<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1996.
Commission file number 000-19388
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PROVIDENT COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 62-1598430
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Fountain Square, Chattanooga, Tennessee 37402
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(Address of principal executive offices)
(Zip Code)
(423)755-1011
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(Registrant's telephone number, including area code)
None
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Former name, former address and former fiscal year, if changed since last
report
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
------ ------
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT June 30, 1996
- ------------------------------ -----------------------------
Common Stock, $1.00 Par Value 45,530,792
Total number of pages included are 41
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PROVIDENT COMPANIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial
Condition at June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
for the Three Months and Six Months
Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
(in millions of dollars)
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $11,376.2 $12,318.6
Held-to-Maturity 242.7 299.0
Equity Securities 4.8 5.3
Mortgage Loans 15.3 104.8
Real Estate 179.8 203.7
Policy Loans 1,651.1 1,574.6
Other Long-term Investments 16.2 14.0
Short-term Investments 151.4 231.0
--------- ---------
Total Investments 13,637.5 14,751.0
Cash and Bank Deposits 9.2 24.8
Accounts Receivable 46.3 41.3
Premiums Receivable 81.2 75.5
Reinsurance Receivable 460.2 435.3
Accrued Investment Income 295.6 277.4
Deferred Policy Acquisition Costs 536.9 271.8
Deferred Federal Income Tax Asset 7.6 -
Property and Equipment 52.0 49.2
Miscellaneous 19.6 17.2
Separate Account Assets 325.5 357.8
--------- ---------
TOTAL ASSETS $15,471.6 $16,301.3
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - Continued
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
(in millions of dollars)
-----------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits $ 397.2 $ 383.7
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 7,822.5 7,814.6
Policyholders' Funds and Experience Rating Refunds 4,570.4 5,492.4
Federal Income Tax Liability 42.0 67.1
Short-term Debt 103.1 1.4
Long-term Debt 200.0 200.0
Other Liabilities 367.4 332.0
Separate Account Liabilities 325.5 357.8
---------- -----------
TOTAL LIABILITIES 13,828.1 14,649.0
---------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 4
STOCKHOLDERS' EQUITY
Preferred Stock 156.2 156.2
Common Stock, $1 par 45.5 45.4
Additional Paid-in Capital 8.9 5.8
Net Unrealized Gain on Securities 44.9 101.9
Foreign Currency Translation Adjustment (5.0) (4.8)
Retained Earnings 1,393.0 1,347.8
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TOTAL STOCKHOLDERS' EQUITY 1,643.5 1,652.3
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,471.6 $ 16,301.3
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1996 1995 1996 1995
(in millions of dollars, except share data)
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Premium Income $ 291.3 $ 313.1 $ 595.9 $ 674.1
Net Investment Income 274.1 309.8 552.6 622.8
Net Realized Investment Losses (5.3) (24.6) (5.9) (28.5)
Gain on Sale of a Portion of a
Line of Business - Note 5 - 21.8 - 21.8
Other Income 8.9 24.0 18.1 67.7
---------- ---------- ---------- ----------
TOTAL REVENUE 569.0 644.1 1,160.7 1,357.9
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Policy and Contract Benefits 309.2 353.0 608.6 747.7
Change in Reserves for Future Policy and
Contract Benefits and Policyholders' Funds 106.1 126.1 246.9 281.7
Amortization of Policy Acquisition Costs 16.1 18.1 33.0 35.2
Salaries 19.8 23.5 36.9 62.5
Other Operating Expenses 64.6 71.5 128.7 159.3
---------- ---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES 515.8 592.2 1,054.1 1,286.4
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 53.2 51.9 106.6 71.5
FEDERAL INCOME TAXES 19.1 16.9 38.1 24.2
---------- ---------- ---------- ----------
NET INCOME $ 34.1 $ 35.0 $ 68.5 $ 47.3
========== ========== ========== ==========
NET INCOME PER COMMON SHARE - NOTE 2 $ 0.68 $ 0.70 $ 1.37 $ 0.90
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 45,507,537 45,383,342 45,472,124 45,372,442
DIVIDENDS PER COMMON SHARE $ 0.18 $ 0.18 $ 0.36 $ 0.36
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended June 30
1996 1995
(in millions of dollars)
-----------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 317.0 $ 353.1
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 740.4 850.0
Proceeds from Maturities of Investments 744.2 601.5
Purchase of Investments (1,023.4) (948.8)
Net Sales of Short-term Investments 79.4 231.4
Disposition of Group Medical Business - (48.9)
Other (32.3) (53.0)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 508.3 632.2
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 203.9 304.4
Maturities and Benefit Payments from Policyholder Accounts (1,126.4) (1,278.3)
Net Short-term Debt Borrowings (Repayments) 101.7 (1.0)
Issuance of Common Stock 3.2 0.8
Dividends Paid to Stockholders (23.3) (22.7)
Other - (0.7)
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NET CASH USED BY FINANCING ACTIVITIES (840.9) (997.5)
----------- ----------
NET DECREASE IN CASH AND BANK DEPOSITS (15.6) (12.2)
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 24.8 35.3
----------- ----------
CASH AND BANK DEPOSITS AT END OF PERIOD $ 9.2 $ 23.1
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
six month periods ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
Note 2--Earnings Per Share
Earnings per common share are computed using net income less preferred stock
dividends ($3.1 million for the three month periods ended June 30, 1996 and
1995 and $6.3 million for the six month periods ended June 30, 1996 and 1995)
divided by the weighted average number of common shares outstanding. There is
no significant difference between earnings per share on a primary or fully
diluted basis.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
NOTE 3--SEGMENT INFORMATION
A summary by segment of the Company's revenue and income before federal income
taxes, excluding and including net realized investment gains and losses,
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
(in millions of dollars)
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenue (Excluding Net Realized Investment
Gains and Losses)
Individual Life and Disability $ 259.3 $ 251.1 $ 517.0 $ 501.5
Employee Benefits 149.8 146.7 311.7 297.4
Other Operations 165.2 270.9 337.9 587.5
------- ------- --------- ---------
Total $ 574.3 $ 668.7 $ 1,166.6 $ 1,386.4
======= ======= ========= =========
Income Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual Life and Disability $ 23.6 $ 17.3 $ 46.4 $ 0.5
Employee Benefits 17.0 8.1 31.6 20.5
Other Operations 17.9 51.1 34.5 79.0
------- ------- --------- ---------
Total $ 58.5 $ 76.5 $ 112.5 $ 100.0
======= ======= ========= =========
</TABLE>
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<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
NOTE 3--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
(in millions of dollars)
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenue (Including Net Realized Investment
Gains and Losses)
Individual Life and Disability $ 260.8 $ 249.8 $ 523.0 $ 500.9
Employee Benefits 150.2 147.1 311.7 298.1
Other Operations 158.0 247.2 326.0 558.9
-------- ------- --------- ---------
Total $ 569.0 $ 644.1 $ 1,160.7 $ 1,357.9
======= ======= ========= =========
Income (Loss) Before Federal Income Taxes
Individual Life and Disability $ 25.1 $ 16.0 $ 52.4 $ (0.1)
Employee Benefits 17.4 8.5 31.6 21.2
Other Operations 10.7 27.4 22.6 50.4
------- ------- --------- ---------
Total $ 53.2 $ 51.9 $ 106.6 $ 71.5
======= ======= ========= =========
</TABLE>
Total revenue (excluding net realized investment gains and losses) includes
premium income, net investment income, and other income. Total revenue
(including net realized investment gains and losses) includes premium income,
net investment income, net realized investment gains and losses, and other
income.
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<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
On April 29, 1996, the Company entered into a definitive agreement (the
Agreement) to acquire The Paul Revere Corporation (Paul Revere), a provider of
life and disability insurance products, at a price of approximately $1.2
billion. Under the terms of the Agreement, the Company has agreed to pay $20
per share in cash and $6 per share in newly issued common stock to Textron Inc.,
an 83 percent shareholder of Paul Revere. The remaining Paul Revere
shareholders may elect to receive per share $26 in cash (cash consideration); a
combination of $20 cash and a number of shares of the Company's common stock
equal to the product of 6 and the Exchange Ratio (mixed consideration); or a
number of shares of the Company's common stock equal to the product of 26 and
the Exchange Ratio (stock consideration). The Exchange Ratio (as defined in
the Agreement) is based on the Company's common stock price during a defined
period prior to closing and is subject to certain maximum and minimum share
amounts.
The transaction will be financed through common equity issued to Zurich
Insurance Company, a Swiss insurer, or one or more of its affiliates, common
equity issued to Paul Revere shareholders, debt, and internally generated
funds. The composition of the proposed financing arrangements will be as
follows, giving effect to each of the three forms of merger consideration
available for election by the Paul Revere public shareholders:
ASSUMING THE DESIGNATED FORM OF MERGER CONSIDERATION
IS ELECTED BY ALL PAUL REVERE PUBLIC SHAREHOLDERS
(IN MILLIONS)
<TABLE>
<CAPTION>
Mixed Consideration Stock Consideration Cash Consideration
--------------------------------------------------------------------
No. No. No.
Shares Shares Shares
Issued Issued Issued
--------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Equity
Zurich Insurance Company $300.0 9.5 $300.0 9.5 $300.0 9.5
Textron Inc. 225.0 7.2 225.0 6.6 225.0 7.7
Paul Revere Public Shareholders 45.0 1.4 195.0 5.8 0 0
Debt 541.8 391.8 586.8
Internally Generated Funds 145.0 145.0 145.0
</TABLE>
The Exchange Ratio and related average closing price per share assumed in the
above examples are as follows:
<TABLE>
<CAPTION>
Mixed Stock Cash
Consideration Consideration Consideration
--------------- --------------- ----------------
<S> <C> <C> <C>
Exchange Ratio .0317 .0295 .0343
Average Closing Price Per Share $31.500 $33.875 $29.125
</TABLE>
The transaction is subject to regulatory and shareholder approval.
- 10 -
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED
CONTINGENT LIABILITIES
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or results of
operations of the Company.
NOTE 5--SALE OF A PORTION OF A LINE OF BUSINESS
In December 1994, the Company entered into an Asset and Stock Purchase
Agreement (the Agreement) with Healthsource, Inc. (Healthsource) whereby
Healthsource agreed to acquire certain assets and assume certain liabilities of
the Company's group medical business. The sale was completed on May 31, 1995
effective April 30, 1995. The Company received $131.0 million in cash and
$100.0 million of a new issue of Healthsource 6.25% preferred stock which was
redeemed at par in the first quarter of 1996. Pursuant to the Agreement,
assets were transferred to Healthsource which had a carrying value of
approximately $297.5 million. Liabilities assumed by Healthsource in
connection with the transferred business totaled $221.5 million. Total revenue
and income before federal income taxes for the group medical business were
$146.2 million and $3.3 million, respectively, for the four month period ended
April 30, 1995. The gain on sale of the Company's group medical business
increased 1995 second quarter and six month operating earnings by $21.8 million
($0.48 per common share) before taxes and $14.2 million ($0.31 per common
share) after taxes.
NOTE 6--CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS
121),Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,effective January 1, 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. SFAS 121 also requires that long-lived assets
and certain intangibles to be disposed of generally be reported at the lower of
the carrying amount or fair value less cost to sell.
The primary assets of the Company which are subject to SFAS 121 are investment
real estate and property and equipment used in the Company's daily operations.
The effect of the adoption of SFAS 121 on the Company's financial position and
results of operations was immaterial.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Provident Companies, Inc.
We have reviewed the accompanying condensed consolidated statement of financial
condition of Provident Companies, Inc. and Subsidiaries as of June 30, 1996,
the related condensed consolidated statements of income for the three and six
month periods ended June 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the six month periods ended June 30, 1996 and
1995. These financial statements are the responsibility of the Company's
management.
We conducted our reviews 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 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, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Provident
Companies, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, not presented herein, and in our report dated February 8,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of December 31,
1995, is fairly stated in all material respects in relation to the consolidated
statement of financial condition from which it has been derived.
ERNST & YOUNG LLP
Chattanooga, Tennessee
August 8, 1996
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue excluding net realized investment gains and losses ("revenue")
declined $94.4 million, or 14.1 percent, to $574.3 million in the second
quarter of 1996 from $668.7 million in the second quarter of 1995. The decline
was the result of lower revenue in the other operations segment ($105.7
million), which was partly offset by increased revenue in the individual life
and disability segment ($8.2 million) and the employee benefits segment ($3.1
million).
For the first six months of 1996, revenue declined $219.8 million, or 15.9
percent, to $1,166.6 million from $1,386.4 million in the first six months of
1995. The decline was the result of lower revenue in the other operations
segment ($249.6 million), which was partly offset by increased revenue in the
individual life and disability segment ($15.5 million) and the employee
benefits segment ($14.3 million).
Income before net realized investment gains and losses and federal income
taxes ("income") declined $18.0 million, or 23.5 percent, to $58.5 million in
the second quarter of 1996 from $76.5 million in the second quarter of 1995.
Included in the income for the second quarter of 1995 is a before-tax gain of
$21.8 million resulting from the sale of the Company's medical services
business to Healthsource, Inc. Excluding the gain, income for the second
quarter of 1996 increased $3.8 million, or 6.9 percent. The increase was the
result of higher income in the employee benefits segment ($8.9 million) and
individual life and disability segment ($6.3 million) which was partly offset
by lower income in the other operations segment ($11.4 million, excluding the
gain on the sale).
For the first six months of 1996, income increased $12.5 million, or 12.5
percent, to $112.5 million from $100.0 million in the first six months of 1995.
Excluding the gain from the sale of the medical services business, income for
the first six months of 1996 increased $34.3 million, or 43.9 percent. The
increase was the result of higher income in the individual life and disability
segment ($45.9 million) and employee benefits segment ($11.1 million) which
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<PAGE> 14
was partly offset by lower income in the other operations segment ($22.7
million, excluding the gain on the sale).
INDIVIDUAL LIFE AND DISABILITY
Revenue in the individual life and disability segment increased $8.2
million or 3.3 percent, to $259.3 million in the second quarter of 1996 from
$251.1 million in the second quarter of 1995. The increase was primarily the
result of higher net investment income. Net investment income in this segment
increased $9.3 million, or 10.5 percent, due to an increased allocation of
capital to the individual disability income line of business. Premium income
in this segment declined $0.2 million, or 0.1 percent, to $159.6 million in the
second quarter of 1996 from $159.8 million in the second quarter of 1995. The
decline was primarily the result of slower new sales of individual disability
income products in recent quarters due to product changes introduced by the
Company in late 1994. These changes are discussed below.
For the first six months of 1996, revenue for this segment increased $15.5
million, or 3.1 percent, to $517.0 million from $501.5 million in the first six
months of 1995. The increase was primarily the result of higher net investment
income, which increased $18.3 million, or 10.5 percent, to $192.9 million for
the first six months of 1996 from $174.6 million for the first six months of
1995, due to an increased allocation of capital to the individual disability
income line of business. Premium income in this segment increased slightly to
$320.6 million in the first six months of 1996, from $320.2 million in the
first six months of 1995. Slower sales of individual disability income
products is the primary reason for the flat revenue.
In November 1994, the Company announced its intention to discontinue
selling individual non-cancellable disability income contracts with
own-occupation provisions (other than conversion policies available under
existing contractual arrangements). The Company is focusing on providing "loss
of earnings" contracts which insure income rather than occupation, instead of
the traditional non-cancellable own-occupation contracts. During the
transition to the new products, revenue in this line is expected to decline as
a result of a period of lower premiums associated with the new
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<PAGE> 15
products. The magnitude and duration of the expected decline are dependent on
the response of customers and competitors in the industry. In the first six
months of 1996, annualized new premiums for individual disability income
declined to $20.5 million, from $33.7 million in the first six months of 1995.
Income in this segment increased $6.3 million to $23.6 million in the
second quarter of 1996 from $17.3 million in the second quarter of 1995. This
segment includes the results of the individual disability income line, which
produced income of $19.9 million in the second quarter of 1996 compared to
$10.2 million in the second quarter of 1995. Management believes substantial
investments in the individual disability claims management process over the
past eighteen months helped produce the significant improvement in results in
this line. New claims remained relatively stable in the second quarter of 1996
relative to the year ago quarter, while net claim resolutions increased
significantly in the quarter. The individual life line of business produced
income of $3.3 million in the second quarter of 1996, compared to $5.8 million
in the second quarter of 1995, primarily due to adverse mortality experience in
the second quarter of 1996 relative to the prior year period.
For the first six months of 1996, income from this segment increased $45.9
million to $46.4 million from $0.5 million in the first six months of 1995.
The individual disability income line of business recorded income of $34.4
million in the first six months of 1996, compared to a loss of $10.3 million in
the first six months of 1995. Morbidity experience was at somewhat higher
levels than expected in the first quarter of 1995. New claims declined at the
end of 1995, and claim termination rates were at higher levels in the final
three quarters of 1995. Claim experience in the first six months of 1996 was
improved over that of the first quarter of 1995. Substantial investments in
the claims management process, which helped produce a higher level of net claim
resolutions, contributed to the improvement. The major elements of the
investments in the claim management process include an emphasis on early
intervention to better respond to the specific nature of the claim, increased
specialization to properly adjudicate the increasingly specialized nature of
disability claims, and an increased level of staffing with experienced claim
adjusters. The individual life line of business produced income of $11.4
million in the first six months of 1996 compared to $9.5 million in the first
six months of 1995. The
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<PAGE> 16
improvement was primarily due to improved mortality in the first quarter of
1996, which offset the adverse mortality experience in the second quarter of
1996.
The Company performed a loss recognition study as of September 30, 1993,
which projected that morbidity would improve over time as a result of stricter
policy provisions, tighter underwriting requirements, improved claim handling
procedures (consisting of centralization of the claims-paying function in the
home office and the availability of additional technical resources), the
effects of anti-selection wearing off over time, and general improvement in the
economy. Management performed a loss recognition study as of December 31,
1995. Based upon the assumptions used in the December 1995 study, which
represented management's best estimates at the time of the study, reserves were
adequate at the end of 1995.
The Company has engaged outside consultants to work with its personnel in
refining its methodology for analyzing frequency and severity rates, as well as
other factors that may affect reserve adequacy. Management believes these
refinements should provide the Company a better methodology for anticipating
changes in morbidity rates and a better methodology for reflecting those
changes in the management of its business. Although still in the developmental
stage, the results of preliminary testing of these methodologies appear
encouraging, and if they prove reliable, would indicate a sufficiency in the
Company's reserves at December 31, 1995. As the Company gains additional
experience to prove the validity of the refined methodologies, adjustments to
reserve assumptions for new claims on the existing block of business may be
appropriate in future periods.
It is not possible to predict with certainty whether morbidity, interest
rates, and expenses will continue at a level consistent with the Company's
assumptions, improve, or deteriorate; however, the current assumptions as to
these factors represent management's best estimates in light of present
circumstances. Additional increases to reserves would be required if there is
material deterioration in morbidity, interest rates, and/or expenses. As part
of its ongoing management of this line of business, the Company will conduct a
loss recognition study annually to validate the continued adequacy of current
reserves.
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EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $3.1 million, or 2.1
percent, to $149.8 million in the second quarter of 1996 from $146.7 million in
the second quarter of 1995. The increase was primarily the result of an
increase in net investment income of $2.9 million, or 13.6 percent, to $24.2
million in the second quarter of 1996 from $21.3 million in the second quarter
of 1995. Premium income increased $1.0 million, or 0.8 percent, to $124.2
million in the second quarter of 1996 from $123.2 million in the second quarter
of 1995. Increased premium income in the voluntary benefits, group life, and
packaged products lines of business contributed to this increase.
For the first six months of 1996, revenue from this segment increased
$14.3 million, or 4.8 percent to $311.7 million, from $297.4 million in the
first six months of 1995. The increase was primarily the result of an increase
in premium income of $9.6 million, or 3.8 percent, to $261.1 million in the
first six months of 1996 from $251.5 million in the first six months of 1995.
Increased premium income in the voluntary benefits, group life, group
disability, and packaged products lines of business contributed to this
increase. Net investment income in this segment increased $5.2 million, or
12.3 percent, to $47.6 million in the first six months of 1996 from $42.4
million in the first six months of 1995.
Income in this segment increased $8.9 million, or 109.9 percent, to $17.0
million in the second quarter of 1996 from $8.1 million in the second quarter
of 1995. Increased income in the voluntary benefits, group disability, and
packaged products lines of business was partly offset by lower income in the
medical stop-loss and group life lines of business. Income from the voluntary
benefits line of business increased to $4.8 million in the second quarter of
1996 compared to $1.6 million in the second quarter of 1995 due to an
improvement in the benefit ratio as well as increased premium income. The group
disability line of business produced income of $0.7 million in the second
quarter of 1996, compared to a loss of $6.6 million in the second quarter of
1995 due to an improvement in the benefit ratio as well as increased premium
income. This increase was due to improved loss ratios which resulted from
actions taken by the Company in 1995 to terminate certain contracts and
increase pricing on others. The packaged products line of business produced
income of $4.1 million in the second quarter of 1996, compared to $2.9 million
in the second
17
<PAGE> 18
quarter of 1995, primarily due to increased premium income and net investment
income.
For the first six months of 1996, income for this segment increased $11.1
million, or 54.1 percent, to $31.6 million from $20.5 million in the first six
months of 1995. Improved results in the voluntary benefits and group
disability lines of business more than offset lower results in the group life,
medical stop-loss, and packaged products lines of business. Income in the
voluntary benefits line improved to $9.2 million in the first six months of
1996 from $2.9 million in the first six months of 1995 due to higher revenue
and an improved benefit ratio. Income from the group disability line improved
to $1.1 million in the first six months of 1996 from a loss of $10.1 million in
the first six months of 1995 due to improved loss ratios resulting from the
cancellation of a block of poorly performing small case group disability
business in 1995.
OTHER OPERATIONS
Revenue in the other operations segment declined $105.7 million, or 39.0
percent, to $165.2 million in the second quarter of 1996 from $270.9 million in
the second quarter of 1995. The decline was primarily due to the sale of the
medical services line of business effective April 30, 1995, which produced
revenue of $38.3 million and a gain on the sale of $21.8 million in the second
quarter of 1995. In addition, revenue in the group pension line of business
declined $49.3 million, or 31.8 percent, to $105.9 million in the second
quarter of 1996 from $155.2 million in the second quarter of 1995 due to a
decrease in funds under management. Premium income in this segment declined
$22.6 million to $7.5 million in the second quarter of 1996 from $30.1 million
in the second quarter of 1995. This decline is primarily due to the sale of
the medical services line of business, which produced $23.5 million of premium
income in the second quarter of 1995.
For the first six months of 1996, revenue in this segment declined $249.6
million, or 42.5 percent, to $337.9 million from $587.5 million in the first
six months of 1995. The decline was primarily due to the sale of the medical
services line of business which produced revenue of $146.1 million and a gain
on the sale of $21.8 million in the first six months of 1995. In addition,
revenue
18
<PAGE> 19
in the group pension line of business declined $97.0 million, or 30.7 percent,
to $218.6 million in the first six months of 1996 from $315.6 million in the
first six months of 1995 due to a decrease in funds under management. Premium
income declined $88.2 million to $14.2 million in the first six months of 1996
from $102.4 million in the first six months of 1995. This decline is primarily
due to the sale of the medical services line of business, which produced $90.9
million of premium income in the first six months of 1995.
Income in this segment declined $33.2 million, or 65.0 percent, to $17.9
million in the second quarter of 1996 from $51.1 million in the second quarter
of 1995. The decline was primarily the result of the $21.8 million before-tax
gain from the sale of the medical services line of business in the second
quarter of 1995. The decline was also the result of lower income in the group
pension line of business, which declined $2.9 million, or 16.6 percent, to
$14.6 million in the second quarter of 1996 from $17.5 million in the second
quarter of 1995. The decline in this line was primarily the result of lower
funds under management and lower income from a reduced amount of capital
allocated to this line. Income from the medical services line of business
contributed $1.2 million to the income of the other operations segment in the
second quarter of 1995. Income from the block of corporate-owned life
insurance increased to $6.6 million in the second quarter of 1996, compared to
$4.3 million in the second quarter of 1995.
The Company announced in December 1994, that it would discontinue the sale
of traditional guaranteed investment contracts (GICs). Funds under management
from traditional GICs declined $2.090 billion, or 34.8 percent, to $3.917
billion at June 30, 1996, from $6.007 billion at June 30, 1995. Total funds
under management and equivalents declined $2.059 billion, or 20.8 percent, to
$7.848 billion at June 30, 1996, from $9.907 billion at June 30, 1995.
Included in this total are accumulated funds from the sale of synthetic GICs
which totaled $2.333 billion at June 30, 1996 compared to $2.252 billion at
June 30, 1995. Deposits of synthetic GICs totaled $133.6 million in the second
quarter of 1996, and $418.0 million in the second quarter of 1995. During the
second quarter of 1996, the Company experienced a $505.5 million withdrawal
from the synthetic GIC block, which increased income $0.3 million due to the
release of reserves. Based on a desire to focus resources elsewhere,
management has decided to discontinue accepting new synthetic GIC
19
<PAGE> 20
deposits and is exploring the potential disposition of its block of synthetic
GICS.
For the first six months of 1996, income for this segment declined $44.5
million, or 56.3 percent, to $34.5 million in the first six months of 1996 from
$79.0 million in the first six months of 1995. The decline was primarily the
result of the gain on the sale of the medical services lines of business
discussed above. In addition, the decline was due to lower income in the group
pension line of business, which declined $9.4 million, or 25.6 percent, $27.3
million in the first six months of 1996 from $36.7 million in the first six
months of 1995. The decline in this line was primarily the result of lower
funds under management and lower income from a reduced amount of capital
allocated to this line. Income from the corporate-owned life insurance line of
business increased $1.8 million to $11.1 million in the first six months of
1996 from $9.3 million in the first six months of 1995. The medical services
line of business produced income of $3.2 million in the first six months of
1995.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company is dependent upon payments from its
wholly-owned subsidiaries, Provident Life and Accident Insurance Company
("Accident"), Provident Life and Casualty Insurance Company ("Casualty"), and
Provident National Assurance Company ("National") (collectively "Provident") to
pay dividends to its shareholders and to pay its expenses. Payments by
Provident may take the form of either dividends or interest payments on amounts
loaned to Provident by the Company.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends or make other payments to their affiliates in excess of
certain prescribed limitations. In Tennessee, Provident's state of domicile,
regulatory approval is required if an insurance company seeks to make loans to
affiliates in amounts equal to or in excess of three percent of the insurer's
admitted assets, or to pay cash dividends in excess of the greater of such
company's net gains from operations of the preceding year or ten percent of its
surplus as regards policyholders, as determined at the end of the preceding
year in accordance with prescribed or permitted
20
<PAGE> 21
accounting practices. On December 22, 1995, Accident distributed all of the
stock of its then wholly-owned subsidiaries, National and Casualty, to its sole
shareholder. This constituted an extraordinary dividend, and approval was
sought and received from the Tennessee Department of Commerce and Insurance.
Under Tennessee law, this dividend will be aggregated with all dividends after
that date for a period of twelve months. This will have the effect of making
any dividends paid by Accident before December 22, 1996, "extraordinary
dividends" for which regulatory approval will be required.
The Company's requirements are met primarily by cash flow provided from
operations, principally in Provident. Premium and investment income as well as
maturities and sales of invested assets provide the primary sources of cash.
Cash flow from operations was sufficient in 1995 and the first six months of
1996. Cash is applied to the payment of policy benefits, costs of acquiring
new business (principally commissions) and operating expenses as well as
purchases of new investments. The Company has established an investment
strategy that management believes will provide for adequate cash flow from
operations.
The Company expects no material adverse effect on its liquidity as a
result of the discontinuance of sales of traditional GICS. While traditionally
the investment strategy for this product line has been to match the effective
asset durations with the related expected liability durations, the Company has
moved to a cash flow matching strategy.
In May 1995, the Company sold 26 restructured mortgage loans with a
principal amount of $147.5 million and a book value of $122.6 million. The
transaction resulted in a before-tax realized investment loss of $23.1 million.
In October 1995, the Company completed the sale of commercial mortgage loans
with a principal amount and a book value of $962.4 million through a
securitization collateralized by 366 loans. The transaction resulted in a
before-tax realized investment gain of $8.9 million. In February 1996, the
Company sold 24 mortgage loans with a principal amount of $81.6 million and a
book value of $75.9 million, realizing a before-tax investment loss of $5.7
million. These transactions have increased the liquidity of the investment
portfolio and facilitated the move to a cash flow matching strategy for the GIC
portfolios. The sale of the mortgage loans is expected to result in lower
21
<PAGE> 22
investment income in the future, as well as lower net realized investment
losses and lower investment expenses. Overall, the Company expects these
transactions to have a positive effect on net income in future years and to
improve asset quality, liquidity, asset/liability management, and the capital
adequacy ratios.
As a result of the release of capital generated by the run-off of the GIC
portfolio, the sale of the commercial mortgage loans, the sale of the medical
services line, and other corporate actions, the Company has increased its
available capital to support the growth of its businesses. On April 29, 1996,
the Company announced that it had entered into an Agreement and Plan of Merger
with Textron Inc. and The Paul Revere Corporation ("Paul Revere") pursuant to
which the Company would acquire Paul Revere at a price of approximately $1.2
billion. The acquisition will be financed through common equity issuance to
Zurich Insurance Company, a Swiss insurer or one or more of its affiliates,
common equity issuance to Paul Revere shareholders, debt, and internally
generated funds. Contractual commitments are in place for the debt issuance.
For additional information, see Note 4 of the Notes to Condensed Consolidated
Financial Statements. The Company believes the cash flows from the combined
operations will be sufficient to meet its operating and financing cash flow
requirements.
INVESTMENTS
The Company's exposure to non-current investments has been insignificant
for the past few years. Non-current investments are primarily foreclosed real
estate investments and mortgage loans which became more than thirty days past
due in their principal and interest payments. Non-current investments at June
30, 1996 were $20.2 million, or 0.15 percent of invested assets.
As previously discussed under Liquidity and Capital Resources, the Company
sold a large majority of its commercial mortgage loan portfolio in October
1995. The remaining $15.3 million of mortgage loans is expected to be repaid,
foreclosed, or sold during 1996. The reserve for problem mortgage loans
totaled $4.6 million at June 30, 1996. Management believes this amount of
mortgage loan loss reserve is adequate.
22
<PAGE> 23
The Company's investment in mortgage-backed securities totaled $2.8
billion on an amortized cost basis at June 30, 1996, and $2.9 billion at
December 31, 1995. At June 30, 1996, the mortgage-backed securities had an
average life of 7.5 years and effective duration of 5.1 years. The
mortgage-backed securities are valued on a monthly basis using valuations
supplied by the brokerage firms that are dealers in these securities. The
primary risk involved in investing in mortgage-backed securities is the
uncertainty of the timing of cash flows from the underlying loans due to
prepayment of principal. The Company uses models which incorporate economic
variables and possible future interest rate scenarios to predict future
prepayment rates. The Company has not invested in mortgage-backed derivatives,
such as interest-only, principal-only or residuals, where market values can be
highly volatile relative to changes in interest rates.
As with most other fixed income investments, below-investment-grade bonds
are subject to the effects of changes in the overall level of interest rates,
which can affect both capital and reinvestment return. Below-investment-grade
bonds are inherently more risky than investment-grade bonds since the risk of
default by the issuer, by definition and as exhibited by bond rating, is
higher. Also, the secondary market for certain below-investment-grade issues
can be highly illiquid. Management does not anticipate any liquidity problem
being caused by the investments in below-investment-grade securities, nor does
it expect these investments to adversely affect its ability to hold its other
investment to maturity. Adverse events occurring in the market for this type
of investment in the last 5-10 years are not reasonably expected to have a
material adverse effect on results of operations or the financial condition of
the Company primarily because of the minimal exposure to such investments.
The Company's exposure to below-investment-grade fixed maturity securities
at June 30, 1996 was $870.3 million, representing 6.4 percent of invested
assets, below the internal limit of 7.5 percent of invested assets for this
type of investment. The Company's holding of $100 million of Healthsource
6.25% preferred stock, related to the sale of the group medical services
business, was redeemed in cash at par by Healthsource during the first quarter
of 1996.
23
<PAGE> 24
During 1995, GIC portfolios totaling $643.0 million were restructured on a
duration neutral basis, moving maturities from 1996 and 1997 to 1995, 1998, and
1999. Hedge transactions totaling $300.0 million were initiated, fixing the
sales price of future asset sales. In addition, $104.0 million of long-term
bonds were sold in the group pension portfolio with $35.0 million invested in
1997 maturity bonds and the remainder used to meet current obligations.
During the third quarter of 1995, the Company executed a series of cash
flow hedges in its individual disability income portfolio, hedging $495.0
million of expected cash flows in the years 1996 through 2000 using forward
interest rate swaps. The purpose of this action was to hedge the reinvestment
of future cash flows and protect the Company from the potential adverse impact
of declining interest rates on the loss recognition reserve over the next five
years. Management estimates that the yields on cash flows in the 1996 to 2000
time period for the individual disability income portfolio will range between
8.15 percent and 8.55 percent when the hedges terminate and long-term assets
are purchased.
During the first quarter of 1996, the Company continued the program of
using forward interest rate swaps to hedge reinvestment of future cash flows.
A notional amount of $100.0 million of forward swaps was executed in the group
pension single premium annuity portfolio against cash flows expected in the
years 2000 and 2001. Management estimates the hedge-adjusted yield on
long-term asset purchases will range between 8.20 percent and 8.40 percent when
the hedges terminate.
During the second quarter of 1996, $200.0 million notional amount related to
the group pension cash match hedge settled, producing a net realized investment
loss of $7.5 million. In addition, $200.0 million of forward interest rate
swaps were added as part of the program to hedge future cash flows for the
individual disability income and the group pension single premium annuity
lines of business for the years 1996 to 2001. During the quarter, $50.0
million in contracts related to the individual disability income line of
business settled, producing a net realized investment gain of $0.7 million.
Management has added resources in the investment area to address portfolio
risks and expects further rebalancing activities in the future.
24
<PAGE> 25
REVIEW BY INDEPENDENT ACCOUNTANTS
The condensed consolidated financial statements at June 30, 1996, and for
the three month and six month periods then ended have been reviewed, prior to
filing, by Ernst & Young LLP, the Company's independent accountants, and their
report is included herein.
25
<PAGE> 26
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company conducted its Annual Meeting of Stockholders on May 1,
1996. Proxies for the meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934. The stockholders
elected all of management's nominees for the Board of Directors as
listed in the proxy statement (vote FOR: 41,030,006; AGAINST: -0-;
ABSTAIN: 87,848; NON-VOTE: -0-); an amendment of the Annual Management
Incentive Compensation Plan of 1994 (vote FOR: 40,515,320; AGAINST:
192,080; ABSTAIN: 410,454; NON-VOTE: -0-); amendment of the Stock
Option Plan of 1994 (vote FOR: 40,478,653; AGAINST: 289,157; ABSTAIN:
350,044; NON-VOTE: -0-); and the selection of Ernst & Young LLP as
independent auditors (vote FOR: 41,048,446; AGAINST: 24,166; ABSTAIN:
45,242; NON-VOTE: -0-); all as described in the Proxy Statement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Amendment of the Annual Management
Incentive Plan of 1994
Exhibit 10.2 Amendment of the Stock Option Plan of 1994
Exhibit 15 Letter re Unaudited Interim Financial
Information
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K: April 29, 1996
May 31, 1996
26
<PAGE> 27
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.
Provident Companies, Inc.
Date: August 12, 1996 /s/J. Harold Chandler
----------------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Date: August 12, 1996 /s/Thomas R. Watjen
----------------------------------
Thomas R. Watjen
Executive Vice President and
Chief Financial Officer
27
<PAGE> 28
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT COMPANIES, INC.
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Exhibit 10.1 Amendment of Annual Management Incentive
Compensation Plan of 1994 30
Exhibit 10.2 Amendment of Stock Option Plan of 1994 36
Exhibit 15 Letter re Unaudited Interim Financial
Information 39
Exhibit 27 Financial Data Schedule (for SEC use only) 41
</TABLE>
28
<PAGE> 1
EXHIBIT 10.1
AMENDMENT OF THE
ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN OF 1994
(Approved by Stockholders on May 1, 1996)
29
<PAGE> 2
AMENDMENT OF THE
ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN OF 1994
(Approved by Stockholders on May 1, 1996)
In May 1994, the stockholders approved the Annual Management Incentive
Compensation Plan of 1994 ("MICP"). The MICP was designed to remain in effect
indefinitely, until terminated by the Board of Directors. Operational details
of the plan, such as goals and the identity of participants, are modified by
the achievement of one-year goals with each cycle of the plan running from
January 1 to December 31. The first plan year was effective January 1, 1994,
and ended December 31, 1994.
The stockholders approved an amendment to the plan for 1995 which changed
certain performance measures for the plan year beginning January 1, 1995, and
ending December 31, 1995.
For all employees except the CEO, the MICP for 1995 provided awards based
on four performance measures, each with an equal weighting. These performance
measures were:
(a) Corporate earnings (after-tax operating earnings per share);
(b) Efficiency ratio (ratio of expenses to premium income);
(c) Individual executive participant's contribution to the business,
with emphasis on positioning for the future; and
(d) Price of the America's Class B Stock.
For 1996, the Compensation Committee recommends changes in the structure
of the plan as described below. There will still be four performance measures,
but these measures will not be weighted equally in determining the incentive
awards. The first two measures will be assigned a weighting of 30% each, and
the other two will be assigned a weighting of 20% each. The four performance
measures are as follows:
(1) The first performance measure (30% weighting) is return on equity.
This is defined as the ratio of the Company's after tax operating
earnings to the average stockholders' equity on the basis of generally
accepted accounting principles excluding the adjustment required by
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The incentive
award is based on the following table:
30
<PAGE> 3
<TABLE>
<CAPTION>
ROE % ACHIEVEMENT
--- -------------
<S> <C>
8.67% 0%
9.15 50
9.63 100
9.80 125
9.97 150
10.14 175
10.49 200
10.84 225
11.53 250
13.67 275
15.81 300
Above 15.81 Additional 3.5% for each
Additional .30% in ROE
</TABLE>
(2) The second performance measure (30% weighting) is premium growth. This
is a measure of growth in premium income from continuing operations. The
incentive award is based on the following table:
<TABLE>
<CAPTION>
Premium Growth % Achievement
--------------- ---------------
<S> <C>
3.49% 0%
3.93 50
4.37 100
4.81 125
5.25 150
5.69 175
6.13 200
7.01 225
8.77 250
10.53 275
Above 10.53 Additional 1% for each
additional .07% in premium growth
</TABLE>
(3) The third performance measure (20% weighting) is the performance of
the Company's stock on a total return basis, relative to a peer group
of ten insurance companies. The peer group is comprised of the
companies included in the S&P Life Insurance Index and the S&P
Multi-Line Insurance Index. The total return includes the appreciation
in stock price as measured by the average price for all trading days in
the fourth quarter of each calendar year, excluding the last two weeks,
plus dividends during a twelve month period.
31
<PAGE> 4
The performance of the Company's stock is ranked with the performance of
the ten peer companies. The incentive award is based on the following table:
<TABLE>
<CAPTION>
Percentile % Achievement
---------- --------------
<S> <C>
10th 0%
20th 0
30th 0
40th 0
50th 0
60th 50
70th 100
80th 150
90th 200
100th 300
</TABLE>
(4) The fourth performance measure (20% weighting) is the individual
executive participant's contribution to the business with emphasis on
positioning for the future. This measure has been included in the MICP
since its inception in 1994. Credit for achievement under this measure
cannot exceed 100%.
Target awards under this plan continue to be set at percentages of base
salary. The target awards for 1996 are set at the following percentages of
base salary: 100% for the CEO, 75% for the Executive Vice President and Chief
Financial Officer, 50% for Senior Vice Presidents (with appropriate percentages
to be assigned by the Compensation Committee for other designated senior
officers), and percentages ranging from 35% to 10% for all other participants
based on assessment of their contribution to the Company's success.
PERFORMANCE SHARE PLAN
A Performance Share Plan is proposed to be included in the MICP. The CEO,
Executive Vice President and Chief Financial Officer, the Senior Vice
Presidents, and other designated senior officers would participate in this
plan. Producers for the Company who achieve certain performance sales goals
would also participate in this plan as described below. It is estimated that
approximately fifteen to thirty-five officers would participate in any one
year. The officers, all of whom have company stock ownership requirements,
would be required to receive a portion of their MICP annual incentive awards in
"Performance Shares," based on the following table:
<TABLE>
<CAPTION>
MICP Incentive % Paid in
Earned Performance Shares
------------------- ------------------
<S> <C>
Less than $99,999 25.0%
$100,000 - $249,999 37.5
$250,000 or more 50.0
</TABLE>
32
<PAGE> 5
Participants may elect to receive any portion of their MICP awards above
the required percentage in Performance Shares.
A "Performance Share" is a unit of deferred compensation equal in value to
the market price of Company stock. The number of Performance Shares to be
awarded to any participant is determined by:
(1) Dividing the amount of MICP award being paid in Performance Shares
(both mandatory and voluntary) by the current market price for a share
of Company stock, and
(2) "Grossing-up" the number of Performance Shares on a 30% basis, to
reflect risk of forfeiture, lack of liquidity and marketability.
Performance Shares are subject to the following:
(1) The shares attributable to the "gross-up" factor are subject to
forfeiture during a three-year period following the award. The
remaining Performance Shares are not subject to forfeiture.
(2) Participants may elect to extend the deferral period for payment of
Performance Shares beyond the required period of three years, but not
beyond the earliest of retirement, death, or disability. Any such
election must be made prior to the date such shares are credited to the
participant.
(3) Generally, Performance Shares will be paid in stock; however, the
Compensation Committee of the Board of Directors has the authority to
direct that the value of such shares be paid in part or entirely in
cash.
(4) Each Performance Share will receive a dividend equivalent in an
amount equal to the then current dividend on the Company's stock. The
dividend may be paid in cash or applied to accumulate additional
Performance Shares, at the election of each participant.
(5) Performance Shares will be counted in the calculation of
participants' total ownership of Company stock for purposes of
determining the extent to which stock ownership requirements have been
met.
(6) In the event of death, disability, normal retirement, termination
without cause, or change in control of the Company, any shares
attributable to the "gross-up" factor, which otherwise would be subject
to forfeiture during a three year period, will automatically cease to
be subject to such forfeiture.
In the event of termination for cause or voluntary resignation, any
shares subject to the "gross-up" factor will be forfeited. The
Compensation Committee of the Board of Directors has the authority to
review such forfeiture on a case by case basis.
33
<PAGE> 6
Certain producers who achieve performance sales goals would also be
eligible to participate in the Performance Share Plan. The goals required and
the terms of the producers' participation will be approved by the Compensation
Committee. However, there would be no "gross-up" of the number of shares to be
awarded under the Plan to the producers, and the terms of such participation
would be no more favorable than those applicable to the officers. Management
estimates that approximately ten to thirty-five producers would participate in
this plan each year.
It is impossible to determine the amount or value of awards which will be
made if this amendment is approved since the total amount depends on the future
performance of both the individual and the Company.
KEY CONTRIBUTOR PLAN
The Key Contributor Plan which was added to the MICP upon approval by the
stockholders in 1995 will be retained in the Plan in its present form.
34
<PAGE> 1
EXHIBIT 10.2
AMENDMENT OF THE STOCK OPTION PLAN OF 1994
(Approved by Stockholders on May 1, 1996)
35
<PAGE> 2
AMENDMENT OF THE STOCK OPTION PLAN OF 1994
(Approved by Stockholders on May 1, 1996)
In May 1993, the stockholders approved the Stock Option Plan of 1994
("1994 Plan"), which was subsequently amended in May 1994 and June 1995. The
1994 Plan currently provides for the granting of non-qualified stock options
subject to the terms of the Plan. In an effort to provide greater flexibility
in the attracting, retaining and providing incentives for key employees,
non-employee directors, and certain non-employee producers of the Company or
its subsidiaries, the Compensation Committee and the Board of Directors
recommend amending the 1994 Plan to provide for the granting of stock awards in
forms other than non-qualified stock options, creating an "omnibus " stock
plan, expand the 1994 Plan to include certain producers as participants, and
change the name of the 1994 Plan to "the Stock Plan of 1994" to reflect the
inclusion of the different forms of awards that could be made under the plan.
The following forms of stock awards would be permitted under the proposed
amendment:
STOCK OPTIONS - All forms of stock options, including incentive stock
options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended from time to time; non-qualified stock
options or any other type of options encompassed by the Code.
STOCK APPRECIATION RIGHTS - Rights to receive a payment from the
Company equal to the excess of the fair market value (as defined in
the plan) of a share of common stock at the date of exercise over the
fair market value at the date of grant.
RESTRICTED STOCK - Stock issued or transferred under the plan which
is subject to restrictions on the vesting, sale or other disposition
thereof.
The plan would also be amended to include certain producers who meet
performance sales goals. The criteria for participation and the goals would be
approved by the Compensation Committee. At this time it is anticipated that
the number of producer participants would probably be in the range of
twenty-five to sixty-five for any given year.
All other provisions of the 1994 Plan, as approved and amended by the
stockholders, would remain in effect. The 1994 Plan provides a limit of
3,500,000 on the number of shares available for grants under the plan. As of
March 1, 1996, 1,649,800 shares remain available for grant under the plan.
It is impossible to determine the number or value of the awards which will
be distributed if this amendment is approved since the
36
<PAGE> 3
identity of participants and the total amount of each award depends on
individual future performance and the future performance of the Company and is
therefore unpredictable. It is not possible to determine the number or value
of awards which would have been distributed if the Plan as amended had been in
effect during the year ended December 31, 1995, since the goals have not been
established at this time by which producer participants would qualify for
awards.
37
<PAGE> 1
EXHIBIT 15
ERNST & YOUNG LETTER
UNAUDITED INTERIM FINANCIAL INFORMATION
38
<PAGE> 2
Board of Directors and Shareholders
Provident Companies, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-47551) pertaining to the Provident Life and Accident Insurance
Company Moneymaker, A Long-Term 401(k) Retirement Savings Plan for the
registration of 500,000 shares of Common stock of Provident Companies, Inc.,
the Registration Statement (Form S-8 No. 33-88108) of Provident Life and
Accident Insurance Company Stock Option Plan of 1994 for the registration of
3,500,000 shares of Common stock of Provident Companies, Inc., and in the
Registration Statement (Form S-8 No. 33-62231) of Provident Life and Accident
Insurance Company Employee Stock Purchase Plan of 1995 for the registration of
1,000,000 shares of Common stock of Provident Companies, Inc., of our report
dated August 8, 1996 relating to the unaudited condensed consolidated interim
financial statements of Provident Companies, Inc. which is included in its Form
10-Q for the quarter ended June 30, 1996. All of the shares of Class B Common
stock of Provident Life and Accident Insurance Company of America were
exchanged for shares of Provident Companies, Inc. pursuant to an Agreement and
Plan of Share Exchange effective December 27, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1993, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
Chattanooga, Tennessee
August 8, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE SIX MONTHS ENDED JUNE
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 11,376,200
<DEBT-CARRYING-VALUE> 242,700
<DEBT-MARKET-VALUE> 242,900
<EQUITIES> 4,800
<MORTGAGE> 15,300
<REAL-ESTATE> 179,800
<TOTAL-INVEST> 13,637,500
<CASH> 9,200
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 536,900
<TOTAL-ASSETS> 15,471,600
<POLICY-LOSSES> 7,822,500<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 397,200
<POLICY-HOLDER-FUNDS> 4,570,400
<NOTES-PAYABLE> 303,100
0
156,200
<COMMON> 45,500
<OTHER-SE> 1,441,800
<TOTAL-LIABILITY-AND-EQUITY> 15,471,600
595,900
<INVESTMENT-INCOME> 552,600
<INVESTMENT-GAINS> (5,900)
<OTHER-INCOME> 18,100
<BENEFITS> 855,500
<UNDERWRITING-AMORTIZATION> 33,000
<UNDERWRITING-OTHER> 165,600
<INCOME-PRETAX> 106,600
<INCOME-TAX> 38,100
<INCOME-CONTINUING> 68,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,500
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>"POLICY LOSSES" INCLUDE RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS OF
$7,766,900 AND UNEARNED PREMIUMS OF $55,600.
</FN>
</TABLE>
