONTINUED OPERATIONS. On May 7, 1993, the Company decided to divest its subsidiary Foster Mortgage Corporation ("FMC"). As a result of this decision, the operations of FMC have been classified as discontinued operations, and, accordingly, the consolidated financial statements and the related notes of the Company segregate continuing and discontinued operations. In connection with the decision to dispose of FMC, the Company recorded a $17.6 million after tax loss in its financial statements as of and for the quarter ended March 31, 1993, reflecting the operating loss of FMC for the quarter ended March 31, 1993 of $1.5 million, net of tax benefit and the estimated loss from disposal of FMC of $16.1 million, net of tax benefit. The Company has not reflected operating losses incurred by FMC subsequent to that date in the Company's financial statements. As of November 30, 1993, the servicing rights owned by FMC, which constituted substantially all of its assets, were sold. On December 21, 1993, the institutional lenders under FMC's primary credit facility (the "FMC Institutional Lenders") filed a petition in the U.S. bankruptcy court to cause the remaining affairs of FMC to be wound up under the supervision of the bankruptcy court. The FMC Institutional Lenders filed and the bankruptcy court has approved a plan of liquidation for FMC providing for the disposal of FMC's remaining assets and distributions to FMC's creditors, and allege therein potential claims of FMC against the Company. FMC and the Company executed, subject to the approval of the bankruptcy court, a settlement agreement relating to payments between FMC and the Company in connection with the federal income tax benefits resulting from FMC's losses and to certain prior intercompany payments between FMC and the Company. The FMC Institutional Lenders opposed the proposed settlement agreement. At the conclusion of a hearing on the proposed settlement on August 18, 1994, the bankruptcy court approved the portion of the settlement providing for a net payment by the Company of $1.65 million to FMC in satisfaction of the federal income tax benefits resulting from FMC's losses. The Company had previously recorded substantially all of the impact of this portion of the settlement in its prior financial statements. The bankruptcy court declined to approve the other portion of the proposed settlement relating to payments received by the Company from FMC within twelve months of the bankruptcy filing. These matters may be pursued by the trustee under the plan of liquidation approved by the bankruptcy court. If the Company were required to refund such payments, the Company has estimated the potential additional loss to be $1.9 million, net of tax benefits. The decision of the bankruptcy court on the settlement is not final and has been appealed by the FMC 5 7 Institutional Lenders. Management of the Company does not believe that any additional amounts are owed by the Company to FMC and intends to vigorously contest any claims which may be brought against it for such amounts. FMC is in payment default under its primary credit facility with the FMC Institutional Lenders and the outstanding principal balance as of September 30, 1994 of approximately $43.7 million is due. The Company has not guaranteed any debt of FMC and believes, based upon advice of its counsel, that it has no responsibility for the obligations of FMC under such credit facility or (excluding potential consequences of the bankruptcy filing on certain prior intercompany transactions or potential additional payment for tax benefits as discussed above) for any other liabilities to FMC's lenders. 3. CASH PAID FOR INTEREST AND INCOME TAXES. During the nine months ended September 30, 1994 and 1993, the Company paid interest on notes payable in the amount of $9.9 million and $8.2 million and income taxes in the amount of $22.2 million and $2.0 million, respectively. 4. BONDS AND STOCKS - NET. During the first quarter of 1994, the Company implemented the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which revised the method of accounting for certain of the Company's investments. Prior to adoption of SFAS 115, the Company reported its investments in fixed income investments at amortized cost, adjusted for declines in value considered to be other than temporary. SFAS 115 requires the classification of securities in one of three categories: "available-for-sale", "held-to-maturity" or "trading". Securities classified as held-to-maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. Effective with the adoption of SFAS 115, the Company determined the appropriate classification of its investments and, if necessary, adjusted the carrying value of such securities accordingly as if the unrealized gains or losses had been realized. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized loss on securities" and is included in stockholders' equity on the balance sheet and the adjustment for investments classified as trading is recorded in "Investment gains" in the statement of income. 6 8 At September 30, 1994, the Company's portfolio of bonds and stocks consisted of the following (in thousands):
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ Trading Common stock . . . . . . . . . . $ 462 $ 35 $ 16 $ 481 ========== ======== ======== ========= Available-for-sale Debt securities Corporate . . . . . . . . . . . $ 254,953 $ 1,251 $ 9,454 $ 246,750 U.S. Treasury . . . . . . . . . 10,719 102 140 10,681 Mortgage-backed . . . . . . . . 710,395 287 44,808 665,874 Foreign governments . . . . . . 18,455 403 438 18,420 Other . . . . . . . . . . . . . 425 24 - 449 ---------- -------- -------- --------- Total . . . . . . . . . . . . 994,947 2,067 54,840 942,174 ---------- -------- -------- --------- Equity securities . . . . . . . . 704 46 407 343 ---------- -------- -------- --------- Total . . . . . . . . . . . . $ 995,651 $ 2,113 $ 55,247 $ 942,517 ========== ======== ======== ========= Held-to-maturity Debt securities Corporate . . . . . . . . . . . $ 11,004 $ 428 $ 11,432 U.S. Treasury . . . . . . . . . 4,750 27 $ 179 4,598 Mortgage-backed . . . . . . . . 48,574 - 3,088 45,486 Other . . . . . . . . . . . . . 150 4 - 154 ---------- -------- -------- --------- Total . . . . . . . . . . . . $ 64,478 $ 459 $ 3,267 $ 61,670 ========== ======== ======== ========= Other Investment in limited partnership $ 25,467 $ 25,467 ========== =========
Net unrealized losses on securities included in stockholders' equity at September 30, 1994 is as follows (in thousands): Gross unrealized gains . . . . . . . . . . $ 2,113 Gross unrealized losses . . . . . . . . . . (55,247) Deferred income taxes . . . . . . . . . . . 18,597 -------- Total $(34,537) ========
During the first nine months of 1994, net realized investment gains of approximately $.3 million resulted from investment gains of $.5 million offset by investment losses of $.2 million. 5. OTHER LIABILITIES. At September 30, 1994, other liabilities included approximately $17.7 million representing a managed cash overdraft in the book balances of the Company's primary disbursement accounts. 6. SHAREHOLDER RIGHTS PLAN. On July 27, 1994, the Board of Directors authorized the redemption of the rights under the rights plan of the Company adopted in 1989 (the "1989 Rights Plan") and approved a new rights plan (the "1994 Rights Plan"). In connection with the redemption, the rights under the 1989 Rights Plan (the "1989 Rights") were redeemed at a price of $.0039526 per 1989 Right with the aggregate redemption price payable to each holder of the l989 Rights to be rounded up to the nearest $.01. In approving the 1994 Rights Plan, the Board of Directors declared a dividend distribution of one preferred share purchase right for each outstanding share of the 7 9 Company's Common Stock. The rights under the 1994 Rights Plan will become exercisable only upon the occurrence of certain events as specified therein (primarily certain changes in ownership of the Company). 7. CONTINGENCIES. On March 21, 1994, the United States Court of Appeals for the Eleventh Circuit held, in part, that a lender improperly disclosed the collection of the Florida state intangible tax from the borrower, thereby subjecting the loan to rescission under the Federal Truth-in-Lending Act (the "TILA") by the borrower for three years after it was made. Subsequent to the court's initial decision and prior to its refusal to reconsider its decision, the Florida Legislature amended the language of the intangible tax to clarify the legislature's previous intention that the intangible tax be disclosed for purposes of the TILA in the manner that had been followed by most lenders in Florida, including the Company. Although the Florida Legislature intended this legislation to apply retroactively, no judicial determination has yet been made as to the effect of this legislation on loans originated prior to its effective date. This court decision may also apply to a similar intangible tax imposed by other states. To its knowledge, as of November 8, 1994, no claims have been filed against the Company under this court decision (other than as a defense to foreclosure proceedings) and no notice of a breach of a representation has been received under the Company's loan sale agreements requesting it to repurchase, cure or substitute other loans for the loans sold. If the intent of the Florida Legislature is not upheld and if a substantial number of claims are filed by borrowers against the Company resulting in rescission or repurchase, the Company's financial statements and operations will be materially adversely affected. As the financial impact, if any, of this contingency cannot presently be reasonably estimated, the Company has made no accrual therefor. A substantial amount of the Company's annuity policies are marketed through financial institutions. In August 1993, the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit") held that the United States Comptroller of the Currency's decision to permit national banks to sell annuities in towns with more than 5,000 inhabitants violated the National Bank Act. In June 1994, the United States Supreme Court granted certiorari and decided that it will hear arguments in this action. If the Fifth Circuit ruling is upheld by the Supreme Court, it will have a material adverse effect on the ability of the Company to market its annuities. Furthermore, any future regulatory restrictions on the authority of financial institutions to market annuities could have a material adverse effect on the ability of the Company to market this product. 8. ACCOUNTING STANDARDS. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 ("SFAS 114") which addresses the accounting by creditors for impairment of loans and specifies how allowances for credit losses related to certain loans should be determined. SFAS 114 also addresses the accounting by creditors for all loans that are restructured in a troubled debt restructuring involving modification of terms of a receivable. SFAS 114 is effective for financial statements for fiscal years beginning after December 15, 1994. The Company is reviewing the provisions of this pronouncement but has not yet determined the effect of its implementation on the Company's financial condition or results of operations. 9. SUBSEQUENT EVENTS. On November 2, 1994 the Company publicly sold $125 million of its senior unsecured notes. The notes bear interest at the rate of 9.35% per annum, payable semi-annually, mature on November 1, 1999 and are not redeemable prior to maturity. The notes rank on a parity with other unsecured and senior indebtedness of the Company. The net proceeds from the sale of the notes were used to repay a portion of the principal amount of indebtedness outstanding under the Company's existing revolving credit facility with a group of banks (the "Bank Facility"). An amendment to the Bank Facility became effective upon consummation of the sale of the notes which (i) extends the maturity of the Bank Facility from December 31, 1995 to December 31, 1996, (ii) provides for the release by the banks of all of their liens on the stock of the Company's subsidiaries 8 10 and other collateral, (iii) reduces the amount available under the Bank Facility from $200 million to $113.6 million and (iv) permits the non-insurance subsidiaries of the Company to have one or more warehouse lines of credit with an aggregate amount outstanding of up to $300 million. On October 26, 1994, the Company's Board of Directors declared a 10% common stock dividend payable to shareholders of record on December 22, 1994. The additional shares will be distributed on January 10, 1995. 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes presented elsewhere herein. OVERVIEW The table below sets forth income from continuing operations before income taxes for each of the Company's business segments and certain home equity loan data for the indicated periods:
Nine Months Ended September 30, ------------------------------- 1994 1993 ---------- ----------- (dollars in thousands) Mortgage operations UC Lending . . . . . . . . . . . . . . . . . . $ 64,086 $ 28,510 Insurance operations UC Life . . . . . . . . . . . . . . . . . . . . 7,207 458 UG Title . . . . . . . . . . . . . . . . . . . 196 791 Other operations . . . . . . . . . . . . . . . . 34 (175) Corporate . . . . . . . . . . . . . . . . . . . (4,437) (4,209) Eliminations . . . . . . . . . . . . . . . . . . (16) 217 --------- ----------- Total . . . . . . . . . . . . . . . . . . . . $ 67,070 $ 25,592 ========= =========== Home equity loan originations . . . . . . . . . . $ 656,742 $ 358,255 Home equity loans sold . . . . . . . . . . . . . 722,799 297,856 Interest spread retained on home equity loans sold . . . . . . . . . . . . . . . . . . 4.63% 6.03%
MORTGAGE OPERATIONS. In 1993, the Company began selling its home equity loans in public securitization transactions through a Company sponsored shelf registration statement. During the second quarter of 1994, an increase in the size of this shelf registration statement was declared effective by the U.S. Securities and Exchange Commission. The Company believes loan securitizations improve its access to funding and thereby provide a distribution outlet sufficient to meet the Company's expanded home equity loan production. During the third quarter of 1994, the Company formed two separate subsidiaries, UNICOR Mortgage(R), Inc. and GINGER MAE(SM), Inc., and intends at a future date to operate its wholesale loan origination programs for brokers and financial institutions, respectively, through these separate subsidiaries. At September 30, 1994, the UNICOR Mortgage division had 865 brokers in 23 states and the Ginger Mae division had 66 financial institutions in 9 states participating in the Ginger Mae program. Wholesale loan originations are presently conducted through United Companies Lending Corporation ("UCLC" or "UC Lending"), the Company's primary loan origination operation which, in addition to wholesale originations, conducts retail originations through 127 branches in 34 states. Home equity loan production for the first nine months of 1994 increased to $657 million compared to $358 million for the same period of 1993. The Company's strategy for increasing home equity loan production includes continued geographic expansion, the introduction of new loan products and wholesale loan originations and acquisitions. As the result primarily of increases in the level of market interest rates, the interest spread retained on home equity loans sold declined to 4.6% in the first nine months of 1994 from 6.0% during the same period of 1993. Notwithstanding the decline in the interest spread retained on home equity loans sold, income from operations before income taxes of the mortgage division for the nine months ended September 30, 1994 increased approximately $35.6 million compared to the same period of 1993, primarily as the result of a $425 million increase in the amount of loans sold and a resulting increase in gains and fees recognized at the time of sale. 10 12 INSURANCE OPERATIONS. Life and annuity products. Income from operations before income taxes of United Companies Life Insurance Company ("UC Life") for the first nine months of 1994 increased approximately $6.7 million compared to the same period of 1993 primarily as the result of the positive effect of an increase in the interest margin on the Company's annuity products, which rose from 2.11% for the first nine months of 1993 to 2.80% for the same period of 1994. Income from operations before income taxes in the first nine months of 1993 was reduced by approximately $1.4 million as the result of an estimated loss in connection with the termination of an agreement with a third-party administrator of credit life insurance underwritten by UC Life. Title insurance products. The Company's title insurance unit, United General Title Insurance Company ("UG Title"), increased its premium volume approximately $17.5 million compared to the first nine months of 1993. Income from operations before income taxes of UG Title during the first nine months of 1994 was adversely impacted by approximately $1.2 million in losses associated with a loan broker in California and claims for escrow shortages under title policies. UG Title underwrites title insurance in 28 states, operating through a network of approximately 840 independent agents. RESULTS OF OPERATIONS The Company's financial statements present Foster Mortgage Corporation as discontinued operations (see note 2 to consolidated financial statements). Discussed below are results of continuing operations for the periods presented and certain financial data by business segment for such periods. NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 The following table sets forth certain financial data for the periods indicated.
Nine Months Ended September 30, ------------------------------- 1994 1993 ------ ----- (dollars in thousands) Total revenues . . . . . . . . . . . . . . . . . $ 267,197 $ 201,284 Total expenses . . . . . . . . . . . . . . . . . 200,127 175,692 Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . 67,070 25,592 Income from continuing operations . . . . . . . 43,662 16,773
Revenues. The following table sets forth information regarding the components of the Company's revenues for the nine months ended September 30, 1994 and 1993.
Nine Months Ended September 30, ------------------------------- 1994 1993 ------ ----- (dollars in thousands) Interest, charges and fees on loans . . . . . $ 88,493 $ 69,437 Investment income . . . . . . . . . . . . . . 61,216 56,052 Loan sale gains . . . . . . . . . . . . . . . 65,550 38,300 Net insurance premiums . . . . . . . . . . . 40,180 28,830 Loan servicing income . . . . . . . . . . . 11,429 8,309 Investment gains . . . . . . . . . . . . . . . 329 356 -------- --------- Total . . . . . . . . . . . . . . . . . . $267,197 $ 201,284 ======== =========
11 13 Interest, charges and fees on loans increased $19.1 million for the first nine months of 1994. This line item includes interest on mortgage loans owned by the mortgage and insurance divisions and loan origination fees earned by the mortgage division. Loan origination fees in excess of direct origination costs on loans held by the Company are recognized over the life of the loan or earlier at the time of sale on loans sold to third parties. During the nine months ended September 30, 1994 and 1993, the Company sold approximately $723 million and $298 million, respectively, in home equity loans and recognized approximately $24.4 million and $12.6 million, respectively, in net loan origination fees in connection with these sales. Other loan income includes primarily prepayment fees, late charges and insurance commissions. The following table presents the composition of interest, charges and fees on loans for the periods indicated.
Nine Months Ended September 30, ------------------------------- 1994 1993 ------ ----- (dollars in thousands) Mortgage loan interest . . . . . . . . . . . $37,619 $ 37,835 Loan origination fees . . . . . . . . . . . . 42,409 24,720 Other loan income . . . . . . . . . . . . . . 8,465 6,882 ------- -------- Total interest, charges and fees on loans $88,493 $ 69,437 ======= ========
The Company estimates that non-accrual loans reduced mortgage loan interest for the first nine months of 1994 and 1993 by approximately $7.6 million and $7.1 million, respectively. During the nine months ended September 30, 1994 the average amount of non-accrual loans owned by the Company was $26.6 million compared to approximately $32.0 million during the same period of 1993. In addition, the average balance of loans serviced for third parties which were on a non-accrual basis or in foreclosure was $53.6 million and $42.8 million during the first nine months of 1994 and 1993, respectively, representing 4.2% and 4.6%, respectively, of the average amount of loans serviced for third parties. The Company is generally obligated to advance interest on delinquent loans to the investor or holder of the mortgage-backed security, as the case may be, at the pass-through rate until satisfaction of the note, liquidation of the collateral or charge off of the delinquent loan. At September 30, 1994, the Company owned approximately $8.0 million of commercial loans which were on an accrual status, but which the Company considers as potential problem loans, compared to $11.0 million at September 30, 1993. The Company evaluates each of these commercial loans to estimate its risk of loss in the investment and provides for such loss through a charge to earnings. Investment income totaled $61.2 million on average investments of approximately $1.0 billion for the first nine months of 1994 compared to investment income of $56.1 million on average investments of approximately $858 million during the same period of 1993. The impact on revenue of the increased asset base in 1994 was partially offset by lower weighted average investment yields than those obtained during the first nine months of 1993. At September 30, 1994 the amortized cost of the fixed income portfolio totaled $1.1 billion and was comprised principally of $748 million in investment grade mortgage-backed securities and $291 million in investment grade bonds. At September 30, 1994, the weighted average rating of the publicly traded bond portfolio according to nationally recognized rating agencies was "AA". During the third quarter of 1994, the Company established a trading account for a portion of its investment portfolio invested in common stocks. At September 30, 1994 the carrying value of investments in the Company's trading account was $.5 million reflecting a $19,000 unrealized gain which is included in investment gains for the three months and nine months ended September 30, 1994. Net insurance premiums increased $11.4 million for the first nine months of 1994 compared with the same period of 1993. Net insurance premiums reflect revenues associated primarily with sales of title insurance policies underwritten by UG Title and credit insurance underwritten by UC Life. The increase in premium income is primarily the result of an increase of $17.5 million in title insurance premiums offset by a reduction in premiums earned on credit insurance products reflecting the impact of UC Life's decision to discontinue sales of credit insurance products. 12 14 Loan sale gains recognized by the Company's mortgage division increased $27.3 million during the first nine months of 1994 over the same period in 1993. Loan sale gains approximate the present value over the estimated lives of the loans of the excess of the contractual rates on the loans sold, over the sum of the pass through rate paid to the buyer, a normal servicing fee, a trustee fee, a surety bond fee, if any, in mortgage-backed securitization transactions, and an estimate of future credit losses. The increase in the amount of loan sale gains was due primarily to a $425 million increase in the amount of loans sold which offset a decrease in excess servicing income retained by the Company (i.e., the stated interest rate on the loan less the pass through rate and the normal servicing fee and other applicable recurring fees). Interest spread retained by the Company on loans sold includes the normal servicing fee. Guidelines were recently published by Standard and Poor Rating Group defining a normal servicing fee as 50 basis points for servicing "B" and "C" quality home equity loans, such as those originated by the Company. As the result of this industry data, the servicing fee rate used by the Company in its 1994 third quarter securitization was 50 basis points. This resulted in an increase in the amount of loan sale gain recognized on the home equity loans sold in the 1994 third quarter pursuant to this transaction compared to previous securitization transactions which include a servicing fee rate of 75 basis points. The following table presents information regarding home equity loan sale transactions for the periods indicated.
Nine Months Ended September 30, --------------------------------- 1994 1993 ------ ------ (dollars in thousands) Home equity loans sold . . . . . . . . . . . . . $722,799 $ 297,856 Average coupon on home equity loans sold . . . . 11.67% 12.13% Interest spread retained on home equity loans sold . . . . . . . . . . . . . . . . . . . . . 4.63% 6.03% Home equity loan sale gains . . . . . . . . . . 65,550 38,080
Historically, the Company originated and sold portfolios of home equity loans on a whole loan basis (or participations therein) to institutional investors or government-sponsored mortgage agencies or conduits and, during 1992, with the participation of one of these investors, securitized and publicly sold home equity loan pass-through certificates. In the second quarter of 1993, the Company began selling its loans in public securitization transactions through a Company-sponsored shelf registration statement. In comparison to the first nine months of 1993, market interest rates were higher during the first nine months of 1994, and, as a result, the Company experienced a decrease in the weighted average interest spread retained on home equity loans sold from 6.0% in the nine months ended September 30, 1993, to 4.6% in the nine months ended September 30, 1994. Fluctuations in and the level of market interest rates will impact the interest spread retained by the Company on loans sold, and, potentially, the amount of its loan sale gains. An increase in the level of market interest rates will generally adversely affect the interest spread on loans sold, whereas such interest spread generally widens during a declining interest rate environment. Although strategic actions can be taken by the Company during a rising interest rate environment to mitigate the impact on earnings of fluctuations in market rates, such as increasing the coupon rate charged on its loan products, the effect of such action will generally lag the impact of market rate fluctuations. The weighted average interest spread retained by the Company on loan sales during the third quarter of 1994 declined to 4.19% from 4.88% retained on loan sales during the first six months of 1994. This decrease is primarily attributable to increases in the pass-through rates on mortgage backed securities sold under the Company sponsored shelf registration statement due to increases in market rates. If the current level of market interest rates increases during the fourth quarter of 1994, the interest spread retained on home equity loans sold by the Company during the fourth quarter of 1994 will likely be narrower than that received on sales during the three months ended September 30, 1994. In connection with the home equity loan securitization transaction which closed in the third quarter of 1994, approximately $130.7 million is being held in a prefunding account for purchase of the Company's home equity loans during the 1994 fourth quarter and this should mitigate the narrowing of the interest spread retained during the fourth quarter of 1994. Loan servicing income increased $3.1 million for the nine months ending September 30, 1994 compared to the same period of 1993, reflecting the impact of an increased amount of home equity loans serviced for third 13 15 parties offset by an increase in the amortization of prior loan sale gains. The reduced normal servicing fee rate from 75 to 50 basis points as discussed above has the impact of increasing current revenues (loan sale gains) while reducing future revenues (loan servicing income) with respect to the loan sale transactions occurring on and after the reduction. The following table reflects the components of loan servicing income for the periods indicated.
Nine Months Ended September 30, ------------------------------- 1994 1993 ------ ------ (in thousands) Servicing fees earned . . . . . . . . . . . . . . . . $39,391 $ 21,795 Amortization of loan sale gains . . . . . . . . . . . (27,962) (13,486) -------- -------- Loan servicing income . . . . . . . . . . . . . . . . $ 11,429 $ 8,309 ======== ========
Expenses. The following table presents the components of the Company's expenses for the periods indicated.
Nine Months Ended September 30, ------------------------------- 1994 1993 ------ ------ (in thousands) Interest on annuity policies . . . . . . . . . . . . . $ 54,115 $ 57,353 Personnel . . . . . . . . . . . . . . . . . . . . . . 43,261 29,901 Insurance commissions . . . . . . . . . . . . . . . . 37,249 23,010 Insurance benefits . . . . . . . . . . . . . . . . . 10,635 14,223 Loan loss provision . . . . . . . . . . . . . . . . . 9,711 12,109 Interest . . . . . . . . . . . . . . . . . . . . . . . 9,672 7,701 Other operating . . . . . . . . . . . . . . . . . . . 35,484 31,395 -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . $200,127 $ 175,692 ======== =========
Interest on annuity policies declined $3.2 million for the first nine months of 1994 when compared to the same period of 1993 as the result of a reduction in the average interest crediting rate on the Company's annuity policies offset by the impact of an increase in annuity reserves. Average annuity reserves were $1.3 billion during the first nine months of 1994, an increase of approximately $113 million from the same period of 1993. Personnel expenses increased approximately $13.4 million primarily because of costs associated with the expansion of the Company's mortgage operations, loan production related incentives and an increase in the cost of the Company's employee benefit and incentive plans. Insurance commissions for the first nine months of 1994 increased by approximately $14.2 million over commissions for the same period of 1993 primarily as the result of commissions associated with the increase in title policies written. Commissions paid on issuance of the Company's single premium deferred annuity products are generally capitalized as deferred policy acquisition costs ("DPAC") and amortized over the estimated life of the policy. During the nine months ended September 30, 1994, the Company capitalized approximately $15.3 million in commissions paid on sales of annuities compared to $10.9 million during the same period of 1993. Amortization of commission expense on annuities capitalized in prior periods was $6.6 million during the nine months ended September 30, 1994, compared to $4.2 million during the same period of 1993. Insurance benefits for the first nine months of 1994 declined $3.6 million over benefits for the same period of 1993 primarily as the result of a reduction in claims on credit insurance offset by an increase in claims paid on title insurance policies. The Company's loan loss provision was $9.7 million and $12.1 million for the nine months ended September 30, 1994 and 1993, respectively. The decrease in the provision resulted from a decrease of $2.9 million in the provision for losses on home equity loans due to a reduction in the amount of loans owned by the Company, 14 16 a decrease in the amount of property placed into foreclosure and a lower incidence of loss per property sold offset by a $.5 million increase by UC Life in the provision for losses on commercial real estate mortgage loans. Interest expense for the first nine months of 1994 increased approximately $2.0 million from the same period of 1993 primarily as the result of an increase in the weighted average interest rate charged on debt. Other operating expenses for the nine months ended September 30, 1994 increased approximately $4.1 million when compared to the same period of 1993. In addition to costs associated with the expansion of the Company's mortgage operations, other operating expenses in the first nine months of 1994 included a $.9 million charge by UG Title in connection with losses associated with a loan broker in California. Other operating expenses in the first nine months of 1993 included a $2.3 million accrual for the estimated cost of a legal settlement and $1.4 million in estimated losses in connection with termination of a third party administrative contract for credit insurance. 15 17 FINANCIAL INFORMATION ON BUSINESS SEGMENTS The following tables reflect income from continuing operations before income taxes for each of the Company's business segments for the nine months ended September 30, 1994 and 1993, respectively.
Nine Months Ended September 30, 1994 ------------------------------------ (in thousands) Corporate, Life Title Other Operations, Mortgage Insurance Insurance & Eliminations Total -------- --------- --------- -------------- ----- Revenues Interest, charges and fees on loans . $50,901 $ 34,427 $ 3,165 $ 88,493 Loan sale gains . . . . . . . . . . . 65,550 65,550 Investment income . . . . . . . . . . 1,461 60,344 $ 522 (1,111) 61,216 Net insurance premiums . . . . . . . . 8,200 31,980 40,180 Loan servicing income . . . . . . . . 14,896 (190) (3,277) 11,429 Investment gains (losses) . . . . . . 358 (29) 329 ------- -------- --------- ------- -------- Total . . . . . . . . . . . . . . . 132,808 103,139 32,502 (1,252) 267,197 ------- -------- --------- ------- -------- Expenses Interest on annuity policies 54,115 54,115 Personnel . . . . . . . . . . . . . . 34,019 3,731 842 4,669 43,261 Insurance commissions . . . . . . . . 9,740 27,029 480 37,249 Insurance benefits . . . . . . . . . . 9,056 1,579 10,635 Loan loss provision . . . . . . . . . 5,346 4,365 9,711 Interest . . . . . . . . . . . . . . . 4,230 1,606 3,836 9,672 Other operating . . . . . . . . . . . 25,127 13,319 2,856 (5,818) 35,484 ------- -------- --------- ------- -------- Total . . . . . . . . . . . . . . . 68,722 95,932 32,306 3,167 200,127 ------- -------- --------- ------- -------- Income (loss) from continuing operations before income taxes . . . . . . . . . $64,086 $ 7,207 $ 196 $(4,419) $ 67,070 ======= ======== ========= ======= ========
Nine Months Ended September 30, 1993 ------------------------------------ (in thousands) Corporate, Life Title Other Operations, Mortgage Insurance Insurance & Eliminations Total -------- --------- --------- -------------- ----- Revenues Interest, charges and fees on loans . $ 30,992 $ 33,895 $ 4,550 $ 69,437 Investment income . . . . . . . . . . 609 55,840 $ 396 (793) 56,052 Loan sale gains . . . . . . . . . . . 38,080 220 38,300 Net insurance premiums . . . . . . . . 14,342 14,488 28,830 Loan servicing income . . . . . . . . 12,538 160 (4,389) 8,309 Investment gains (losses) . . . . . . 360 (4) 356 -------- ---------- --------- -------- --------- Total . . . . . . . . . . . . . . . 82,219 104,597 14,884 (416) 201,284 -------- ---------- --------- -------- --------- Expenses Interest on annuity policies . . . . . 57,353 57,353 Personnel . . . . . . . . . . . . . . 22,908 2,876 497 3,620 29,901 Insurance commissions . . . . . . . . 10,216 12,202 592 23,010 Insurance benefits . . . . . . . . . . 13,773 450 14,223 Loan loss provision . . . . . . . . . 8,248 3,861 12,109 Interest . . . . . . . . . . . . . . . 3,130 620 3,951 7,701 Other operating . . . . . . . . . . . 19,423 15,440 944 (4,412) 31,395 -------- ---------- --------- -------- --------- Total . . . . . . . . . . . . . . . 53,709 104,139 14,093 3,751 175,692 -------- ---------- --------- -------- --------- Income (loss) from continuing operations before income taxes . . . . . . . . . $ 28,510 $ 458 $ 791 $ (4,167) $ 25,592 ======== ========== ========= ======== =========
16 18 MORTGAGE OPERATIONS The following tables reflect results of operations and selected financial data for the indicated periods for the Company's mortgage operations.
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1994 1993 1994 1993 ------ ------ ------ ------ (in thousands) Revenues: Loan sale gains . . . . . . . . . . . . . $ 22,204 $ 15,455 $ 65,550 $ 38,080 Loan fees . . . . . . . . . . . . . . . 15,199 10,197 42,409 24,720 Loan servicing income . . . . . . . . . . 4,819 4,069 14,896 12,538 Other . . . . . . . . . . . . . . . . . . 4,008 2,642 9,953 6,881 -------- --------- --------- -------- Total . . . . . . . . . . . . . . . . 46,230 32,363 132,808 82,219 -------- -------- ------- -------- Expenses . . . . . . . . . . . . . . . . 23,921 17,466 68,722 53,709 -------- -------- -------- -------- Income before income taxes . . . . . . $ 22,309 $ 14,897 $ 64,086 $ 28,510 ======== ======== ======== ========
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1994 1993 1994 1993 ------ ------ ------- ------ (in thousands) SELECTED MORTGAGE FINANCIAL DATA HOME EQUITY ORIGINATIONS: Loan originations . . . . . . . . . . . $231,296 $148,497 $ 656,742 $ 358,255 Number of loans originated . . . . . . . 5,774 3,774 15,809 9,560 Average loan origination amount . . . . 40 39 42 37 HOME EQUITY SALES: Loan sales . . . . . . . . . . . . . . . $262,440 $129,967 $ 722,799 $297,856 Loan sale gains . . . . . . . . . . . . . 22,204 15,455 65,550 38,080 Interest spread retained on loans sold . 4.19% 5.68% 4.63% 6.03% LOAN PORTFOLIO - PERIOD END: Total home equity portfolio (period end) $1,529,496 $1,003,403 Total loan portfolio (period end) . . . . 1,892,461 1,478,464 Loans 30+ days past due (period end) . . 125,104 111,348
17 19 INSURANCE RESULTS OF OPERATIONS The following tables reflect results of operations and selected financial data for the respective periods for the Company's insurance operations.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ---------------------- 1994 1993 1994 1993 ------ ------ ------ ------ (in thousands) Revenues: Investment income . . . . . . . . . . . . $ 21,717 $ 19,298 $ 60,866 $ 56,236 Interest on loans . . . . . . . . . . . . 11,371 11,108 34,427 33,895 Title insurance premiums . . . . . . . . 12,531 6,286 31,980 14,488 Life insurance premiums . . . . . . . . . 2,497 3,849 8,200 14,342 Other . . . . . . . . . . . . . . . . . . 206 324 168 520 ---------- ----------- -------- --------- Total . . . . . . . . . . . . . . . . 48,322 40,865 135,641 119,481 ---------- ----------- -------- --------- Expenses . . . . . . . . . . . . . . . . 45,420 38,824 128,238 118,232 ---------- ----------- -------- --------- Income before income taxes . . . . . . . $ 2,902 $ 2,041 $ 7,403 $ 1,249 ========== =========== ======== ========= Selected Insurance Financial Data Annuities: Annuity sales . . . . . . . . . . . . . . $ 70,650 $ 44,150 $ 186,972 $ 164,178 Annuity reserves - period end . . . . . . 1,396,310 1,277,569 Average interest margin on annuities . . 3.03% 2.25% 2.80% 2.11%
ASSET QUALITY AND RESERVES The quality of the Company's loan and bond portfolios and of the loan portfolio serviced for third parties significantly affects the profitability of the Company. The values of and markets for these assets are dependent on a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in such factors, which become more pronounced in periods of economic decline, may affect the quality of these assets and the Company's resulting ability to sell these assets for acceptable prices. General economic deterioration can result in increased delinquencies on existing loans, reductions in collateral values and declines in the value of investments resulting from a reduced capacity of issuers to repay the bonds. Loans. Substantially all of the loans owned by the Company were originated by UC Lending through its branch (i.e, retail) network or wholesale loan programs. The Company's loan portfolio at September 30, 1994 was comprised primarily of $222 million in home equity loans and $160 million in commercial loans. In connection with its origination of home equity loans, the Company relies on thorough underwriting and credit review procedures by UC Lending, a mortgage on the borrower's residence and, in some cases, other security, and, in its retail origination program, contact with borrowers through its branch office system to manage credit risk on its loans. In addition to servicing the loans owned by the Company, UC Lending serviced approximately $1.5 billion in loans for third parties at September 30, 1994. The Company is subject to risk of loss on loans in its owned portfolio and for loans sold under loan sale agreements that provide limited recourse against or guarantee by the Company or subordination of cash and excess interest spread relating to the sold loans by the Company. Such recourse, guarantees and subordination relate to credit losses which may occur after the sale of the loans and continues until the earlier of the payment in full of the loans or termination of the agreement pursuant to which the loans were sold. The Company is also obligated to cure, repurchase or replace loans which may be determined after the sale to violate representations and warranties relating to them and which are made by the Company at the time of the sale. The Company regularly evaluates the quality of the loan portfolio and estimates its risk of loss based upon historical loss experience, prevailing economic conditions, estimated collateral value and such other factors which, in management's judgment, are relevant in estimating the credit risk 18 20 in owned and/or serviced loans. Estimated losses on the owned portfolio are provided for by an increase in the allowance for loan losses through a charge to current operating income. For loans sold with limited recourse, guarantees or subordination of certain cash and excess interest spread relating to the sold loans, the Company reduces the amount of gain recognized on the sale by the estimated amount of credit losses, subject to the recourse or guarantee limitation or maximum subordination amount of the related loan sale agreements, and records such amount on its balance sheet in the allowance for loss on loans serviced. At September 30, 1994, the maximum recourse associated with sales of home equity loans according to terms of the loan sale agreements totaled approximately $195.2 million, of which amount approximately $179.6 million relates to the subordinated cash and excess interest spread. However, the Company's estimate of its losses was approximately $24.2 million at September 30, 1994, and is recorded in the Company's allowance for loss on loans serviced. Should credit losses on loans sold with limited recourse or guarantee or subordination of certain cash and excess interest spread materially exceed the Company's estimates for such losses, such consequence will have a material adverse impact on the Company's operations. At September 30, 1994, the contractual balance of loans serviced by UC Lending was approximately $1.9 billion comprised of approximately $375 million serviced for the Company and approximately $1.5 billion serviced for investors. The geographic distribution of this portfolio by state and by loan category was as follows at September 30, 1994:
Percent State Home Equity Commercial Conventional Consumer Total of Total ----- ----------- ---------- ------------ -------- ------- -------- (dollars in thousands) Florida . . . . . . . . $ 200,206 $ 78,313 $ 9,227 $ 13 $ 287,759 15.2% Ohio . . . . . . . . . . 196,720 6,086 1,485 - 204,291 10.8 Louisiana . . . . . . . . 144,474 12,805 39,413 24 196,716 10.4 North Carolina . . . . . 128,486 15,371 1,816 - 145,673 7.7 Tennessee . . . . . . . . 113,351 19,408 4,991 3 137,753 7.3 Alabama . . . . . . . . . 113,686 12,456 4,954 2 131,098 6.9 Georgia . . . . . . . . . 77,353 46,196 2,590 11 126,150 6.7 Indiana . . . . . . . . . 77,179 3,449 1,129 - 81,757 4.3 Virginia . . . . . . . . 49,755 23,018 2,519 - 75,292 4.0 South Carolina . . . . . 68,653 1,268 1,259 - 71,180 3.8 Michigan . . . . . . . . 64,709 - 181 - 64,890 3.4 Other States . . . . . . 294,924 66,010 8,959 10 369,903 19.5 ---------- ----------- ---------- --------- ---------- ------ Total . . . . . . . . $1,529,496 $ 284,380 $ 78,523 $ 63 $1,892,462 100.0% ========== =========== ========== ========= ========== ======
19 21 The following table provides a summary of loans owned and/or serviced by UC Lending which are past due 30 days or more, foreclosed properties and loans charged off as of the dates indicated.
Foreclosed Properties ------------------------ Contractual Delinquencies % of Owned Serviced Net Loans % of Period Ended Balance Contractual Amount by the for Third Charged Average ------------ of Loans Balance Company Party Off Loans* Investors ---------------------------------------------------------------------------------------- (dollars in thousands) Nine months ended September 30, 1994 ------------------------------------ Home Equity . . . . . . $1,529,496 $113,498 7.42% $10,687 $ 9,415 $ 9,252 0.93% Commercial . . . . . . 284,380 8,299 2.92% 28,433 9,363 2,965 1.25% Conventional . . . . . 78,523 3,294 4.20% 35 - 15 0.02% Consumer . . . . . . . 63 13 - - - (32) - ---------- -------- ------- ------- ------- Total . . . . $1,892,462 $125,104 6.61% $39,155 $18,778 $12,200 ========== ======== ======= ======= ======= Year ended December 31, 1993 ---------------------------- Home Equity . . . . . . $1,125,139 $ 92,974 8.26% $17,014 $ 8,355 $ 8,548 0.88% Commercial . . . . . . 345,365 19,292 5.59% 20,871 9,275 3,579 0.95% Conventional . . . . . 98,189 3,730 3.80% 148 - 112 0.09% Consumer . . . . . . . 88 17 - - - (35) - ---------- -------- ------- ------- ------- Total . . . . $1,568,781 $116,013 7.40% $38,033 $17,630 $12,204 ========== ======== ======= ======= ======= Year ended December 31, 1992 ---------------------------- Home Equity . . . . . . $ 819,448 $ 71,762 8.76% $13,092 $ 7,244 $ 4,498 .59% Commercial . . . . . . 404,857 29,954 7.40% 20,976 7,338 4,805 1.14% Conventional . . . . . 143,311 2,933 2.05% 291 - 4 - Consumer . . . . . . . 206 64 - - - 82 2.86% ---------- -------- ------- ------- ------- Total . . . . $1,367,822 $104,713 7.66% $34,359 $14,582 $ 9,389 ========== ======== ======= ======= =======
*Annualized for the nine months ended September 30, 1994 Management continues to focus on reducing the level of non-earning assets owned and/or serviced by focusing on expediting the foreclosure process. As the result of being more aggressive in liquidating foreclosed property, the Company's net charge-offs on home equity loans for the nine months ended September 30, 1994 increased to $9.3 million compared to $6.8 million during the same period of 1993. During the first nine months of 1994, the balance of foreclosed home equity loans owned and/or serviced by the Company was reduced by $5.3 million. The Company will continue to focus resources on further reductions in the level of foreclosed properties. The above delinquency and loan loss experience represents the Company's recent experience. However, the delinquency, foreclosure and net loss percentages may be affected by the increase in the size and relative lack of seasoning of the portfolio. As a result, the information in the above tables should not be considered as a basis for assessing the likelihood, amount or severity of delinquencies or losses in the future on loans and no assurance can be given that the delinquency and loss experience presented in the tables will be indicative of such experience on loans. 20 22 A summary analysis of the changes in the Company's allowance for loan losses for the indicated periods is as follows.
Nine Months Ended September 30, -------------------------------- 1994 1993 ------ ------ (in thousands) Balance at beginning of period . . . . . . $ 21,017 $ 15,842 Loans charged to allowance Home equity . . . . . . . . . . . . . . . . (10,027) (7,236) Commercial . . . . . . . . . . . . . . . . (2,968) (2,587) Conventional . . . . . . . . . . . . . . . (21) (49) Consumer . . . . . . . . . . . . . . . . . (7) (13) -------- -------- Total . . . . . . . . . . . . . . . . . (13,023) (9,885) Recoveries on loans previously charged to allowance . . . . . . . . . . . 823 460 -------- -------- Net loans charged off . . . . . . . . . . . (12,200) (9,425) Loan loss provision . . . . . . . . . . . . 9,711 12,109 Reserve reclassification . . . . . . . . . . (166) 81 -------- -------- Balance at end of period . . . . . . . . . . $ 18,362 $ 18,607 ======== ======== Specific reserves . . . . . . . . . . . . . $ 8,549 $ 7,937 Unallocated reserves . . . . . . . . . . . . 9,813 10,670 -------- -------- Total reserves . . . . . . . . . . . . . . . $ 18,362 $ 18,607 ======== ========
Specific reserves are provided for foreclosures in which the carrying value of the loan exceeds the market value of the collateral. Unallocated reserves are provided for loans not in foreclosure and are calculated primarily using objective measurement techniques. Unallocated reserves also include reserves for active loans which have been modified or indicate potential problems as well as reserves for a $32.5 million subordinated position the Company acquired in connection with the securitization and sale of approximately $230 million in commercial real estate mortgage loans in 1990. At September 30, 1994, the Company owned $39.2 million of property acquired in settlement of loans, excluding the specific reserves attributed to these properties. These balances are included in the loans owned by the Company. The specific reserve in the table above is provided to reduce the carrying value of these properties to their market value. A summary of the amounts provided by the Company for future credit losses on loans and foreclosed properties owned by the Company and loans sold with recourse (including for purposes hereof loans sold with limited guarantees and subordination of cash and excess interest spread owned by the Company) as of the dates indicated is as follows:
September 30, December 31, September 30, 1994 1993 1993 ------------ ----------- ------------ (in thousands) Allowance for loan losses (Applicable to loans and foreclosed properties owned by the Company) . . . . . . . . . . $ 18,362 $ 21,017 $ 18,607 Allowance for loss on loans serviced (Applicable to loans sold with recourse) . . . . . . . . . . . 24,171 12,938 11,005 --------- ---------- ---------- Total . . . . . . . . . . . . . . . $ 42,533 $ 33,955 $ 29,612 ========= ========== ==========
21 23 As of September 30, 1994, approximately $1.3 billion of home equity loans sold were serviced by UC Lending under agreements which provide limited recourse, guarantees or subordination of cash and excess interest spread owned by the Company, for credit losses ("loans sold with limited recourse"). The Company's estimate of its losses, based on historical loan loss experience, was approximately $24.2 million at September 30, 1994 and is recorded in the Company's allowance for loss on loans serviced. Should credit losses on loans sold with limited recourse, or subordination of cash and excess interest spread owned by the Company, materially exceed the Company's estimate for such losses, such consequence will have a material adverse impact on the Company's financial statements. Recent legal developments related to mortgage loans. On March 21, 1994, the United States Court of Appeals for the Eleventh Circuit held, in part, that a lender improperly disclosed the collection of the Florida state intangible tax from the borrower, thereby subjecting the loan to rescission under the Federal Truth-in-Lending Act (the "TILA") by the borrower for three years after it was made. Subsequent to the court's initial decision and prior to its refusal to reconsider its decision, the Florida Legislature amended the language of the intangible tax to clarify the Legislature's previous intention that the intangible tax be disclosed for purposes of the TILA in the manner that had been followed by most lenders in Florida, including the Company. Although the Florida Legislature intended this legislation to apply retroactively, no judicial determination has yet been made as to the effect of this legislation on loans originated prior to its effective date. This court decision may also apply to a similar intangible tax imposed by other states. To its knowledge, as of November 8, 1994, no claims have been filed against the Company under this court decision (other than as a defense in foreclosure proceedings) and no notice of a breach of a representation has been received under the Company's loan sale agreements requesting it to repurchase, cure or substitute other loans for the loans sold. If the intent of the Florida Legislature is not upheld and if a substantial number of claims are filed by borrowers against the Company resulting in rescission or repurchase, the Company's financial statements and operations will be materially adversely affected. As the financial impact, if any, of this contingency cannot presently be reasonably estimated, the Company has made no accrual therefor. Bonds. Investment purchases are made with the intention of holding fixed income securities until maturity. Prior to January 1, 1994 securities were generally carried at cost adjusted for discount accretion and premium amortization. At September 30, 1994, the amortized cost of the Company's bond portfolio was $1.1 billion consisting primarily of $759 million in mortgage- backed securities and $266 million in corporate bonds. In connection with the adoption of SFAS 115 (see note 4 to the consolidated financial statements), bonds with an amortized cost of approximately $995 million or 94% of the Company's bond portfolio were classified in an available-for-sale category and the carrying value adjusted to market value by means of an adjustment to stockholders' equity. The remainder of the portfolio consists primarily of private placements made either directly or through an investment partnership and are classified as held-to-maturity and valued at cost. At September 30, 1994, the Company owned $.5 million in equity securities classified as trading securities. The net unrealized loss in the bond portfolio (cost over market value) at September 30, 1994 was $55.9 million compared to an unrealized gain of $31.5 million at December 31, 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirements consist of funding loan originations in its mortgage operations and the payment of policyholder claims and surrenders incurred in its insurance operations. The Company's mortgage operations require continued access to short and long-term sources of debt financing, the sale of loans to UC Life and the sale of loans and asset-backed securities in the secondary market; whereas liquidity requirements for the Company's insurance operations are generally met by funds provided from the sale of annuities and cash flow from its investments in fixed income securities and mortgage loans. The Company's primary debt facility has been a revolving credit facility (the "Bank Facility") dated as of October 11, 1988. On November 2, 1994 the Company publicly sold $125 million of its senior unsecured notes. The net proceeds from the sale of the notes were used to repay a portion of the principal amount of the indebtedness outstanding under the Bank Facility. The senior notes bear interest at the rate of 9.35% per annum, 22 24 are payable semi-annually, mature on November 1, 1999 and are not redeemable prior to maturity. The senior notes rank on a parity with other unsecured and unsubordinated indebtedness of the Company. An amendment to the Bank Facility became effective upon the consummation of the sale of the senior notes which (i) extends the maturity of the Bank Facility from December 31, 1995 to December 31, 1996, (ii) provides for the release by the banks of all of their liens on the stock of the Company's subsidiaries and other collateral, (iii) reduces the amount available under the Bank Facility from $200 million to $113.6 million and (iv) permits the non-insurance subsidiaries of the Company to have one or more warehouse lines of credit with an aggregate amount outstanding of up to $300 million. The following discussion reflects the primary sources of liquidity and capital for each of the Company's primary operating divisions. UC Lending. The principal cash requirements of the Company's mortgage operations arise from loan originations, repayments of inter-company debt borrowed by the Company under the Bank Facility, payments of operating and interest expenses and deposits to reserve accounts related to loan sale transactions. Loan originations have historically been funded principally through the Bank Facility short-term bank facilities pending loan sales to UC Life and in the secondary market. Substantially all of the loans originated by UC Lending are sold. Net cash used by investing activities of the Company in the nine months ended September 30, 1994 and 1993, respectively, reflects approximately $659 million and $363 million, respectively, in cash used for loan originations. The primary source of funding for loan originations is derived from the reinvestment of proceeds from the ultimate sale of loans in the secondary market which totaled approximately $724 million and $298 million in the first nine months of 1994 and 1993, respectively. In connection with the loan sale transactions in the secondary market, third- party surety bonds and cash deposits by the Company as credit enhancements were provided. The loan sale transactions required the subordination of certain cash flows payable to UC Lending to the payment of principal and interest due to certificate holders. In connection with these transaction, UC Lending was required, in some instances, to fund an initial deposit, and thereafter, in each transaction, a portion of the amounts receivable by UC Lending and its subsidiaries from the excess interest spread is required to be placed and maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to a reserve account until a specified level of cash, which is less than the maximum subordination amount, is accumulated therein. The capitalized excess servicing income of the Company is subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections from borrowers who default on the payment of principal or interest on the loans underlying the pass-through certificates issued until the total of the Company's deposits into the reserve account equal the maximum subordination amount. In the loan sale transaction consummated in the third quarter of 1994 under the Company sponsored shelf registration statement, in consideration of a guarantee fee payable from a portion of the excess interest spread, a subsidiary of the Company provided a limited guarantee to the issuer of the surety bond insuring the pass-through certificates sold to public investors. In connection with the issuance and sale of approximately $1.6 billion of pass-through certificates through September 30, 1994, the aggregate subordination amounts were initially set at approximately $179.6 million. After the Company's deposits into the reserve account equal the maximum subordination amount for a transaction, the subordination of the related excess interest spread (including the guarantee fee payable therefrom) for these purposes is terminated. The excess interest spread required to be deposited and maintained in the respective reserve accounts will not be available to support the cash flow requirements of the Company until such amount exceeds the maximum subordinated amount (other than amounts, if any, in excess of the specified levels required to be maintained in the reserve accounts, which may be distributed periodically to the Company). At September 30, 1994, the amounts on deposit in such reserve accounts totaled $68.7 million. UC Life. The principal cash requirement of UC Life consists of contractual obligations to policyholders, principally through policy claims and surrenders. The primary sources of funding these obligations, in addition to cash flow from investments, are the sale of annuities. Net cash flow from underwriting operations is used to build an investment portfolio, which in turn produces future cash flows from investment income and provides a secondary source of liquidity for this division. Net cash provided by operating activities of the insurance division 23 25 in the nine months ended September 30, 1994 and 1993 was approximately $48.2 million and $60.4 million, respectively, resulting primarily from cash earnings on investments. The Company monitors available cash and cash equivalents to maintain adequate balances for current payments while maximizing cash available for longer term investment activities. The Company's financing activities during the first nine months of 1994 and 1993 reflect approximately $187 million and $164 million, respectively, in cash received primarily from sales by UC Life of its annuity products. As reflected in the net cash used by investing activities during the same periods, investment purchases were approximately $248 million and $225 million, respectively, reflecting the investment of these funds and the reinvestment of proceeds from maturities of investments. Cash used by financing activities during these nine month periods also reflects payments of $141 million and $92 million primarily on annuity products resulting from policyholder surrenders and claims. The increase in annuity surrenders during the first nine months of 1994 was expected, due in part to an increase in the amount of annuity policies which were beyond the surrender penalty period and to a planned widening of the interest margin on the Company's annuity products by reducing annuity crediting rates in a rising interest rate environment. The interest margin on the Company's annuity liabilities during the first nine months of 1994 was 2.80% compared to 2.11% during the same period of 1993. UC Life's investments at September 30, 1994, included approximately $345 million in residential and commercial mortgage loans, and the amortized cost of its bond portfolio included $296 million in corporate and government bonds and private debt placements and $757 million in mortgage-backed securities. The investment portfolio is also managed to provide a secondary source of liquidity as investments can be sold, if necessary, to fund abnormal levels of policy surrenders, claims and expenses. An unanticipated increase in surrenders would impact the Company's liquidity, potentially requiring the sale of certain assets, such as bonds and loans priorto their maturities, which may be at a loss. A substantial amount of the Company's annuity policies are marketed through financial institutions. In August 1993, the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit") held that the United States Comptroller of the Currency's decision to permit national banks to sell annuities in towns with more than 5,000 inhabitants violated the National Bank Act. In June 1994, the United States Supreme Court granted certiorari and decided that it will hear arguments in this action. If the Fifth Circuit ruling is upheld by the Supreme Court, it will have a material adverse effect on the ability of the Company to market its annuities. Furthermore, any future regulatory restrictions on the authority of financial institutions to market annuities could have a material adverse effect on the ability of the Company to market this product. As a Louisiana domiciled insurance company, UC Life is subject to certain regulatory restrictions on the payment of dividends. UC Life has the capacity at September 30, 1994 to pay dividends of $8.5 million. UC Life did not pay any dividends to the Company during 1991, 1992, 1993 or in 1994 in order to retain capital in UC Life. UG Title. Liquidity requirements for the Company's title insurance business are generally met from funds provided by the sale of title insurance policies and cash flow from its investment portfolio. UG Title's investments at September 30, 1994 included approximately $3.2 million in residential mortgage loans, $6.9 million in U.S. government and agency securities and $1.7 million in temporary investments, primarily certificates of deposit. An unanticipated increase in policy claims would impact UG Title's liquidity, potentially requiring the sale of its investments prior to their maturities, which may be at a loss. The principal liability of UG Title is the loss reserve established for title policy claims. ACCOUNTING STANDARDS In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 ("SFAS 114") which addresses the accounting by creditors for impairment of loans and specifies how allowances for credit losses related to certain loans should be determined. SFAS 114 also addresses the accounting by creditors for all loans that are restructured in a troubled debt restructuring involving modification of terms of a receivable. SFAS 114 is effective for financial statements for fiscal years beginning after December 15, 1994. The Company is reviewing the provisions of this pronouncement but has not yet determined the effect of its implementation on the Company's financial condition or results of operations. 24 26 RIGHTS PLAN On July 27, 1994, the Board of Directors of the Company authorized the redemption of the rights under the Company's rights plan adopted in 1989 and approved a new rights plan and declared a dividend distribution of rights thereunder. The new rights plan is an update of the old plan and reduces the threshold of beneficial ownership at which rights issued under the plan become exercisable and trade separately from the common shares when a person or group acquires beneficial ownership of 20% or more of the common shares. The threshold under the old plan was 45%. The rights also become exercisable and trade separately when a tender or exchange offer for 25% or more of the common shares is commenced, down from 50% under the old plan. The new plan also adds an adverse person provision whereby the rights may become exercisable and trade separately. The trigger for a flip-in event is also reduced from 50% to 25% ownership by a person and the redemption price of the rights is reduced from $.01 to $.001. The new plan extends the final expiration date provided by the old plan from January 31, 1999 to July 31, 2004 and changes the exercise price of the rights from $80.00 to $240.00. STOCK DIVIDEND On October 26, 1994, the Company's Board of Directors declared a 10% common stock dividend payable to shareholders of record on December 22, 1994. The additional shares will be distributed on January 10, 1995. RATINGS THE COMPANY. As discussed above, the Company recently sold publicly $125 million in its unsecured and unsubordinated 9.35% senior notes due November 1, 1999. Duff and Phelps, Inc. ("D&P") has rated the issue BBB and the Company anticipates that Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc. ("S&P") will rate the notes BBB and Moody's Investor Services, Inc. ("Moody's") will rate the notes Ba2, respectively. D&P previously assigned a rating of BBB to the Bank Facility. INSURANCE SUBSIDIARIES. UC LIFE. In June, 1994, A.M. Best Company reaffirmed its "A-" (Excellent) rating of UC Life. Best's ratings depend in part on its analysis of an insurance company's financial strength, operating performance and claims paying ability. In addition, UC Life's claims paying ability has been rated "A+" by D&P. In October 1994, S&P revised the formula used in assigning its qualified solvency ratings of insurance companies and, as a result, revised its rating assigned to UC Life from BBBq to BBq. The Company believes that UC Life's ratings are adequate to enable it to continue to compete successfully. UG TITLE. In August, 1994, D&P revised its claims paying rating of UG Title from "A" to "A-". Operations of UG Title in 1994 have been negatively impacted by losses associated with a loan broker in California and claims for escrow shortages under title policies. 25 27 REVIEW BY INDEPENDENT ACCOUNTANTS The Company's independent accountants, Deloitte & Touche LLP, have performed a review of the accompanying unaudited consolidated balance sheet as of September 30, 1994 and the related consolidated statements of income and cash flows for the three months and nine months ended September 30, 1994 and 1993, and previously audited and expressed an unqualified opinion dated February 18, 1994 on the consolidated financial statements of the Company and its subsidiaries as of December 31, 1993, from which the consolidated balance sheet as of that date is derived. 26 28 INDEPENDENT ACCOUNTANTS' REPORT United Companies Financial Corporation: We have reviewed the accompanying condensed consolidated balance sheet of United Companies Financial Corporation and subsidiaries as of September 30, 1994, and the related condensed consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 1994 and 1993. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of United Companies Financial Corporation and subsidiaries as of December 31, 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 18, 1994, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1993 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana November 4, 1994 27 29 PART II OTHER INFORMATION Items 1 through 5. Inapplicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - (4) First Supplemental Indenture, dated as of November 2, 1994, to Indenture dated as of October 1, 1994 relating to $125 million of 9.35% Senior Notes due November 1, 1999 (10) Terms Agreement dated October 26, 1994 to Underwriting Agreement - Basic Provisions dated September 29, 1994 relating to $125 million of 9.35% Senior Notes due November 1, 1999 (11) Statement re computation of earnings per share (15) Letter of Deloitte & Touche LLP regarding unaudited interim financial information (27) Financial Data Schedules (b) Reports on Form 8-K - None 28 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED COMPANIES FINANCIAL CORPORATION Date: November 9, 1994 By: /s/ J. TERRELL BROWN ------------------------------------ J. Terrell Brown President and Chief Executive Officer Date: November 9, 1994 By: /s/ DALE E. REDMAN ------------------------------------ Dale E. Redman Executive Vice President and Chief Financial Officer 29 31 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
Exhibit No. Page No. ----------- -------- 4 First Supplemental Indenture, dated as of November 2, 1994, to 31 Indenture dated as of October 1, 1994 relating to $125 million of 9.35% Senior Notes due November 1, 1999 10 Terms Agreement dated October 26, 1994 to Underwriting Agreement - 47 Basic Provisions dated September 29, 1994 relating to $125 million of 9.35% Senior Notes due November 1, 1999 11 Statement re computation of 51 earnings per share 15 Letter of Deloitte & Touche LLP regarding 52 unaudited interim financial information 27 Financial Data Schedules 53
30 EX-4 2 FIRST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4 FIRST SUPPLEMENTAL INDENTURE (Senior Debt Securities) FIRST SUPPLEMENTAL INDENTURE dated as of November 2, 1994 (the "First Supplemental Indenture"), to the Indenture, dated as of October 1, 1994 (the "Indenture"), between UNITED COMPANIES FINANCIAL CORPORATION, a Louisiana corporation (hereinafter called the "Company"), having its principal executive office at 4041 Essen Lane, Baton Rouge, Louisiana 70809, and THE FIRST NATIONAL BANK OF CHICAGO, a national banking association (hereinafter called the "Trustee"), having its Corporate Trust Office at One First National Plaza, Suite 0126, Chicago, Illinois 60670-0126. RECITALS OF THE COMPANY WHEREAS, the Company has duly authorized the execution and delivery of the Indenture to provide for the issuance from time to time of its unsecured debentures, notes, bonds or other evidences of indebtedness (hereinafter called the "Debt Securities") to be issued in one or more series, as in the Indenture provided; WHEREAS, the Company desires and has requested the Trustee to join it in the execution and delivery of this First Supplemental Indenture in order to establish and provide for the issuance by the Company of a series of Debt Securities designated as its 9.35% Senior Notes due November 1, 1999 in the aggregate principal amount of $125,000,000, a specimen copy of which is attached hereto as Exhibit A (the "Notes"), on the terms set forth herein; WHEREAS, Section 11.01 of the Indenture provides that a supplemental indenture may be entered into by the Company and the Trustee without the consent of any holder of any Debt Securities to, inter alia, establish the terms of any Debt Securities as permitted by Sections 2.01 and 3.01 of the Indenture, provided certain conditions are met; WHEREAS, the conditions set forth in the Indenture for the execution and delivery of this First Supplemental Indenture have been complied with; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Company and the Trustee, in accordance with its terms, and a valid amendment of, and supplement to, the Indenture have been done; NOW THEREFORE: There is hereby established a series (as that term is used in Section 3.01 of the Indenture) of Debt Securities to be issued under the Indenture, which series of Debt Securities shall have the terms set forth herein and in the Notes, and in consideration of the premises and the purchase and acceptance of the Notes by the holders thereof, the Company mutually covenants 31 2 and agrees with the Trustee, for the equal and proportionate benefit of all holders of the Notes, that the Indenture is supplemented and amended, to the extent and for the purposes expressed herein, as follows: ARTICLE ONE Scope of This First Supplemental Indenture Section 1.1. Changes, etc. Applicable Only to the Notes. The changes, modifications and supplements to the Indenture effected by this First Supplemental Indenture in Sections 2.1 through 2.6 hereof shall be applicable only with respect to, and govern the terms of, the Notes, which shall be limited in aggregate principal amount to $125,000,000, except as provided in Section 3.01(2) of the Indenture, and shall not apply to any other Debt Securities which may be issued under the Indenture unless a supplemental indenture with respect to such other Debt Securities specifically incorporates such changes, modifications and supplements. ARTICLE TWO Amendments to the Indenture Section 2.1. Amendments to Section 1.01. Section 1.01 of the Indenture is hereby amended by adding the following definitions in their proper alphabetical order: "Consolidated Fixed Charge Coverage Ratio" of the Company means, for the twelve-month period ended as of the last day of the most recent fiscal quarter, the ratio of (a) the sum of consolidated net income, consolidated interest expense and consolidated income tax expense deducted in computing consolidated net income (loss), in each case for such period, of the Company and its consolidated Subsidiaries on a consolidated basis, to (b) the sum of consolidated interest expense for such period and cash dividends paid on any preferred stock of the Company during such period, all determined in accordance with generally accepted accounting principles. "Moody's" means Moody's Investors Service, Inc. and its successors in interest. "Notes" means $125,000,000 aggregate principal amount of the Company's 9.35% Senior Notes due November 1, 1999. "Rating Agencies" means Moody's and S&P. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., and its successors in interest. 32 3 Section 2.2. Amendment to Article Ten. Article Ten of the Indenture is hereby amended by deleting the words "Intentionally Omitted" and inserting instead "Consolidation, Merger, Conveyance, Transfer or Lease" and adding the following Sections 10.01 and 10.02: "Section 10.01. Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey, transfer or lease all or substantially all of its assets as an entirety to any Person, unless: (1) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, all or substantially all of the assets of the Company as an entirety (the "successor corporation") shall be a corporation organized and existing under the laws of the United States or any State or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Notes and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. For purposes of this Section 10.01, assets of the Company which did not account for at least 50% of the consolidated net income of the Company for its most recent fiscal year ending prior to the consummation of such transactions shall not in any event be deemed to be all or substantially all of the assets of the Company. Section 10.02. Successor Corporation Substituted. Upon any consolidation with or merger into any other corporation, or any conveyance, transfer or lease of all or substantially all of the assets of the Company as an entirety in accordance with Section 10.01, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and 33 4 may exercise every right and power of, the Company under this Indenture, as supplemented, with the same effect as if such successor corporation had been named as the Company herein, and thereafter the predecessor corporation shall be relieved of all obligations and covenants under this Indenture, as supplemented, and the Notes." Section 2.3. Amendments to Sections 12.07 and 12.08. Sections 12.07 and 12.08 of the Indenture are hereby amended by deleting the words "Intentionally Omitted" and inserting instead the following new Sections 12.07 and 12.08: "Section 12.07. Limitation Upon Mortgages and Liens. The Company will not at any time directly or indirectly create or assume, otherwise than in favor of the Company or a Wholly-Owned Subsidiary, any mortgage, pledge or other lien or encumbrance upon any stock of any Subsidiary directly owned by the Company, any indebtedness of any Subsidiary to the Company or any other property of the Company or any interest it may have therein, whether now owned or hereafter acquired, without making effective provision (and the Company covenants that in such case it will make or cause to be made, effective provision) whereby the Notes shall be secured by such mortgage, pledge, lien or encumbrance equally and ratably with any and all other obligations and indebtedness thereby secured, so long as any such other obligations and indebtedness shall be so securedprovided, however, that the foregoing covenant shall not be applicable to the following: (a) (i) any mortgage, pledge or other lien or encumbrance on any such asset hereafter acquired or constructed by the Company, or on which property so constructed is located, and created prior to, contemporaneously with or within 180 days after, such acquisition or construction, or the commencement of commercial operation, of such asset to secure or provide for the payment of any part of the purchase or construction price of such asset, or (ii) the acquisition by the Company of such asset subject to any mortgage, pledge, or other lien or encumbrance upon such asset existing at the time of acquisition thereof, whether or not assumed by the Company; provided that, in the case of clauses (i) and (ii) of this Section 12.07(a), the lien of any such mortgage, pledge or other lien does not spread to an asset owned by the Company prior to such acquisition or construction or to another asset thereafter acquired or constructed other than fixed improvements on such acquired or constructed property; (b) any mortgage, pledge or other lien or encumbrance created for the sole purpose of extending, renewing or refunding any mortgage, pledge, lien or encumbrance permitted by subsection (a) of this Section 12.07; provided, however, that the principal amount of 34 5 indebtedness secured thereby shall not exceed the principal amount of indebtedness so secured at the time of such extension, renewal or refunding and that such extension, renewal or refunding mortgage, pledge, lien or encumbrance shall be limited to all or any part of the same asset that secured the mortgage, pledge or other lien or encumbrance extended, renewed or refunded, or to another asset of the Company not subject to the limitations of this Section 12.07; (c) liens for taxes or assessments or governmental charges or levies not then due and delinquent or the validity of which is being contested in good faith, and against which an adequate reserve has been established; liens on any such asset created in connection with pledges or deposits to secure public or statutory obligations or to secure performance in connection with bids or contracts; materialmen's, mechanics', carrier's, workmen's, repairmen's or other like liens; or liens on any such asset created in connection with deposits to obtain the release of such liens; liens on any such asset created in connection with deposits to secure surety, stay, appeal or customs bonds; liens created by or resulting from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings; leases and liens, rights of reverter and other possessory rights of the lessor thereunder; zoning restrictions, easements, rights-of-way or other restrictions on the use of real property or minor irregularities in the title thereto; and any other liens and encumbrances similar to those described in this subsection, the existence of which does not, in the opinion of the Company, materially impair the use by the Company of the affected asset in the operation of the business of the Company, or the value of such asset for the purposes of such business; (d) any mortgage, pledge or other lien or encumbrance created after the date of this Indenture on any asset leased to or purchased by the Company after that date and securing, directly or indirectly, obligations issued by a State, a territory or a possession of the United States, or any political subdivision of any of the foregoing, or the District of Columbia, to finance the cost of acquisition or cost of construction of such asset, provided that the interest paid on such obligations is entitled to be excluded from gross income of the recipient pursuant to Section 103(a)(1) of the Code (or any successor to such provision) as in effect at the time of the issuance of such obligations; (e) any mortgage, pledge or other lien or encumbrance on any asset now owned or hereafter acquired or constructed by the Company, or on which an asset so owned, acquired or constructed is located, to 35 6 secure or provide for the payment of any part of the construction price or cost of improvements of such asset, and created prior to, contemporaneously with or within 180 days after, such construction or improvement; and (f) any mortgage, pledge or other lien or encumbrance not otherwise permitted under this Section 12.07; provided, the aggregate amount of indebtedness outstanding at any time secured by all such mortgages, pledges, liens or encumbrances does not exceed the greater of $25,000,000 or 10% of the consolidated stockholders' equity of the Company. Section 12.08. Maintenance of Net Worth. The consolidated stockholders' equity of the Company at the end of any fiscal quarter shall not be less than $100,000,000 (without giving effect to any adjustment to consolidated stockholders' equity for such fiscal quarter pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115); provided that if the foregoing covenant is not satisfied for a fiscal quarter as a result, in whole or in part, of a change in generally accepted accounting principles which was implemented by the Company during such fiscal quarter, the Company shall not be in default of the foregoing covenant unless and until such covenant is not satisfied as of the last day of the fourth fiscal quarter following the fiscal quarter in which the change in generally accepted accounting principles was implemented by the Company; andprovided further that this Section 12.08 shall cease to be effective from and after the first date on which the Notes are rated BBB- or higher by S&P and Baa3 or higher by Moody's or such other comparable ratings as such Rating Agencies shall designate at any time in the future." Section 2.4. Amendment to Section 12.09. The current Section 12.09 of the Indenture is hereby renumbered to become Section 12.10 of the Indenture and the following Section 12.09 is hereby inserted immediately following Section 12.08: "Section 12.09. Maintenance of a Consolidated Fixed Charge Coverage Ratio. The Company shall maintain a Consolidated Fixed Charge Coverage Ratio for the Company of at least 1.75:1.0; provided that if the foregoing covenant is not satisfied for a period as a result, in whole or in part, of a change in generally accepted accounting principles which was implemented by the Company during the last fiscal quarter of such period, the Company shall not be in default of the foregoing covenant unless and until such covenant is not satisfied at the end of the twelve-month period ended as of the last day of the fourth fiscal quarter following the fiscal quarter in which the change in generally accepted accounting principles was implemented by the Company; and 36 7 provided further that this Section 12.09 shall cease to be effective from and after the first date on which the Notes are rated BBB- or higher by S&P and Baa3 or higher by Moody's or such other comparable ratings as such Rating Agencies shall designate at any time in the future." Section 2.5. Ranking. The Notes will be senior unsecured obligations of the Company, ranking pari passu with all existing and future senior indebtedness (including, without limitation, the indebtedness of the Company represented by the notes and debentures referred to in Section 6.08 (c)(1) of the Indenture) of the Company and senior to all existing and future subordinated indebtedness of the Company. Section 2.6. Terms of the Notes. In accordance with Section 3.01 of the Indenture, the Notes are subject to the terms set forth in this First Supplemental Indenture including without limitation Exhibit A hereto, the terms of which are hereby incorporated in their entirety by reference. In addition to the other terms of the Notes which are set forth elsewhere in this First Supplemental Indenture and Exhibit A hereto, the Notes are subject to all of the provisions of the Indenture including, without limitation, the Company's legal defeasance option and covenant defeasance option pursuant to Section 15.02 of the Indenture. For purposes of Section 15.02 of the Indenture, the restrictive covenants referred to therein shall include the covenants set forth in Article Two of this First Supplemental Indenture. ARTICLE THREE Miscellaneous Section 3.1. Defined Terms. Unless otherwise provided in this First Supplemental Indenture, all defined terms used in this First Supplemental Indenture shall have the meanings assigned to them in the Indenture. Section 3.2. Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this First Supplemental Indenture limits, qualifies or conflicts with another provision included in this First Supplemental Indenture or in the Indenture which is required to be included herein or therein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, as amended, such required provision shall control. Section 3.3. New York Law to Govern. THIS FIRST SUPPLEMENTAL INDENTURE AND THE NOTES SHALL BE DEEMED TO BE CONTRACTS MADE AND TO BE PERFORMED ENTIRELY IN THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF SAID STATE. Section 3.4. Counterparts. This First Supplemental Indenture may be executed in any number of counterparts, each of 37 8 which shall be an original, but such counterparts shall together constitute but one and the same instrument. Section 3.5. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 3.6. Severability of Provisions. In case any provision in this First Supplemental Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 3.7. Successors and Assigns. All covenants and agreements in this First Supplemental Indenture by the parties hereto shall bind their respective successors and assigns and inure to the benefit of their respective successors and assigns, whether so expressed or not. Section 3.8. Benefit of Supplemental Indenture. Nothing in this First Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto, any Security Registrar, any Paying Agent and their successors hereunder, and the Holders of the Notes, any benefit or any legal or equitable right, remedy or claim under this First Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the day and year first above written. UNITED COMPANIES FINANCIAL CORPORATION By:___________________________________ Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, as Trustee By:___________________________________ Name: Title: 38 9 EXHIBIT A (FORM OF FACE OF NOTE) UNITED COMPANIES FINANCIAL CORPORATION 9.35% Senior Notes due November 1, 1999 REGISTERED REGISTERED No. R-___ CUSIP 909870 AA 5 If this Note is registered in the name of The Depository Trust Company (the "Depositary") (55 Water Street, New York, New York) or its nominee, this Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary, unless and until this Note is exchanged in whole or in part for Notes in definitive form. Unless this certificate is presented by an authorized representative of the Depositary to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of the Depositary (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co. has an interest herein. UNITED COMPANIES FINANCIAL CORPORATION, a corporation duly organized and validly existing under the laws of the State of Louisiana (herein called the "Company", which term includes any successor corporation under the Indenture, as defined on the reverse side hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of $ ( ) on November 1, 1999 in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on May 1 and November 1 of each year, commencing May 1, 1995, on said principal sum in like coin or currency, at the rate per annum specified in the title of this Note, from the May 1 or November 1, as the case may be, next preceding the date of this Note to which interest has been paid or duly provided for, unless the date hereof is a date to which interest has been paid or duly 39 10 provided for, in which case from the date of this Note, or unless no interest has been paid or duly provided for on the Notes, in which case from November 2, 1994, until payment of said principal sum has been made or duly provided for. Notwithstanding the foregoing, if the date hereof is after any April 15 or October 15, as the case may be, and before the following May 1 or November 1, this Note shall bear interest from such May 1 or November 1; provided, however, that if (A) the Termination Date has not occurred and (B) the Company shall consummate an acquisition of assets from, or an equity interest in, another Person (other than a Subsidiary), in each case other than in the ordinary course of business, or a merger or consolidation with another corporation (other than a Subsidiary) (a "Business Combination") and (i) such Business Combination involves the issuance of securities or other payment of consideration by the Company to one or more third parties or the assumption by the Company of indebtedness for borrowed money which consideration and assumption of indebtedness for borrowed money have an aggregate Fair Market Value in excess of $50 million and (ii) either (a) a Rating Decline occurs during the period commencing on the date of the initial public announcement of the proposed Business Combination and ending on the thirtieth day after such date (the "Public Announcement Period") which is directly attributable to such proposed Business Combination or (b) a Rating Agency publicly states that the rating of the Notes is under review with negative or uncertain implications either (1) during the Public Announcement Period because of the public announcement of the proposed Business Combination or (2) during the period commencing on the date of the initial public announcement of a material change in the structure of the proposed Business Combination and ending on the thirtieth day after such date because of the public announcement of such material change, and a Rating Decline occurs subsequent thereto and prior to the thirtieth day after the consummation of the Business Combination which is directly attributable to such Business Combination, then the Note shall bear interest at the Reset Rate. The interest so payable on May 1 or November 1 will be paid to the Person in whose name this Note is registered at the close of business on the Regular Record Date, which shall be the April 15 or October 15 (whether or not a Business Day) next preceding such May 1 or November 1, provided that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. For purposes of the preceding paragraph: "Fair Market Value" means (a) in the case of cash, the amount thereof, (b) in the case of indebtedness for borrowed money, the principal amount thereof outstanding, (c) in the case of any securities, the average of the last sales prices for such securities on the five trading days ending five days prior to the date of determination or, if such securities do not have an existing public trading market, the fair market value reasonably ascribed to such securities in good faith by the Board of Directors of the Company or the Executive Committee thereof as of the date of determination (which valuation shall be evidenced by a resolution of the Board of Directors of the Company or the Executive Committee thereof, as the case may be, which shall be delivered 40 11 to the Trustee together with an Officers' Certificate); and (d) in the case of any other form of consideration, the fair market value reasonably ascribed to such consideration in good faith by the Board of Directors of the Company or the Executive Committee thereof as of the date of determination (which valuation shall be evidenced by a resolution of the Board of Directors of the Company or the Executive Committee thereof, as the case may be, which shall be delivered to the Trustee together with an Officers' Certificate); "Rating Decline" means any reduction in the rating of the Notes by either Rating Agency to a rating which is BB+ or lower, in the case of S&P, or Ba3 or lower, in the case of Moody's (or such comparable ratings as such Rating Agencies shall designate at any time in the future); "Reset Rate" means, prior to the Termination Date and so long as the Notes continuously are rated BB+ or lower by S&P or Ba3 or lower by Moody's, 10.10% per annum, provided that if as a result of a Rating Decline referred to in clause (a) or (b) of the first proviso to the preceding paragraph, the Notes are rated B+ or lower by S&P or B1 or lower by Moody's (or such comparable ratings as such Rating Agencies shall designate at any time in the future), the Reset Rate shall be 11.35% per annum prior to the Termination Date and so long as the Notes continuously are rated B+ or lower by S&P or B1 or lower by Moody's (or such comparable ratings as such Rating Agencies shall designate at any time in the future), and provided further that if none of the foregoing is applicable, the interest rate borne by the Notes shall be 9.35% per annum; and "Termination Date" means the first date on which the Notes are rated BBB- or higher by S&P and Baa3 or higher by Moody's (or such other comparable ratings as such Rating Agencies shall designate at any time in the future) for four consecutive fiscal quarters of the Company. If the interest rate borne by the Notes is reset as contemplated above (including a decrease in such interest rate due to an increase in the rating of the Notes by a Rating Agency) the Company shall notify the Trustee in writing of such occurrence and the date thereof as promptly as practicable and deliver therewith an Officers' Certificate certifying the interest rate to be borne by the Notes. The Company must provide each Holder with notice of each change in the interest rate on the Notes (which notice shall include the new interest rate to be borne by the Notes and the effective date of the change in the interest rate) and may request the Trustee to give such notice to the Holders, on the Company's behalf and at the Company's expense. The notice shall be sent to each Holder at such Holder's last address as it shall appear upon the Security Register for the Notes maintained by the Security Registrar pursuant to Section 3.05 of the Indenture. Payment of the principal of, and premium, if any, on, this Note will be made in immediately available funds upon surrender of the Notes at the Corporate Trust Office of the Trustee. Interest will be paid by check mailed to the address of the Person entitled thereto as it appears in the Security Register on the applicable Regular Record Date or, at the option of the Company, by wire transfer to an account maintained by such Person with a bank located in the United States. 41 12 THIS NOTE SHALL BE DEEMED A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE. Unless the certificate of authentication hereon has been executed by the Trustee referred to herein by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: _____________________ TRUSTEE'S CERTIFICATE OF UNITED COMPANIES FINANCIAL CORPORATION AUTHENTICATION This is one of the series of Debt Securities issued under the within mentioned Indenture. By__________________________ Title: THE FIRST NATIONAL BANK OF CHICAGO As Trustee Attest By__________________________ By__________________________ Title: Title: 42 13 (REVERSE SIDE OF NOTE) UNITED COMPANIES FINANCIAL CORPORATION 9.35% Senior Notes Due November 1, 1999 This Note is one of a duly authorized issue of Debt Securities of the Company designated as its 9.35% Senior Notes due November 1, 1999 (herein called the "Notes"), limited in aggregate principal amount to $125,000,000, issued and to be issued under an Indenture dated as of October 1, 1994, as amended and supplemented by the First Supplemental Indenture dated as of November 2, 1994 (herein called the "Indenture"), between the Company and The First National Bank of Chicago, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture reference is hereby made for a statement of the respective rights of the Company, the Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Security Register relating to the Notes, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount with like terms and conditions, will be issued to the designated transferee. The Notes are issuable only as registered Notes without Coupons in the denominations of $1,000 and any integral multiple thereof. As provided in the Indenture, and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes with like terms and conditions of different authorized denominations, as requested by the Holder surrendering the same. Except as otherwise provided in the Indenture, no service charge will be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment for registration of transfer of this Note, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. If an Event of Default shall occur with respect to the Notes, the principal of all the Notes, plus accrued and unpaid interest, may be declared due and payable in the manner and with the effect provided in the Indenture. 43 14 The Indenture contains provisions permitting the Company and the Trustee, with the written consent of the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of each series affected by such supplemental indenture, voting separately, to enter into supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the Holders under the Indenture of such Debt Securities, or Coupons, if any; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Debt Security of each such series affected thereby, (i) change the Stated Maturity of the principal of, or installment of interest, if any, on, any Debt Security, or reduce the principal amount thereof, or the interest thereon or any premium payable upon redemption thereof, or change the Stated Maturity of or reduce the amount of any payment to be made regarding any Coupon, or change the Currency or Currencies of the payment of principal of (and premium, if any) or interest on such Debt Security is denominated or payable, or reduce the amount of the principal of a Discount Security that would be due and payable upon a declaration of acceleration of the Maturity, or adversely affect the right of repayment or repurchase, if any, at the option of the Holder, or reduce the amount of, or postpone the date fixed for, any payment under any sinking fund, or impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity thereof, or (ii) reduce the percentage in principal amount of Outstanding Debt Securities of any series, the Holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series, on behalf of the Holders of all the Debt Securities of any such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults or Event of Default under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, place and rate, and in the coin or currency, herein prescribed. No recourse shall be had for the payment of the principal of or the interest on this Note, or any part thereof, or of indebtedness represented hereby, or upon any obligation, covenant or agreement of the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company or any predecessor or successor corporation, either directly or indirectly through the Company, or any such predecessor or successor corporation whether by 44 15 virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed and understood that the Indenture or any indenture supplemental thereto and this Note are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be incurred by, any such incorporator, stockholder, officer or director, past, present or future, of the Company or any predecessor or successor corporation, either directly or indirectly through the Company or any such predecessor or successor corporation, because of the indebtedness authorized under the Indenture or under or by reason of any of the obligations, covenants, promises or agreements contained in the Indenture or in this Note or to be implied therefrom or herefrom; and that any such personal liability, by the acceptance hereof and as part of the consideration for the issue hereof, is expressly waived and released. All terms used in this Note which are defined in this Note shall have the meanings assigned to them in the Indenture. ______________________________ The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws and regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entirety JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- _______________ Custodian _________________ (Cust) (Minor) under Uniform Gifts to Minors Act ____________________________ (State) Additional abbreviations may also be used though not in the above list. 45 16 _______________________________________ FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto UNITED COMPANIES FINANCIAL CORPORATION (a Louisiana corporation) PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ************************************ * * * * * * ************************************ ________________________________________________________________________________ (Name and Address of Assignee, including zip code) ________________________________________________________________________________ the within Note, and all rights thereunder, hereby irrevocably constituting and appointing _______________________________________________________ Attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated: NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Note in every particular, without alteration or enlargement or any change whatever and must be guaranteed. 46 EX-10 3 TERMS AGREEMENT 1 EXHIBIT 10 $125,000,000 Debt Securities TERMS AGREEMENT October 26, 1994 To: United Companies Financial Corporation 4041 Essen Lane Baton Rouge, Louisiana 70809 Dear Sirs: Reference is made to the United Companies Financial Corporation Securities Underwriting Agreement-Basic Provisions dated September 29, 1994 (the "Underwriting Agreement"). This Agreement is the Terms Agreement referred to in the Underwriting Agreement. We offer to purchase, on and subject to the terms and conditions of the Underwriting Agreement, the following securities ("Securities") on the following terms: Title: 9.35% Senior Notes due November 1, 1999 Principal Amount to be issued: $125,000,000 Date of maturity: November 1, 1999 Interest rate: 9.35% Interest payment dates: May 1 and November 1 of each year. Public offering price: 100.00%, plus accrued interest, if any, from November 2, 1994. Purchase Price: 98.75%, plus accrued interest, if any, from November 2, 1994 (payable by wire transfer in same-day federal funds, less one day's interest at the federal funds rate to an account or accounts to be specified by the Company). Underwriting Commission: 1.25% Redemption provisions: The Notes are not redeemable prior to maturity.
47 2 Indenture Provisions: As described in the Indenture dated as of October 1, 1994, between the Company and The First National Bank of Chicago, as Trustee, as supplemented by the First Supplemental Indenture, dated as of November 2, 1994. Conversion or None. Exchange Provisions: Delayed Delivery Contracts: None. Closing date and location: November 2, 1994, 10:00 A.M.; Simpson Thacher & Bartlett, 425 Lexington Avenue New York, New York 10017 Additional co-managers: Chemical Securities Inc. and NationsBanc Capital Markets, Inc. Notices to Underwriters: Notices to the Underwriters shall be directed to: Merrill Lynch & Co. Merrill Lynch World Headquarters World Financial Center North Tower New York, NY 10281 Attention of Peter Jachym, with copy to: Simpson Thacher & Bartlett, Attention of Peter J. Gordon Option Securities: None. Other terms: The Company will reimburse the Underwriters up to an aggregate amount of $200,000, pursuant to Section 4 of the Underwriting Agreement, if the Underwriting Agreement is terminated in accordance with the provisions of Section 5 or 9(a)(i) thereto.
The Company represents and warrants to each of us that the representations and warranties of the Company set forth in Section 1 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. All of the provisions contained in the Underwriting Agreement, a copy of which is attached hereto as Annex A, are herein incorporated by reference in their entirety and shall be deemed to be a part of this Agreement to the same extent as if such provisions had been set forth in full herein. Terms defined in such document are used herein as therein defined. As contemplated by Section 2 of the Underwriting Agreement, attached as Schedule A hereto is a completed list of 48 3 our respective underwriting commitments, which shall be a part of this Agreement and the Underwriting Agreement. This Agreement shall be governed by the laws of the State of New York without regard to the conflicts of law principles thereof. If the foregoing is in accordance with your understanding of the agreement between the Underwriters and you, please sign and return to the Underwriters a counterpart hereof, whereupon this instrument along with all counterparts and together with the Underwriting Agreement shall be a binding agreement between the Underwriters and you in accordance with its terms and the terms of the Underwriting Agreement. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (for itself as Underwriter and as Representative of the Underwriters) By: ________________________ Peter Jachym Director Confirmed and accepted as of the date first above written: UNITED COMPANIES FINANCIAL CORPORATION By: ________________________ Laura T. Martin Senior Vice President and Treasurer 49 4 SCHEDULE A
Principal Amount of Debt Securities Underwriter to be Purchased ----------- --------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . . . . $ 87,500,000 Chemical Securities Inc. . . . . . . . . . 18,750,000 NationsBanc Capital Markets, Inc.. . . . . 18,750,000 ------------ Total $125,000,000 ============
50 EX-11 4 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 UNITED COMPANIES FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 --------- ----------- --------- --------- (in thousands, except per share amounts) Primary Earnings Per Share -------------------------- Income available to common shareholders: ---------------------------------------- Income from continuing operations . . . . . . . . $ 15,253 $ 9,827 $ 43,662 $ 16,773 Less: Loss from discontinued operations . . . . . - - (17,585) --------- ----------- --------- --------- Net income (loss) . . . . . . . . . . . . . . . . 15,253 9,827 43,662 (812) Less: Dividends on preferred stock . . . . . . . . - (325) (333) --------- ----------- --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 15,253 $ 9,502 $ 43,662 $ (1,145) ========= =========== ========= ========= Weighted average number of common and common equivalent shares: ------------------------------------- Average common shares outstanding . . . . . . . . 12,444 9,329 12,396 9,128 Add: Dilutive effect of stock options and warrants after application of treasury stock method 534 468 579 277 --------- ----------- --------- --------- 12,978 9,797 12,975 9,405 ========= =========== ========= ========= Earnings (loss) per share: -------------------------- Income from continuing operations . . . . . . . . . $ 1.18 $ .97 $ 3.36 $ 1.75 Loss from discontinued operations . . . . . . . . - - (1.87) --------- ----------- --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 1.18 $ .97 $ 3.36 $ (.12) ========= =========== ========= ========= Fully Diluted Earnings Per Share -------------------------------- Income available to common shareholders: ---------------------------------------- Income from continuing operations . . . . . . . . . $ 15,253 $ 9,827 $ 43,662 $ 16,773 Less: Loss from discontinued operations . . . . . - - - (17,585) --------- ----------- --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . $ 15,253 $ 9,827 $ 43,662 $ (812) ========= =========== ========= ========= Weighted average number of common and all dilutive contingent shares: -------------------------------------- Average common shares outstanding . . . . . . . . . 12,444 9,329 12,396 9,128 Add: Dilutive effect of preferred stock after application of "if converted" method . . . - 1,792 - 614 Dilutive effect of stock options and warrants after application of treasury stock method 534 579 580 542 --------- ----------- --------- --------- 12,978 11,700 12,976 10,284 ========= =========== ========= ========= Earnings (loss) per share: -------------------------- Income from continuing operations . . . . . . . . . . $ 1.18 $ .84 $ 3.36 $ 1.63 Loss from discontinued operations . . . . . . . . . . - - - (1.71) --------- ----------- --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 1.18 $ .84 $ 3.36 $ (.08) ========= =========== ========= =========
51 EX-15 5 LETTER OF DELOITTE & TOUCHE 1 EXHIBIT 15 United Companies Financial Corporation: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim condensed consolidated financial information of United Companies Financial Corporation and subsidiaries for the periods ended September 30, 1994 and 1993, as indicated in our report dated November 4, 1994; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is being incorporated by reference in the following: Registration Statement No. 33-15326 on Form S-8 pertaining to the United Companies Financial Corporation 1986 Employee Incentive Stock Option Plan, Registration Statement No. 33-17366 on Form S-8 pertaining to the United Companies Financial Corporation Employees' Savings Plan and Trust, Registration Statement No. 33-29994 on Form S-8 pertaining to the 1989 Stock Incentive Plan and the 1989 Non-Employee Director Stock Option Plan, Registration Statement No. 33-54955 on Form S-8 pertaining to the 1993 Stock Incentive Plan and the 1993 Non-Employee Director Stock Option Plan, Registration Statement No. 33-68626 on Form S-3 pertaining to the registration of 1,951,204 shares of United Companies Financial Corporation Common Stock, Registration Statement No. 33-55227 on Form S-3 pertaining to the registration of $200 million of United Companies Financial Corporation Debt Securities and Preferred Stock and Registration Statement No. 33-52739 on Form S-3 pertaining to the registration of 200,000 shares of United Companies Financial Corporation Common Stock. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana November 4, 1994 52 EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Form 10-Q for the quarterly period ended September 30, 1994 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 79,749 1,032,943 418,040 19,654 0 0 29,955 0 1,973,421 0 197,120 25,944 0 0 138,004 1,973,421 0 267,197 0 0 180,744 9,711 9,672 67,070 23,408 43,662 0 0 0 43,662 3.36 3.36
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